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Strategic Accounting Issues in Multinational Corporations

Strategic Accounting Issues in Multinational Corporations. Determining Net Present Value For a Foreign Investment. Present Value of estimated future cash flows Minus initial investment = Net Present Value. Three Inputs. Future Net Cash Flows (estimate) Discount Rate Initial Investment.

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Strategic Accounting Issues in Multinational Corporations

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  1. Strategic Accounting Issues in Multinational Corporations

  2. Determining Net Present Value For a Foreign Investment • Present Value of estimated future cash flows • Minus initial investment • = Net Present Value

  3. Three Inputs • Future Net Cash Flows (estimate) • Discount Rate • Initial Investment

  4. Future Cash Flows • Risks associated with foreign investments can have an adverse impact on cash flows: • Political risk • e.g., foreign exchange controls, repatriation restrictions, tax and labor laws, expropriation • Economic risk • e.g., inflation, currency devaluation • Financial Risk • e.g. interest rates, FX exchange rate movements

  5. A major question: • Should NPV be based on project cash flows (in local currency) or • Parent cash flows??

  6. Project Perspective • Factors to consider: • Taxes • Rate of inflation • Political risks (e.g., price controls, government intervention in a market)

  7. Parent Perspective: • All of the project concerns, plus: • Form of repatriation (dividend, interest, etc.) • Exchange rate movements • Added Political risks (e.g., repatriation restrictions)

  8. Factors can be added in two ways: • Into estimates of future cash flows • By adjusting the discount rate

  9. Performance Evaluation of Foreign Operations • Example: Sun Visors is considering establishing a manufacturing facility in Brazil • How can we evaluate? • Return on investment?? • IRR? • NPV?

  10. Performance Evals • If the parent is decentralized- must hire a manager and motivate that manager to achieve corporate objectives. • Should financial criteria be used? • Nonfinancial? • The environments such units operate in are often diverse. How can one size fit all?

  11. Performance Evaluation Issues • Selection of performance measure (balanced scorecard, financial measures, etc.) • Investment, profit or cost center? Should the unit be accountable for all profit, or just controllable profit? • How should profit be measured? Local currency? Parent currency? • Should performance eval be adjusted for country specific risk?

  12. Profitability measures commonly used: • ROI • Budget vs actual profit

  13. Separation of Managerial and Unit Performance • Uncontrollable Items • Sales revenue/COGS when determined by discretionary transfer pricing • Allocations of corporate expenses • Restrictions on Foreign exchange spending • Price controls • Lost production from labor strikes • Foreign exchange rate movements (sometimes) • Etc.

  14. Translating Results of the Unit Should FC rate used: Cause FC movements to create changes in profitability for evaluation purposes?

  15. Possibilities Rate Used To Track Performance Actual at TOB Projected at TOB Actual at EOP Budget rate • Actual X ** • Projected X * • EOP X X = manager not responsible for FC effects * = manager is partly responsible **= manager is fully responsible

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