Why should financial comparisons of multi-national companies with subsidiaries in different countries be undertaken with caution?

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Shamir Patel – BAC4                                                                             International Accounting 2                                                                                  

Student No: 00006150                                                                             Multinational Corporations

Why should financial comparisons of multi-national companies with subsidiaries in different countries be undertaken with caution?

A multinational corporation (MNCs) is, “an international or transnational company with its headquarters in one country but branch offices in a wide range of both developed and developing countries” It is generally accepted that a MNC involves producing and selling goods in several different countries. The expansion of corporations internationally tends to be one of the most important goals for continuing success.

The creation of a subsidiary in a new country creates many problems for the corporation. Consideration will be given to both internally and externally financial reporting problems. The focus of this essay will be on the language, currency, Accounting Standards and external audit problems and why caution has to be taken when comparing MNCs.

For MNCs, deciding on what language to use for reporting purpose can be a problem, this is because each subsidiary may have a different native language. Making this decision will depend on the language which is the most recognisable by their portfolio of investors. The majority of the MNCs would produce reports in English or have copies available in English. The language chosen does not tend to be a major problem to investors. This is due to English been well known globally and many investors being multilingual or having access to translation services. Terminology tends to be a bigger problem. An example of this is the American word ‘stock’ which describes what in the UK is ‘shares’ and the British use of the word ‘stock’ is labelled as ‘inventory’ in the US.  The more experienced users of financial statements would understand these problems and as a result they may not be affected. On the other hand the less experienced would find it more difficult to understand.

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One of the benefits of having a multinational operation according to David Gayfer is to generate long-term capital in the countries where their are subsidiaries of the MNCs. However, certain stock markets require stringent rules i.e. the New York stock exchange requires accounts to be prepared in accordance to US GAAP. The benefit of obtaining long-term capital could be seen as an incentive for entering into these countries. MNCs would therefore tend to consider countries which have a low gearing ratio therefore strong equity. The stringent rules can have the impact of making some MNCs create two sets of financial reports. ...

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