FINANCIAL

MANAGEMENT
FOR MNCS AND
THEIR
ACCOUNTING

Asif Ishaq
FCA (ICAEW), FCCA
 AGENDA
-nature of country risk with a special focus on emerging
markets.
-how country risk relates to international investments.
- how to estimate the cost of capital and the future value of an
international investment
-how international managers decide on the mix of debt and
equity for the capital structure of an MNC’s subsidiary.
- How Tariffs impact the value chain
-basic methods of payment in international trade and export
financing options
-managerial and Financial Accounting
-types of accounting systems around the world
-emerging markets accounting complexities
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INTRODUCTION
Financial Management in MNCs and their
accounting has many aspects.
Right and aware decision making plays a
key role when expanding and operating in
ever changing complex world.
Decisions such as which country to invest
in (country risk),what should be the capital
structure (WACC) and when the investment
will be recovered (NPV) create challenges.
Accounting, IFRS, US GAAP, UK GAAP,
which one to choose? Tariffs? Where to list
in stock exchanges? Dual listing vs single
listing.
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FINANCIAL
MANAGEMENT
COUNTRY RISK
Country risk:
how a country’s business environment might influence
the MNC’s profits or the value of its assets (e.g.
factories, inventory) within the specific country

Economic risk:
considers a country’s economic strengths and weaknesses and
how these might affect
Investments

Financial Risk:
the ability of the country to finance its trade debt and
commercial obligations 5
COUNTRY RISK
Political Risk:
the political stability of a country in areas such as civil unrest,
war, terrorism, and changing regulations

Sustainability Risk:
the factors that may increase the cost of capital or reduce
profits through changing
environmental conditions or changing regulatory environments
– can cause 12% decline in market value – e.g. Biodiversity,
Climate change and energy, water, Health and environment

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COUNTRY RISK

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COST OF CAPITAL AND NPV
Capital Budgeting:
the process of determining whether a project should be financed
based on its
expected financial returns

Net Present Value (NPV):

technique used to estimate whether and when an initial capital
investment will lead to
future cash flows that exceed the cost of the capital

Weighted average Cost of Capital (WACC):

what should be mix of finance for new project equity vs debt. What is
the optimum structure- Pecking order theory argues that a company
will always prefer internal sources of funding such as equity over 2/7/20XX 8
COST OF CAPITAL AND NPV
Factors Impacting Cost of capital for MNCs

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COST OF CAPITAL AND NPV

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COST OF CAPITAL AND NPV- TRADITIONAL- EXAMPLE

Tesco example:
• Third ranking retailer in the world, expansion in the US in 2007
• Abandoned the project by 2012
• Initial estimate £250 million vs actual costs of £1 billion
• Fresh products did not work in the US
• Estimates at the start of project were wrong for cost outlay and
return
• Had to spend e.g. $100 million on own food preparation centre
• Worst economic situation, overestimating demand of products,
internet shopping, buy local, all contributed to Tesco failure

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COST OF CAPITAL AND NPV

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COST OF CAPITAL AND NPV
• The UK headquartered Gymshark’s story can be traced back to the
garage of its founder and CEO, Ben Francis, who started the brand as a
small screen-printing operation in 2012.
• Since then, the Gymshark brand has grown significantly, using social
media and fitness influencers to leverage their reach to both gym
enthusiasts and casual gym-goers alike.
• Today, Gymshark only has four physical locations, functioning primarily
as a direct-to-consumer (D2C) online brand that operates in over 180
countries worldwide.
• Total revenue global £459m UK- £112m
• Only 1 store in the UK, all online sales, social media and influencers, sells
gym clothing, online fitness app

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TARIFFS
Latest update

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TARIFFS
Latest update : 10th April- blanket us tariff of 10% except China

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METHODS OF PAYMENTS
Various method of payments and their risks

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METHODS OF PAYMENTS

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 ACCOUNTING FOR
MNCS

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NATIONAL ACCOUNTING SYSTEM

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REGULATORY QUALITY

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ACCOUNTING SYSTEMS

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INTERNATIONAL ACCOUNTING
STANDARDS- EXAMPLE
Unilever accounts:
b09c3510ee7cec58440d5f044f02bdefe85aa186.pdf (unilever.c
om)
Financial Statements are prepared using IFRS:
Extract from Unilever report

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INTERNATIONAL ACCOUNTING
STANDARDS
International Accounting Standards Board (IASB)-an
independent accounting standard setter located in London,
UK

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Stages of adoption

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PRIORITIES – TRANSFER PRICING
Priorities of MNCs with regards to transfer pricing

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 THANK YOU-
QUESTIONS
Asif Ishaq FCA, FCCA
[email protected]

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