INTERNATIONAL FINANCE MANAGEMENT
› International Financial Management is the activity of management which is concerned
with the planning, procuring and controlling of the firm's financial resources globally
The worldwide accounting diversity chapter. 1
The definition of MNCs: a multinational corporation is a corporate organization that owns or
controls production of goods or services in one or more countries other than its home country
(Pitelis et al., 2000)
MNCs are the major participants of the international financial management. They are typically
very big company and they are accounted for the major part of the global GDP and they are like
an engine of the push innovation in the world. They increase the research and development.
What are the challenges for MNCs in terms of accounting ad controlling?
MNCs’ Accounting and Control Issues
› Subsidiaries spread across the globe
› Exposure to different accounting systems
› Complexity of accounting and control systems
› MNCs face the problem of accounting diversity
Information of the subsidiary must be the same with the parent firm’s accounting standard. The
have to exposed to different systems, it will take time and money to integrate to different resources
of the information.
Evidence of Accounting Diversity:
› Presentation differences (Format of statements)
› Terminology differences (names of accounts) could be different across the firms and
› Differences in recognition and measurement rules (definition of accounts) -Recognition
means how do we determine the nature of the transaction. How much of the expenses or
revenues will be recognised?
British company on the left-hand side we can see that the order of the assets is in the reverse way
of the liquidity. So, the most illiquid asset ‘goodwill’ is at the beginning and the most liquid asset
‘cash’ is at the bottom.
Typically for British companies the assets are ordered in a reverse liquidity. This is the first major
Secondly, footnote is very important to understand how the values are calculated and the definition
of the assets. In the U.S. company the footnote is not shown.
Lastly, Verizon has provided more detailed value of property, plant and equipment by giving the
net value and depreciation rather than the gross value that Vodafone gave.
There are also terminology differences between UK and US.
But once we are more experienced this won’t be a major problem. But differences in recognition
and Measurement rules can create a problem.
What are the consequences of replacing FIFO with LIFO? (A higher COGS due to the inflation
effect and a lower gross margin; low tax paid and low dividend due)
LIFO Last in first out
FIFO First in first out
They are both about how to recognizing the costs, when there is going to be some sales. We should
recognize the inventories and when they arrived.
Expenses of LIFO is typically higher than FIFO, this makes the net income of the company lower
in LIFO. In some countries LIFO is not allowed and in some of them FIFO is not allowed.
Governments does not want the companies to pay less taxes, so this may be making them reluctant
about LIFO. So, LIFO &FIFO also determines how much of the money will be paid to the
Sources of Accounting Diversity
➢ Legal System – There are two legal system which are Code Law (Civil Law) and Common
Law. Code Law system is typically used in United Kingdom and the major features is that
there are many codified laws and statues which tries to regulate the society according to
norms. Common Law relies on the older cases which differs than code law. Common Law
characteristics: (i) there is not always a written constitution or codified law; (ii) Judicial
decisions are binding – decisions of the highest court can generally only be overturned by
that same court or through legislation; (iii) Extensive freedom of contract - few provisions
are implied into the contract by law (although provisions seeking to protect private
consumers may be implied); and (iv) generally, everything is permitted that is not expressly
prohibited by law.
▪ CODE LAW (also called Civil Law)
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
▪ 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
o Accounting rules in common law countries are characterized with fair presentation,
high transparency and full disclosure
➢ Taxation – In some countries accounting serves for taxation like Poland or Germany.
Depreciation can be straight line, where the loss is distributed evenly or it can be
Accelerated depreciation, this can be double declining which depreciates faster than
straight line method. If a country or company uses accelerated depreciation than the annual
expenses will be higher for the first year. U.S accounting system allows their companies to
choose between two methods, but in Germany only allows Accelerated depreciation for
both tax accounting and financial accounting.
➢ Providers of Financing – This is about how the capital market determined the providers of
financing. If it is coming from debt or equity. Debtors and shareholders have a different
interest in the company, debt holders only care about the interest rate. Equity investors care
about the dividend or about the share price of being high or not. Debtors (Creditors) focus
on downside risk, where Equity investors focus on both downside risk and upside potential.
Also, the creditors care more about the balance sheet statement rather than the income
statement. But shareholders care about the growth so they care about both. It is visible in
the debt holder countries they care about the balance sheet where they can find more
detailed information than the income statement. Creditors are in company’s board and/or
have direct access to information on the other hand, All shareholders cannot be in
company’s board and they do not have direct access to information
➢ Inflation - Double or Triple inflation renders historical cost accounting useless. Countries
use adjusting accounting records to correct the distorted accounting numbers in financial
statements. Without any adjustments, during inflation periods, in countries where
accounting serves for taxation, companies will pay taxes on fictitious profits. Inflation can
be a serious problem for some countries and people have to find a way to cope with it.
➢ Political and Economic Ties – Accounting is a technology that is borrowed from another
2.The Influence of Culture
Culture is the way that we think act and interact. It also effects the accounting systems and their
inflations. To understand the cultural difference Hofstede has 5 dimensions; Individualism, Power
Distance, Uncertainty Avoidance, Masculinity, Long-term Orientation.
Gray’s Accounting Sub-Cultures from Countries
▪ Professionalism versus Statutory Control: a preference of using individual
professional judgement and the maintenance of professional self-regulation as
opposed to compliance with statutory control
▪ Uniformity versus Flexibility: a preference of unfirming accounting processing for
all firms vs. flexibility (The Germany’s case of depreciation treatment in financial
and tax accounting)
▪ Conservatism versus Optimism: a preference of cautious measurement to financial
performance vs. more opportunistic methods
▪ Secrecy versus Transparency: a preference of confidentiality and restriction to
public disclosures vs. more transparent, open and publicly accountable approach
Problems Due to Accounting Diversity
› Preparation of consolidated statements – Multinational firms have subsidiaries have all
over the world, so the first-hand statement of these subsidiaries will differ according to the
country. So, the parent firms have to change and integrate the financial statement. This is
just a consumption of the money and energy and time to consolidate the financial statement.
› Access to foreign capital markets or financing abroad – Companies have to translate their
statement to the country that they are trying to get in.
› Comparability of financial statements- in terms of understanding the financial performance
and situation. When the financial statements of both countries have very much differences
it will create a comparability problem.