4500.19 - International Performance Measurement In...

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International Performance Measurement In principle, there should be no difference between evaluation of foreign and domestic operations Multinational Oil MiniCase (based on Set 1, #3) FRA today $1,000,000 769,230. 77 $1,027,766. 31 784,554. 44 Profit = $22,822. 69 NY today $1.30 = 1 $1.31 = 1 FRA later 4% NY later 1% $1,004,943. 62 What tax & accounting issues arise here?
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Central Issues • Has operation added to our shareholders’ value? • To what extent is local management responsible for success (or lack of it)? • Investment/Divestment Questions: – Can additional capital be invested profitably? – Can currently-invested capital be removed profitably? What Are Value-Drivers? • Expected cash flow ; not earnings • Market value of assets • Growth opportunities – Strategic position – Established product in growing market – Examples: Coca-Cola and Pepsi
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Why are there difficulties? • Local currency’s usefulness as unit of accounting • Local currency’s usefulness as store of value • Local currency’s usefulness as medium of exchange } Inflation Differential Inflation differential • May reduce value of historical-cost accounting • Impacts of high inflation – Illusory gains in inventory – Assets carried at values below current market – Overstated profits and understated capital=distorted performance report
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Usefulness as medium of exchange • Restrictions on exchange – Imposed by government – Resulting from lack of external demand • Volatility of exchange – Fluctuating supply and demand • Markets’ capacity to absorb volume – Depends on consistency of supply and demand for
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4500.19 - International Performance Measurement In...

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