IFM lectures summary
Lecture 1
International Financial Management = the activity of management, which is concerned with
the planning, procuring and controlling of the firm’s financial resources globally.
The aim of the course: address the significant accounting, financing and strategic problems
that multinational corporations (MNCs) may experience and propose methods to solve these
problems.
Structure of the course:
Shuo:
- Accounting diversity as a problem for MNCs
- Reconciliation as a solution for MNCs
Sakshi:
- International transfer pricing strategy of MNCs
- Strategic decisions of MNCs
Shiv:
- Foreign exchange exposures for MNCs
Accounting part of ISM:
1. Worldwide accounting diversity (p 2-40)
Learning objectives:
- Provide evidence of the diversity that exists in accounting internationally
- Describe the major environmental factors that influence national accounting systems
and that lead to accounting diversity
- Explain the problems caused by accounting diversity
- Solving the accounting diversity by reconciling foreign financial statements with each
other.
2. Additional reporting issues (p 92-136)
Multinational Corporations (MNCs) (focus of this course)
= a corporate organization that owns or controls production of goods or services in one or
more countries other than its home country (e.g. Unilever and Shell)
Why do we focus on MNCs?
- MNCs are the major participants of the IFM
- What are the challenges for MNCs in terms of accounting and controlling?
MNCs accounting and control issues
- Subsidiaries spread across the globe; when an MNC has a different subsidiary in
another country, the information has to be prepared following the accounting
requirements of that country. If the accounting standard from the subsidiary’s country
is not the same as the parent firm’s country, because the information provided by the
subsidiary has to be different than the information of the parent firm. It takes time
and money to integrate the information.
- Exposure to different accounting systems
, - Complexity of accounting and control systems
Evidence of accounting diversity:
- Presentation differences (format of statements)
- Terminology differences (names of accounts)
- Differences in recognition and measurement rules (definition of accounts)
LIFO = Last In First Out; FIFO = First In First Out.
Example: inflation; inventory cost is going up. Expenses of the LIFO will be higher than the
FIFO. Net income is going to be lower, if the expenses are going to be higher. So would say
that companies should not follow LIFO. Not true; is reported income is lower, has a benefit;
they have to pay lower taxes. They have different economic outcomes.
Reasons/sources of accounting diversity
Institutional characteristics
1. Legal system
- CODE LAW (also called Civil Law) (is typically used in continental Europe, US, UK and
colonies from these countries)
, o Accounting in code law countries is legislated; therefore, accounting professions may
have less influence over the accounting rules
o Accounting rules tend to be general
o Information disclosures tend to be low
o Characteristics:
It is a codified system of law (e.g. civil code, codes covering corporate law,
administrative law, tax law and constitutional law) enshrining basic rights and
duties; administrative law is however usually less codified and administrative
court judges tend to behave more like common law judges
Only legislative enactments are considered binding for all. There is little scope for
judge-made law in civil, criminal and commercial courts, although in practice
judges tend to follow previous judicial decision; constitutional and administrative
courts can nullify laws and regulations and their decisions in such cases are
binding for all
Less freedom of contract – many provisions are implied into a contract by law and
parties cannot contract out of certain provisions.
- COMMON LAW (Also called Anglo-Saxon Law)
o Accounting rules in common law countries are generally determined by the non-
government accounting professions; therefore, their accounting rules are more
specific
o Accounting rules in common law countries are characterized with fair presentation,
high transparency and full disclosure
o Characteristics:
There is not always a written constitution or codified law
Judicial decisions are binding – decision of the highest court can generally only be
overturned by that same court or through legislation
Extensive freedom of contract – few provisions are implied into the contract by
law (although provisions seeking to protect private consumers may be implied)
Generally, everything is permitted that is not expressly prohibited by law
2. Taxation
- In some countries accounting serves for taxation (e.g. Germany, Poland); in these
countries the differences between financial accounting and taxation accounting is
almost nothing. (With accelerating depreciation, the expenses will be higher in first
years; net income is lower, so as the tax. If financial accounting will allow to use
straight line depreciation, this means that differences are allowed (for example in US).
In Germany the tax accounting is using the accelerating depreciation, and the financial
accounting is also using the accelerating depreciation, so there are no differences.
- If accounting rules or principles align with tax rules, then:
o The net income may lose its ability to reflect the economic reality
o Think about a case of car depreciation
3. Providers of financing
Lecture 1
International Financial Management = the activity of management, which is concerned with
the planning, procuring and controlling of the firm’s financial resources globally.
The aim of the course: address the significant accounting, financing and strategic problems
that multinational corporations (MNCs) may experience and propose methods to solve these
problems.
Structure of the course:
Shuo:
- Accounting diversity as a problem for MNCs
- Reconciliation as a solution for MNCs
Sakshi:
- International transfer pricing strategy of MNCs
- Strategic decisions of MNCs
Shiv:
- Foreign exchange exposures for MNCs
Accounting part of ISM:
1. Worldwide accounting diversity (p 2-40)
Learning objectives:
- Provide evidence of the diversity that exists in accounting internationally
- Describe the major environmental factors that influence national accounting systems
and that lead to accounting diversity
- Explain the problems caused by accounting diversity
- Solving the accounting diversity by reconciling foreign financial statements with each
other.
2. Additional reporting issues (p 92-136)
Multinational Corporations (MNCs) (focus of this course)
= a corporate organization that owns or controls production of goods or services in one or
more countries other than its home country (e.g. Unilever and Shell)
Why do we focus on MNCs?
- MNCs are the major participants of the IFM
- What are the challenges for MNCs in terms of accounting and controlling?
MNCs accounting and control issues
- Subsidiaries spread across the globe; when an MNC has a different subsidiary in
another country, the information has to be prepared following the accounting
requirements of that country. If the accounting standard from the subsidiary’s country
is not the same as the parent firm’s country, because the information provided by the
subsidiary has to be different than the information of the parent firm. It takes time
and money to integrate the information.
- Exposure to different accounting systems
, - Complexity of accounting and control systems
Evidence of accounting diversity:
- Presentation differences (format of statements)
- Terminology differences (names of accounts)
- Differences in recognition and measurement rules (definition of accounts)
LIFO = Last In First Out; FIFO = First In First Out.
Example: inflation; inventory cost is going up. Expenses of the LIFO will be higher than the
FIFO. Net income is going to be lower, if the expenses are going to be higher. So would say
that companies should not follow LIFO. Not true; is reported income is lower, has a benefit;
they have to pay lower taxes. They have different economic outcomes.
Reasons/sources of accounting diversity
Institutional characteristics
1. Legal system
- CODE LAW (also called Civil Law) (is typically used in continental Europe, US, UK and
colonies from these countries)
, o Accounting in code law countries is legislated; therefore, accounting professions may
have less influence over the accounting rules
o Accounting rules tend to be general
o Information disclosures tend to be low
o Characteristics:
It is a codified system of law (e.g. civil code, codes covering corporate law,
administrative law, tax law and constitutional law) enshrining basic rights and
duties; administrative law is however usually less codified and administrative
court judges tend to behave more like common law judges
Only legislative enactments are considered binding for all. There is little scope for
judge-made law in civil, criminal and commercial courts, although in practice
judges tend to follow previous judicial decision; constitutional and administrative
courts can nullify laws and regulations and their decisions in such cases are
binding for all
Less freedom of contract – many provisions are implied into a contract by law and
parties cannot contract out of certain provisions.
- COMMON LAW (Also called Anglo-Saxon Law)
o Accounting rules in common law countries are generally determined by the non-
government accounting professions; therefore, their accounting rules are more
specific
o Accounting rules in common law countries are characterized with fair presentation,
high transparency and full disclosure
o Characteristics:
There is not always a written constitution or codified law
Judicial decisions are binding – decision of the highest court can generally only be
overturned by that same court or through legislation
Extensive freedom of contract – few provisions are implied into the contract by
law (although provisions seeking to protect private consumers may be implied)
Generally, everything is permitted that is not expressly prohibited by law
2. Taxation
- In some countries accounting serves for taxation (e.g. Germany, Poland); in these
countries the differences between financial accounting and taxation accounting is
almost nothing. (With accelerating depreciation, the expenses will be higher in first
years; net income is lower, so as the tax. If financial accounting will allow to use
straight line depreciation, this means that differences are allowed (for example in US).
In Germany the tax accounting is using the accelerating depreciation, and the financial
accounting is also using the accelerating depreciation, so there are no differences.
- If accounting rules or principles align with tax rules, then:
o The net income may lose its ability to reflect the economic reality
o Think about a case of car depreciation
3. Providers of financing
