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Unformatted text preview: Chapter 12 - Strategic Accounting Issues in Multinational Corporations CHAPTER 12 STRATEGIC ACCOUNTING ISSUES IN MULTINATIONAL CORPORATIONS Chapter Outline I. The strategic issues faced by a MNC are related to strategy formulation and strategy implementation. A. Strategy formulation is the process of deciding on the goals of the organization and plans for attaining those goals, whereas strategy implementation refers to the process by which managers influence others within the organization to behave in accordance with those goals. B. Capital budgeting is an important activity associated with strategy formulation, and strategies are implemented mainly through operational budgeting and performance evaluation. Accounting plays a major role in these activities as a source of information. II. Accounting provides quantitative information about (a) opportunities and threats as well as strengths and weaknesses, and (b) costs and benefits needed for long-term investment (or capital budgeting) decisions. A. Techniques such as payback period, return on investment (ROI), net present value (NPV), and internal rate of return (IRR) are employed in making long-term investment decisions. B. All capital budgeting techniques compare estimates of future cash flows with the cost of the investment. C. NPV and IRR take the time value of money into consideration by calculating the present value of future cash flows in evaluating potential capital investments. D. Preferences for using particular capital budgeting techniques vary across countries due to cultural and other reasons. E. In calculating future cash flows from foreign investments, MNCs should consider various risks associated with them, namely, political risk, economic risk, and financial risk. F. MNCs tend to evaluate foreign investments from both project and parent viewpoints. III. Accounting provides tools for implementing strategies and monitoring their effectiveness through the development of operating budgets. A. Operating budgets help express a firm’s long-term strategy within shorter time frames and specify criteria for monitoring progress. B. It is important for MNCs to translate operating budgets of foreign subsidiaries using an appropriate exchange rate. IV. Accounting provides tools for evaluating organizational effectiveness in fulfilling its objectives, and at the same time for motivating organizational members to behave in a manner consistent with the organization’s goals. A. The level of performance depends on many factors, and no single measure can incorporate all of them. Therefore, it is common for MNCs to use a mixture of measures, financial and non-financial, formal and informal, and formula-based and subjective in evaluating performance....
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- Spring '11