Lecture 4

Question 1

What are strategic issues with strategic planning: (2)

Answer 1

1. Strategy Formulation - this involves determining the organizational goals and strategies to achieve those goals.
2. Strategy Implementation - This involves managerial efforts to influence employees to achieve those organizational goals.

Question 2

How do management accountants play a role in Strategic Planning?

Answer 2

Management accountants provide information towards the strategy formulation and implementation.

Question 3

Define and explain the use of Budgeting

Answer 3

Budgeting is the primary use of accounting information in strategy formulation.
- It assists strategy formulation by providing managers with information about short-term and long-term responsibilities.
- It also provides expectations against which future results could be judged.

Question 4

What is Capital Budgeting? Provide the 3 main steps:

Answer 4

Capital budgeting refers to large, long-term investments. There are 3 steps to capital budgeting:
1. Project identification and definition: Finding opportunities
2. Evaluation and selection: Comparing projects based on risks and returns.
3. Monitoring and review: Ensuring the selected investment is on track for success.

Question 5

What are the 4 Capital Budgeting techniques:

Answer 5

1. Payback period
   
   2. Return on Investment
   3. Net Present value
   4. Internal rate of return

Question 6

How do you calculate and determine an Acceptable project with the Net Present Value (NPV) method?

Answer 6

NPV = Present value of future cash flows - Initial Investment
Acceptable project: NPV >/= 0

Question 7

What are the downsides of the NPV method? (2)

Answer 7

• It cannot be used for projects of different sizes
  
  • Favors large projects

Question 8

What is an upside of the NPV method? (3)

Answer 8

• It includes the cost of capital, interest rate and is derived from the required return.

Question 9

Can you apply the 4 Capital Budgeting methods in international situations?

Answer 9

Yes, however cautiousness is requiredand some information is needed as the international context can be complicated by several factors:
- Risks associated to future cash flows.
1. Political Risk
2. Economic Risk
3. Financial Risk
- Information may be needed relating to:
Taxes, import duties, dividend restrictions, and cash flow limitations imposed by governments.

Question 10

Describe how political risk may influence capital budgeting in an international context:

Answer 10

There is a likelihood that political events will impact cash flows.
- The risk can vary from one country to another
- Nationalization and expropriation of assets is the most extreme form of political risk.
- Political risk can also be associated with changes in foreign exchange controls, repatriation restrictions, tax rules, and labor laws.

Question 11

Describe how economic risk may influence capital budgeting in an international context:

Answer 11

This is the risk that may impact cash flows through the performance of the host country’s economy.
- Examples of economic risk:
○ Country’s balance of payments
○ Inflation - this is the most significant of economic risks.
§ Affects the host country’s population purchasing power.
§ Impacts the company’s cost structure.

Question 12

Describe how financial risk may influence capital budgeting in an international context:

Answer 12

Cash flows may be impacted by financial risk when there are changes in currency values, interest rates, and other financial factors.

Question 13

Define Management Control and explain why it may be relevant to strategy implementation for accountants:

Answer 13

• Management control aims to evaluate the implementation and effectiveness of strategy.
  ○ Accounting is through its role in operating budgets and performance evaluation.
  ○ Operating budgets create a link between strategy and performance (more towards the short-term)

Question 14

Define Ethnocentric:

Answer 14

Home country-oriented organizational structure.

Question 15

Define Polycentric:

Answer 15

Both the host and unique product strategy is taken into account in the organizational structure.

Question 16

Define Geocentric:

Answer 16

Global network structure that supports both product and geographical divisions.

Question 17

What factors affect management control?

Answer 17

• Organizational structure and culture
  
  • Levels of control and delegation
    ○ Influenced by the organizational structure and roles of each division in the structure.

Question 18

What are the 2 types of management control systems? Define them:

Answer 18

• Bureaucratic control - employs a significant amount of structure.
  
  • Cultural control - more informal and less structured.

Question 19

Explain the use of Performance Evaluation (PE) for MNCs:
Give factors that may impact the measurement of PE’s: (4)

Answer 19

PE is about Monitoring an organization’s effectiveness. However, this can be a complex issue for an MNC as there are many factors that impact the measurement of effectiveness, such as:
- Exchange rate fluctuations
- Inflation
- Transfer pricing
- Cultural and environmental differences

Question 20

What is considered in order to create an effective performance evaluation system?

Answer 20

1. Which performance measures?
   
   2. The treatment of foreign operations as a profit or investment center
   3. Evaluation of foreign operations versus the manager of the unit.
   4. How to measure profit?
      Although all of these questions may not be taken into account, these questions can help guide us on finding the right factors specific to the foreign operation.

Question 21

What are the 2 types of measures that could be used for performance evaluation?

Answer 21

1. Financial measures are based directly on financial statement data:
   
   • Net profit
   • Return on investment
   • Comparison of budget to actual profit
     2. Non-financial measures are based on data not obtained directly with financial statements:
   • Market share
   • Labor turnover

Question 22

Explain the Performance Evaluation-Balanced Scorecard

Answer 22

This approach is used to acquire a “balanced” consideration to both financial and non-financial measures.

Question 23

What are the 4 balanced scorecard perspectives?

Answer 23

There are 4 stakeholder perspectives:
1. Shareholder perspectives - in financial measures
2. Internal business perspective- this is reflected in business process measures.
3. Customer’s wishes and interests in customer perspective
4. Employee’s perspective- future generations in an innovation and learning perspective

Question 24

What are Responsibility centers? Name the 3 types:

Answer 24

The idea of responsibility centers is to identify the activities that the individual units perform and what classification are they responsible for?
1. Cost centers- the job of these centers is to produce an output using a certain amount of resources.
2. Profit centers- these are responsible for costs and revenues.
3. Investment centers- these have the responsibilities of a profit center plus for investment decisions:
- Return on Investment (ROI): this is the most common performance measure for an investment center.

Question 25

How can you separate managerial and unit performance?

Answer 25

In an international context, there are a number of factors which create a separation between manager performance and unit performance. These factors are referred to as “uncontrollable items”. Responsibility accounting implies that managers should not be held accountable for uncontrollable items.

Question 26

What are Uncontrollable Items:

Answer 26

These include the circumstances controlled by the parent company, the host government, or controlled by others out of the managers power.

Question 27

How can a company measure profit internationally?

Answer 27

- Either local or parent currency. - Local currency is appropriate if the subsidiary is not expected to pay parent currency dividends § Otherwise, Parent Currency is appropriate. - When the parent currency is used, the company must choose a translation method. —> A decision must be made about whether the translation adjustment must be included in the profit measure or not.

Question 28

How can a company determine whether to include the translation adjustment or not?

Answer 28

- Does the adjustment reflect the impact of exchange rates on the parent currency cash flows? - Does the local manager have the authority to hedge against exchange rate changes? If yes —> Include translation adjustment. If no—> they can decide As the translation adjustment is for internal purposes, it is not required by law to follow accounting standards for this.

Question 29

Once the host country project has run, how can you compare the budgets vs. the actual results and what are the potential variances?

Answer 29

- Maintaining local currency: - Budgets vs Actual Results (in local currency) - Variances: Sales volume & Local currency price - Parent currency: - Budgets vs Actual Results (in parent currency) - Beginning vs Ending exchange rate Variances: Sales volume, parent currency price, exchange rate variance

Question 30

The success of a performance evaluation system depends on a number of factors:

Answer 30

- Integration of the Performance Evaluation system with the overall business strategy. - Feedback of actual results and revision of budgets - Comprehensiveness of the set of performance measures: Does this consider the right perspectives? Financial and non-financial for example? - Organizational buy-in: Employees should be able to understand and accept the measurements, they should not blindly follow a random system. - Reasonableness of budgeted measures: should be feasible. - Understandability and simplicity of the system.

Question 31

What is sustainability reporting?

Answer 31

Sustainability reporting builds on traditional financial reporting by providing information about an entity’s environmental and social practices.

Question 32

What are the theories to explain sustainability reporting?

Answer 32

GRI is the largest voluntary reporting framework: - Stakeholder theory: Disclosures in sustainability reports are given in response to the stakeholder demand for environmental and social information. - Legitimacy theory: Social reporting is a mean to deal with firm’s exposure to political, economic, and social pressures. This aims to address perceived goals of society to legitimize their performance.

Question 33

What is a common issue with the stakeholder theory in sustainability reporting?

Answer 33

The stakeholder theory fails to explain why there are different disclosures in similar industries in the same geographic areas.

Question 34

What are the 2 types of investors companies need to consider for sustainability reporting?

Answer 34

- Traditional Investors: care about the company profitability and stock performance. - Socially responsible investors (SRI’s): These are investors who make social and environmental performance a significant factor in decisions. Both of these groups care about the social and environment, however the difference of the two investors are the emphasis of importance from each investors perspective.

Question 35

Where is Sustainability Reporting Mandatory?

Answer 35

- European Union - GRI Reporting framework - OECD Guidelines for Multinational Enterprises - ISO 26000 - Hong Kong Stock Exchange - Disclosure is needed § Key Performance Indicators (KPI’s) should be reported or mentioned why it can’t be determined.