Multinational Corporations and Financial Accounting Framework

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With the growing internationalization of economic trade and the globalization of businesses and financial markets, financial information prepared according to a national accounting system may no longer satisfy the needs of users whose decisions are more and more international in scope. Multinational companies who were the most affected have been in the forefront in pressuring the International Accounting Standards Board (IASB) as well as the national standard setter to produce a core set of international accounting standards.

In this presentation slide, we would like to discuss:

(a) Define the Multinational Company.
(b) What are the advantages and disadvantages of multinational companies?
(c) Explain how multinational companies benefits from the convergence/ harmonization of accounting standards.
(d) Explain any 5 efforts taken by the Malaysian Accounting Standards Board (MASB) to align the two sets of standards.
(e) Discuss the impacts that occur on the financial reporting of companies in Malaysia arising from the new Financial Reporting Standard.

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Multinational Corporations and Financial Accounting Framework

  1. 1. What is …MultinationalCompany?
  2. 2. Multinational Company (MNC) At least 2 controls countries production delivers services facilities*Originated in 20th century and expanded after World
  3. 3. Also can be named as… Multinational enterprise (MNE), Transnational corporation (TNC), Multinational organization (MNO) , Super National Enterprises, Global companies, Cosmocorps, International corporation.
  4. 4. Examples…..
  5. 5. Characteristics:
  6. 6. Advantages &Disadvantages of Multinational Companies (MNC)
  7. 7. Advantages Acquire larger pool of customer Borderless World- do global, get more customers 96% Consumers/ 67% World Purchasing Power=> Outside U.S.A.
  8. 8. Advantages Create rivalry and increase competitivenessSource :http://www.goldensegroupinc.com/mosongo/0906CW-IndiancompaniesvsMNCsTheRac
  9. 9. Advantages Gain cost advantage Increase efficiency, cut costs India receives most of all offshore revenue Companies from U.S. and Western Europe have hired 170,000 Indians
  10. 10. Advantages Avoid trade barriers Inward investment- build own facilities Japanese car manufacturers invest into UK -avoid EU Common External Tariff- UK can access to high-quality cars at lower prices.
  11. 11. Disadvantages Exploitation on natural resources by MNCs Japanese MNCs - obtain raw materials or lower-cost components to the international markets (Ozoigbo & Chukuezi, 2011)
  12. 12. Disadvantages A threat to economic and political sovereignty of host countries, perhaps Protectionism Keep new entrants away from market- reap profits
  13. 13. Disadvantages Destroy local companies Destroy competition in local market Acquire monopoly through acquisition of domestic firms
  14. 14. Disadvantages MNCs may ignore home countries’ industrial and economic development More investments to foreign countries Less availability of domestic capital
  15. 15. Harmonization ofaccounting standards BENEFITMULTINATIONAL COMPANIES
  16. 16. Systematic review and evaluation of the company performance Communication within the groups become easier Monitoring business operation and take corrective action
  17. 17.  Increases comparability of company performance against domestic and international peers Financial statements presented on same basis Analysis of competitive and operational can be conducted easier
  18. 18.  Attract capital from a larger pool of investors Differences in financial reports reduced Better quality and credibility of financial report Investors understand and confidence
  19. 19.  Reduce reporting costs Simplified consolidation of financial statements of foreign subsidiaries Accountants only require knowledge for common accounting practices
  20. 20. Easier to move accounting staff between foreign subsidiaries Increase mobility of accountants Not need outsource accounting tasks Better respond and manage human capital needs of subsidiaries
  21. 21. What MASB Do???- Align two sets of standards
  22. 22.  Renamed as Financial Reporting Standards (FRS) & Renumbering the standards Correspond to international standards Example: >> IFRS 1 to 5 are FRS 1 to 5 in Malaysia
  23. 23.  Introduced a two-tier reporting framework For non-private entities:>> Financial Reporting Standards (FRS) For private entities:>> Private Entity Reporting Standards (PERS)
  24. 24.  FRS made identical to IFRS and 10 revised accounting standards issued Removed all remaining differences>> Local guidance and editorial matters
  25. 25.  Issued statement about the fully convergence plans with IFRS Ensure companies have sufficient time to prepare Ample time frame was necessary to adopt remaining standards
  26. 26.  Issued Malaysian Financial Reporting Standards (MFRS) Fully IFRS-compliant framework Equivalent to IFRS
  27. 27. What is the impact?? - Arising from new Financial Reporting Standard
  28. 28.  Increase the transparency of financial reporting Provide more disclosures More flexibility in financial reports Principle-based standard To determine stock option value: >> Not only use option pricing model >> Allow for use of valuation techniques
  29. 29.  Increase the credibility and reliability High quality and consistency reports Increases the ability of foreign investors and analysts to understand
  30. 30.  Greater comparability Sets limits on the alternatives allowed for similar transactions Facilitates comparison between Malaysian companies with foreign companies
  31. 31.  Small companies bear a higher cost Lesser resources to handle the implementation and training

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