A multinational company (MNC) is an enterprise that delivers services facilities or owns and controls production in at least two countries other than its home country. It means the company not only export products but also has branches and manufacturing in others countries. In 20th century, MNC is originated and expanded after World War II. A MNC is also can be termed as multinational enterprise (MNE), transnational corporation (TNC), Multinational organization (MNO), Super National Enterprises, Global companies, Cosmocorps and International corporation. The examples of MNC are Samsung, Microsoft, Nokia, Nike, General Motors, Sony, IBM, Coca-Cola, Honda, Mc Donalds, Celcom Bhd and so on. A MNC plays an important role in globalization.
The characteristic of MNCs are shown below. Generally, a MNC is a gigantic size company. It has large amount of capital, size plant and machinery with sales turnover of 100 million dollars and make supernormal profits. It operates its business in many countries and it is considered as a super powerful organisation. Instead of social oriented, MNCs are more toward to profit oriented. Their main objective is to generate the highest possible profit. Therefore, they not really concern on the social welfare activities. The branches and subsidiaries of MNCs are operated under the unified control of the parent company. Although its subsidiary is in the host country, big decisions such as new investment or local objectives are decided by parent company and majority of the members of BOD of the subsidiaries are citizens of home country.
What are the advantages and disadvantages of multinational companies?
There are some advantages of Multinational Companies (MNCs). The first advantage of MNCs is they can obtain a larger pool of potential consumers. Borderless world grants many companies opportunities to expand their business and appeal to more prospective foreign customers. Renowned MNCs like McDonalds, Nestlé, and Apple Inc. have great customer base. According to U.S. Small Business Administration, about 96% consumers, and over 67% of the world’s purchasing power is located outside United States. By doing globalization, there will be more customers to buy products and services. Entrance of MNCs to the local market creates rivalry among domestic companies, and thus, helps to increase competitiveness of local companies. For example, paints and coatings industry in India has witnessed competition between indigenous companies (such as Asian Paints, Kansai Nerolac Paints and Berger Paints) and subsidiaries of MNCs (such as BASF Coatings, Akzo Nobel Paints, and Nippon Paints). In order to sustain business, local companies would have to increase their productivity and become more innovative. Besides that, MNCs can gain cost advantages when doing global, like obtaining lower-cost inputs, hiring skilled workers but paying low labour costs, and possessing efficient processes. According to research from Yunus Kathawala, Ren Zhang, and Jing Shao, India receives most of all offshore revenue, particularly for IT field. Companies from United States and Western Europe hired about 170,000 Indians. Indians are preferred to be employed as they have high competence in English, skillful, and low-costs. MNC can avoid trade tariffs when doing global. MNCs would just build up their facilities inside the countries, as they can circumvent trade barrier. According to biz/ed website, many Japanese car manufacturers invest into UK and enable them to gain access to EU and avoid EU Common External Tariff. In return, UK can access to these high-quality cars at lower prices.
However, there are some drawbacks of MNCs. Firstly, MNCs may exploit natural resources of the host countries arbitrarily, and causing scarcity of the resources. Due to the lower-costs resource available in host countries, MNCs may exploit over host nations’ resources to reduce their costs of production. According to research from Bonaventure I. Ozoigbo and Comfort O. Chukuezi, Japanese MNCs especially in the third world countries are just to obtain raw materials or lower-cost components to the international markets. MNCs may become a threat to economic and political sovereignty of host countries. MNCs control government to practice protectionism, which they can avoid new entrants to enter the market. In order to reap profits, Chrysler, Hewlett-Packard, Compaq, Apple, and other foreign investors fought to keep the protectionist policies practiced in Mexico through inefficient production techniques. (Moran 2005, 281-309) Without any worries about new entrants, MNCs can sell two- to three-year-old computer technologies in local market at prices 130%-170% of external price. (Moran, 2005, 281-309) Although MNCs can promote productivity of local companies, they may destroy local companies at the same time. MNCs may destroy the competitions in local market, and acquire monopoly through acquisition of domestic firms or other means. (Francis C., 2010, 392) As most of MNCs have strong business foundation basically, small local companies are hard to compete with MNCs. When MNCs acquire monopoly successfully, they charge expensive monopoly prices, and gain windfall profits. MNCs may ignore home countries’ economic and industrial development, since many MNCs would invest into foreign countries. They assume that investments in foreign countries are more profitable. At the meantime, MNCs take resources out from their countries, like financial resources (capital), human resources (labours), and technology. As a result, less availability of domestic capital in home countries will occur.
Explain how multinational companies benefits from the convergence/ harmonization of accounting standards.
The harmonization of accounting standards involves the process of ensuring the accounting practices are formulated, aligned and updated to international best practices with suitable modifications and fine tuning considering domestic conditions.
Multinational companies (MNCs) gain a lot of benefits in achieving convergence of accounting standard. First, MNCs can enjoy a systematic review and evaluation of the company performance regardless their subsidiaries and associates are located in any countries. Common accounting practices make it easier for MNCs to communicate financial information within the group which helps to monitor the subsidiaries operation and take corrective action if necessary. In addition, it also increases the comparability of company performance against its domestic and international peers as the businesses present their financial statements on the same basis. It enables the analysis of competitive and operational needed to run businesses can be conducted easier. As a result, MNCs can identify their strengths and weaknesses and keep track its competitors in the industry.
Besides, MNCs can attract capital from a larger pool of investors with the harmonization of accounting standards. It reduces the differences in financial reports prepared in different countries and provides a better quality and credibility of financial report that meet the information needs of the investors. It results in better understanding of financial statements, thus investors will feel more confidence regarding the financial report and able to make right investment decisions.
Reporting costs can be reduced with the convergence of accounting standards. Consolidation of financial statements of foreign subsidiaries also will be greatly simplified since MNCs no need to prepare the financial reports based on the multiple sets of accounting standards of different nations. Besides, MNCs not need to train their accounting staff to adopt various accounting practices because the accountants only require knowledge for the common accounting practice. As the accounting practices are similar throughout the world, it increases the mobility of accountants and allows MNCs to move their accounting staff between foreign subsidiaries easily. It results MNCs not necessary outsourcing their accounting tasks to suitably qualified staff in foreign countries. Therefore, MNCs can better respond and manage the human capital needs of subsidiaries around the world.
Explain any 5 efforts taken by the Malaysian Accounting Standards Board (MASB) to align the two sets of standards.
Malaysian Accounting Standards Board (MASB) is an independent authority that develops and issues accounting and financial reporting standards in Malaysia. The MASB, together with the Financial Reporting Foundation (FRF), move closer to world convergence of accounting standards when they announce their plans to align the accounting standards to the international accounting standards, International Financial Reporting Standards (IFRS).
As a first step, MASB renamed the existing MASB Standards as Financial Reporting Standards (FRS) and renumbering the standards will to correspond to those of the international standards in the beginning of year 2005. This changes will streamline the Malaysia accounting standards with the international standards, thus make it easier for investors, preparers and auditors to see the relationship between the two. For example, IFRS 1 to 5 are FRS 1 to 5 in Malaysia.
In 2006, MASB introduced a two-tier reporting framework for companies in Malaysia. It consists of two distinct frameworks which are FRS and Private Entity Reporting Standards (PERS). For those entities other than private entities, they are compulsory to follow FRS. Yet, private entities shall comply either PERS or FRS in their entirety. A private entity is defined as a company that restricts the right to transfer its shares to the public. During year 2007, MASB announced that FRS is made virtually identical to the IFRS and issues 10 revised accounting standards. In line with the policy of convergence with IFRS, the accounting standards issued prior to 2005 are decided to be aligned with respective IFRS, both in terms of form and contents. MASB also removed all remaining differences between the two standards, which is removal of local guidance and editorial matters.
A statement about the fully convergence plans with IFRS by 1 January 2012 is issued by FRF and MASB in year 2008. The aim for MASB announced this plan is to ensure companies have sufficient time to prepare themselves for the changeover. Therefore, MASB believed that 2012 is the right date for convergence because ample time frame was necessary to adopt the remaining standards. In year 2011, MASB issued a new MASB approved accounting framework, the Malaysian Financial Reporting Standards (MFRS). It is a fully IFRS-compliant framework and equivalent to IFRS. MFRS comprises both Standards issued by the International Accounting Standards Board (IASB), which are the Standards that are effective on 1 January 2012 and the new and revised Standards that will be effective after 1 January 2012. Malaysian entities are allowed to be able to assert that their financial statements are in full compliance with IFRS with the adoption of MFRS.
Discuss the impacts that occur on the financial reporting of companies in Malaysia arising from the new Financial Reporting Standard.
The new Financial Reporting Standard (FRS) which aligns with the International Financial Reporting Standard (IFRS) brings a significant impact to the financial reporting of companies in Malaysia. Firstly, it increases the transparency of financial reporting in Malaysia. FRS requires the companies in Malaysia provide disclosures in their financial statements. Sufficient information should be provided to permit reconciliation to the line items presented in the financial reports. The transparency of financial disclosure enables users to evaluate the performance, nature and extent of risk of the businesses more easily. Furthermore, new FRS allows for more flexibility in financial report as it uses a principles-based standard instead of rules-based standard. In the financial reports, stock options value is determined by the available market price. However, the option pricing models are not the only method for the measurement of stock options and share-based payments. Valuation techniques can be used to estimate the fair value of stock option when the market prices cannot be determined.
With the new FRS, it increases the credibility and reliability of the financial reports. With the high quality and consistency reports provided, it increases the ability of foreign investors and analysts to understand the financial reports of Malaysian companies. This helps to increase foreign investment of Malaysia as the investors will choose to invest in the countries that provide more understanding and reliable information because they consider them to be safer investments. It also results a greater comparability by complying the new FRS. It sets limits on the alternatives allowed for similar transactions in the financial reports. When comparing Malaysian companies with the foreign companies, the uniform accounting standards allow the more accurately and meaningful comparison as same standards are used to prepare the financial reports. Therefore, it is important for Malaysian capital market to prepare financial reports based on the international accounting standards.
Besides, small companies have to bear a higher cost for the adoption of new FRS. Small businesses usually have lesser resources to handle the implementation of the new accounting standards and training of staff compared to the larger companies. As a result, smaller companies have to hire accountants and consultants from the outside to help make the changeover.
