Assignment 1: Global View After 7 weeks in the program, you have developed a kee
ID: 2426880 • Letter: A
Question
Assignment 1: Global View After 7 weeks in the program, you have developed a keen sense of how business should be operating. You are also engaging in conversations with your peers in the business about how you can make the business better and stronger. Now is the time to put that brain power to work. Write an analysis about how economics, government, and law affect value creation in the global context for your business.
Requirements
1. In a 5-page research paper, address the following: Analyze how economics, government, accounting standards, GAAP and IFRS, and law would impact your business if your business would expand globally.
2. Include four academic references.
3. Minimum of 5 pages in length utilizing APA formatting and citation style (excluding title and reference pages).
Explanation / Answer
The Internet has made it possible for nearly any individual to open a business selling products or services. It has also broadened our horizons by making news, culture and business available from countries all over the globe. The ability to obtain inexpensive customer, administrative and manufacturing services from offshore companies is a boon for small companies unable to afford extra employees, plants and equipment at home. It has also tempted many small companies to try to expand internationally.
Language and Culture
One of the most famous examples of language and cultural gaffes by well-intentioned companies was Chevrolet's introduction of its Nova model in Mexico, where "no va" means "it doesn't go" -- clearly a bad name for a car. Language is not the only challenge. In Japan, discount pricing is considered a sign of inferior products, and white is a funeral color. These linguistic and cultural misfires can be avoided if you've established reliable partner companies and reliable advisers or investors in your target countries. Working according to local customs can allow you to access lucrative overseas markets -- but you must develop cultural savvy prior to entering the marketplace.
Cross-Time Zone Business
Managed well, your market can be as large as 40 percent of the world population in the BRIC countries alone -- Brazil, Russia, India and China -- but cultural differences aren't your only problem. Doing business in different time zones can also be difficult. Be prepared to have 24-hour management capabilities and customer care. When a significant problem arises, such as a snafu at the port of entry, natural disaster or trouble with local government authorities, it must be handled immediately by an authorized manager. Even daily business decisions involve senior management. The best solution is to have senior management on location in your key global regions. If you run your U.S. facilities round-the-clock with personnel work shifts to cover every appropriate time zone, be aware that some problems require face-to-face intercession by a senior corporate officer and, as rapid as air travel may be, it's not always rapid enough.
Currency
Unexpected currency fluctuation can destroy your profits, but can also produce a windfall. The relative strength of the U.S. dollar against the currencies in the countries you supply can make your products and services expensive or inexpensive. This can be controlled through currency hedging, but unless you know a great deal about this, seek the services of a professional currency trading firm. Credit card currency translations can also be problematic, so look for a merchant account provider that provides the best currency conversions.
Legalities
It may come as no surprise that different countries have different laws, but you may be surprised at the problems they can pose. Don DePalma, author of "Business Without Borders: A Strategic Guide to Global Marketing," warns, "European countries have strict regulations about what you can do with customer information. Besides privacy, you will also encounter laws about selling over the Internet, by telephone, or by fax." Varying views regarding the protection of your intellectual property are also in play. It helps to license your IP to a trusted overseas partner with the understanding that the partner must responsibly protect your company interests, but knock-off products, pirated software and proprietary products are costly problems. Before making expensive legal mistakes, hire an attorney experienced in international trade and protection of intellectual property. You'll be playing in a local company's backyard, and your company is vulnerable to any complaints they may file against you.
Delivery
If you've had products manufactured overseas, you're aware it can take two months or longer to ship them to the United States. International trade also requires payment guarantees for orders, accomplished through the use of bank letters-of-credit. You may also have faced the disappointment of receiving shipping containers that have been damaged, looted or that contain merchandise not meeting your expectations. Delivery of ordered goods from your U.S.-based facilities to offshore buyers can suffer similar problems. Reliable delivery services, such as international overnight package companies, can solve such problems and open your customer market considerably. Again, local company managers and a strong business relationship with an international bank, with branches in your target markets, provide vital on-the-scene problem-solving capability.
Tax codes and compliance issues. If you think it's difficult to navigate the various tax codes and business regulations from state to state, try selling in another country. Paris reminded entrepreneurs that the United States taxes worldwide income, and the IRS also imposes special reporting requirements on this income. Additionally, foreign banks may be hesitant to deal with a U.S.-based account due to the administrative burden, so you might need to set up a separate, foreign business entity and bank account to make handling transactions worth while for the banks.
Paris also noted that other countries have different labeling and packaging standards that you may need to comply with, depending on what you sell.
"In the states, the instructions you include with your product will be in English — sometimes Spanish or French," Paris told Business News Daily. "But in Europe, your instructions, even for the simplest product, will be in multiple languages, sometimes up to 24 languages. If your product is sold more regionally, you will have to consider the increase in packaging cost associated with labeling. In addition, your product will have to be certified as safe [by those countries' standards]."
Globalization is the key issue in determining the future of financial accounting, says professor Gregory S. Miller. And as more countries consider adopting an international accounting standard, India is positioned to be a strong leader.
As business goes global, pressure is increasing for adoption of a single set of accounting standards worldwide. In this e-mail interview, Harvard Business School professor Gregory S. Miller discusses this trend and India's unique position to be a leader in the international accounting environment.
The U.S. uses Generally Accepted Accounting Principles (GAAP), which are deemed to have a relatively high standard. However, in addition to the E.U., some of the U.S.’ largest trading partners, including Canada, Australia and China, are moving closer to adopting the International Financial Reporting Standards (IFRS).The international rules tend to be more simple and less stringent in disclosure requirements, says Bruce Pounder, president of Leveraged Logic, a company that provides education for accountants.
While it is true that changes to long-established accounting rules will initially have a direct impact only on publicly-traded U.S. companies, it will ultimately “trickle down” to privately held companies as well.
The pace at which major U.S. financial markets and the global business community are endorsing the IFRS is quickening. In August, the Securities and Exchange Commission (SEC) released a timeline that would allow about 100 of the largest U.S. multinationals to adopt IFRS beginning in 2010. Most other publicly traded companies would begin phasing in the use of IFRS beginning in 2014.
At the same time, the SEC is giving itself three years to call the project off if it feels the new rules are too burdensome, or they are not producing the desired results.
What is IFRS All About?
The move toward a globally accepted and understood set of accounting and auditing standards is simply an acknowledgment of the global nature of today’s marketplace. More than 12,000 companies in 100-plus countries have already put aside national pride and politics and adopted IFRS. Now they can “talk the same language” when comparing and analyzing financial information. The U.S. is one of a handful of holdouts that has not yet converted to the international framework.
However, in an acknowledgement of this international movement, the SEC has dropped an earlier requirement that foreign IFRS filers reconcile their financial statements with GAAP. Some U.S. multinational companies are using IFRS for their foreign subsidiaries, and some private companies with foreign owners have also used IFRS to obtain financing.
Who Benefits From IFRS?
Investors, financial institutions, equity markets and accounting/auditing professionals all benefit from a common accounting framework. Not using the IFRS framework puts U.S. companies at a disadvantage in the world marketplace. The use of globally accepted accounting rules and language removes barriers and increases the competitiveness of U.S. companies doing business in other countries.
Many believe that IFRS offers solid benefits to U.S. businesses, because it will:
It’s Evolution, Not Revolution
Private companies with international issues and connections may have already encountered IFRS. For example, a company operating in the U.S. as a subsidiary of a parent in Europe may already be required to use IFRS. But for the vast majority of small- and medium-sized enterprises, there is currently no mandate.
Auditors and financial statement preparers are beginning the process of learning the differences between the two sets of standards. In fact, a survey by the American Institute of Certified Public Accountants (AICPA) concluded in December that a 55-percent majority of CPAs at firms and companies nationwide are preparing for the adoption of IFRS. According to the survey, 65.2 percent of CPAs say they have some knowledge of IFRS, but need to learn more.
Many financial statement users in the U.S. also do not fully understand the differences between international and U.S. standards. Until they are able to get up to speed, they may not accept financial statements prepared according IFRS rules.
There are a number of reasons why a switch from GAAP to IFRS, or some hybrid of the two, will come sooner rather than later:
What Should Private Companies Do Now?
While public companies should get up to speed on IFRS soon, it is still fairly early in the game for private companies.
Many accounting firms are encouraging private companies not to convert to IFRS too soon. The learning curve is going to be significant for everyone involved, and there will likely be indirect implications that should be identified and worked through before the move is made. For example, many entities have contracts, compensation awards and debt covenants that rely on GAAP-based measurements of financial performance. Such agreements would need to be addressed before conversion to avoid unintended consequences.
However, this is the ideal time for private companies of all sizes to become aware of the changes that are just around the corner for public companies. Financial officers of small- and mid-sized companies should monitor the convergence of GAAP and IFRS, and with the insight of an accounting or audit professional, begin to considering how global accounting standards will impact their domestic and foreign business strategies.
Along with promise, going global carries an equally heavy load of peril. From chasing too many opportunities to getting whacked by currency fluctuations, the game of international expansion has many threats that domestic-only businesspeople never see. You can grab the brass ring of growth by going global, but only if you avoid the pitfalls.
The moment you've been waiting for has finally arrived, and you're ready to export your product. Now what? Your first order of business is to heed the hard lessons learned by those who have gone before you. Many have blundered, but that doesn't mean you have to. Below are some of the most common exporting mistakes, according to John E. Cleek, program director at the Bloch School of Business Administration at the University of Missouri in Kansas City.