Environmental Force Shaping Globalization Accounting Help

Companies considering international operations as a means of fulfilling strategic objectives need to undentand how international environmental forces affect the accounting infonnation measured, reported, and created. We consider these environmental forces in
four categories: (I) political and legal systems, (2) economic systems, (3) culture, and (4) technology and infrastructure. You should not think of these categories as independent. As the following exhibit demonstrates, a country’s economy and culture have an influence on its political and legal structures. Culture affects and is affected by economics. The technological position  of a country is dependent on political, demographic, and cultural issues.

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Political and Legal Systems Managers operating in or planning operations in foreign settings must track and attempt to manage political risks associated with the country of operation. Political risk occurs . when governments shift asset ownership from the company to the government or when r the company ‘relinquishes command over operations due to government intervention.

For example, when Iran -nationalized its oil industry in the late 1970s. many companies lost ownership of the assets they had invested in oil exploration. drilling. and oil delivery. Laws enacted by foreign governments often have an impact on the net profits earned on international activities. Taxes. tariffs. and licensing fees vary substantially from country to country.

Laws restricting the flow of currency can affect the amounts of foreignearned profits that can be transferred out and used elsewhere. Ownership requirements are a common form of governmental control. Por example.

governments in China and India have made creating wholly owned subsidiaries in their countries very difficult. Joint ventures in China typically result in Chinese companies (or citizens) owning at least 51%  of the joint venture company. Other types of political intervention include content or value-added requirements and _ sourcing requirements.

Trade agreements often specify the source of raw material. or bor content to allow preferential treatment in tariffs and customs for products or st:n t..’s that are produced in the regions covered by the agreement. For example. NAFfA (the North American Free Trade Agreement) specifies regional value content conditions to qualify for favorable tariff and customs duty treatment.

Regional value content requirements come into play when a good is manufactured partially in countries that are mern-hers of the free trade agreement and partially in countries that are not. These rules can be very complex and dictate the amount of total cost or the percentage of the sales price · that must be added in those countries thar have signed the free trade agreement. Governments create tariffs, duties, and special trade zones that affect the cost associated with producing and selling goods and services in ,markets. Because countries wish to encourage or discourage particular .types of importing or exporting activities, they use their political powers to regulate cross-border commerce. For example, the U.S. government has identified several foreign trade zones within the United States. Goods imported into these zones are- duty-free until they leave the zone. Companies that import raw materials frequently sct up their factories in these trade zones.

These companies are not required to. pay duty on the imported raw materials until the tinished product is shipped out of the zone. The delay in paying duty enlarges the company working capital as discussed in .The costs added by the governments where a company is operating or planning to operate must be considere’d when resource allocation decisions are made.

A manager practicing global sourcing will need information on taxes, tariffs, local content laws, and so oil to make effective, competitive resource decisions. Legal reporting requirements vary significantly from country to country.

Differences in accounting practices reflect the influences that shape business activity in the country, ·,the legal environment In which the business operates, and the primary providers of decapitator the’ business. For ‘example, in the United .

Kingdorn and the United States, reporting requirements are based primarily on the need to provide useful information for investors and. creditors: Thinned results from those countries having many companies that raise capital! by selling their securities in well-developed capital markets.

In Europe Japan, .on the other hand, banks provide much of the capital for business. In those countries, accounting requirements are more legalistic and are intended to satisfy governmental reporting requirements, including income tax reporting. In South America, financial reporting is oriented toward the needs of governmental planning and follows practices dictated by the government .

These differences in accounting practices create problems in trying to ‘analyze and compare accounting information. For example, financial reporting in the United States, is based primarily on the principle of historical cost without adjustment for changes in general price levels.

South American countries, on the other hand, have experienced such high rates of inflation that inflation-adjusted informational is required in most countries:’

Similarly, differences exist in the financial reporting requirements in ‘the United States and Mexico in, such important areas as earnings per share, .consolidation of financial statements, and reporting for retiree medical and insurance benefits. These differences cause the financial statements of a U.S. company and those of a Mexican company to be’ very different and difficult to compare.

 As long as an enterprise operates solely within its own borders, differences in financial reporting practices between countries are not as significant a problem as they are if business activity extends across borders.

When a company buys or sells products in another  country, the lack of comparability of accounting information becomes a greater problem. Similarly, cross-border financing, in which a company sells its securities in the capital markets of another country, has become increasingly popular.

Business activities that cross borders create the need for more comparable information between companies that reside in different countries. This, in turn, has ied to an interest in the harmonization
of accounting standards, a phrase used to describe the’ standardization of accounting methods and principles used in different countries throughout the world. The International.

Accounting Standards Committee (IASC) is particularly interested in
harmonization and is charged with the responsibility of establishing and gaining acceptance of international accounting standards. 1 he sale represents 110 professional organizations and over 1 million accounting professionals worldwide. While the sale has no regulatory authority in any country, it uses its influence to move the reporting standards of all countries closer together in hopes of better harmonizing those standards, For countries that do not have well-developed capital markets, lASe standards provide model that often has a significant i-nfluenceon,their early attempts to develop standardized accounting practices.

As countries change and grow, governments try to managethat growth through political and legal means. For example, in addition to creating legal reporting requirements for companies wishing to raise capital in equity markets, governments also use tax incentives for individuals that encourage or discourage ownership of stocks, Employment and governmental policies also affect the level of. individual savings, which has an impact on the availability of capital in a specific country. Educational’ policies impact the literacy rate. extent of formal education and training.’ and level or management development.

The political and legal structures of each country provide the framework for their economic structures. Although the political, legal, and economic structures are discussed here as separate ideas, you should think of these structures as highly related. These structures evolve and change over time, affecting the flow of capital and goods across borders.

Economic Systems The economic systems under which businesses operate significantly affect the form and availability of accounting information. In a planned economy, the government uses central planning to allocate resources and determine output among various segments of the economy.

Land and production facilities are government owned and controlled. The for- . mer Soviet Union and Soviet Eastern Bloc countries used central planning and had planned economies. China continues to use central planning extensively. In market economies, ownership of land and the means of production are private, and markets dictate the allocation of resources and the output among segments of the economy.

Companies formerly operating in a planned economy can encounter significant difficulties when attempting to operate in a market economy. The reverse can also be true. Many companies from market economies have been unsuccessful when attempting to do business. in foreign locations that are primarily planned economies .These differences in accounting practices create problems in trying to ‘analyze and compare accounting information.

For example, financialreporting in the United States, is based primarily on the principle of historical cost without adjustment for changes in general price levels. South American countries, on the other hand, have experienced such high rates of inflation that inflation-adjusted informatlorr is required in most countries:’ Similarly, differences exist in the financial reporting requirements in ‘the United States and Mexico in, such important areas as earnings per share, .consolidation of financial statements, and reporting for retiree medical and insurance benefits.

These differences cause the financial statements of a U.S. company and those of a Mexican company to – be’ very different and difficult to compare. ‘ As long as an enterprise operates solely within its own borders, differences in financial  reporting practices between countries are not as significant a problem as they are if business activity extends across borders. When a companybuys or sells products in another  country, the lack of comparability of accounting information becomes a greater problem.

Similarly, cross-border financing, in which a company sells its securities in the capital markets of another country, has become increasingly popular. Business activities that cross borders create the need for more comparableinformation between companies that reside in different countries. This, in turn, has ied to an interest in the harmonization of accounting standards, a phrase used to describe the’ standardization of accounting methods and principles used in different countries throughout the world.

The International Accounting Standards Committee (IASC) is particularly interested in harmonization and is charged with the responsibility of establishing and gaining acceptance of international accounting standards. 1 he lASe represents 110 professional organizations and over 1 million accounting professionals worldwide. While the lASe has no regulatory authority in any country, it uses its inlluence to move the reporting standards of all countries closer together in hopes of better harmonizing those standards, For countries that do not have well-developed capital markets, lASe standards provide u model that often has a significant i-nfluenceon,their early attempts to develop standardized accounting practices.

As countries change and grow, governments try to managethat growth through political and legal means. For example, in addition to creating legal reporting requirements for companies wishing to raise capital in equity markets, governments also use tax incentives  for individuals that encourage or discourage ownership of stocks,

Employment and governmental policies also affect the level of. individual savings, which has an impact on the availability of capital in a specific country.

Educational’ policies impact the literacy rate. extent of formal education and training.’ and level or management devolopment. The political and legal structures of each country provide the framework for their economic structures. Although the political, legal, and economic structures are discussed here as separate ideas, you should think of these structures as highly related. These structures evolve and change over time, affecting the flow of capital and goods across borders.

Economic Systems The economic systems under which businesses operate significantly affect the form and availability of accounting information. In a planned economy, the government uses central planning to allocate resources and determine output among various segments of the economy. Land and production facilities are government owned and controlled.

The former Soviet Union and Soviet Eastern Bloc countries used central planning and had planned economies. China continues to use central planning extensively.

In market economies, ownership of land and the means of production are private, and markets dictate the allocation of resources and the output among segments of the economy. Companies formerly operating in a planned economy can encounter significant difficulties when attempting to operate in a market economy. The reverse can also be true.

Many companies from market economies have been unsuccessful when attempting to do business. in foreign locations that are primarily planned economies .
• Environmental Forces Shaping Globalization/on In 1997, Antechamber abandoned a joint venture in the People’s Republic of China because of bureaucratic and technological difficulties. The number of failed and abandoned Joint ventures in China Is a reminder that expertise In one economic system may not transfer· to other locations. Obtaining capital and creating international business partnerships require an understanding of international differences in how capital is acquired and how businesses are organized. Although the United Sautes has a strong capital market where companies can acquire capital by issuing equity shares in the company, many other countries’ have either no capital market or a very restricted, low-volume market. In those countries, banks or governments are the dominant providers of capital. Islamic governments (Iran and Sudan) do not allow banks to make interest payments to depositors. Instead, individual depositors share in·the bank’s profits. Commercial borrowers pay the bank and its depositors a share of their profits instead of interest. Government restrictions on the availability of capital significantly influence how accounting information is treated and reported

The way businesses are organized into industrial organizations is one reason methods for raising capital can be very different around the globe. In some Asian countries, such as South Korea arid Japan, companies group themselves. into conglomerates representing different industries. South Korean conglomerates, called chaebol. and Japanese conglomerates. called keiretsu. consist of companies that are grouped as customers and suppliers. and they usually contain a bank, Within these cartels of companies. suppliers receive loans, instrumentalist, technology. and long-term supply agreements from customers higher up on the pyramid.

Suppliers integrate their operations with other suppliers and with their customers. Transactions between suppliers and customers are not arms length as in most U.S. transactions. ln the United States, antitrust and price-fixing laws. preclude the type of organized business groups found in Japan and South Korea.

Posted on November 23, 2015 in Global Business and Accounting

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