Question

Why do the accounting systems of different countries differ? Why do these differences matter?

why might an accounting- based system provide headquarters management with biased information about the performance of a foreign subsidiary? how can these biases best be corrected?

you are the CFO of the U.S. firm whose wholly owned subsidiary in Mexico manufactures component parts for your U.S. assembly operations. The subsidiary has been financed by bank borrowings in the U.S. one of your analysts told you that the Mexican peso is expected to depreciate by 30% against the dollar on the foreign exchange markets over the next year. what actions. if any. should you take?

you are the CFO of a Canadian firm that is considering building a $10 million factory in Russia

Answer 1

1) Why do the accounting systems of different countries differ? Why do these differences matter?

Ans:- Accounting systems are shaped by the environment of the country, and have evolved to meet the nature of demand for accounting information in that country. Five factors seem to influence the type of accounting system in a country. These are 1) the relationship between business and the providers of capital, 2) political and economic ties with other countries, 3) levels of inflation, 4) the level of a country's development, and 5) the prevailing culture of a country. These differences are important because they affect the way financial reports are created and interpreted, and make comparisons across borders difficult.

2 )why might an accounting- based system provide headquarters management with biased information about the performance of a foreign subsidiary? how can these biases best be corrected?

Ans:-There are three primary reasons why accounting based control systems may provide headquarters management with biased information about the performance of a subsidiary: exchange rate changes, transfer prices, and general economic conditions. Because exchange rates can change over the course of a budget, translated financial data can be misleading - an increase in domestic sales could actually show up as a decrease after translation due to home currency appreciation. By using a common exchange rate for both budget setting and evaluation (i.e. the initial rate or a forecast rate), this problem can be addressed. Since multinational firms often have significant intra-firm transactions, prices have to be set on these transactions. Due both to the difficulty of setting such prices fairly, and the incentives to set prices in order to minimize tax or import duties, profitability of units can be distorted by unrealistic transfer prices. Since it can be impossible and inefficient to use only fair transfer prices, the effects of transfer prices have to be taken into consideration when evaluating the performance of a subsidiary. Lastly, different foreign subsidiaries may be operating in vastly different business environments. The subsidiary that is growing and barely showing a profit in an economy that is in recession is clearly doing better than one that is growing quickly and is profitable, but in country where the GDP is growing twice as fast as the subsidiary.

3) you are the CFO of the U.S. firm whose wholly owned subsidiary in Mexico manufactures component parts for your U.S. assembly operations. The subsidiary has been financed by bank borrowings in the U.S. one of your analysts told you that the Mexican peso is expected to depreciate by 30% against the dollar on the foreign exchange markets over the next year. what actions. if any. should you take?

Ans:- This issue suggests that some interest and principal will have to be repaid in U.S. dollars in the near future, but the plan was likely to pay this off out of earnings from the Mexican subsidiary. Paying off the entire loan in advance before the peso depreciates would be a good option. At least the peso funds could be transferred out of Mexico now and invested in the U.S. in dollars to pay off the loan later. Alternatively, it may be possible to use a forward rate to lock in an exchange rate now for future remittances, but unless the analyst has some information that is not generally available in the market, the efficacy of this approach will be limited since the forward rate will likely already reflect the expected depreciation. Another option available is to simply pay off the loan with funds already in the U.S. over time, and retain the pesos in Mexico for reinvestment if needed. The actual action taken would likely depend upon the size of the loan, any restrictions on the loan, and where funds are most efficiently available for paying off the loan. In any case, it would probably be unlikely that the best solution would be to wait until later to exchange pesos for dollars later to pay off the loan.

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