Tag: Accounting

Accounting and multinational corporations

Accounting and multinational corporations

Multinational corporations are dedicated to the development of one or more activities in several countries, where they’ll seek to grow their operations, and further expansion of their activities, resulting in an economic growth, given the low costs that allow low prices and an expansion of their market.

Regarding the precise definitions of a multinational, there has been a certain amount of controversy over the different ones that exist. Some define it as any company that maintains economic operations in more than one country, while others argue that this should not be limited to possessing operations outside the borders, but they must also have capital and staff from different countries as well.

Several different types of corporations can be identified. An ethnocentric company is oriented to their nation and its subsidiaries are controlled by the parent company, the accounting system is based upon the practices used in the country of origin, and there is a permanent domain of the head office. A polycentric company implies a decentralization in which the development of the accounting practices of each of its subsidiaries is allowed, and the economic returns are expected by the parent company. In the case of a geocentric company, accounting information systems are accessible to the systems of all countries involved in it. Its design is created based upon the systems of the most developed countries and international standards.

Needs and financing

What needs do these multinational corporations develop and how can they be financed?

Among the needs we can find a quest for homogenization on how to use the resources, personnel and financial information, and, overall, the control of its subsidiaries, creating an organizational environment with efficacy. Another need is to create good relations with the governments of countries in which the subsidiaries of the multinational firm are located, demonstrating the benefits it generates, thus allowing an atmosphere of trust that will facilitate an easy access and distribution of their products.

A multinational firm must comply with various legal areas allowing the development of its activities and creating a degree of confidence in their products and the financial information presented to users, which should be easy to understand since it should be developed based on the normative aspects of their country.

In order to work on these needs, multinationals must have a source of funding that can be a north american source for obtaining funds, an international source of funds, local sources of funds abroad, or other foreign sources of funds.

Accounting development of multinationals and its issues

While the basic techniques of accounting for business transactions are the same regardless of the country in which the business is conducted, problems arise when applying these techniques to foreign operations, which do not exist in domestic operations.

These problems grow out of conditions such as the distance from the parent company, different languages and the resulting barriers to facilitate communications, different laws and legal systems, different stages of progress in the art of applying accounting, different accounting practices, and different types of currency. Let’s take a closer look at each one of these.

  1. Distance from the parent company: this difficulty is presented by the distance between the parent company and its subsidiaries at the time of collection of the information related to the different movements and transactions that will be necessary to prepare financial statements.

In many cases the parent companies attribute the delay in getting the financial statements of foreign subsidiaries to the fact that accountants in some countries do not put much emphasis on periodic reports, as do the accountants in developed countries.

  1. Different languages: local laws and employment of local staff make it necessary to keep accounting records in the national language and the national currency in most countries, without the need to store this information in a different language (the parent or subsidiary’s language), causing problems when it comes to analyzing and interpreting the information presented by different companies.
  1. Foreign laws: Each country has its own laws and administrative agencies that regulate accounting in that country. Due to the approach given to every law in their country of origin, this leads accountants to give a different management to their profession, be it thinking about the welfare of the company, state or partners.
  1. Differences in accepted accounting practices: when a subsidiary conducts its financial statements, these are made according to the laws of each country. When consolidating the information, certain difficulties may arise. When differences are material, subsidiaries adjust their statements to the accepted practices that the parent company follows.
dollars no cents_multinational corporations_shahram shirkhani
Image courtesy of Monica PC at Flickr.com

Some companies require that all of their subsidiaries follow the same methods of accounting, which is why multinational companies have an accounting manual that provides a set of accounts, standard depreciation rates and a number of reporting forms. All of this makes it possible to compare accounting and costs between countries.

  1. How to ensure a competent accounting staff abroad: what is believed to be the most appropriate is to have a responsible accountant in the same country as the subsidiary, but many multinational companies do not agree, and have sent local staff from the parent office to perform these duties in the various subsidiaries they own.

In search of a greater degree of trust and credibility of transactions and movements made by each subsidiary, the parent chooses to apply some of their practices in other countries, sometimes without being aware that this can bring administrative and legal consequences to its subsidiaries. This is why it is best to train foreign personnel to perform their duties according to what the headquarters want, but proportionately to the development of said countries.

  1. Accounting issues due to differences in currency: due to devaluation, in some cases, when the foreign currency is converted to the local one, a company can go from profiting to losing.

What many multinationals sometimes don’t understand is that the profit margins that are satisfactory when measured in local currency, may not be the most appropriate to compensate for the devaluation and thereby maintain working capital and productive capacity.