国际会计(第七版)课后习题答案作者常勋国际会计教师手册(5-7章)(常勋等)

一、讨论题7.1比照本章引述的金融工具的3个定义，说明各自的特点。

经济学家和金融界所举的定义都把金融工具界定为金融领域运用的单证：史密斯的定义把金融工具表述为“对其他经济单位的债权凭证和所有权凭证”，而《银行与金融百科全书》的定义中列举了金融领域运用的各种单证。

FASB和IASC所下的定义基础是一致的，都把金融工具界定为现金、合同权利或义务及权益工具。

IASC 的定义较清晰，在指明金融工具是“形成个企业的金融资产并形成另一企业的金融负债或权益工具的合同”后，又分别就金融资产、金融负债和权益工具下了定义。

7.2比照本章引述的衍生金融工具的4个定义，说叫各自的特点。

OECD的定义指叫衍生金融工具是“一份双边合约或支付交换协议”，ISDA定义中的表述是“有关互换现金流量和旨存为交易名转移风险的双边合同”。

后名的表述更清晰。

两个定义都着币指明衍生金融工具价值的“衍生性”，并指明可作为衍生价值的基础的标的。

两者都列举了各种不同的标的。

FASB和IASC所下的定义基本上是致的，更便于作为衍生金融工具交易的会计处理所依据的概念。

讨论时可参照教本中归纳的6项最基本的特征展开〔本章教学要点〔二〕第3点中的(2)也有简括的表述〕。

7.3区分金融资产和负债与非金融资产和负债项日是否等同于区分货币性资产和负债与非货币性资产和负债项日？请予以说明。

不等同。

形成收取或支付现金或另金融资产的合同权利或义务，是金融资产和负债的最摹本的特征，以此〔合同权利或义务〕区别于非金融资产和负债〔参阅教术7 2 1〕，而货币性资产和负债与非货币性资产和负债的区分则是根据这些项目对通货膨胀影响或汇率变动的不同反应而作出的。

二者是完全不相下的两种分类法。

更为币要的是，不要把“货币性金融资产和负债”与“货币性资产和负债”这两个概念相混淆。

前名是指“将按固定或可确定的金额收取或支付的金融资产和金融负债”，只是金融资产和金融负债的特定类别。

7.4衍生金融工具品目繁多，但其基本形式不外乎：(1)远期合同；(2)期货合同：〔3)期权合同：(4)互换〔掉期〕合同。

国际会计课后习题答案国际会计课后习题答案在学习国际会计的过程中，课后习题是巩固知识和理解的重要环节。

通过解答习题，我们可以更好地掌握会计原理和方法，提高自己的会计思维和分析能力。

本文将为大家提供一些国际会计课后习题的答案，并对其中的一些重要概念进行解析和讨论。

1. 在国际会计准则体系中，资产的定义是什么？请举例说明。

答案：根据国际会计准则体系，资产是指企业拥有的具有经济利益并且能够被可靠计量的资源。

这些资源可以是物质的，如土地、建筑物、设备等；也可以是非物质的，如专利权、商标权等。

例如，一家公司拥有一座办公楼和一批生产设备，这些都可以被视为该公司的资产。

2. 什么是会计准则的重要特征？为什么会计准则的一致性很重要？答案：会计准则的重要特征包括可理解性、相关性、可靠性和比较性。

其中，一致性是指在同一会计期间内，企业在处理同类交易和事件时应采用相同的会计政策和方法。

一致性的重要性在于它可以确保企业的财务报表具有可比性，使用户能够更好地进行横向和纵向的比较分析，从而做出正确的决策。

3. 什么是财务报表的基本要素？请简要介绍每个要素的含义。

答案：财务报表的基本要素包括资产、负债、所有者权益、收入和费用。

资产是指企业拥有的具有经济利益的资源；负债是指企业对外部经济利益的现时义务；所有者权益是指企业所有者对企业净资产的权益；收入是指企业在经营活动中获得的经济利益的流入；费用是指企业在经营活动中为获取收入所支出的经济利益的流出。

4. 请解释会计准则中的“谨慎原则”和“实质重于形式”原则。

答案：谨慎原则是指在不确定性和风险存在的情况下，会计人员应该对企业的财务状况和经营成果进行保守估计，避免对企业的财务报表进行过度乐观的呈现。

实质重于形式原则是指在处理会计事务时，应该以事物的实质为依据，而不是仅仅根据其法律形式来决定其会计处理方式。

这两个原则都是为了保证财务报表的真实性和可靠性。

5. 请解释会计准则中的“货币计量原则”和“历史成本原则”。

Chapter 5Reporting and DisclosureDiscussion Questions1. Accounting measurement is the process of assigning numerical symbols to events or objects.Disclosure, on the other hand, is the communication of accounting measurements to intended users. Advances in financial disclosure are likely to outpace those related to accounting measurement for a number of reasons. First, many would argue that financial disclosure is a less controversial area than accounting measurement. Second, changes in disclosure requirements are more rapidly implemented than changes in accounting measurement rules. Finally, whereas a single set of accounting measurement rules may not serve users equally well under different social, economic and legal systems, a company can disclose without necessarily sacrificing its accounting measurement system.2.Four reasons why multinational corporations are increasingly being held accountable toconstituencies other than traditional investor groups:a.The development and growth of the influence of trade unions.b.The growing recognition of the view that those who are significantly affected bydecisions made by institutions in general must be given the opportunity to influence thosedecisions.c.The rejection by many governments of classical economic premises such as the beliefthat the regulated pursuit of private gain maximizes society’s welfare.d.The increasing concern over the social and economic impact of multinationalcorporations in host countries.3.Arguments in favor of equal disclosure include:a.The absence of equal disclosure would create an unfair playing field for U.S. companies.Non-U.S. companies would have a competitive advantage in that they would not have todisclose the same information and so would not incur the costs involved in generatingand publishing it.b.Investors in non-U.S. companies have the same information needs as those who invest inU.S. companies. A market concerned with investor protection would make sure thatinvestors have timely and material information on all listed companies, not just thosedomiciled in the United States.c.Unequal disclosure might impede cross-company comparisons involving U.S. and non-U.S. companies.Possible reasons against equal disclosure include:a.The high cost of meeting equal disclosure requirements may deter foreign issuers fromlisting in the United States.b.The extra costs involved work against the benefits of listing to the foreign companies.Evaluation of arguments:All of these arguments have merit. There is no unambiguously correct answer as to what disclosure requirements should be imposed on foreign issuers, and there has been a contentious debate on this subject in the U.S. in recent years. In practice, fairness arguments often carry great weight in public debate, even when objective economic analysis does not support them.4.Managers in Continental Europe and in Japan have for many years strongly objected to disclosinginformation about business segment financial results. These managers have argued that the information can be used by their competitors. In addition, Continental Europe and Japan have had traditions of low disclosure.Requirements for disclosure about segment results have become more stringent in Japan, France, and Germany in response to strong investor and analyst demand for the information. More generally, the three countries are striving to improve the quality of their financial reporting standards in order to improve the reputation and credibility of their capital markets.5.The simple answer is that mandatory disclosures are corporate disclosures made in response toregulatory requirements (for example, rules issued by national regulators or stock exchanges), and that voluntary disclosures are purely discretionary in nature. The distinction between mandatory and voluntary disclosures can be ambiguous in some settings, however. For example, the requirement that U.S. companies must file Form 10-Ks with the U.S. Securities and Exchange Commission is straightforward. However, measurement and disclosure approaches for some of the items in the Form 10-K are not. Similarly, there are widely divergent views concerning what types of press announcements are mandatory versus voluntary.Two possible explanations for differences in managers’ voluntary disclosure practices are: (1) Managers in highly competitive industries may be less forthcoming than managers in less competitive industries due to the expected cost of releasing information of potential use to their competitors. (2) Managers are expected to be more forthcoming when there is good news to disclose, than when there is bad news, particularly when the news can be expected to affect share prices.Two explanations for differences in managers’ mandatory disclosure practices are: (1) Cross-jurisdictional differences in disclosure requirements. (2) Differences in the extent of compliance with disclosure rules due to cross-jurisdictional differences in enforcement.6. Triple bottom line reporting refers to reporting on a company’s eco nomic, social, andenvironmental performance. It is a form of social responsibility reporting designed to demonstrate good corporate citizenship. So-called “sustainability” reports are an increasingly popular means of triple bottom line reporting. There is substantial variation in social reporting today. More regulation would improve comparability, but it might also stifle reporting innovations. The usefulness of social reporting to outside parties, particularly investors, needs to be demonstrated before implementing more regulation for it.6.Often we expect to observe less voluntary disclosure by companies in emerging market countriesthan by those in developed countries:a.Equity markets are relatively less developed in many emerging market countries,resulting in lower total demand for company information by investors and analysts.b.In many emerging market countries, most financing is supplied by banks and insiderssuch as family groups. This also leads to less demand for timely, credible publicdisclosure, and in these markets enhanced disclosure may have limited benefits.8. In general, for the same reasons as in Discussion Question 7, we expect to observe fewerregulatory disclosure requirements in emerging market countries than in developed countries.The equity markets and disclosure requirements in many emerging market countries are not yet well developed, and accounting and auditing systems in emerging market countries are less well developed than in more developed market countries.9. The two broad objectives of investor-oriented equity markets are investor protection and marketquality. In the absence of investor protection, investors will not be willing to participate in a market. However, in the absence of market quality, markets will not function satisfactorily.Many would consider the objectives equally important.10. It certainly is possible that more required disclosure will further encourage investorparticipation in capital markets by providing more and better information on which to base investment decisions. Benefits of increased investor participation include increased liquidity, reduced transaction costs, and more accurate and efficient market pricing. However, it can also be argued that in some situations disclosure requirements are excessive. In markets where disclosure requirements are considered too stringent, companies may be deterred from publicly listing their shares, and may choose to use secondary markets (such as the over-the-counter market in the United States) that lack the investor protections of regulated stock exchanges, and which provide investors with lower liquidity and higher transaction costs. Thus, more required disclosure is not necessarily better than less.11. Forecasts of revenues and income are relatively uncommon because there can be legalrepercussions if forecasts are not met. Forecasts rely on subjective estimates of uncertain future events, making them unreliable in many situations. Vaguer forms of forward looking information are more common than precise forecasts. For example, directional forecasts (up or down) of revenues and income are more common than range forecasts which are, in turn, more common than precise forecasts of these amounts.12. Corporate governance refers to the structure of relationships and responsibilities amongshareholders, board members, and corporate managers. Investors and financial analysts use information about a company’s corporate governance (for example, whether an audit committee’s members are independ ent, and responsibilities and remuneration of board members) to better assess the level of investor protection (and therefore, expected cash flows to investors) at the company.Exercises1. a. Transparent financial reporting means that timely and accurate disclosures are made onall important matters affecting a company’s financial position and performance. Itimplies openness, communication, and accountability.b. Transparent financial reporting protects investors because nothing is hidden from them.Investors can better assess the risks of owning securities when information is truthfuland complete. Transparent financial reporting also improves market quality. Itenhances investor confidence. Open communication creates markets that are fair,orderly, efficient, and free from abuse and misconduct.c. The financial reporting requirements on the Hong Kong Exchange promote transparentfinancial reporting and they protect investors and promote market quality. For example,they require a complete set of audited financial statements, including a balance sheet,income statement, cash flow statement, and explanatory notes. Substantial disclosuresare also required, including segments and forward looking information discussed in thechapter. Reports must include a management discussion and analysis. Accountingprinciples may be either Hong Kong Financial Reporting Standards or InternationalFinancial Reporting Standards. Both sets of standards are known for their high quality.All reports must be in English. There are requirements on corporate governance.Timely disclosure of price sensitive information is required. Annual reports must bepublished within four months of year-end and half-yearly reports must be publishedwithin three months. Overall, the reporting requirements are substantial and complete. 2.Schering AG provides a qualitative forecast of one-year-ahead and two-year-ahead net sales.One-year-ahead net sales are expected to increase in the “mid to high single-digit” range. From this, an investor would likely infer growth of between 6 and 8 percent. Two-year-ahead sales are expected to increase further. Thus, this forecast is directional (up). There are similar forecasts of net sales for certain products and for certain regions. For example, Yasmin® is expected to experience “double-digit” growth, while Betaferon® is expected to grow at “high single-digit” rates. Net sales in Europe are expected to grow at “mid single-digit” rates, while those in the United States are forecast to be “above average.” Schering also forecasts an operating margin of 18 percent for the next year. This is a precise forecast. There is no forecast of net income.Investors should find this information useful, but specific growth percentages would be even useful. Investors are concerned about a company’s future prospects. Management’s expectations guide users’ own forecasts. Investors would also find a forecast of net income useful.3. IFRS 8 requires that the following items be disclosed for each reportable segment:a.Profit or loss.b.Assets.c.Particular income and expense items if such measures are regularly provided to the chiefoperating decision maker.d.Reconciliations of reportable segment revenues, profit or loss, assets, and liabilities toconsolidated totals.(A reportable segment is an operating segment about which separate financial information isavailable that is evaluated regularly by management in assessing segment performance and deciding how to allocate resources to operating segments.)In addition to the above items, information must also be disclosed about:a.Revenues derived from products or services.b.Revenues derived from countries.c.Major customers.d.How operating segments are determined.Lafarge discloses that its reportable segments are its four product lines. The company discloses all of the items required to be disclosed by reportable segment. Operating income, assets, and individual income and expense items are reported. Segment revenues, operating income, assets, and liabilities are reconciled to consolidated totals.Lafarge also discloses revenues by selected countries and regions of the world. In addition, capital expenditure and capital employed by selected countries and regions are disclosed. There is no information about major customers, but Lafarge may have a large, diversified customer base.Overall, Lafarge complies with the requirements of IFRS 8 and even goes beyond its requirements in some cases.4. a. Overall headcount has increased between the two years. Both of its divisions(pharmaceuticals and diagnostics) show increased levels of employment. With theexception of Latin America, all regions of the world also show increased levels ofemployment. Roche attributes these increases to the fact that it has been expanding fasterthan its competitors.b.“Regretted losses” refers to “fluctuations not initiated by Roche,” presumably employeeswho quit the company on their own accord. While the overall percentage of employeeslost (“fluctuation”)has increased between the two years, the percentage of regrettedlosses has decreased.c.Roche states that it “places a high value on diversity and seeks to benefit from it….”Roche seems to have had some success in improving diversity in the company. Rochenotes that it employs people from over 190 countries and that the 336 employees in itsCorporate Center come from 23 countries. General managers from the local country head60 percent of its affiliates, and the trend is rising. Data presented on women in theworkplace all show improvements.d.Outside investors may find this information useful because it speaks to the welfare ofcompany employees. For example, satisfied employees will work harder to achieve acompany’s goals than unsatisfied ones will. The information is also useful in judgingwhether companies comply with employment laws, such as those dealing withnondiscriminatory hiring.5. The overall conclusion is that Roche’s safety record worsened while its environmental recordimproved.Safety:Note that Roche’s total number of workdays increased by 17 percent, while the total number of employees grew by 6 percent. Accidents and other measures of safety can be expected to increase, but not at rates higher than these. Occupational accidents increased by 14 percent, while work-related accidents per million working hours decreased 3 percent. These measures suggest that accident rates are about the same between the two years. There were no work-related fatalities in either year. Workdays lost due to work-related accidents increased by 31 percent, occupational illnesses increased by 60 percent, illnesses per million working hour increased 36 percent, and workdays lost due to occupational illnesses increased 42 percent. These measures indicate a worsening safety record. Transport accident per metric ton transported decreased. In general, most measures got worse.Environmental:Energy consumption increased by 5 percent and TOC t/year increased 36 percent. However, the other pollution measures (such as CO2t/year and NO2t/year) decreased. Figures later in the disclosure compare eco-efficiency measures for 2005, 2004, and 1992. Long-term trends (92/05) of all measures beside the one for CO2show significant decreases. In genera l, Roche’s environmental record has improved.6. a. According to the Web site, the objective of the International Auditing and AssuranceStandards Board (IAASB) is to serve the public interest by:•setting, independently and under its own authority, high quality standards on auditing, quality control, review, other assurance, and related services, and •facilitating the convergence of national and international standards,thereby enhancing the quality and uniformity of practice throughout the world andstrengthening public confidence in the global auditing and assurance profession.b.According to this Web site, auditing standards refer to the audit or review of historicalfinancial information, while assurance standards refer to engagements dealing withsubject matters other than historical financial information.c.PricewaterhouseCoopers states that Roche’s internal sustainability reporting guidelinesare properly applied, that its data collection system is functioning as designed, and that its“social dim ension reporting provides an appropriate basis for the disclosure of socialdimension information…” Thus, Roche has received a “clean opinion”on itssustainability reporting.7. a. Corporate social responsibility is about how companies conduct themselves in relation to“stakeholders,” such as workers, consumers, and the broader society in which firmsoperate.b.Some argue that “the business of business is business.” In conducting their business,companies provide huge and critical contributions to society. Among these areproductivity gains, innovation and research, employment, and human capitaldevelopment. In poor countries, companies often contribute critical capital, technology,and skills that reduce poverty. Companies that compete and prosper make society betteroff. Under this view, the proper guardian of the public interest is government, notbusiness. Another view is that social issues (and social responsibility) are not tangentialto business but fundamental to it. Companies that ignore public sentiment makethemselves vulnerable to attack. Ignoring social issues turns a blind eye to forces thatmay alter a company’s strategic future. Thus, companies ought to do more than the lawrequires since social issues ultimately feed into shareholder value.c.Whether companies ought to report on their social responsibility activities probablydepends on one’s view of corporate social responsibility. Nevertheless, a strong case canbe made that proactive disclosure of a company’s societal contribu tions can positivelyaffect its image and ultimately its bottom line.d.As noted in c., the relevance of CSR disclosures for outside investors is that a company’ssocietal contributions can positively affect its image and ultimately its bottom line.8. a. The performance indicators recommended in the GRI guidelines are as follows:Economic Performance IndicatorsCore IndicatorsAdditional IndicatorsDirect Economic ImpactsCustomersEC1. Net sales.EC2. Geographic breakdown of markets.For each product or product range, disclosenational market share by country where this is 25% or more. Disclose market share and sales for eachcountry where national sales represent 5% or moreof GDP.SuppliersEC3. Cost of all goods, materials, and servicespurchased.EC11. Supplier breakdown by Organization and country. List all suppliers from which purchases in the reporting period represent 10% or more of total purchases in that period. Also identify all countries where total purchasing represents 5% or more of GDP. EC4. Percentage of contracts that were paid in accordance with agreed terms, excluding agreed penalty arrangements. Terms may include conditions such as scheduling of payments, form of payment, or other conditions. This indicator is the percent of contracts that werepaid according to terms, regardless of the details ofthe terms.EmployeesEC5. Total payroll and benefits (including wages,pension, other benefits, and redundancy payments)broken down by country or region. This remuneration should refer to current payments andnot include future commitments.Providers of CapitalEC6. Distributions to providers of capital brokendown by interest on debt and borrowings, anddividends on all classes of shares, with any arrearsof preferred dividends to be disclosed. Thisincludes all forms of debt and borrowings, not only long-term debt.EC7. Increase/decrease in retained earnings at endof period.Public SectorEC8. Total sum of taxes of all types paid broken down by country. EC12. Total spent on non-core business infrastructure development. This is infrastructureEC9. Subsidies received broken down by country or region. This refers to grants, tax relief, and other types of financial benefits that do not represent a transaction of goods and services.Explain definitions used for types of groups.built outside the main business activities of the reporting entity such as a school, or hospital for employees and their families.E10. Donations to community, civil society, andother groups broken down in terms of cash and in-kind donations per type of group.Indirect Economic ImpactsEC13. The Organization’s indirect economicimpacts. Identify major externalities associated withthe reporting Organization’s products and services .Environmental Performance IndicatorsCore Indicators Additional IndicatorsMaterialsEN1. Total materials use other than water, by type.Provide definitions used for types of materials.Report in tons, kilograms, or volume.EN2. Percentage of materials used that are wastes(processed or unprocessed) from sources external to the reporting Organization. Refers to both post-consumer recycled material and waste fromindustrial sources. Report in tons, kilograms, orvolume.EnergyEN3. Direct energy use segmented by primary source. Report on all energy sources used by the reportingOrganization for its own operations as well as for the production and delivery of energy products (e.g., electricity or heat) to other Organizations. Report in joules.EN17. Initiatives to use renewable energy sources and to increase energy efficiency. EN18. Energy consumption footprint (i.e., annualized lifetime energy requirements) of major products. Report in joules. EN4. Indirect energy use. Report on all energy used to produce and deliver energy products purchased by the reporting Organization (e.g., electricity or heat). Report in joules.EN19. Other indirect (upstream/downstream) energy use and implications, such as Organizational travel, product lifecycle management, and use of energy-intensive materials. WaterEN5. Total water use. EN20. Water sources and relatedecosystems/habitats significantly affected by use ofwater. Include Ramsar-listed wetlands and theoverall contribution to resulting environmentaltrends.EN21. Annual withdrawals of ground and surfacewater as a percent of annual renewable quantity ofwater available from the sources. Breakdown byregion.EN22. Total recycling and reuse of water.Include wastewater and other used water (e.g.,cooling water).BiodiversityEN6. Location and size of land owned, leased, or managed in biodiversity-rich habitats. EN23. Total amount of land owned, leased, or managed for production activities or extractive use. EN24. Amount of impermeable surface as apercentage of land purchased or leased.EN7. Description of the major impacts onbiodiversity associated with activities and/or products and services in terrestrial, freshwater, and marine environments. EN25. Impacts of activities and operations on protected and sensitive areas (e.g., IUCN protectedarea categories 1-4, world heritage sites, and biosphere reserves).EN26. Changes to natural habitats resulting fromactivities and operations and percentage of habitatprotected or restored.Identify type of habitat affected and its status.EN27. Objectives, programs, and targets forprotecting and restoring native ecosystems andspecies in degraded areas.EN28. Number of IUCN Red List species withhabitats in areas affected by operations.EN29. Business units currently operating orplanning operations in or around protected orsensitive areas.Emissions, Effluents, and WasteEN8. Greenhouse gas emissions. (CO2, CH4, N2O, HFCs, PFCs, SF6). Report separate subtotals for each gas in tons and in tons of CO2 equivalent for the following: - direct emissions from sources owned or controlled by the reporting entity - indirect emissions from imported electricity heat or steamEN30. Other relevant indirect greenhouse gas emissions. (CO2, CH4, N2O, HFCs, PFCs, SF6). Refers to emissions that are a consequence of the activities of the reporting entity, but occur from sources owned or controlled by another entity Report in tons of gas and tons of CO2 equivalent. EN9. Use and emissions of ozone-depletingsubstances. Report each figure separately in accordance with Montreal Protocol Annexes A, B, C, and E in tons of CFC-11 equivalents (ozone-depleting potential).EN31. All production, transport, import, or export of any waste deemed “hazardous” under the terms of the Basel Convention Annex I, II, III, and VIII.EN10. NOx, SOx, and other significant air emissions by type. Include emissions of substances regulated under: - local laws and regulations - Stockholm POPs Convention (Annex A, B, and C) –persistent organic pollutants - Rotterdam Convention on Prior Informed Consent (PIC)- Helsinki, Sofia, and Geneva Protocols to the Convention on Long-Range Trans-boundary Air Pollution EN32. Water sources and related ecosystems/habitats significantly affected by discharges of water and runoff. Include Ramsar-listed wetlands and the overall contribution to resulting environmental trends. See GRI Water Protocol.EN11. Total amount of waste by type anddestination.“Destination” refers to the method by w hich wasteis treated, including composting, reuse, recycling,recovery, incineration, or land filling. Explain typeof classification method and estimation method.EN12. Significant discharges to water by type.EN13. Significant spills of chemicals, oils, and fuelsin terms of total number and total volume.Significance is defined in terms of both the size ofthe spill and impact on the surroundingenvironment.SuppliersEN33. Performance of suppliers relative toenvironmental components of programmer andprocedures described in response to GovernanceStructure and Management Systems section. Products and ServicesEN14. Significant environmental impacts ofprincipal products and services.Describe and quantify where relevant.EN15. Percentage of the weight of products soldthat is reclaimable at the end of the products’ usefullife and percentage that is actually reclaimed.ComplianceEN16. Incidents of and fines for non-compliancewith all applicable internationaldeclarations/conventions/treaties, and national, sub-national, regional, and local regulations associatedwith environmental issues. Explain in terms ofcountries of operationTransportEN34. Significant environmental impacts oftransportation used for logistical purposes.OverallEN35. Total environmental expenditures by type.。

Chapter 4Comparative Accounting: The Americas and AsiaDiscussion Questions1. Public and private sector bodies are involved in regulating and enforcing financial reporting in the UnitedStates. The Financial Accounting Standards Board is a private sector body that determines U.S.generally accepted accounting principles. The Securities and Exchange Commission has the authority to determine U.S. GAAP for publicly held companies, but defers to the FASB. The FASB and SEChave a close working relationship that ensures that FASB standards are acceptable to the SEC. The SEC enforces financial reporting rules for publicly held companies. It actively reviews the filings thatcompanies make. Auditors are the enforcers for non-publicly held companies.Accounting standards in Mexico are issued by the Council for Research and Development of Financial Information Standards (CINIF), an independent public-private sector body patterned after the U.S.FASB. Its authority for issuing Mexican accounting standards is recognized by the National Bankingand Securities Commission, the government agency that regulates the Mexican Stock Exchange. The Commission is responsible for enforcing financial reporting standards for listed companies. However, it is unclear how proactive the Commission is in investigating filings that it receives. Enforcement offinancial reporting for non-listed companies effectively rests with auditors.Japanese accounting standards are set by a private sector body, the Accounting Standards Board of Japan. The establishment of the ASBJ is a recent development in Japan. Before, accounting standard setting was a government activity. Enforcement of financial reporting effectively rests with auditors. The stock exchange is regulated by the Financial Services Agency, a government body. However, it isunclear how proactive the FSA is in monitoring financial reporting by Japanese companies.Accounting standard setting is a government activity in China. The China Accounting StandardsCommittee is the authoritative body within the Ministry of Finance responsible for developingaccounting standards. The China Securities Regulatory Committee is the government agency thatregulates China 'tws o stock exchanges. The CSRC is also responsible for enforcing financial reporting for listed companies. Many question the effectiveness of the Chinese enforcement mechanism.The Institute of Chartered Accountants in India, a private sector professional body, developsaccounting standards in India. The Securities and Exchange Board of India, an agency of the Ministry of Finance, regulates India '22s stock exchanges and is responsible for enforcing financial reportingrules. However, it is unclear how proactive the board is in monitoring financial reporting by Indiancompanies.Overall, the five countries vary in terms of private versus public sector responsibility for regulating and enforcing financial reporting. Enforcement is questionable in several countries.The United States has the strongest mechanism for regulating and enforcing financial reporting of the five countries.2. The United States and India are common law countries that have fair presentation oriented financialreporting. Mexico also has fair presentation oriented financial reporting because of U.S.influence. In addition, Mexico has inflation-adjusted accounting, in contrast to the other four countries.Japan is a code law country and its accounting has traditionally been characterized as conservativeand tax-driven, just like other code law countries (such as France and Germany discussed in Chapter3.) However, it is moving to fair presentation because of its commitment to converge Japaneseaccounting standards with IFRS. China is likewise moving toward fair presentation oriented accountingby adopting IFRS as Chinese GAAP. Despite adopting fair presentation principles, one can questionwhether the Chinese achieve it in application. There is an acute shortage of trained accountants inChina and the profession remains undeveloped. The accounting profession is strong in the other fourdevelopin countries, including the of India and Mexico.3. The auditor oversight bodies discussed in this chapter are:a. Un ited States - Public Company Acco un ti ng Oversight Boardb. Japan - Certified PublicAccountant and Auditing Oversight BoardThe recent establishment of independent auditor oversight bodies in the United States and Japan is inresponse to recent worldwide accounting scandals. Both represent tightening control over auditors.4. Tax legislation pays a limited role in all five countries, with the exception of Japan. In the United States,financial and tax accounting are separate except for LIFO. Tax legislation has little influence onfinancial reporting practices in Mexico. For example, there are numerous differences between financialand tax accounting, such as the calculation of cost of sales, depreciation, and goodwill amortization.Tax legislation has traditionally been one side of the “triangularlegal system” in Japan, exerting aninfluence on Japanese accounting standards. However, the influence of taxation is declining with thealignment of Japanese accounting standards to IFRS. Several years ago, tax legislation had someinfluence in China, but this has waned as China develops a more complete set of financial reportingstandards. India, like other common law countries, separates financial and tax accounting.4.This question has been of interest in academia for quite some time. Is accounting expertise a necessaryprecondition for economic development, or can an economy advance without it? It would seem that aneconomy cannot advance very far without accounting expertise. But the relationship probably worksboth ways, just like demand creates supply and vice-versa.The example of China demonstrates the importance of developing accounting (standards, knowledge,etc.). Accounting is a part of the market reform packages in China, so the need has been recognizedfrom the start. Mexico and India have been market-oriented longer than China, and their accounting ismore developed. But again, it is apparent in these two countries that accounting supports economicdevelopment.6. U.K. standards (Chapter 3) and IFRS (Chapter 8) are said to reflect principles-based standards, whileU.S. standards (this chapter) are said to be rules-based. Generally speaking, principles- basedstandards set forth broad objectives and fundamentals and require professional judgment for theirimplementation. They are more flexible than rules-based standards and are likely to result in moredivergence in practice. Rules-based standards are more specific in their requirements and have moredetailed implementation guidance than principles-based standards. They are likely to result in morecomparability than principles-based standards, but are said tofoster a “checkthe box ”mentality. The chapter says that U.S. GAAP is “probablymorevoluminous than in the rest of the world combined and substantially more detailed than in any other country. ” Thus, one can argue that U.S. GAAP is r-ublae s ed.7. The U.K. and U.S. both follow fair presentation accounting, reflecting economic substance ratherthan legal form. Both the U.K. “ trueand fair ”and the U.S. “ presentsfairly r ”eflect fair presentation. However, the U.K. has a true and fair override -accounting standards can be overridden if necessary to achieve a true and fair view. In the U.S., presents fairly means that generally accepted accounting principles have been followed. 8. The most important reconciling item (i.e., the most significant difference between Mexican and U.S.accounting) relates to the use of general price level accounting in Mexico. Strict historical cost is used in the U.S. Two other differences noted in the chapter are (a) Mexico applies the equity method at 10 percent, whereas the U.S. applies it at 20 percent and (b) in Mexico development costs are capitalized and amortized after technological feasibility has been established; in the U.S., they are expensed. 9. The bursting of the Japanese bubble economy in the 1990s prompted a review of Japanesefinancial reporting standards. It became clear that many accounting practices hid how badly many Japanese companies were actually doing. The accounting was d “esbii g nbeadntgom ”ake thefinancial condition of Japanese companies more transparent and bring Japanese accounting more in line with international norms.Practice changes include the following:Requiring listed companies to report a statement of cash flows.Subsidiary companies are consolidated based on control rather than ownership.Affiliated companies are accounted for using the equity method based on influence ratherthan ownership. Investments in securities are valued at market rather than cost. Deferred taxes are fully provided. Pension and other retirement obligations are accrued in full.10. Full and complete disclosure of reliable, evenhanded information is necessary to develop a fair andefficient stock market. The “Anglo-Saxon ” model of accounting (discussed in Chapter 2),emphasizing a fair presentation of financial condition and results, and emphasizing stewardship, also fosters the development of a fair and efficient stock market. Countries with this accounting orientation (such as the U.S. and U.K.) have active, fair and efficient stock markets. There is also a legal structure and an effective enforcement of laws and accounting disclosures to make it all work.China is developing accounting standards with the stock market orientation discussed above. So China is on the right track here -the standards themselves will support the development of a stock market. In addition, investors must have confidence that the standards are being followed, i.e., that the information disseminated by companies is reliable. Thus, good auditing by well- trained accounting professionals is important. China may have difficulty developing ana. b. c. d. e. f.accounting profession, which would in turn be a hindrance to stock market development. China must also overcome the culture of secrecy developed under communism.11. The chapter mentions a number of examples where Chinese accounting standards are consistentwith world class practices. A selective list of the more important ones are the following:a. Comparative, consolidated financial statements including a balance sheet, incomestatement, cash flow statement, and notes. b. Accrual basis for recognizing revenues and expenses, matching, and consistency. c. Purchase method for business combinations with annual impairments test. d. Equity method for nonconsolidated affiliates.e. Use of historical cost.f. Finance leases capitalized. 12. The British influence on accounting in India is clear. India has a common law legal system and fair presentation accounting that accompanies it. Like Britain, financial statements must give a true and fair view and there is a strong self-regulated accounting profession. Professional accountants (auditors) are called chartered accountants in both countries. The financial reporting and accounting measurements described in this chapter for India are very similar to those described in Chapter 3 for the United Kingdom. Exercises 1. United States Financial Accounting Standards Board.Securities and Exchange Commission.a. b. Mexicoa. b. The Council for Research and Development of Financial Information Standards.There is no definitive enforcement agency. However, the National Banking and Securitiescommission regulates the Mexican Stock Exchange.Japana. b. The Accounting Standards Board of Japan.The Financial Services Agency for listed companies under the securities law and the Ministry of Justice, when company law is involved.Chinaa. b. The Chinese Accounting Standards Committee under the Ministry of Finance.The Chinese Institute of Certified Public Accountants, under the jurisdiction of the Ministry of Finance, regulates auditing. Indiaa. b. Institute of Chartered Accountants of India. Institute of Chartered Accountants of India.2.At the time of writing, the following organizations were linked to IFAC 's website:United StatesInstitute of Management AccountantsAmerican Institute of Certified Public AccountantsNational Association of State Boards of AccountancyMexicoInstituto Mexicano de Contadores P blicos uJapanJapanese Institute of Certified Public AccountantsChinaChinese Institute of Certified Public Accountants3.The question asked for five expressions, terms, or short phrases unfamiliar or unusual in the student's home country. Taking the United States as the home coyu,nhterre are twelve:a. Triangular legal system -A description of accounting regulation in Japan consisting of theinteracting Company Law, Securities and Exchange Law, and Corporate Income TaxLaw.b. Socialist market economy -Used in China to describe its planned economy with marketadaptations.c. Land and in dustrial prop erty rights - Still owned by the Chin ese gover nment, p rivatecompanies acquire the right to use these industrial assets.d. Pesos of current purchasing power -A term to describe general price level accounting inMexico.e. Tax complianee audit report - Mexican auditors must attest that no irregularities wereobserved regarding compliance with tax laws.f. Statement of changes in financial position - the financial statement in Mexico thatcorresponds to the statement of cash flow. However, the statement of changes in financialposition is prepared in constant pesos (adjusted for inflation), while the cash flowstatement uses historical cost.g. Seni ority p remiums - compen sati on p aid in Mexico at the term in ati on of employmentbased on how long the employee has worked.h. Keiretsu —n terlock ing gia nt con glomerates inJapan.i. Guanxi -Relationship culture in China that is based on mutuality and mutual duties.j. B-shares -Shares issued to foreig n in vestors by Chin ese listedcompanies.k. True and fair view -The requirement in India that financial statements present a true and fair view came from Britain.I. Amalgamaten -The term used in India for a merger.4. The most important financial accounting practice or principle at variance with international norms isprobably the following:Uni ted States -LIFO. Drive n by tax law con siderati ons, no other country uses LIFO to the exte nt found in the U.S. LIFO reduces reported earnings. Because older, lower costs of inventory are shown on the balance sheet, the debt to asset ratio will be higher. Companies using LIFO must report so-called LIFO reserves that enable an analyst to convert LIFO amounts to FIFO amounts.Mexico Tnflation adjustments. Most countries in the world value assets and related expenses at historical cost; few countries incorporate inflation adjustments. With inflation adjustments, earnings will be lower and the debt to asset ratio will probably be lower as well. It is unlikely that an analyst will be able to adjust Mexican accounts to historical cost. Of course, such an adjustment is unwise, given high inflation.Japan - Pooli ng of in terests method for bus in ess comb in ati ons where no p arty obta ins con trol over the other. The international norm is to treat all business combinations as a purchase.Compared to purchase accounting, pooling results in higher income and lower asset values.Therefore, the debt to asset ratio will be higher. An analyst will be unable to adjust for thisaccounting method.China -Show ing the right to use land and in dustrial property owned by the gover nment as an intangible asset. China is unusual in the extent to which the government owns land and industrial property. As long as these intangibles are fairly valued, there will be no effect on reported earnings or the debt to asset ratio. However, the analyst must realize that the intangible asset shown on a Chinese company' sbalance sheet is a tangible asset on the balance sheets of companies from other countries.In dia -Pooli ng of in terests method for amalgamati ons (mergers). As no ted above for Japan, the international norm is to treat all business combinations as a purchase. Compared to purchase accounting, pooling results in higher income and lower asset values. Therefore, the debt to asset ratio will be higher. An analyst will be unable to adjust for this accounting method.5. At the time of writing, the following numbers are reported by the World Federation of StockExchanges:The significant number of listed companies in India may be surprising. It may also be surprising that the number of listed Japanese companies matches the numbers for the United States. Ano ther poten tial sur prise is the fact that the Mexica n Stock Excha nge has more foreig n listed firms than domestic listed firms. Students will probably speculate that most of the foreig n listed firms in Mexico are from other Lat in America n coun tries, a stateme nt that is in fact true.The lack of foreig n listed firms in China and In dia has two p ossible explan ati ons -either the gover nment does not allow foreig n firms to list on domestic excha nges, or companies do not see these stock markets as an attractive place to raise cap ital. The latter explan ati on is why there are so few foreig n listed firms in Japan.5.A comparison of the countries in Exhibit 4-5 reveals few differences among the United States,Mexico, and China. Thus, all three coun tries can claim that their GAAP are comp arably orie nted toward equity in vestors. However, of the three coun tries, the Un ited States can p robably claim to have GAAP most orie nted toward equity in vestors. The cha pter no tes that the U.S. has the most voluminous and detailed accounting requirements in the world and that they are rigorously en forced. Thus, the nod goes to the Un ited States.India and Japan both allow pooling of interests accounting, an accounting treatment now at varia nee with in ter nati onal no rms. The treatme nt of goodwill in these two coun tries is also atvarianee with international norms. In addition, Japan ‘ s lee accounting treatment is at varianee with in ter nati onal no rms. Thus, Japan seems to be the country whose GAAP is least orie nted toward equity in vestors.6. At the time of writi ng, the followi ng companies are listed on the New York Stock Excha nge fromMexico, Japan, In dia, and China:MexicoAmerica MovilCemexCoca-Cola FEMSA Desarrolladora HomexEmpresas ICAFomento Economico Mexicano GRUMAGrupo Aeroportuario del PacificoGrupo Aeroportuario del SuresteGrupo Casa SabaGrupo Radio CentroGrupo TelevisaGrupo TMMIndustrias BachocoTelefonos de MexicoVitroJapanAdvantestCannonHitachiHonda MotorKonamiKubotaKyoceraMatsushita Electric IndustrialMitsubishi UFJ Financial GroupMizuho Financial GroupNidecNippon Telegraph and Telephone NIS Group Co.Nomura HoldingsNTT DoCoMoOrixSonyTDKToyota MotorIndiaDr. Reddy 's LaboratoriesHDFC BankICICI BankMahanagar Telephone Nigam Patni Computer Systems Satyam Computer Services Tata MotorsVidesh Sanchar NigamWiproWNS HoldingsChinaAluminum Corporation of China American Oriental Bioengineering China Eastern Airlines China Life InsuranceChina MobileChina Netcom GroupChina Petroleum and ChemicalChina Southern AirlinesChina TelecomChina UnicomGuangshen RailwayHuaneng Power InternationalMindray Medical InternationalNew Oriental Education and TechnologyPetroChinaSemiconductor Manufacturing InternationalSinopec Shanghai PetrochemicalSuntech Power HoldingsTrina SolarYanzhou Coal MiningMexico has 16 companies listed on the NYSE, ranking third after Brazil (35) and Chile (17). This is perhaps surprising given the strong economic links between the United States and Mexicodiscussed in the chapter. One would expect Mexico to have the most of any Latin Americancountry. Of the countries in the Asia-Pacific region, China has the most number of companies listed on the NYSE (20); Japan is second (19); and India is third (10). As discussed in the chapter, the economies of China and India are growing rapidly. The relatively large numbers of NYSE listed Chinese and Indian companies probably reflect a need for capital by their larger companies. That Japan has approximately the same number of NYSE listed companies as China is perhapssurprising. However, the chapter discusses how debt financing dominates equity financing inJapan.8. a. The two major areas of difference are asset valuation and accounting for goodwill. In the U.K.,assets may be valued at historical cost, current cost, or a mixture of the two. When fixedassets are revalued, depreciation and amortization must be calculated using the revaluedamounts. Only historical cost is allowed in the U.S. In the U.K., goodwill can beimpairments tested, as in the U.S., but may also be amortized over 20 years or less.Other differences between U.K. and U.S. GAAP relate to LIFO and the calculation of long-term deferred taxes. LIFO is rarely used in the U.K., but is relatively more common inthe U.S. In the U.K., long-term deferred taxes may be valued at discounted present value.Finally, opportunities for income smoothing are probably greater in the U.K. than in theU.S.b. Research has documented that U.S. GAAP earnings is systematically more conservativethan U.K. GAAP earnings (see, for example, P. Weetman and S.J. Gray, InternationalFinancial Analysis and Comparative Corporate Performance: The Impact of U.K. versusU.S. Accounting Principles on Earnings, Journal of International Financial Managementand Accounting (Summer & Autumn 1990), pp. 111-130). However, many of theaccounting principles on which this research study is based have now changed.Goodwill accounting should result in a more conservative income amount for U.K.companies if they systematically amortize it over 20 years. However, the occasionalimpairments write-downs that U.S. companies will have will result in a lower incomeamount in the year of write-down. The use of LIFO in the U.S. will result in moreconservatively measured U.S. income amount. However, U.K. companies will report lowerearnings if assets are revalued, because corresponding depreciation charges will behigher. The effects of U.K. smoothing activities are unclear, but it seems likely thatcompanies would be more inclined to smooth toward higher earnings rather than lower.On balance, we think that U.S. companies will have somewhat more conservative earningsamounts, but U.K and U.S. GAAP are converging.9. The chapter identifies the following major changes that have occurred since the Japanese“bigbang”:a. Large companies must prepare consolidated financial statements, not just listed ones.b. Listed companies must report a statement of cash flows.c. Consolidation is based on control rather than ownership.d. Use of the equity method is based on significant influence rather than ownership.e. Goodwill is calculated based on fair market value of net assets acquired rather than bookvalue.f. Goodwill is amortized over 20 years rather than 5 years. It is also impairments tested.g. Investments in securities are valued at fair market value rather than cost.h. Inventory is valued at the lower of cost or net realizable value rather than cost.i. Deferred taxes are now fully provided.Pension and other retirement obligations are now fully accrued.k. Research and development is now expensed rather than deferred in some cases.l. For foreign currency translation, revenues and expenses are now translated at the average rate (rather than a choice between year-end or average rates) and the translationadjustment is in stockholders ' equity (rather than shown as an asset or liability).10. The chapter identifies the following major changes that have occurred in Chinese accounting sincethe 1990s:a. The ASBE issued in 2006 represent a comprehensive set of Chinese accounting standardsthat are substantially in line with IFRS.b. The ASBE issued in 2006 also contains auditing standards similar to InternationalStandards on Auditing. All Chinese accounting firms and auditors are required to followthese audit standards.c. A cash flow statement is now required.d. Goodwill is impairments tested rather than amortized.e. Use of the equity method is based on influence rather than ownership percentage.f. Consolidation of subsidiary companies is based on control rather than ownershippercentage.Foreig n curre ncy tran slati on of overseas subsidiaries is based on the p rimary econo mic en vironment in which they op erate.Tan gible assets are dep reciated over their exp ected useful lives rather tha n based on tax law.Lower of cost or market is now used to value inven tory.LIFO is no Ion ger an acce ptable inven tory costi ng method.Finance leases are now cap italized.Deferred taxes are now p rovided in full for all temporary differe nces.Con ti ngent obligati ons are now p rovided for whe n they are both p robable and a reliableestimate can be made of their amount.Japan and In dia allows po oli ng, while the others do not. Pooli ng usually results in lower noncurre nt asset amounts and higher in come amoun ts. Goodwill and subseque nt amortization isalso excluded under pooling. To the extent that pooling is used byJapan ese and In dia n compani es, they are likely to have higher debt to equity and debt to assetratios. The nu merator (retur n) and the denomin ators (assets and equity) in the two p rofitabilityratios should all be higher, but the effect on the ratio is in determ in ate. Liquidity ratios should beunaffected.Japan and In dia both require goodwill to be cap italized and amortized. This should have noeffect on the either liquidity ratio. The amortizati on will result in a lower amount of in come goingto reta ined earnin gs. Thus, the debt to equity ratio will be higher tha n what it would be withoutamortizati on. The debt to asset ratio will also be higher. The effect on the p rofitability ratios is unclear. The nu merator (i ncome) will be lower tha n what it would be without amortization.However the denominators in each case (assets andequity) will also be lower.The equity method is used in all five coun tries, so there is no effect on comp arative ratios.g. h. i.k.l.m. b. c.11.12. a.Price-level adjusted accounting is practiced in Mexico and Indian companies may revalue their tangibleassets to current values. The result is higher asset values, higher equity, and lower income (because ofhigher depreciation and cost of goods sold charges), compared to historical cost. The current ratio will be higher, but cash flow from operations to current liabilities will be unaffected. Both solvency ratios will belower because their denominators (assets and equity) will be higher. Both profitability ratios will be lower. The numerator (income) will be lower and the denominators (assets and equity) will be higher.Depreciation in Japan is tax-based, which is normally higher than economics-based depreciation. This will reduce income and lower the profitability ratios. The more rapid write-off of fixed assets will cause lowertotal asset values. Thus, the debt to asset ratio should be higher. The debt to equity ratio and both liquidityratios should be unaffected.LIFO is used in the United States. It is permitted in Japan, but not widely used. Companies using LIFOshould have lower income, so lower profitability ratios. Inventory will probably be lower, causing the debt to asset ratio to increase and the current ratio to decrease. Cash flow to current liabilities will be unaffected.With less income going to retained earnings, the debt to equity ratio will be higher.Probable losses are accrued in all five countries, so there is no effect on comparative ratios.Not all finance leases are capitalized in Japan. Companies will report comparatively lower noncurrentliabilities and noncurrent assets. Income will also be affected, but the amount is probably immaterial. Theliquidity ratios should be unaffected. Both solvency ratios should be lower and return on assets will behigher. The effect on return on equity is probably immaterial.Deferred taxes are accrued in all five countries, so there is no effect on comparative ratios.Some opportunity for income smoothing exists in India. Income smoothing has an indeterminate effect on income in any given year. Therefore it is not possible to know how the profitability ratios are affected. The effect of creating reserves is to shift amounts that would otherwise be in retained earnings into the reserve accounts. Since both of these are in shareholders ' equity, this total is unaffected. Therefore, the solvencyratios are likely to be unaffected. The two liquidity ratios will be unaffected.d. e. f. g. h.i. j.。

Chapter 3Comparative Accounting: EuropeDiscussion Questions1.Regulating and enforcing financial reporting is a government function in France. TheNational Accounting Board (CNC) and the Accounting Regulation committee (CRC) setaccounting standards under the jurisdiction of the Ministry of Economy and Finance. TheFinancial Markets Authority (AMF) ensures compliance with French accounting rules (forlisted companies). It is also a government agency.Public and private sector bodies are involved in the regulation and enforcement of financial reporting in Germany. The German Accounting Standards Board is a private sector body that develops German reporting standards for consolidated financial statements. However, German law (the HGB) governs financial statements at the individual company level. Enforcement also involves private and public sector bodies. The Financial Reporting Enforcement Panel is a private sector body that investigates compliance and relies on companies to voluntarily correct any problems that it finds. Matters that cannot be resolved are referred to the Federal Financial Supervisory Authority, a government agency, for final resolution.The regulation and enforcement of financial reporting is in the public sector in the Czech Republic. The Ministry of Finance is responsible for setting accounting principles and it also oversees the Czech Securities Commission which is responsible for enforcing compliance with Czech requirements. Some observers question the effectiveness of the Czech system.A private sector group is responsible for regulating financial reporting in the Netherlands. TheDutch Accounting Standards Board issues guidelines on acceptable accounting principles.Enforcement is handled by the Enterprise Chamber, a special accounting court. It rules on whether companies have used acceptable accounting practices, but only after an interested party has brought a complaint. The Financial Reporting Supervision Division of the Netherlands Authority for Financial Markets is responsible for enforcing reporting requirements for listed companies.Regulation of financial reporting is in the private sector in the United Kingdom. The Accounting Standards Board determines Financial Reporting Standards. The authority of the ASB is set out in the law. Two groups are responsible for enforcing financial reporting standards, one in the private sector and the other in the public sector. The Financial Reporting Review Panel (private sector) and the Department of Trade and Industry (public sector) can investigate complaints about departures from accounting standards. If necessary, they can go to court to force companies to revise its financial statements.2.Given the requirement that all EU listed companies must use International FinancialReporting Standards in their consolidated financial statements, all five countries follow fairpresentation principles for this group of companies’ financial statements. The differenceamong the countries comes with listed companies’ individu al financial statements and withnon-listed companies. The overall picture is quite confusing.At the individual company level, France and Germany require local accounting standards. Both can be characterized as legal compliance, conservative, and tax-driven. Individual companyfinancial statements in the Netherlands and United Kingdom may use either local requirements or IFRS. However, in either case the result is fair presentation financial statements. The Czech Republic requires IFRS in listed c ompanies’ individual company financial statements, so the result is that they are fair presentation. In all five countries, non-listed companies may use either IFRS or local accounting standards for their consolidated financial statements. As characterized above, the resulting financial statements will be quite different for German and French companies. Czech accounting standards are mostly fair presentation, but there is still some tax influence. Thus, the resulting financial statements can also be different depending on the choice that companies make. Finally, non-listed companies’ individual financial statements must be prepared under local accounting standards in the Czech Republic, France, and Germany. Local accounting standards or IFRS may be used by this group of companies in the Netherlands and United Kingdom.3.The recently established auditor oversight bodies discussed in this chapter are:a.France –Haut Conseil du Commissariat aux Comptes (High Council of ExternalAuditors)herlands – Netherlands Authority for Financial Marketsc.United Kingdom – Professional Oversight BoardThe oversight body in France is in a government agency, while the one in the U.K. is a private sector body. The Dutch body is an autonomous administrative authority under the Ministry of Finance. They are a response to recent accounting scandals and represent efforts to the tighten control over auditors.4. Tax legislation is a significant influence on local accounting requirements in France andGermany. It is unimportant in the Netherlands and United Kingdom. Tax legislation has limited influence in the Czech Republic. Given that Czech accounting is still evolving, tax law can be expected to fill in areas where accounting standards are missing.5. Consolidated financial statements are the statements of a group of companies under commonmanagement or control. Individual company financial statements are the statements of the separate legal entities (parent and subsidiaries) that make up the group. EU countries prohibit IFRS for individual company financial statements when these statements are the basis for taxation and dividend distributions. They are “legal compliance” countries (see Chapter 2) and individual company financial statements must comply with the law. Other countries permit or require IFRS for individual company financial statements because they are “fair presentation”countries (Chapter 2). Individual company financial statements are not the basis for taxation or dividends. Local accounting standards follow fair presentation principles.6. There is no conclusive evidence linking high levels of legal accounting and reportingrequirements in a country and corresponding high quality levels of financial reporting. It appears that high legal requirements (for example, in France and Germany) lead to a certain amount of professional or bureaucratic inertia and form over substance thinking in financial reporting. Indeed, countries with significant state regulation of accounting and accountants are generally not among the innovative accounting leadership countries. If anything, comparatively high levels of legal requirements appear to depress the overall quality of reporting.7.This quote paraphrases a statement in the preamble to the charter establishing the GermanAccounting Standards Committee. We agree. Private sector initiatives (self-regulation) havebeen more successful than governmental initiatives in developing financial reporting regulations for national and international capital markets.Two noteworthy examples are the Accounting Standards Board in the U.K. (discussed in Chapter 3) and the Financial Accounting Standards Board in the U.S. (discussed in Chapter 4).Both have been flexible and adaptable in developing reporting standards in response to new circumstances. They are arguably the premier national standard setting bodies in the world. It is also noteworthy that Germany and Japan (Chapter 4) have recently moved to establish private sector organizations.Chapter 8 discusses international harmonization and convergence. There, the work of the International Accounting Standards Board and the European Union are discussed. The EU was not effective in establishing standards for capital markets and has now endorsed the efforts of the IASB.8. Existing French companies’ legislation in the form of the Plan Comptable Général and Code deCommerce have the greatest influence on day-to-day French accounting practices. The two other authoritative sources of financial accounting standards and practices have comparatively modest or sporadic influence.9. The statement is true. The German Accounting Standards Board is a private-sector body likethe FASB (U.S.), ASB (U.K.), and IASB. The process for establishing standards is also similar.Working groups examine issues and make recommendations to the Board. These groups represent a broad constituency. GASB deliberations follow a due process and meetings are open.10.Accounting requirements in the Czech Republic are based on EU Directives. Examples noted inthe chapter are the following:a.True and fair view embodied in the Accountancy Act.b.Required audit.c.Statement of cash flows not a required financial statement (though it is required in thenotes).d.Disclosures of employee information and revenues by segment.e.Consolidated financial statements required.f.Abbreviated reporting requirements for small companies.g.Notes include accounting policies.h.Listed companies use IFRS in consolidated financial statements.The accounting measurements discussed are also consistent with EU Directives, for example, the requirement for the equity method.11.The Dutch Enterprise Chamber of the Court of Justice of Amsterdam helps ensure that filed orpublished Dutch financial statements conform to all applicable laws. Shareholders, employees, trade unions, or public prosecutors may bring proceedings to the Chamber by alleging that officially filed or published financial statements do not conform to applicable requirements.The Enterprise Chamber carries out its mission by determining whether the allegations of deficient financial reporting are true and how material such deficiencies are. Depending uponthe case, the Chamber may require that financial statements be modified or it may seekpenalties through the Court of Justice.The Chamber is composed of three judges and two Dutch RAs. There is no jury. Appeals of anyof the Chambers rulings are difficult, may only be lodged with the Dutch Supreme Court, andare restricted to points of law.12.Britis h financial statements must present a “true and fair view” of a company’s financial positionand results of operations. The intent is similar to the U.S. “presents fairly.” However, the “presents fairly” test in the United States is whether financial sta tements conform to U.S. GAAP.The “true and fair” test in the United Kingdom requires auditors to step back and see whether the financial statements –taken as a whole –result in a fair presentation. U.K. GAAP may be overridden if complying with them wo uld result in an “unfair” presentation. In other words, judgment is exercised in determining whether the financial statements are true and fair. Exercises1. Francea.The Conseil National de la Comptabilité, or CNC (National Accounting Board) throughthe latest Plan Comptable Général and the Comité de la Réglementation Comptable, orCRC (Accounting Regulation Committee). The CNC and CRC are attached to theMinistry of Economy and Finance.b.The Autoritédes Marches Financiers (AMF) for French listed firms. The Division ofCorporate Finance (SOIF) conducts a general review of legal and other filings with theAMF. The Accounting Division (SACF) verifies compliance with accounting standards.The Ministry of Justice is indirectly responsible for compliance with reportingrequirements by non-listed companies through its role in supervising statutory auditors.Germanya.The German Accounting Standards Board for consolidated financial statements.Parliamentary legislation for individual company financial statements.b.The Financial Reporting Enforcement Panel (FREP). Matters that FREP cannot resolveare referred to Federal Financial Supervisory Authority (BaFin).Czech Republica.The Ministry of Finance.b.The Ministry of Finance also has supervisory responsibilities. Audits are regulated by theAct on Auditors which established Chamber of Auditors to oversee the auditingprofession.The Netherlandsa.Dutch Accounting Standards Board.b.Dutch Enterprise Chamber of the Court of Justice in Amsterdam. Financial ReportingSupervision Division of the Netherlands Authority for Financial Markets for listed firms.United Kingdoma.Accounting Standards Board.b.Both the Department of Trade and Industry and the Financial Reporting Review Panel ofthe Financial Reporting Council can investigate complaints about departures fromaccounting standards and they can go to court if necessary to force compliance.2. Good arguments can be made that France and Germany have the most effective accounting andfinancial reporting supervision mechanism for publicly traded companies. In France, the Autoritédes Marches Financiers (AMF) is a government agency that supervises the stock market. It is the French equivalent of the U.S. Securities and Exchange Commission (SEC). Two divisions within the AMF enforce compliance with reporting rules. The Division of Corporate Finance (SOIF) conducts a general review of legal and other filings with the AMF (including the annual report).The Accounting Division (SACF) verifies compliance with accounting standards. The AMF has the power to force compliance with accounting requirements. Germany has a two-tiered system.A private sector body, the Financial Reporting Enforcement Panel (FREP) reviews suspectedirregular financial statements that come to its attention. It also conducts random review of financial statements. If companies do not voluntarily change their financial statements, FREP refers the matter to the Federal Financial Supervisory Authority (BaFin), a government agency that regulates the stock exchanges (and banking and insurance industries). In both countries, the agencies responsible for compliance are proactive. The responsibility in the Czech Republic is the Ministry of Finance, but there are many questions about its effectiveness. The responsibility in the Netherlands rests with the Enterprise Chamber. However, it isn’t proactive – cases must be brought to it first. The Financial Reporting Supervision Division of the Netherlands Authority for Financial Markets is new (2006) but it can be expected to be effective. In the United Kingdom, the Financial Reporting Review Panel and the Department of Trade and Industry investigate complaints about financial reporting practices. It isn’t clear how proactive either o ne is in enforcing reporting standards for publicly traded companies. The United Kingdom does not have the equivalent of the U.S. SEC. In our view the most effective way to enforce accounting and financial reporting rules for publicly traded companies is a through government agency that is proactive in insuring compliance.3. At the time of writing, the following accounting organizations discussed in this chapter werelinked to IFAC s website:FranceCompagnie Nationale des Commissaires aux ComptesConseil Supérieur de l’Ordre des Experts-ComptablesGermanyInstitut der Wirtschaftsprüfer in Deutschland e.v.WirtschaftsprüferkammerCzech RepublicChamber of Auditors of the Czech RepublicUnion of Accountants of the Czech RepublicThe NetherlandsKoninklijk Nederlands Instituut van Registeraccountants (Royal NIvRA)United KingdomChartered Institute of Management AccountantsInstitute of Chartered Accountants in England and WalesChartered Institute of Public Finance and AccountancyThe Association of Chartered Certified AccountantsInstitute of Chartered Accountants of Scotland4.The question asked for five expressions, terms, or short phrases unfamiliar or unusual in thestudent’s home country. Taking the United States as the home country, here are eighteen:a.Duality in individual company and consolidated statements — The idea that the two setsof financial statements may be based on different GAAP, as in France in Germany.b.Social report —Required in France for companies with 300 or more employees itdescribes, analyzes, and reports on matters of training, industrial relations, health andsafety conditions, wage levels, benefits, and other work conditions.panies Act — National law regulating, among other things, financial reporting anddisclosures by companies.d.True and fair override — The idea in the U.K. that professional judgment can override astandard if necessary to give a true and fair view.e.Provisions and reserves — Used to smooth income and often based on tax laws, such asin Germany.f.National chart of accounts — A formal chart of accounts designed for an entire economyand typically used for strong central economic control.g.Secret reserves —Undisclosed and deliberate understatements of assets oroverstatements of liabilities.h.Plan Comptable Général — French uniform national chart of accounts.i.Sworn book examiners — A class of statutory auditors legally sanctioned in Germany toconduct independent audit examinations of companies.j.Statutory auditors —Auditors who are required by law (statute) to audit a company’s financial statements.k.Enterprise Chamber of the Court of Justice of Amsterdam —A judicial institution receiving formal complaints of nonconformance with established Dutch accounting andreporting standards.l.Generally acceptable accounting principles — Accounting guidelines issued by the Dutch Accounting Standards Board in the Netherlands.m.Proportional consolidation —Consolidation technique often used for joint ventures where all assets and liabilities are prorated to the owners in strict proportion to theirrespective ownership interest percentages.n.Legal reserves — Appropriations of retained earnings required by law in most code law countries.o.Determination principle — German requirement for book/tax conformity.p.Parent company only statements —Unconsolidated financial statements of a company controlling other (subsidiary) companies.q.Coupon voucher privatization system - the method used by the Czech Republic to privatize large-scale, government-owned enterprises. Vouchers allowed CR citizens tobuy shares for a nominal price.r.Joint stock companies and limited liability companies - the terms used in the CR for corporations and limited liability partnerships, respectively. Joint stock companies issueshares while limited liability companies do not.5.For each country discussed in the chapter, there are several financial accounting practices orprinciples at variance with international norms. The items below are illustrative only.a.France –Liabilities for post-employment benefits do not have to be recognized andfinance leases do not have to be capitalized. Both accounting treatments are examples ofform over substance and violate fair presentation. The treatment of post-employmentbenefits will understate reported earnings and understate reported liabilities. The debt toasset ratio will be understated. It is unlikely that an analyst will be able to adjust for thisvariance. The treatment of leases understates assets and liabilities, and understates thedebt to asset ratio. The effect on income depends on how much lease payments differfrom the amount of depreciation that would be recognized had the leased property beencapitalized. It is unlikely that an analyst can adjust for this variance.b.Germany - Two different purchase methods are allowed, and goodwill can be treatedseveral ways. The effects on reported earnings and the debt to asset ratio are unclear andit is unlikely that an analyst can adjust for these variances.c.Czech Republic –Goodwill may be written off in the first year of consolidation orcapitalized and amortized over a maximum of 20 years. The international norm is now tocapitalize goodwill and impairments test it each year. If goodwill is written offimmediately, there will be no effect on income compared to the international norm,except in a year where an impairments write-down would occur. The debt to asset ratiowill be higher compared to the international norm. If goodwill is capitalized andamortized, reported earnings will be lower than what it would be under the internationalnorm. As goodwill gets amortized, the debt to asset ratio will increase compared to theinternational norm. Analysts should be able to adjust to achieve “apples to apples”comparisons as long as the effects of the goodwill accounting are disclosed by Czechcompanies.d.The Netherlands - Comprehensive current value accounting. Though only used by aminority of Dutch companies, this microeconomics approach to measurement isencouraged in the Netherlands to an extent not seen elsewhere. Expenses should behigher under current value accounting, especially for cost of goods sold and depreciation.This means that reported earnings will be lower. With higher asset values, the debt toasset ratio will decrease. Generally, the effects of applying current value accounting aredisclosed in footnotes, so analysts should be able to adjust for this variance.e.U.K. – Assets may be valued at historical cost, current cost, or a combination of the two.To the extent that current cost is used, the effects on reported earnings and the debt toasset ratio will be the same as described for Dutch current value accounting. Analystswill be able to adjust for this variance to the extent that the effects of using current costsare disclosed in the footnotes.6. At the time of writing, the following numbers are reported by the World Federation of Stocka Euronext is a merger of the Paris, Amsterdam, and Brussels Stock Exchanges.The London Stock Exchange is significantly larger than the other stock exchanges in terms of numbers of listed companies. It also has more foreign listed firms. However, Euronext has proportionately more foreign listed firms than the other exchanges. Students will probably speculate that most of the “foreign” listed firms on these exchanges are from other European countries, a statement that is in fact true. No data are reported by the Prague Stock Exchange. It is not a member of the World Federation of Stock Exchanges. However, the chapter notes that the Prague Stock Exchange is small.7. The country whose GAAP is most oriented toward equity investors appears to be the UnitedKingdom. Its GAAP is closest to IFRS, which is clearly aimed at equity investors. Under U.K.GAAP, goodwill may be capitalized and impairments tested, the IFRS treatment. LIFO is alsonot permitted, the IFRS treatment. The Netherlands comes in “second,” but Dutch GAAP differs with IFRS on these two issues. The country whose GAAP is least oriented toward equity investors appears to be Germany, with France a close second. Germany has the most differences with IFRS.8. At the time of writing, the following companies are listed on the New York Stock Exchange fromthe European countries discussed in this chapter:FranceAir France - KLMAlcatel-LucentAlstomAXACompagnie Generale Geophysique-VeritasFrance TelecomGroupe DanoneLafargePublicis GroupeRhodiaSanofi-SynthelaboSCOR GroupSodexho AllianceSuezTechnipThomsonTOTAL .Veolia EnvironmentGermanyAllianzAltanaBASFBayerDaimlerChryslerDeutsche BankDeutsche TelekomE.ONEpcosFresenius Medical CareInfineon TechnologiesPfeiffer Vacuum TechnologyQimondaSAPSGL CarbonSiemensCzech Republic – None.NetherlandsABN AMROAEGONAerCap HoldingsArcelor MittalBuhrmannChicago Bridge & Iron CompanyCNH GlobalCore LaboratoriesHeadING GroupJames Hardies IndustriesReed ElsevierRoyal AholdRoyal Dutch ShellRoyal KPNRoyal Philips ElectronicsTNTUnileverVan der Moolen Holding United KingdomAbbey NationalAMVESCAPAstraZeneca GroupBarclays BankBarclaysBG GroupBHP BillitonBPBritish AirwaysBritish Sky Broadcasting GroupBT GroupBunzlCadbury SchweppesCarnivalCorus GroupDiageoGallaher GroupGlaxoSmithKlineHansonHSBC HoldingImperial Chemical IndustryImperial Tobacco GroupInterContinental Hotels GroupInternational PowerLloyds TSB GroupNational GridNational Westminster BankPearsonPrudentialReed ElsevierRio TintoThe Royal Bank of Scotland GroupScottish PowerSignet GroupSmith & NephewSpirent CommunicationsTomkinsUnileverUnited UtilitiesVodafone GroupWOLSELEYThe United Kingdom and the Netherlands have the most listed companies from European countries. The United Kingdom has the most, reflecting a common language and financial reporting heritage with the United States. The Netherlands has the second most. The chapter talks about Dutch companies’ long history of international listings and the fact that the Amsterdam Stock Exchange has not been an important source of finance. It is not surprising that Dutch companies would look to the United States for finance. Dutch financial reporting is also aimed at fair presentation, just as the United States (and United Kingdom). There are no Czech companies listed on the NYSE, reflecting the fact that the Czech Republic has only recently become a market economy.9. The role of government in developing accounting and auditing standards is strongest in France.Government agencies are responsible for both activities and government involvement is all-encompassing. The private sector has little or no influence. The government plays the least role in the United Kingdom and the Netherlands. In both countries, the private sector is responsible for both accounting and auditing standards. Government influence is strong in Germany, but the German Accounting Standards Board is in the private sector and the German Institute is responsible for audit standards. The government is responsible for accounting standards in the Czech Republic (the Ministry of Finance), but auditing standards are developed by the Chamber of Auditors, a self-regulated professional body.10. The European Commission has set up the European Group of Auditors’ Oversight Bodies(EGAOB) to coordinate the new public oversight systems of statutory auditors and audit firms within the European Union. The EGAOB may also provide input to the Commission on issues such as endorsing International Standards on Auditing and assessing the public oversight systems in individual European countries. These public oversight systems have responsibility for overseeing:•The approval and registration of statutory auditors and audit firms•The adoption of standards on ethics, internal control of audit firms and auditing•Continuing education, quality assurance and investigative and disciplinary systems.At the time of writing, the EU Web site listed four EU countries with an auditing oversight body: •France (Le Haut Conseil du Commissariat aux Comptes)•Germany (Abschlussprüferaufsichtskommission – Auditor Oversight Commission)•Ireland (Irish Auditing & Accounting Supervisory Authority)•United Kingdom (Financial Reporting Council)12.a.All countries require the purchase method, so there is no effect on the ratios for thismethod.b.All countries require that goodwill be capitalized and amortized, so there is no effect onthe ratios for this method. Compared to the IFRS treatment (capitalize and impairmentstest), the general effect is: (1) liquidity ratios unaffected; (2) debt to equity ratiounaffected; debt to asset ratio will be higher; (3) both profitability ratios will be lower.c.The equity method is used in all five countries, so there is no effect on comparative ratios.d.Current cost revaluations are allowed in the Netherlands and U.K. This practice results inhigher asset values, higher equity, and lower income (because of higher depreciation andcost of goods sold charges). Both solvency ratios and both profitability ratios willdecrease. The liquidity ratios should be unaffected.e.German and French depreciation charges are tax-based, which are normally higher thaneconomics-based depreciation. This will reduce income and lower the profitability ratios.The more rapid write-off of fixed assets will cause lower total asset values. Thus, thedebt to asset ratio should increase. The debt to equity ratio and both liquidity ratiosshould be unaffected.f.LIFO is permitted in Germany and the Netherlands, but not widely used. Companiesusing LIFO should have lower income, so lower profitability ratios. Inventory willprobably be lower, causing the debt to asset ratio to increase and the current ratio todecrease. Cash flow to current liabilities will be unaffected.g.Probable losses are accrued in all five countries, so there is no effect on comparativeratios.h.Finance leases are not capitalized in France, Germany, and the Czech Republic.Companies will report comparatively lower noncurrent liabilities and noncurrent assets.Income will also be affected, but the amount is probably immaterial. The liquidity ratiosshould be unaffected. Both solvency ratios should be lower and return on assets will behigher. The effect on return on equity is probably immaterial.。

Chapter 9International Financial Statement AnalysisDiscussion Questions1. a. Business strategy analysisDifficulties in cross-border business strategy analysis: Identifying key profit drivers and business risk in two or more countries can be daunting. Business and legal environments and corporate objectives vary around the world. Many risks (such as regulatory risk, foreign exchange risk, and credit risk) need to be evaluated and brought together coherently. In some countries, sources of information are limited and may not be accurate.b. Accounting analysisDifficulties in accounting analysis: Two issues are important here. The first is cross-country variation in accounting measurement quality, disclosure quality, and audit quality. National characteristics that cause this variation include required and generally accepted practices, monitoring and enforcement, and extent in managerial discretion in financial reporting. The second issue concerns the difficulty in obtaining information needed to conduct accounting analysis. The level of credibility and rigor of financial reporting in Anglo-American countries generally is much higher than that found elsewhere. In fact, financial reporting quality can be surprisingly low in both developed and emerging-market countries.c. Financial analysis (ratio analysis and cash flow analysis)Difficulties in financial analysis: Extensive evidence reveals substantial cross-country differences in profitability, leverage, and other financial statement ratios and amounts that result from both accounting and non-accounting factors. Differences in financial statement items caused by national differences in accounting principles can be significant, and unpredictable in amount. Even after financial statement amounts are made reasonably comparable, interpretation of those amounts must consider cross-country differences in economic, competitive, and other conditions.d. Prospective analysis (forecasting and valuation)Difficulties in prospective analysis: Exchange rate fluctuations, accounting differences, different business practices and customs, capital market differences, and many other factors have major effects on international forecasting and valuation. Application of price multiples in a cross-border setting requires that the determinants of each multiple, and reasons why multiples vary across firms, be thoroughly understood. National differences in accounting principles are one source of cross-country variations in these ratios.Finally, all four stages of business analysis may be affected by:i. information access,ii. timeliness of informationiii. foreign currency issuesiv. differences in financial statement formatsv. language and terminology barriers.2. Here we will consider the information needs of investors, creditors, regulators, and competitors.Investors have high information needs at all stages of business analysis. They need to be able to accurately assess the merits of the company’s business strategy, the quality of its accounting, the company’s financial strength, and its future prospects. Since each step in the business analysis process builds on its predecessors, each step is critical in its turn. It can’t be said that any one step is more or less important than the others.Creditors need to go through much the same analysis, but are advantaged in that through direct contact with the companies they often have more extensive and detailed information than do investors. The goal of analysis is also often somewhat different. Many investors, hoping that their shares will increase in value, are interested in prospective analysis. The creditor’s interest is more often limited to being sure (with a margin of safety) that the loan will be repaid. For the creditor, the accounting analysis, financial analysis, and forecasting, all are important; valuation is less so. Regulators have much different interests. Since regulators have no direct interest in the future earnings of the companies they regulate, a prospective analysis (in most cases) is of limited value to them. However, if regulators need to be aware of the financial strength of the companies they regulate, they will need to conduct accounting analysis and (in many cases) financial analysis, particularly when assessing how much of an economic burden can be imposed on companies resulting from a particular regulation.Competitors are intensely interested in finding out as much about a company as possible. Business strategy analysis of one’s competitors is an important part of formulating one’s own business strategy, especially in terms of assessing strengths and weaknesses. Accounting and financial analysis also can uncover strengths and weaknesses. Prospective analysis may be important if a merger or acquisition is contemplated.3. Information accessibility is a major condition for an efficient capital market, that is, information must be rapidly analyzed and made available to investors capable of acting on it. In the United States and other broadly-based financial markets, a whole industry specializing in information analysis and dissemination has developed. Similar investment analysis services in many non-U.S. capital markets are at an earlier stage of development.4. Investment analysis almost always involves paired comparisons, even if the benchmark alternative is to do nothing. In evaluating the risk and return characteristics of a non-domestic company differences in accounting measures of risk and return are often due as much to differences in measurement rules between countries as they are to real economic differences. Corporate transparency compounds the problem by depriving analysts of information necessary to adjust for national measurement differences. Many analysts consider the disclosure issue to be even more important than measurement differences.5. One way of coping with GAAP differences is to restate foreign accounting measures to an internationally recognized set of principles or the reporting framework of the investor’s home country. An alternative tack is to develop a detailed understanding of accounting practices in the investee’s country.Students will definitely disagree on this one. Eventually some will offer a compromise: use the former coping mechanism if the investee company is being compared with a firm in the investor’s home country and adopt a “multiple principles capability” when comparing the investee company to another company in the same country. Another tack would be to examine who is making the market for the investee’s shares. If local investors are making th e market, one should not ignore local norms. However, if investors in the investor’s country are making the market; e.g., U.S. institutional investors, then restatement to the investor’s home country GAAP makes sense.6. Prospective analysis invo lves forecasting a firm’s future cash flows and then valuing those cash flows. As future cash flow estimates are based on accounting measurements, differences in measurement rules between countries complicate this effort. The range of accounting choicesavailable abroad add to this complexity. However, measurement differences are only one of the variables that complicates prospective analysis, Differences in environmental variables such as rates of inflation, sovereign risk, business practices, and institutions complicate both forecasting and valuation. Different institutions include financial norms, tax regimes and market enforcement mechanisms. In terms of valuation, while P/E multiples may be popular in one country, discounted dividends may be more popular in another. Even if two countries employ the same valuation framework, differences in investment horizons and methods of calculating discount rates/cost of capital will vary.7. Translation of foreign financial statements for the convenience of domestic readers is fundamentally distinct from the translation of branch or subsidiary accounts for purposes of consolidation. In the latter case, translation involves a remeasurement process. In most countries, foreign accounts first are restated to the accounting principles of the parent country prior to restatement to parent currency. Convenience translations merely involve a restatement process in the sense that foreign accounts are multiplied by a constant to change the currency of denomination fro m domestic currency to the currency of the reader’s domicile.8. Rules of thumb can vary substantially from one country to another due to both accounting and non-accounting factors. Japan provides a striking example. Many Japanese companies are members of large trading groups (keiretsu) with large commercial banks at their core. Keiretsu often postpone interest and principal payments, so that long-term debt in Japan works more like equity in the United States. Short-term debt is attractive to Japanese companies because short-term obligations typically have lower interest rates than long-term obligations, and normally are renewed or “rolled over” rather than repaid. Thus, debt has a much different nature and purposein Japan than in the United States.The acid test ratio specifically involves cash, marketable securities and receivables as the numerator in the equation, and current liabilities as the denominator. But what counts as current liabilities versus long-term debt (or how long-term debt is viewed) is very different in Japan than in the U.S. In Japan, high short-term debt is less likely to indicate a lack of liquidity, for the reasons stated above. Banks often are willing to renew these loans because it allows them to adjust their interest rates to changing market conditions. Thus, short-term debt works like long-term debt elsewhere, and Japanese companies can operate successfully with a quick ratio at a level that would be entirely unacceptable in the United States. Note, however, that banking practices in Japan are changing rapidly, and the tolerance in Japan for high levels of debt financing may well decrease in the future.9. Important recommendations include the following:∙Be aware that national differences in accounting measurement rules c an add “noise” to reported performance comparisons. The reader should be prepared to unwind accounting differences where necessary.∙Use a structured approach, such as the one presented in this chapter, to ensure that all relevant factors are considered.∙Cash flow-related measures are less affected by accounting principle differences than are earnings-based measures, thus making them potentially valuable in international analysis.∙Audit quality varies dramatically across countries. Become familiar with the level of audit quality in a particular country before reaching conclusions using financialstatements prepared by companies in that country.∙Corporate transparency also varies dramatically across countries. Be sure to assess accurately the quality of financial disclosures before reaching conclusions based on them.Above all, appreciate that measurement and disclosure practices are environmentally based. Appreciation for institutional differences will greatly aid in proper interpretation of accounting based performance and risk measures.10. The following list describes in general fashion what probable effect the Dutch translation practice would have on selected financial ratios in comparison with the temporal method. The analysis assumes that the original financial statements of the two companies are identical in all respects save for the currency translation method used. Inventories are assumed to be carried at cost._________________________________ _______________________________________________ Devaluation ___ R evaluationCurrent ratio (liquidity) decrease increaseInv. At mkt goes downInv at mkt goes upDebt ratio (solvency) increase decreaseLoss goes in ATA so eq. smallerGain in ata eq lrg.Fixed asset turnover (efficiency) increase decreaseNet sales/assets assets smaller so inc.A ssets larger so dec.Return on assets (profitability) increase decreaseloss not in incomeGain not in incomeAs can be seen, the current rate method can have a significant effect on key financial indicators. Accordingly, security analysts must be careful to distinguish between the currency in which a foreign account is denominated and the currency in which it is measured.11. The attest function is what gives credibility to the financial statements. If this function is important in the domestic case, it is even more important internationally where statement readers are separated from the companies they are interested in not only by physical distance but also by cultural distance.12. Internal control is an activity performed by a firm’s int ernal auditors that helps to assure that management’s policies and procedures are being carried out effectively, that financial transactions are being properly reported both internally and externally and that the assets of the firm are safeguarded. Intern al control is relied upon by a firm’s external auditors in determining to what extent their work should replicate the work of the internal auditor. The role of the internal auditor has become even more important in assuring the reliability of management’s financial representations owing to the large number of financial scandals that has rocked the U.S. and other financial markets during the start of this decade. Recent legislation in the U.S., which is increasingly being emulated elsewhere, has made management responsible for assuring that their system of internal controls are not only in place but are working well. This has beennecessary to reduce investor uncertainty regarding the quality and reliability of a firm’s published financial accounts.In the absence of a strong system of internal controls, investors will adopt a more passive approach to investing as opposed to relying on firm-specific information. This involves taking a mutual fund approach to investing which attempts to diversify away information risk, although at the cost of lesser performance.Exercises1. The trend of dividends from a U.S. dollar perspective can be ascertained by translating the peso dividend stream using the $/P exchange rate prevailing at the beginning of the time series or the end. Use of the ending exchange rate provides the following trend data:20X6 ________ 20X7 ________ 20X8 ______Net income (P) 8,500 10,800 15,900Dividends (P mill’s)2,550 3,240 4.770Dividends ($000) 850 1,080 1,590Percentage change --- 27.1% 47.2%2.How the statement of cash flows appearing in Exhibit 9.5 was derived:Beg. Bal. DR. CR. End. Bal.Cash 2,400 3.990New fixed assets 8,500 (3) 2,695 (2) 555 10,640ST $ payable 500 500LT debt 4,800 (3) 1,584 6,384Capital stock 3,818 3,818Retained earnings 1,782 (1) 250 2,030Translation adjustment 1,898Sources Usesof ofFunds FundsSources:Net income (1) 250Depreciation (2) 555Increase in LT debt (3) 1,584Translation adjustment (4) 1,898Uses of funds:Increase in fixed assets (3) 2,6954,287 2,695Net increase in cash 1,5924,287 4,2873. Consolidated Funds Statement(figures appearing in parentheses denote changes due primarily to translation effects) Sources:Net income 250Depreciation 555Increase in LT debt 1,584 (1,584)Translation adjustment 1,898 (1,898)less intercompany payable 138Uses of funds:Increase in fixed assets 2,695 (2,695)Net increase in cash 1,590 (924) The $924 translation effect is that part of the $1,898 gain on the translation of net worth which is related to the translation of cash. It is derived as follows.a. Opening cash of 24,000 krona translated at .10 =$2,400Opening cash retranslated at 12/31 at .133 = 3,192Gain 792b. 6,000 krona increase in cash during the yearinitially translated at .111 =$6666,000 krona retranslated at 12/31 at .133 = 798Gain 132Total translation gain applicable to cash 9244. Yes, Infosys added value for its shareholders as its EVA was a positive RPE 1,540. Operating income more than covered the company’s cost of debt and equity.5. Debit: Cost of goods sold ¥250,000,000Taxes payable 87,500,000Credit Inventories ¥250,000,000Tax expense 87,500,0006. a.20X6 20X7 20X8Sales revenue (£) 23,500 28,650 33,160Sales revenue ($) 49,350 63,030 53,056b. Percentage change 20X7/20X6 20X8/20X7Pounds 21.9% 15.7%Dollars 27.8% -15.8%The two time series do not move in parallel fashion because of changes in exchange rates used to perform the convenience translations.c. This problem can be minimized by translating the time series using the 20X6 exchange rate or by using the 20X8 exchange rate. Trend analysis can also be performed in the local currency.7. a. ROE (per Swedish GAAP) = 4,709/88,338 = 5.3%ROE (per U.S. GAAP) = 3,127/84,761 = 3.7%b. Some students will favor using the ROE based on Swedish GAAP, especially if Volvo’sperformance is being compared with that of another company in Sweden. Others willfavor basing their performance assessment on ROE per U.S. GAAP, especially if Volvois being compared to a U.S. counterpart. The latter at least minimizes the apples tooranges issue. It is not clear which viewpoint is correct, and this question should provoke good discussion of the value of restated accounting numbers.c. Even if students all agreed that an ROE based on U.S. GAAP were preferable, the user ofthis information should take into account all institutional considerations, such asdifferences in tax laws, financial norms and business practices that affect all ratios in the Swedish business environment. In the absence of such analysis, restated ratios are likely to be misinterpreted.8. Assessing reasons for P/E ratio trends and cross-country comparisons is difficult. Thetext discusses two studies that have analyzed differences in P/E ratios between Japan and the United States in the late 1980s. The studies differ greatly in their explanations of the(then) much higher Japanese P/E ratios, and neither study claims to explain more than apart of the difference. Part but not all of the reasons were attributable to accountingmeasurement differences. We suspect that differences in institutional factors probablyexert the dominant reason for observed differences internationally.9. Students answers will naturally vary. However, they should recognize that audit practiceare influenced as much by differences in social, economic and political environments as are measurement standards. They should also recognize that standard setting is as mucha political process as it is a process of logic or sound principles.10. Judging from information provided in Exhibit 9-22, liability cases vary far more bycountry than by auditor – with 35 cases in the U,.S., over twice as many as in the nexthighest country (the U.K., with 17). No audit firms had cases in every country, and thetotal number for each auditor is relatively similar, ranging from 11 (Arthur Andersen) to18 (KPMG). The country where liability cases were least frequent was the Netherlands,with only one case.Why? Laws and regulations in the Anglo-American countries, including the UnitedStates, stress investor protection. This places more liability on the auditor and makes iteasier for companies or shareholders to bring or prove a suit. In response to the threat of litigation, auditors are probably more careful in the United States, and more willing tosubject themselves to strict regulations.Implications? It is reasonable to argue that financial reporting quality is positivelycorrelated with frequency of audit litigation. For example, the patterns of auditorlitigation shown in the table above are consistent with the relatively high financialreporting quality found in the U.S., the U.K., Australia and Canada.11. Student opinions are likely to vary on this one as well. Some will argue for opinionscoined by private professional bodies. Others, in light of Enron, et. al., will opt for more legal opinions. In the end, students should conclude that enforcement mechanisms arealso very important. Recent U.S. indictments of company officers for accountingviolations as well as mandated prison terms is unprecedented. Together with increasing recourse to the courts by aggrieved investors, the imbalance between an auditor’sresponsibility and authority is being redressed.12. Reasonable criteria for judging the merits of a database for company research include(but are not limited to):-coverage (number of companies, countries, years of data).-amount of information for each company (number of financial, market-based measures per company).-reliability, ease of use, language translations, search features.-cost (a re only some of the data “freely available?”).-access and links to other Web sites provided?Case 9-1Sandvik1.a. There are several advantages that accrue to Swedish firms employing the system of special reserves. First, political dividends accrue to firms that align their goals with those of the government. Second, there are tax advantages as expenses recognized in establishing a reserve are tax deductible. Third, the use of reserving allows companies to manage their earnings. Disadvantages include the risk of reducing a company’s reporting credibility with the international investing community. This, in turn, may limit the company’s external financing flexibility.2. The government benefits from the reserving system in that it has ally in maintaining full employment. That is to say, its macroeconomic tool kit is expanded in that it yet another vehicle for managing the economy in addition to monetary and fiscal policy.3. The use of reserves makes it difficult for statement readers who are unfamiliar with Swedish reporting practices to assess the risk and return attributes of the firm. For example, it will not be clear to what extent observed differences in financial ratios between a Swedishcompany and a non-Swedish company are due to accounting differences as opposed to real economic differences in the attributes being measured.4. The use of reserves had a dampening effect on Sandvik’s reported earnings.5. The entries used to increase the reserves can be determined by examining the change in Untaxed Reserves in the balance sheet as well as examining the relevant notes to the financial statements. The entries were:Depreciation expense 172Excess depreciation reserve 172Other expenses 13Other untaxed reserves 136. With reserves Without reservesROS 3,731/15,242 3,731 + 185(1-.03)/15,242= 24.5% = 25.7%ROA 3,731 + 1 + 633 3,731 + 1 + 633 + 185(38,142 + 22,286)/ 2 [(38,142 – 185) + (22,286 + 85)] /2= 14.4% = 15.1%Case 9-2Continental A.G.Students will first gravitate to the notes to the financial statements dealing with Special Reserves and Provisions. Their instincts are correct. The problem facing an external analyst is that it is difficult to determine which of the reserve and provision items are legitimate and which are not. It turns out that two important keys to this case are to be found in footnotes 21 and 22. Focusing on the consolidated figures, we see that Continental is using entries under Other operating income and Other operating expenses to smooth reported earnings. The following analysis backs out 1) Credit to income from the reversal of provisions, 2) Credit to income from the reduction of the general bad debt reserve, and 3) Credit to income from the reversal of special reserves appearing in note 21 and Allocation to special reserves under note 22.Adjustments:19X9Operating income DM68,029Provisions DM33,559General B/D Reserve 2,014Special reserve 32,456Special reserves 1,278Operating income 1,27820X0Operating income DM57,237Provisions DM17,312General B/D Reserves 1,101Special Reserves 38,824Special Reserves 168Operating income 168To determine the net overstatement on an after-tax basis, the students should attempt to approximate Continental’s effective tax rate. Information to do this are contained in footnote 24 and Continental’s income statement.Effective Taxes: 19X9 20X0Income tax 141,476 59,884Income after tax 227,838 93,435Income before tax 369,314 153,319Effective rate: 141,476/369,314 59,884/153,319= 39% = 39%Reduction in taxes:66,751 X .39 57,069 X .39= 26,033 = 22,257Net overstatement:66,751 57,069-26,033 -22,25740,718 34,812This overstatement, as a percentage of reported consolidated earnings, was 18% for 19X9and 37% for 20X0. Dietrich and Marissa have cau se to pay Continental’s CFO a visit.。

Chapter 21 AppendixCost-Volume-Profit (CVP) Analysis√Appendix Short Exercises(10-15 min.) S 21A-37LimonadeIncome Statement (Variable Costing)Month Ended April 30, 2009Sales revenue (10,000 × $25) $250,000 Variable costs (10,000 × $10) 100,000 Contribution margin 150,000 Fixed costs 75,000 Operating income $ 75,000(15 min.) S 21A-38 Req. 1LimonadeIncome Statement (Absorption Costing)Month Ended April 30, 2009Sales revenue (10,000 × $25) $250,000 Cost of goods sold[10,000 × ($8 var. + $5 fixed*)] 130,000 Gross Profit 120,000 Selling and administrative cost[(10,000 × $2) + $20,000] 40,000 Operating income $ 80,000 *$55,000 / 11,000 = $5 per unitReq. 2The difference in incomes of $5,000 is the 1,000 units in ending inventory × $5 fixed cost per unit that will be expensed when goods are sold next month.√Appendix Exercises(15-20 min.) E 21A-39 Req. 1Seams CompanyConventional (Absorption Costing) Income StatementYear Ended December 31, 2008Sales revenue (185,000 × $35) $6,475,000 Less: Cost of goods sold (185,000 × $25*) 4,625,000 Gross profit 1,850,000 Operating costs [(185,000 × $5) + $300,000] 1,225,000 Operating income $ 625,000 __________*Variable manufacturing cost per unit of $15 plus $10 fixedmanufacturing cost per unit ($2,000,000 fixed manufacturing overhead / 200,000 units produced).Seams CompanyContribution Margin (Variable Costing) Income StatementYear Ended December 31, 2008Sales revenue (185,000 × $35) $6,475,000 Variable costs:Variable cost of goods sold (185,000 × $15manufacturing) $2,775,000 Variable sales commission (185,000 × $5) 925,000 3,700,000 Contribution margin 2,775,000 Fixed costs:Manufacturing overhead $2,000,000 Operating costs 300,000 2,300,000 Operating income $ 475,000(continued) E 21A-39 Req. 2Absorption costing operating income is higher than variable costing operating income. This is because absorption costing defers 15,000 goggles × $10 fixed manufacturing overhead per goggle = $150,000 of 2008 fixed manufacturing overhead as an asset in ending inventory. In contrast, variable costing expenses all the 2008 fixed manufacturing overhead during 2008. Variable costing expenses $150,000 more costs during 2008, so variable costing operating income is $150,000 less than absorption costing income in 2008 ($625,000 − $475,000). Req. 3Seams’ managers can use the contribution margin income statement format to evaluate the sales promotion.Increase in contribution margin (15,000 × $15)*... $225,000Increase in fixed costs……………………………… (150,000)Increase in operating income……………………… $ 75,000Seams should go ahead with the promotion.*Contribution margin per unit:Sale price………………………………………... $35 Variable manufacturing cost………………… $15 Variable operating cost……………………….. 5 (20)Contribution margin per unit………………… $15√ Appendix Problems(10-15 min.) P 21A-40Req. 1January, 2007 Absorption Variable Costing CostingVariable manufacturing costs………… $4.00 $4.00Fixed manufacturing costs……………. .50a — Total………………………………………...$4.50 $4.00a Fixed overhead Fixed manufacturing overheadper meal= Number of meals producedIn January:$700 = 1,400= $0.50 per mealReq. 2aGia’s FoodsIncome Statement (Absorption Costing)Month Ended January 31, 2007Sales revenue (1,000 × $8) $ 8,000 Deduct: Cost of goods sold (1,000 × $4.50) (4,500) Gross profit 3,500 Deduct: Operating costs:Marketing and administrative costs[(1,000 × $1) + $600] (1,600) Operating income $ 1,900 UnitsBeginning inventory 0Units produced…………………… 1,400Units available…………………….1,400Units sold…………………………. (1,000)Ending inventory (400)Req. 2bGia’s FoodsIncome Statement (Variable Costing)Month Ended January 31, 2007Sales revenue (1,000 × $8) $ 8,000 Deduct: Variable costs:Variable cost of goods sold (1,000 × $4) $4,000Sales commission cost (1,000 × $1) 1,000Total variable costs (5,000) Contribution margin 3,000 Deduct: Fixed costs:Fixed manufacturing overhead 700 Fixed marketing and administrative costs 600Total fixed costs (1,300) Operating income $ 1,700Req. 3In January, absorption costing operating income exceeds variable costing income. This is because production exceeds sales. Absorption costing defers some of January’s fixed manufacturing overhead costs in the 400 units of ending inventory. These costs will not be expensed until those units are sold. Deferring some of January’s fixed manufacturing overhead costs to the future increases January’s absorption costing income.Absorption costing assigns $0.50 of fixed manufacturing overhead to each unit. There are 400 units in ending inventory, so absorption costing defers 400 × $0.50 = $200 of January fixed overhead costs. Thus, absorption costing income is $200 higher than variable costing income in January.Req. 1OctoberVariable AbsorptionCosting CostingVariable manufacturing costs………… $15 $15Fixed manufacturing costs……………. 4 — Total………………………………………...$19 $15Req. 2aVideo KingIncome Statement (Absorption Costing)Month Ended November 30, 2008Sales revenue (3,000 × $40) $120,000 Deduct: Cost of goods sold (3,000 × $19) (57,000) Gross profit 63,000 Deduct: Operating costs:Marketing and administrative costs[(3,000 × $8) + $9,000] (33,000) Operating income $ 30,000 UnitsBeginning inventory (500)Units produced…………………… 2,500Units available…………………….3,000Units sold…………………………. (3,000)Ending inventory 0Req. 2bVideo KingIncome Statement (Variable Costing)Month Ended November 30, 2008Sales revenue (3,000 × $40) $120,000 Deduct: Variable costs:Variable cost of goods sold (3,000 × $15) $45,000Sales commission cost (3,000 × $8) 24,000Total variable costs (69,000) Contribution margin 51,000 Deduct: Fixed costs:Fixed manufacturing overhead 10,000Fixed marketing and administrative costs 9,000Total fixed costs (19,000) Operating income $ 32,000Req. 3In November, variable costing operating income exceeds absorption costing income. This is because sales exceed production. Absorption costing deferred some of October’s fixed manufacturing overhead costs in the 500 units of beginning inventory for November. These costs were expensed when those units were sold in November. Deferring some of October’s fixed manufacturing overhead costs to the future increased October’s absorption costing income and decreased November’s absorption costing income.Absorption costing assigns $4.00 of fixed manufacturing overhead to each unit. There are 500 units in October’s ending inventory, so absorption costing deferred 500 × $4 = $2,000 of October fixed overhead costs until November, when the 500 units were sold. Thus, absorption costing income is $2,000 lower than variable costing income in November.√Team Project(60-70 minutes, most of which is advance preparation)This challenging role play works best with groups of 4 to 6 students. Each group will form two subgroups—one for each role.Kevin McDaniel:Req. 1FASTPACK ManufacturingIncome Statement (Absorption Costing)Year Ended December 31, 2007(In millions)Sales revenue (15 × $3) $45.00 Less: Cost of goods sold:Beginning finished goods inventory $ 0Cost of goods manufactured (15 × $2.56)a38.4Cost of goods available for sale 38.4Ending finished goods inventory 0Cost of goods sold 38.4 Gross profit 6.6 Less: Operating costs:Marketing and administrative costs[(15 × $0.50) + $1.1] (8.6) Operating loss $ (2.0) a[$2 variable manufacturing cost per roll + ($8.4 million / 15million) fixed manufacturing overhead per roll = $2.56 per roll]Req. 2FASTPACK should adopt the advertising campaign.DATE: __________TO: Board of Directors, FASTPACK Manufacturing FROM: Kevin McDanielSUBJECT: Advertising campaignI have authorized our ad agency to go ahead with the advertising campaign. Although this campaign will cost us $2.3 million, I expect it to increase our operating income by $2.2 million, as shown below.In millions Increased revenue from higher sales (9 million more rolls sold × $3)…..... $27.0(22.5) Increase in variable costs (9 million more rolls sold × $2.50b)….………..... Increase in contribution margin from higher sales…………………………... 4.5 Increase in fixed costs from advertising campaign………………………….. (2.3) Increase in operating income from advertising campaign………………….. $ 2.2b$2 Variable manufacturing costs + $0.50 variablemarketing and administrative costs per roll.Req. 3McDaniel’s bonus is based on absorption costing operating income. Absorption costing defers part of current period fixed manufacturing overhead in ending inventory. Therefore, increasing ending inventory increases current period absorption costing income. If McDaniel wants to maximize his bonus, he will direct FASTPACK to produce at capacity, 30 million rolls.If McDaniel is more concerned about FASTPACK than about himself or his bonus, he will direct FASTPACK to produce the 24 million rolls that he expects will be sold in 2008.Req. 4If FASTPACK produces 30 million rolls:FASTPACK ManufacturingIncome Statement (Absorption Costing)Year Ended December 31, 2008(In millions)Sales revenue (24 × $3) $ 72.00 Less: Cost of goods sold:Beginning finished goods inventory $ 0.00Cost of goods manufactured (30 × $2.28)c68.40Cost of goods available for sale 68.40Ending finished goods inventory (6 × $2.28) (13.68) Cost of goods sold 54.72 Gross profit 17.28 Less: Operating costs:Marketing and administrative costs[(24 × $0.50) + $3.4]d(15.40) Operating income $ 1.88c$2 variable manufacturing cost per roll + ($8.4 million / 30million) fixed manufacturing overhead per roll = $2.28 per roll. d$1.1 million + $2.3 million = $3.4 million.Kevin McDaniel’s bonus is 10% of absorption costing income: 10% × $1,880,000 = $188,000Req. 4 (continued)If FASTPACK produces only 24 million rolls:FASTPACK ManufacturingIncome Statement (Absorption Costing)Year Ended December 31, 2008(In millions)Sales revenue (24 × $3) $ 72.0 Less: Cost of goods sold:Beginning finished goods inventory $ 0Cost of goods manufactured (24 × $2.35)e56.4Cost of goods available for sale 56.4Ending finished goods inventory 0Cost of goods sold (56.4) Gross profit 15.6 Less: Operating costs:Marketing and administrative costs[(24 × $0.50) + $3.4]f 15.4 Operating income $ 0.2 e$2.00 variable manufacturing cost per roll + ($8.4 million / 24 million) fixed manufacturing overhead per roll = $2.35 per roll.f$1.1 million + $2.3 million = $3.4 million.If FASTPACK produces only 24 million rolls, absorption costing operating income is $200,000, so Kevin McDaniel’s bonus is only $20,000.Req. 5Assuming McDaniel ordered FASTPACK to produce 30 million rolls, McDaniel is building up inventory because FASTPACK can only sell 24 million rolls per year. Under absorption costing, this defers part of current year fixed manufacturing costs to the future. This increases current period absorption costing income.The maximum FASTPACK can sell in the near future is 24 million rolls. If McDaniel continues to produce 30 million rolls per year, but FASTPACK sells only 24 million, FASTPACK will soon run out of room to store the inventory. Eventually, FASTPACK will have to reduce production and use up inventory. When inventory declines, absorption costing expenses prior period costs stored in the inventory. This will reduce absorption costing income in years when inventory declines. In turn, this would reduce McDaniel’s bonus.If he must reduce inventory, McDaniel is unlikely to continue his employment at FASTPACK under a contract that bases his bonus on absorption costing income. Consequently, McDaniel may well take the job at the new company. He can increase his bonus by building up its inventories.If McDaniel produced only 24 million rolls, operating income would be $200,000, and he would receive a small bonus. In this case, he is likely to leave FASTPACK and take the other company’s offer.Board of Directors:Req. 1See income statement in Req. 1 of McDaniel’s role.Req. 2FASTPACK should adopt the advertising campaign, because the campaign will increase operating income by 2.2 million.In millions Increased revenue from higher sales (9 million more rolls sold × $3).…… $27.0(22.5) Increase in variable costs (9 million more rolls sold × $2.50)*……….......... Increase in contribution margin from higher sales…………………….…….. 4.5 Increase in fixed costs from advertising campaign………………………….. (2.3) Increase in operating income from advertising campaign………………….. $ 2.2*$2.00 variable manufacturing costs + $0.50 variablemarketing and administrative costs per roll.Req. 3FASTPACK can only sell 24 million rolls of tape. Therefore, it should produce only 24 million rolls of tape.Req. 4The evaluation of McDaniel will depend upon his decisions:•McDaniel should receive a more favorable evaluation if he adopts the advertising campaign.•McDaniel should receive a more favorable evaluation if he produces only 24 million rolls. McDaniel’s bonus is basedon absorption costing income. This gives him the incentive to produce at capacity (30 million rolls). Buildinginventory defers part of current period fixed costs to the future. This inflates current year absorption costing income, and McDaniel’s bonus. If he resists this temptation, the Board should take this into considerationin his evaluation.•McDaniel’s evaluation also should depend upon FASTPACK’s performance. The Board can assess FASTPACK’s performance using a variable costing incomestatement. The following income statement assumes that FASTPACK produces 30 million rolls, but variable costingincome would be the same regardless of the number of rolls produced.FASTPACK ManufacturingIncome Statement (Variable Costing)Year Ended December 31, 2008(In millions)Sales revenue (24 × $3) $72.0 Less: Variable costs:Beginning finished goods inventory $ 0.0Cost of goods manufactured (30 × $2) 60.0Cost of goods available for sale 60.0Ending finished goods inventory (6 × $2) (12.0)Variable cost of goods sold 48.0Variable marketing and administrativecosts (24 × $0.50) 12.0 Total variable costs (60.0) Contribution margin 12.0 Less: Fixed costs:Fixed manufacturing overhead 8.4 Fixed marketing and administrative costs($1.1 + $2.3) 3.4 Total fixed costs (11.8) Operating income $ 0.2 Variable costing shows that FASTPACK has made a profit of $200,000 in 2008. While this is better than the $2.0 million loss in 2007, the present level of performance probably is not good enough to ensure FASTPACK’s long-run survival.1436Accounting 7/e Solutions ManualReq. 5The bonus provision should be revised. Basing the bonus on absorption costing operating income gives the president an incentive to build up inventory. This inflates absorption costing income by deferring current period fixed manufacturing costs to the future. While it is a good idea to tie the president’s bonus to FASTPACK’s income, it would be better to use variable costing income, which does not give an incentive to build inventory.If the Board wants to keep the absorption costing income provision, then it should adopt a policy preventing inventory buildup.Chapter 21 Cost-Volume-Profit (CVP) Analysis 1437Meeting between the Board and McDaniel:The content and outcome of this meeting will depend upon the decisions McDaniel has made, and whether the Board believes he has made enough progress in improving FASTPACK’s performance. If the Board wants to keep McDaniel, it should base the bonus on variable costing income (or at least implement a provision against building up inventory). However, the Board may be inclined to let McDaniel go, given FASTPACK’s lackluster performance. This is especially true if the Board believes McDaniel has taken advantage of FASTPACK by building up inventory, or if McDaniel made a mistake by not adopting the advertising campaign.Even if the Board offers McDaniel a new contract, it is not clear whether he will stay with FASTPACK or accept the other company’s offer. If he must start reducing inventory, McDaniel is unlikely to continue at FASTPACK if his bonus is based on absorption costing income. There is not enough information to determine whether McDaniel would be better off staying with FASTPACK under a contract that granted a bonus based on variable costing income or whether he would be better off accepting the position with the new company.1438Accounting 7/e Solutions Manual。

Chapter 8Global Accounting and Auditing Standards Discussion Questions1.A rgument for measurement:•Discrepancies in international measurement may produce accounting amounts that are vastly different (even where financial transactions and position areidentical), leading to incorrect comparisons. Here it doesn’t matter what isdisclosed; no reliable comparisons are possible anyway.Arguments for disclosure:•If companies do not disclose complete information, they can hide losses or future problems from financial statement users. For example, losses can behidden by offsetting them against gains. Expected future problems related toloss contingencies can be hidden simply by not disclosing them. Thus, ifdisclosure is incomplete, even the application of similar measurementprinciples will lead to incorrect comparisons.Clearly, international accounting convergence requires that both measurementand disclosure be made comparable.2. The term convergence is associated with the International AccountingStandards Board. Before the IASB, harmonization was the commonly used term.Harmonization means that standards are compatible; they do not containconflicts. Harmonization was generally taken to mean the elimination ofdifferences in existing accounting standards, in other words, finding a commonground among existing standards. Convergence means the gradual eliminationof differences in national and international accounting standards. Thus, theterms harmonization and convergence are closely aligned. However, convergencemight also involve coming up with a new accounting treatment not in any currentstandards.3.a. Reciprocity, or mutual recognition, exists when regulators outside of the homecountry accept a foreign firm’s financial sta tements based on the homecountry’s principles, or perhaps IFRS. For example, the London StockExchange accepts U.S. GAAP-based financial statements in filings made by non-U.K. foreign companies. Reciprocity does not increase cross-countrycomparability of financial statements, and it can create an unlevel playing field inthat foreign companies may be allowed to apply standards that are less rigorousthan those used by domestic companies.b. With reconciliation, foreign firms can prepare financial statements using the accounting standards of their home country or IFRS, but also must provide a reconciliation between accounting measures (such as net income and shareholders’ equity) of the home country and the country where the financial statements are being filed. Reconciliations are less costly than preparing a full set of financial statements under a different set of accounting principles, but provide only a summary, not the full picture of the enterprise.c. International standards are a result of either international or political agreement, or voluntary (or professionally encouraged) compliance. When accounting standards are applied through political, legal, or regulatory procedures, statutory rules typically govern the process. All other international standards efforts in accounting are voluntary in nature.include:a.A growing body of evidence indicates that the goal of international convergence ofaccounting, disclosure and auditing has been widely accepted.b.A ll dimensions of accounting are becoming converged worldwide.c.Increasing numbers of highly credible organizations strongly support the goals ofthe IASB.d.N ational differences in the underlying factors that lead to variation in accounting,disclosure, and auditing practices are narrowing as capital and product markets become more international.e.International standards will improve the comparability of international financialinformation.f.Time and money will be saved on international consolidations, the components ofwhich now are subject to different national laws and practices.g.T here may be a tendency for accounting standards throughout the world to beraised to the highest possible level.h.W idespread application of IFRS might also result in:•Improved managerial decision making within multinational enterprises.•Improved allocations of corporate investment money worldwide.•Better international understandability of financial statements.•Cost reductions in accounting information processing and financial disclosure costs for multinational enterprises.•Greater international credibility for published financial statements.a.Accounting has built-in flexibility. Its ability to adapt to widely differentsituations is one of its most important features. Critics doubt thatinternational standards can be flexible enough to handle differences innational backgrounds, traditions, and economic environments, and may bea politically unacceptable challenge to sovereignty.b.It is claimed that international accounting standard setting is a tactic of thelarge international accounting service firms to expand their market share.c.International standards may create standards overload for companies thatdo business internationally.d.National political concerns frequently intrude on accounting standards.International political influences would compromise internationalaccounting standards.e.International standards are not suitable for small and medium-sizedcompanies, particularly unlisted ones with no public accountability.f.Risks of misinformation —uniform standards may give the appearance ofsimilarities when in fact countries and companies may be highly dissimilar.g.Political costs of the necessary international treaties on financial accountingand reporting which would have to be negotiated to enforce the use of IFRS.6.Evidence indicating wide acceptance of IFRS around the world:a.Growing numbers of companies are adopting IFRS voluntarily and refer totheir use of IFRS in their annual reports.b.Dozens of countries base their national accounting standards on IFRS.c.Some 7,000 EU listed companies now use IFRS in their consolidatedfinancial statements.d.Many international organizations, such as IOSCO, endorse the use of IFRS.e.IFRS are used as an international benchmark in many major industrializedcountries.f.IFRS are accepted by many stock exchanges and securities regulators.g.IFRS are recognized by the European Commission (EC) and othersupranational bodies.h.Norwalk Agreement committed FASB and IASB to convergence.7. The International Accounting Standards Board is overseen by the International Accounting Standards Committee, consisting of 22 trustees: six from North America, six from Europe, six from the Asia-Pacific region, and four from any area. The trustees appoint the members of the IASB. The IASB receives advice from the Standards Advisory Council on its agenda and priorities. The SAC consists of around30 members appointed by the IASC trustees and they represent a diversity of geographic and professional backgrounds.The IASB consists of 14 members, 12 full-time and two part-time. It follows a due process in setting accounting standards. For each standard, the board normally publishes a discussion paper that sets out the various possible requirements for the standard and the arguments for and against each one. Later, the board publishes an exposure draft for public comment, and it then examines the arguments put forward in the comment process. A final standard is issued when nine of the 14 board members have voted in its favor.8.Accounting harmonization in the EU is just one element of the overall project of harmonizing the legal and economic systems of the member states, and is part of the process of harmonizing company law.The Fourth Directive illustrates the concept of harmonization, and specifies accounting measurement (valuation) and disclosure requirements. It provides format rules for the balance sheet and the profit and loss account. The true and fair view is the overriding requirement and holds for footnote disclosures as well as the financial statements. The Fourth Directive also sets out the requirements for financial statement audits.The Seventh Directive addresses consolidated financial statements. It requires consolidations for groups of companies above a certain size, specifies disclosures and notes, and requires a directors’ report. When it was issued in 1983, consolidated financial statements were the exception rather than the rule in Europe.The Eighth Directive addressed various aspects of the qualifications of professionals authorized to carry out legally required (statutory) audits. Now referred to as the Statutory Audit Directive, it was substantially amended in 2006. The new directive tightens oversight of the audit profession and has standards for, among other points, auditor appointment and rotation, and continuing professional education.The EU abandoned its approach to harmonization to one favoring the IASB for practical and political reasons. The Fourth and Seventh Directives were incomplete and essentially remained as they were issued. Improvements to them proved difficult to achieve and the directives did not achieve the comparability expected. Some saw a set of Europe-wide standards as an unnecessary redundancy given the emergence of comprehensive IFRS. Others saw U.S. GAAP as a rival to IFRS. The EU cannotinfluence U.S. GAAP, but can influence IFRS. By putting its weight behind the IASB, the EU could serve as a counterweight to U.S. GAAP.9.International accounting harmonization/convergence should address many, if not most, investor concerns about cross-national differences in accounting practices. The key issue here is comparability –investors want to make “apples to apples” comparisons of financial statements of companies from countries around the world. However, converged standards are only the beginning. Standards must also be comparably applied and they must be rigorously enforced. The financial statements must also be similarly audited to ensure comparable reliability.10.Convergence of auditing standards will help ensure that audit quality will reach acceptable levels worldwide. Auditing convergence may be less difficult to achieve than accounting convergence because auditing is more technically oriented and there is wider agreement as to what constitutes best practices in auditing than there is for accounting principles.IFAC is a worldwide organization of over 160 member organizations in 120 countries. Its mission includes establishing and promoting adherence to high-quality auditing and other professional standards, and furthering the international convergence of such standards. Its work is done through standard setting boards and standing committees. Among its standard setting boards are:•International Accounting Education Standards Board•International Auditing and Assurance Standards Board•International Ethics Standards Board for AccountantsIts work spans the entire array of professional responsibilities of auditors and includes standards covering professional education, the conduct of the audit, and professional ethics.11.IOSCO consists of securities regulators from more than 100 countries. Together, IOSCO members are responsible for regulating more than 90 percent of global securities markets. One of IOSCO’s objectives is promoting “high standards of regulation in order to maintain just, ef ficient, and sound markets.” IOSCO has worked extensively on international disclosure and accounting standards to facilitate the ability of companies to raise capital efficiently in global securities markets. It has a technical committee whose sole focus is multinational disclosure and accounting. Model disclosure standards were published in 1998 and 2002.IOSCO’s disclosure harmonization work is important because it has established a set of high quality disclosure standards, globally recognized, that serves as a model for nations around the world as they develop national requirements for cross-border offerings and initial listings.12.The UN and OECD now play supporting roles in harmonizing accounting and auditing standards. The IASB and IFAC are now the clear leaders in this endeavor, but in the 1970s and 1980s, both the UN and OECD were potential rivals. Most of the effort of the UN and OECD is directed toward providing technical accounting assistance to developing countries. For example, the UN has focused much attention on Russia and countries of the former Soviet bloc, and on African countries.Exercises1.One of the main problems with mutual recognition (or reciprocity) is that it actuallymay make financial statements within the home market noncomparable. If many different accounting standards are acceptable, then companies domiciled in countries with rigorous standards (such as the United States) would be at a disadvantage to companies whose home country standards are not as stringent, but still would be acceptable. Investors also would face the difficult task of having to master many sets of accounting principles in order to be able to understand the associated financial statements.The U.S. SEC considers reconciliation to be a cost-effective means to allow foreign firms to list on a domestic exchange. With reconciliation, differences between accounting standards are identified and quantified without the need to prepare a second set of financial statements. However, significant differences between domestic and foreign accounting principles can increase the burdens associated with reconciliation, and reconciliations do not provide a full picture of the enterprise as would result from a second set of financial statements.The use of International Financial Reporting Standards would provide many benefits for cross-border listings. Companies would have to provide only one set of financial statements for all nondomestic capital markets, and investors would have to be familiar with only one set of accounting principles to properly understand and interpret nondomestic financial statements. However, as with reconciliation, domestic companies required to comply with domestic standards still would compete for capital with nondomestic companies that would be required to comply with a different (and possibly less stringent) standard.Preferred approaches from perspectives of different groups:a.Investors might prefer international standards, as they would increase the ease inunderstanding information from nondomestic companies. Knowledge of onlyone set of standards would be required to understand all nondomesticstatements. However, there is also a case for reconciliation, which presents inan economical manner the significant differences between nondomestic anddomestic financial statements and does not require investors to be familiarwith any set of accounting standards other than the home country.b.C ompany management might prefer mutual recognition, as it does not require acompany to prepare any additional information and requires no additionalexpense or time commitments. However, companies in some countries mightadopt IFRS voluntarily to increase their credibility with investors and increase the overall quality of their financial reporting.c.Regulatory authorities might prefer reconciliation as it places the burden oncompanies yet provides adequate disclosure and investor protection.d.S tock exchanges might prefer convergence as it is the only method that providestruly complete and identical information disclosure from companies outside the home market.e.Professional associations will take positions according to their constituents –associations of stockbrokers might prefer convergence to the extent that it would make company information easier to understand, whereas associations of company executives might prefer reciprocity.2.The following discussions are based on the respective organizations’ Web sites at the time of writing.International Federation of Accountants (IFAC)IFAC, an organization of national professional accountancy organizations, plays a critical role in the convergence of auditing standards and other international auditing initiatives. The organization has over 160 member organizations in 120 countries, representing more than 2.5 million accountants. Organized in 1977, IFAC’s goal is to develop the accountancy profession and converge its professional standards worldwide to enable accountants to provide services of consistently high quality in the public interest.To achieve its objective, IFAC develops and promotes technical, professional and ethical standards for accountants, provides leadership on emerging issues, and serves as a voice for the world’s accountants on issues of public and profess ional concern. IFAC fosters the advancement of strong national professional accountancy organizations, and works closely with regional accountancy organizations and outside agencies to accomplish this.The IFAC Council, comprised of one representative from each member body, provides overall leadership of IFAC. The council elects the IFAC Board, and is responsible setting policy and overseeing IFAC operations, the implementation of programs, and the work of IFAC’s standard setting groups and committees. The Public Interest Oversight Board (PIOB), an independent board, provides additional oversight. Day-to-day administration is provided by the IFAC chief executive located in New York, which is staffed by accounting professionals from around the world.IFAC’s professional work is done through its standard setting boards and standing committees. IFAC standard setting boards are:•International Accounting Education Standards Board•International Auditing and Assurance Standards Board•International Ethics Standards Board for Accountants•International Public Sector Accounting Standards BoardIFAC standing committees are the following:•Compliance Advisory Panel•Developing Nations Committee•Nominating Committee•Professional Accountants in Business Committee•Small and Medium Practices Committee•Transnational Auditors CommitteeIFAC issues standards in these key areas: auditing, assurance, and related services; education; ethics; and public sector accounting. IFAC’s International Auditing and Assurances Standards Board issues International Standards on Auditing (ISA), which are intended for international acceptance. ISA s deal with topics such as auditors’ responsibilities, risk assessment and evidence, and audit reporting.IFAC has close ties with organizations such as the IASB and IOSCO, and its pronouncements are receiving growing recognition for their quality and relevance. Financial statements of companies around the world are increasingly being audited in conformity with International Standards on Auditing.United Nations Intergovernmental Working Group of Experts on International Standards of Accounting and Reporting (ISAR)ISAR was created in 1982 and is part of the United Nations’ Conference on Trade and Development (UNCTAD). ISAR is the only intergovernmental working group devoted to accounting and auditing at the corporate level. Its objective “is to promote the transparency, reliability and comparability of corporate accounting and reporting as well as to improve disclosures on corporate governance by enterprises in developing countries and countries with economies in transition. ISAR achieves this through an integrated process of research, intergovernmental consensus building, information dissemination and technical cooperation.”In recent years, ISAR focused on important topics that other organizations were not yet ready to address, such as environmental accounting. It has also conductedtechnical assistance projects in a number of areas such as accounting reforms and retraining in the Russian Federation, Azerbaijan and Uzbekistan, and designing and developing a long-distance learning program in accountancy for French-speaking Africa. Topics discussed at recent ISAR conferences include practical implementation of IFRS, corporate responsibility reporting, and corporate governance disclosures. Organization for Economic Cooperation and Development (OECD)OECD is the international organization of 30 (mostly industrialized) market economy countries. It functions through its governing body, the OECD Council, and its extensive network of committees and working groups. Its publication Financial Market Trends, issued two times each year, assesses trends and prospects in the international and major domestic financial markets of the OECD area.The OECD often publishes reports on the structure and regulation of securities markets, and has played a leading role in promoting improved corporate disclosure and governance around the world. With its membership consisting of larger, industrialized countries, the OECD is often a counterweight to other bodies (such as the United Nations and the International Confederation of Free Trade Unions) that have built-in tendencies to act contrary to the interests of its members.3.As an example, consider the Financial Accounting Standards Board (FASB) in the United States. The FASB’s Web site presents detailed information on the FASB’s international activities, including an overview, convergence with IASB, cooperative efforts with other standards setters, and the FASB/IASB memorandum of understanding.The FASB’s objective for participating in international activities is to increase the international comparability and the quality of standards used in the United States. This objective is consisten t with the FASB’s obligation to its domestic constituents, who benefit from comparability of information across national borders. The FASB pursues that objective in cooperation with the International Accounting Standards Board (IASB) and national standard setters.The FASB believes that the ideal outcome of cooperative international accounting standard-setting efforts would be the worldwide use of a single set of high-quality accounting standards for both domestic and cross-border financial reporting. At present, a single set of high-quality international accounting standards that is accepted in all capital markets does not exist. In the United States, for example, domestic firms that are registrants with the SEC must file financial reports using U.S. GAAP. Foreign firms filing with the SEC can use U.S. GAAP, their home country GAAP,or international standards –although if they use their home country GAAP or international standards, foreign issuers must provide a reconciliation to U.S. GAAP.The FASB engages in a variety of activities in pursuit of the goals of high-quality international standards and increased convergence of the accounting standards used in different nations. Almost every FASB project is a matter of interest in some other country or with the IASB.4. a. Comparison of standard-setting proceduresEuropean UnionAccounting and auditing requirements are established under EU company law directives, which are legal instruments that member countries must implement. Thus, all accounting and auditing standards in EU directives become legally enforceable. The EU comprises several key organizations that need to be understood in order to understand how EU directives come into being. Briefly, the European Commission initiates EU p olicy and acts in the community’s general interest. Commissioners are completely independent and may not seek or take instructions from governments or interest groups. The Council of the European Commission is the EU’s decision-maker. Here, the member states legislate for the EU, deciding some matters by majority vote and others unanimously. The European Parliament represents the EU’s citizens. Its main functions are to enact legislation and to scrutinize and control the use of executive power. The Treaty of European Union of 1993 strengthened the European Parliament’s responsibilities.Only the Commission can propose new directives. Proposals typically undergo many drafts. Proposed directives are submitted to the Council of the European Commission, which first seeks opinions of the Economic and Social Committee and the European Parliament. Next, a working party set up by the Council discusses the proposal. Member countries typically are allowed several years to implement a new directive after its final adoption. (Note to instructors: The information contained in this paragraph is based on information on the EU’s Web site at the time of writing.)I ASBThe IASB follows due process in setting accounting standards. For each standard, the Board may publish a discussion paper that sets out the various possible requirements for the standard and the arguments for and against each one. Subsequently, the Board publishes an exposure draft for public comment, and then examines the arguments put forward in the comment process before deciding on the final form ofthe standard. An exposure draft and final standard can be issued only when nine (of14) members of the board vote in favor of it.I FACThe standard setting boards of IFAC also follows a due process procedure. Meetings to discuss the development and approval of standards are open to the public and, where practicable, are broadcast over the Internet. Issues papers and draft standards are published on the IFAC Web site along with updated project summaries and meeting highlights. New projects are based on a review of national and international developments and comments from interested observers. An advisory group is consulted to determine priorities and activities. Task forces are usually assigned the responsibility for the development of new standards. These task forces conduct research and consult interested parties on the issues under consideration. One or more public forums or roundtables may be held before an exposure draft is issued. Re-exposure is sometimes necessary. Final standards are issued after considering comments to the exposure draft. (Note to instructors: The information contained in this paragraph is taken from IFAC’s Web site at the time of writing.)a.At what types and sizes of enterprises are their standards primarily directed?EU company law directives apply both to public and private companies inthe EU, without respect to size.IFRS are financial reporting standards for business whose applicabilitydepends on the context. For example, if IFRS are adopted as nationalaccounting standards in a particular country, their applicability dependson the type of entities that are subject to those national standards.IFAC’s standards are directed toward the audits of both public and private companies.In summary, all three sets of standards are meant to apply to most (if notall) enterprises, without regard to size or whether the enterprises areprivate or public.b.B rief critique of statementIt is true that IFRS are particularly useful to companies that operate in morethan one country, because IFRS are widely recognized and are acceptable inmany different countries and stock exchanges. However, as stated in the text,IFRS also are used as the basis for national accounting standards in manycountries, and these national standards typically apply to a wide range ofcompanies, not just multinational companies.5. Following is a sample essay on the 1995 European Commission adoption of a new approach to accounting harmonization. The essay is based on material in articles by Gerhard G. Mueller, "Harmonization: Efforts in the European Union," in Frederick D.S. Choi, ed., International Accounting and Finance Handbook, New York: John Wiley & Sons, 1997, page 11.28; and Peter Walton, “European Harmonization,” in Frederick D.S. Choi, ed., International Finance and Accounting Handbook, New York: John Wiley & Sons, 2003, page 17.7Beginning in the early 1990s, the Commission examined a number of alternative harmonization strategies. These included, among others, substantive revisions of the existing accounting Directives, creation of a Europe-wide accounting standards-setting board, exempting certain European companies from all EU accounting requirements so that these companies might apply accounting standards of other jurisdictions, or re-enforce its earlier push for mutual recognition.The reality of international pressures and the need of European multinationals to be listed on several stock exchanges finally made it clear that the creation of a strong European regional level of accounting regulation was simply adding an unnecessary third tier, sandwiched between national regulations and the international capital markets.In the end, the European Commission adopted a new accounting harmonization strategy on November 14, 1995 and forwarded respective recommendations to the European Council and to the European Parliament. The essence of the recommendation is that the EU will support the IASC/IOSCO initiatives and work to bring EU accounting requirements in line with International Accounting Standards (IAS). The Commission decided, after many years of hesitation, to participate in IASC standard setting, although only as an observer.In addition, the new harmonization strategy concentrated on consolidated financial statements. It had come to be realized that harmonization of individual company accounts is not necessarily very useful. This decision endorsed a break of the link between individual company accounts and consolidated accounts.The new European Commission’s strategy for EU accountin g harmonization is a major change from the EU accounting harmonization policies that had been in place over the preceding twenty-five years.。

Chapter 21Cost-Volume-Profit (CVP) Analysis√ Quick CheckAnswers:1. b 3. a 5. d 7. b 9. a2. d 4. b 6. a 8. c 10. cExplanations:2. d. $110,000 = (100,000 × $1) + $10,0003. a. Breakeven sales $50,000in units = $60 − $10 = 1,000 passengers4. b. Breakeven sales $0.60 millionin dollars = 0.40 =$1.5 million$3 billion − $1.8 billionContribution margin ratio (40%)=$3 billion5. d. Target sales $50,000 + $100,000in dollars = 0.40 =$375,000$60 − $36Contribution margin ratio (40%) =$609. a. Margin of safety ($0) = Expected sales ($800,000*) − breakeven sales ($800,000)*($600,000 + $700,000 + $900,000 + $800,000 + $1,000,000) / 5 = $800,00010. c. Breakeven sales $50,000in total units =$40* =1,250 passengers625 regular 625 discount*Weighted-average ($60 − $10) + ($40 − $10)contribution margin = 2 =$40per unit√Short Exercises(5-10 min.) S 21-1 F 1. Depreciation on routers used to cut wood enclosures V 2. Wood for speaker enclosuresF 3. Patents on crossover relaysV 4. Crossover relaysV 5. Grill clothV 6. GlueF 7. Quality inspector’s salary(5-10 min.) S 21-2 F 1. Building rentF 2. ToysF 3. Playground equipmentV 4. Afternoon snacksF 5. Sally’s salaryV 6. Wages of after-school employeesV 7. Drawing paperF 8. Tables and chairs(5-10 min.) S 21-3 Req. 1a. Call for 20 minutes$5.00 + (20 × $0.35)$5.00 + $7.00 = $12.00b. Call for 40 minutes$5.00 + (40 × $0.35)$5.00 + $14.00 = $19.00c. Call for 80 minutes$5.00 + (80 × $0.35)$5.00 + $28.00 = $33.00(continued) S 21-3 Req. 2(5-10 min.) S 21-4 Req. 1Variable cost per unit =Change in total cost ÷ Change inofactivityvolume− $2,200) ÷ (1,000 machine=($2,400− 500 machine hours)hours=$200 ÷ 500 hours = $.40 per machinehourReq. 2Total fixed cost =Total mixed cost − Total variable cost− ($.40 × 1,000 machine hours)=$2,400− $400 = $2,000=$2,400In this example the highest cost and volume were chosen to calculate the total fixed cost, but the lowest cost and volume also could be used to calculate the $2,000 total fixed cost:Total fixed cost =Total mixed cost − Total variable cost− ($.40 × 500 machine hours)=$2,200− $200 = $2,000=$2,200(5-10 min.) S 21-5Income statement approach:Fixed OperatingSales revenue− Variable costs −costs =incomeVariable cost Units Fixed OperatingSale price Units per unit × sold − per unit × sold −costs =income ($60 × Units sold) − ($20 × Units sold)−$275,000 = $0 ($60 − $20) × Units sold −$275,000 = $0 $40×Units sold = $275,000 Units sold = 6,875 ticketsAlternative: Shortcut contribution margin approach:Units sold Fixed costs + Operating income(to break even) =Contribution margin per unit $275,000 + 0=$40* = 6,875 tickets*Contribution margin $60 sale $20 variable costper person = price −per personProof:Sales revenue (6,875 × $60)................................….. $412,500 Variable costs (6,875 × $20)........................….......... 137,500 Contribution margin............................................….. 275,000 Fixed costs........................................………….......... (275,000) Operating income......................................……….… $ 0(continues S 21-4) (5 min.) S 21-6Req. 1Contribution margin ratioContribution margin per person $40*Sale price per person =$60= 0.66667*Sale price ($60) minus variable cost per person ($20)Req. 2Breakeven Fixed costs + Operating incomesales in dollars =Contribution margin ratio $275,000 + $0=0.66667 = $412,500(10 min.) S 21-7Req. 1Fixed OperatingSales revenue− Variable costs −costs =incomeVariable cost Units Fixed OperatingSale price Units per unit × sold − per unit × sold −costs =income ($50 × Units sold) − ($20 × Units sold)−$275,000 = $0 ($50 − $20) × Units sold −$275,000 = $0 $30×Units sold = $275,000 Units sold = 9,167 tickets9,167 tickets × $50 = $458,350Reducing the sale price increases the breakeven point.Alternatively,Contribution Contribution margin per unitmargin ratio =Sale price per unit$50 − $20=$50 = 0.60Breakeven Fixed costs + Operating incomein dollars =Contribution margin ratio $275,000 + $0=0.60 = $458,333The difference between the income statement approach breakeven sales ($458,350) and the contribution margin ratio formula breakeven sales ($458,333) is a small rounding error.(continued) S 21-7Req. 2Fixed OperatingSales revenue− Variable costs −costs =IncomeVariable cost Units Fixed OperatingSale price Units per unit × sold − per unit × sold −costs =Income ($60 × Units sold) − ($15 × Units sold)−$275,000 = $0 ($60 − $15) × Units sold −$275,000 = $0 $45×Units sold = $275,000 Units sold = 6,111 tickets6,111 tickets × $60 = $366,660Reducing variable costs reduces the breakeven point.Alternatively,Contribution Contribution margin per unitmargin ratio =Sale price per unit$60 − $15=$60 = 0.75Breakeven Fixed costs + Operating incomein dollars =Contribution margin ratio $275,000 + $0=0.75 = $366,667(Again, the small difference is due to rounding.)(5-10 min.) S 21-8Fixed OperatingSales revenue− Variable costs −costs =incomeVariable cost Units Fixed OperatingSale price Units per unit × sold − per unit × sold −expenses =income ($60 × Units sold) − ($20 × Units sold)−$200,000 = $0 ($60 − $20) × Units sold −$200,000 = $0 $40×Units sold = $200,000 Units sold = 5,000 tickets5,000 tickets × $60 = $300,000Reducing fixed costs reduces the breakeven point.Alternatively,Contribution Contribution margin per unitmargin ratio =Sale price per unit$60 − $20=$60 = 0.66667Breakeven Fixed costs + Operating incomein dollars =Contribution margin ratio $200,000 + $0=0.66667 = $300,000(5-10 min.) S 21-9a. Margin of safety Expected sales Breakeven salesin units =in units −in units = 7,000 − 6,875 (from S 21-5) = 125 ticketsb. Margin of safety Margin of safety Sale pricein dollars =in units ×per unit = 125 tickets × $60 = $7,500(10-15 min.) S 21-10 Calculate: AContribution margin per unit $ 4 Sale price − Variable costs ($10 − $6) Contribution margin ratio 40%Contribution margin ÷ Sale price ($4 ÷ $10) Breakeven point in units Fixed costs ÷ Contribution margin$4)÷($50,00012,500Breakeven point in sales $ Breakeven in units × Sale price$125,000 (12,500 × $10)Units to achieve target (Fixed costs + income) ÷ CM ($50,000 +÷$4)income 25,000 $50,000)operatingCalculate: BContribution margin per unit $ 8 Sale price − Variable costs ($16 − $8) Contribution margin ratio 50%Contribution margin ÷ Sale price ($8 ÷ $16) Breakeven point in units Fixed costs ÷ Contribution margin$8)÷($21,0002,625Breakeven point in sales $ Breakeven in units × Sale price$42,000 (2,625 × $16)Units to achieve target (Fixed costs + income) ÷ CM ($21,000 +$8)÷income 11,375 $70,000)operating(continued) S 21-10 Calculate: CContribution margin per unit $ 9 Sale price − Variable costs ($30 − $21) Contribution margin ratio 30%Contribution margin ÷ Sale price ($9 ÷ $30) Breakeven point in units Fixed costs ÷ Contribution margin20,000 ($180,000 ÷ $9)Breakeven point in sales $ Breakeven in units × Sale price$600,000 (20,000 × $30)Units to achieve target (Fixed costs + income) ÷ CM ($180,000 +$9)÷operatingincome 30,000 $90,000)(5-10 min.) S 21-11Tickets Individual Family Sale price per unit $ 25 $ 75 Variable costs per unit 15 60 Contribution margin per unit $ 10 $ 15 Sales mix in units 1 3 4Contribution margin $ 10 $ 45 $ 55Weighted-average CM ($55 ÷ 4)…………………………. $ 13.75(5-10 min.) S 21-12Req. 1Units sold Fixed costs + Operating income(to break even) =Weighted-average contribution margin per unit $39,000 + $0=$13 = 3,000 ticketsReq. 23,000 tickets × (2/5) = 1,200 individual tickets 3,000 tickets × (3/5) = 1,800 family tickets√Exercises(15 min.) E 21-13g 1. Costs that do not change in total despite wide changesvolume.ina 2. The sales level at which operating income is zero: Totalrevenues equal total costs.d 3. Drop in sales a company can absorb without incurringoperatingloss.anf 4. Combination of products that make up total sales.b 5. Sales revenue minus variable costs.c 6. Describes how costs change as volume changes.h 7. Costs that change in total in direct proportion tovolume.changesine 8. The band of volume where total fixed costs remainconstant and the variable cost per unit remainsconstant.(5-10 min.) E 21-14 filterOilV 1.rentF 2.BuildingOilV 3.V 4. Wages of maintenance workerF 5.TelevisionManager’ssalaryF 6.registerCashF 7.EquipmentF 8.(5-10 min.) E 21-15 (a) (b) (c)Fixed Expenses$40$30$20$10Cost(thou-sands)Cost(thou-sands)0 2 4 6 8 10Volume(thousands ofunits)Volume(thousands ofunits)Volume(thousands ofunits)(5-10 min.) E 21-16 Req. 1Variable cost per unit = ($4,000 − $3,600) ÷ (1,000 inspections− 600 inspections)= $400 ÷ 400 inspectionsinspectionper=$1Req. 2Total fixed cost = Total mixed cost − Total variable cost=$4,000− ($1 × 1,000 inspections)− $1,000 = $3,000=$4,000Req. 3Total operating cost =$1 per inspection + $3,000The estimated operating cost=($1 × 900 inspections) + $3,000 based on 900 inspections=$3,900(15 min.) E 21-17 Req. 1Contribution margin ratio = $187,500 / $312,500 = 0.60Req. 2Aussie TravelContribution Margin Income StatementsSales revenue $250,000 $360,000 Variable expenses(40% of sales revenue*) 100,000 144,000 Contribution margin 150,000 216,000 Fixed costs 170,000 170,00046,000 Operating income (loss) $ (20,000) $*$125,000 / $312,500 = 0.40Req. 3$170,000 + $0Breakeven sales =0.60=$283,333(15 min.) E 21-18Req. 1Contribution margin per unit:Sale price....................................…………..$1.70 Variable costs.................................………. 0.85 Contribution margin per unit....................$0.85Contribution margin ratio:Contribution margin per unit $0.85Sale price per unit =$1.70= 0.50Req. 2Fixed costs + Operating income Breakeven sales in units=Contribution margin per unit$85,000 + $0=$0.85 =100,000 packagesFixed costs + Operating incomeBreakeven sales in dollars =Contribution margin ratio$85,000 + $0=0.50 =$170,000(10-15 min.) E 21-19Req. 1Contribution Contribution margin per unitmargin ratio =Sale price per unit$5.00 − $1.50=$5.00 =0.70Breakeven sales Fixed costs + Operating incomein dollars =Contribution margin ratio $8,400 + $0=0.70 =$12,000Req. 2If franchisees require a monthly operating income of $8,750:Target sales Fixed costs + Operating incomein dollars =Contribution margin ratio $8,400 + $8,750=0.70 =$24,500Yes, Lo’s franchising concept is a good idea. She expects most locations could sell more ($25,000) than the sales required to earn the target profit ($24,500).(10-15 min.) E 21-20Req. 1Fixed costs + Operating incomeBreakeven sales in dollars=Contribution margin ratio$640,000 + $0=0.80=$800,000Req. 2Gordon’s Steel PartsContribution Margin Income Statementsat Different Sales LevelsSales revenue $ 500,000 $1,000,000Variable expenses:($500,000 × 0.20*) 100,000($1,000,000 × 0.20*) 200,000800,000 Contribution margin 400,000Fixed costs 640,000 640,000Operating income (loss) $(240,000) $ 160,000__________*1 − Contribution margin ratio = Variable expenses as % of revenues1 − 0.80 = 0.20.Req. 3Yes, the results of the contribution margin income statements at the twodifferent sales levels make sense given the breakeven sales level($800,000) computed in Req. 1. Req. 2 shows that if Gordon’s revenue isonly $500,000—well short of the revenue required to break even—thecompany incurs a loss. On the other hand, if revenue is $1,000,000(higher than the revenue required to break even), the company earns aprofit.(15-20 min.) E 21-21Req. 1The vertical axis is dollars and the horizontal axis is students (or units). The sales revenue and total expense lines are labeled on the graph. Fixed cost of $30,000 is labeled. The operating income area and the breakeven point of 500 students ($50,000) also are labeled.Req. 2If Hill attracts only 400 students, the venture will not be profitable. The graph shows the operating loss will be $6,000 if only 400 students register for the course.(continued) E 21-21 Req. 3Breakeven sales = 500 students ($50,000), labeled on the graph. Note: Some students may recognize that the results at 400 students also can be determined as follows:At the breakeven point:Sales revenue = $50,000 for 500 students, so sales revenue is $100 per student.Total expenses are $50,000, of which $30,000 are fixed, so variable expenses are ($50,000 − $30,000) / 500 students = $40 per student.The results at 400 students can be computed as follows: Sales revenue (400 × $100)......................…$40,000Variable costs (400 × $40)................……… 16,000Contribution margin..........................………24,000Fixed costs.................................…………… 30,000Operating loss........................................…..$( 6,000)(15 min.) E 21-22(1.)(2.)(3.)(4.)Breakeven Sale pricedecreaseVariablecostsdecreaseFixedcostsdecreaseSale price per unit $ 200 $ 180 $ 200 $ 200 Variable costs per unit $ 120 $ 120 $ 110 $ 120 Total fixed costs $50,000 $ 50,000 $50,000 $40,000 Calculate: Contribution margin perunit $ 80 $ 60 $ 90 $ 80 Breakeven point in units 625 833 556 500The contribution margin decreases when the sale price decreases. The contribution margin increases when variable costs decrease. Changes in fixed costs do not affect the contribution margin.The breakeven point increases when the sale price decreases. The breakeven point decreases when variable costs decrease. The breakeven point decreases when fixed costs decrease.(15 min.) E 21-23Req. 1Contribution margin ratio = 1.00 − 0.70 = 0.30Fixed costs + Operating incomeBreakeven sales in dollars =Contribution margin ratio$9,000 + $0=0.30 = $30,000Fixed costs + Operating incomeTarget sales in dollars=Contribution margin ratio$9,000 + $12,000=0.30 $21,000=0.30 = $70,000Margin of safety = $70,000 − $30,000= $40,000Req. 2Margin of safety as $40,000a % of target sales =$70,000= 0.57, or 57% of target sales(15-20 min.) E 21-24To Breakeven:Standard Chrome Sale price per unit $54.00 $78.0050.00Variable costs per unit 36.00Contribution margin per unit $18.00 $28.00Sales mix in units 2 3 5Contribution margin $36.00 $84.00 $120.00Weighted-average CM ($120 / 5) $ 24.00Fixed costs + Operating incomeBreakeven units sold =Weighted-average contributionunitpermargin$12,000 + $0=$24scooters=500Number of Standard [500 × (2/5)]200Number of Chrome [500 × (3/5)] 300(continued) E 21-24To earn operating income of $6,600:Standard Chrome Sale price per unit $54 $7850Variable costs per unit 36Contribution margin per unit $18 $28Sales mix in units 2 3 5Contribution margin $36 $84 $120Weighted-average CM ($120 / 5) $ 24Fixed costs + Operating incomeUnits sold =Weighted-average contribution margin per unit$12,000 + $6,600=$24scooters=775Number of Standard [775 × (2/5)]310Number of Chrome [775 × (3/5)] 465√ ProblemsGroup A(15-30 min.) P 21-25A Managers often want to predict the change in profit likely to result from a change in revenue. The contribution margin income statement yields this information. It separates variable expenses from fixed expenses to isolate their effects on profits. As revenues change, variable expenses change also. Fixed expenses may or may not change, depending on the circumstances.The contribution margin is the excess of revenues over variable expenses. Each dollar of additional revenue adds to the contribution margin. In Ralph’s example, $6,000 of added revenue contributes a margin of $3,600, as computed below. Subtracting the fixed advertising expense of $600 yields the $3,000 addition to monthly operating income.Increase in revenues………………………..$6,000 (given) Increase in variable expenses…………….2,400Increase in contribution margin…………..3,600Increase in fixed advertising expense…... 600 (given) Increase in operating income…………….. $3,000 (given) The margin of safety is the excess of sales over breakeven sales. Fox Club’s situation appears to be critical because a decreasing margin of safety means that the business is getting closer to breakeven sales. At that level there will be no profit, and Fox Club Clothiers could be forced out of business.Note: Student responses may vary considerably.(45-60 min.) P 21-26ACost-Volume-Profit AnalysisCompanies North, East, South, WestCOMPANYWestSouthEastNorthTarget sales $703,000 $187,500 $600,000 $195,000Variable costs 421,800 150,000 280,000 156,000Fixed costs 254,000 123,000 138,000 4,000Operating income (loss) $ 27,200 $ (85,500)$182,000 $ 35,000Units sold 190,000 10,000 3,200 3,250Contribution marginper unit $ 1.48 $ 3.75 $ 100 $ 12Contribution marginratio 0.40 0.200 0.533 0.200Computations (top to bottom for each company)North:(1) Units sold × Unit contribution margin = Contribution marginSales − Contribution margin = Variable costs190,000 × $1.48=$281,200; $703,000 − $281,200 = $421,800(2) Sales − Variable costs − Operating income = Fixed costs$703,000 − $421,800 − $27,200 = $254,000(3) Contribution margin / Sales = Contribution margin ratio=0.40$281,200 / $703,000(continued) P 21-26A East:(4) 1.00 − Contribution margin ratio = Variable cost %Variable costs / Variable cost % = Sales1.00 − 0.20 = 0.80; $150,000 / 0.80 = $187,500(5) Sales − Variable costs − Fixed costs = Operating income$187,500 − $150,000 − $123,000 = $(85,500)(6) Sales − Variable costs = Contribution margin;Contribution margin / Units sold = Contribution margin per unit $187,500 − $150,000 = $37,500; $37,500 / 10,000 = $3.75 South:(7) Sales − Variable costs − Fixed costs = Operating income$600,000 − $280,000 − $138,000 = $182,000(8) Sales − Variable costs = Contribution margin;Contribution margin / Contribution margin per unit = Units sold $600,000 − $280,000 = $320,000; $320,000 / $100 = 3,200 units(9) Contribution margin / Sales = Contribution margin ratio$320,000 / $600,000 = 0.533 (rounded)West:(10) 1.00 − Contribution margin ratio = Variable cost %Variable costs / Variable cost % = Sales1.00 − 0.20 = 0.80; $156,000 / 0.80 = $195,000(11) Sales − Variable costs − Operating income = Fixed costs$195,000 − $156,000 − $35,000 = $4,000(12) Sales − Variable costs = Contribution marginContribution margin / Contribution margin per unit = Units sold $195,000 − $156,000 = $39,000; $39,000 / $12 = 3,250 units(continued) P 21-26A Breakeven Sales:$254,000North: B/E =0.40= $635,000$123,000East: B/E=0.20= $615,000$138,000South: B/E =0.533= $258,912$4,000 West: B/E=0.20 = $20,000Lowest breakevenpointCompany West’s low breakeven point results from its low fixed costs.(30-45 min.) P 21-27A Req. 1Revenue per show:1,000 tickets × $60 / ticket........................…………… $60,000 Variable costs per show:Programs: 1,000 guests × $8 / guest....................…. $ 8,000 Cast: 60 cast members × $320 / cast member.......... 19,200 Total variable costs per show.......................……….. $27,200 Req. 2costs −Fixed costs = Operating income Sales revenue− VariableRevenue Number Variable Numberper × of − cost per×of −Fixed costs = Operating income show shows show showsNumber Number=$0 $60,000 × of − $27,200×of −$459,200shows shows($60,000 − $27,200) × Number of shows = $459,200$32,800 × Number of shows = $459,200$459,200Number of shows =$32,800 Breakeven number of shows = 14 shows(continued) P 21-27A Req. 3Contribution margin = $60,000 − $27,200=$32,800Fixed costs + Target operating income Target number of shows =Contribution margin per unit$459,200 + $4,264,000Target number of shows =$32,800$4,723,200Target number of shows =$32,800Target number of shows = 144 showsThis profit goal is not realistic. British Productions performs only 120 shows each year.Req. 4British ProductionsContribution Margin Income StatementYear Ended December 31, 2007Sales revenue (120 × $60,000) $7,200,000 Variable costs (120 × $27,200) 3,264,000 Contribution margin 3,936,000 Fixed costs 459,200 Operating income $3,476,800(30-45 min.) P 21-28A Req. 1Sales Revenue− Variablecosts −Fixed costs = Operating incomeSale Variableprice × Units sold − cost ×Unitssold−Fixed costs = Operating incomeper unit perunit($12.00 × Units sold) − ($4.20 × Units sold)− $639,600 = $0($12.00 − $4.20) × Units sold =$639,600 $7.80 × Units sold =$639,600$639,600Units sold =$7.80Breakeven sales in units = 82,000 flagsReq. 2Contribution margin =$12.00 − $4.20=$7.80Contribution margin ratio =$7.80=$12.00=0.65Fixed costs + Target operating income Target sales in dollars =Contribution margin ratio$639,600 + $32,500Target sales in dollars =0.65$672,100=0.65=$1,034,000(continued) P 21-28A Req. 3Kincaid CompanyContribution Margin Income StatementYear Ended December 31 2007Sales revenue (70,000 × $12.00) $840,000 Variable expenses:Cost of goods sold (70,000 × $4.20 × 0.60) $176,400Operating costs (70,000 × $4.20 × 0.40) 117,600 294,000 Contribution margin 564,000 Fixed costs:Operating costs 639,600 Operating loss $ (93,600)Req. 4New fixed costs =$639,600 × 1.20=$767,520New variable costs =$4.20 + 0.30=$4.50Sale Variableprice × Units sold − cost ×Units sold−Fixed costs = Operating income perper unitunit($12.00 × Units sold) − ($4.50 × Units sold) − $814,320 = $ 0 ($12.00 − $4.50) × Units sold = $767,520$7.50 × Units sold = $767,520$767,520Units sold=$7.50Breakeven sales in units= 102,336 flagsBreakeven sales in dollars = 102,336 × $12.00= $1,228,032(continued) P 21-28A Req. 4 (continued)Kincaid Company’s 2007 sales of 70,000 flags is well below the breakeven point of 82,000. Apparently the company is having trouble generating enough business to fully use the plant capacity it already has. An expansion that would increase Kincaid’s variable and fixed costs would be a good idea only if the company could use its expanded facilities to generate enough new business to earn additional income. This seems unlikely in this case.(30-45 min.) P 21-29AReq. 1Contribution margin ratio =0.70 (1.00 − 0.09 − 0.12 − 0.04 − 0.05)Monthly fixed costs =$19,600 ($8,100 + $1,700 + $2,000 +$1,000 + $2,000 + $4,800)Fixed costs + Operating incomeBreakeven sales in dollars =Contribution margin ratio$19,600 + $0 =0.70= $28,000$28,000 Breakeven sales in units (trades)=$700= 40 tradesReq. 2Operating Sales revenue − Variable costs − Fixed costs =incomeSales revenue − 0.30 Sales revenue − $19,600= $9,800 0.70 Sales revenue= $29,400 Sales revenue = $29,400 0.70Sales revenue= $42,000(continued) P 21-29A Req. 3(continued) P 21-29AReq. 4Breakeven sales in dollars= $28,000(from Req. 1)$28,000Breakeven sales in units (trades)=$800trades=35 The increase in the average trade commission revenuedecreases the breakeven point from 40 to 35 trades.(20 min.) P 21-30AReq. 1Plain/doz Filled/doz Sale price per unit $6.00 $7.004.20Variable costs per unit 2.00Contribution margin per unit $4.00 $2.80Sales mix in units 2 1 3$10.80Contribution margin $8.00$2.80Weighted-average CM ($10.80 / 3)$ 3.60Fixed costs + Operating incomeBreakeven sales in units =Weighted-average contributionunitmarginper$43,200 + $0=$3.60units=12,000Breakeven units 12,000Number of plain [12,000 × (2/3)] 8,000Number of custard-filled [12,000 × (1/3)] 4,000(continued) P 21-30AProof:TotalFilled/dozPlain/dozSales revenue $48,000 $28,000 $76,00032,800Variable costs 16,00016,800Contribution margin $32,000 $11,200 43,200Fixed costs 43,200Operating income $ 0Req. 2Margin of Safety = Expected Sales Dollars−Breakeven Sales Dollars=$128,000 −$76,000$52,000Req. 3If monthly sales volume increases 10%, sales revenue will be$140,800 ($128,000 × 1.10). The new operating income iscomputed as follows:Fixed costs + Operating incomeSales in dollars =Contribution margin ratio$43,200 + Operating income$140,800 =0.568*Operating income = $36,774*From Req. 1 “proof,” $43,200 / $76,000 = 0.568.√ProblemsGroup B(15-20 min.) P 21-31B Plan 1 leans to higher fixed costs because the business pays fixed salaries to employees. The high fixed expenses raise the breakeven point and make it difficult to earn a profit. This plan may provide too much risk for a new business.Plan 2 calls for a higher level of variable expenses, with lower fixed expenses. The lower fixed expenses create a relatively low breakeven point. If the business cannot generate much revenue in the early going, expenses also will be relatively low because more expenses are variable. This plan appears better suited for a new business because it relieves the pressure of fixed expenses, lowers the breakeven point, and increases the likelihood of earning a profit.Note: Student responses may vary considerably.(45-60 min.) P 21-32BCost-Volume-Profit AnalysisCompanies J, K, L, MCOMPANYMLKJTarget sales $810,000 $300,000 $190,000 $900,000Variable costs 270,000 180,000 76,000 260,000Fixed costs 474,000 56,000 100,000 560,000Operating income $ 66,000 $ 64,000 $ 14,000 $ 80,000Units sold 90,000 40,000 12,000 16,000Contributionmargin per unit $ 6 $ 3.00 $ 9.50 $ 40Contributionmargin ratio 0.67 0.40 0.60 0.711Computations (top to bottom for each company)J:(1) Sales − Variable costs − Operating income = Fixed costs$810,000 − $270,000 − $66,000 = $474,000(2) Sales − Variable costs = Contribution marginContribution margin / Unit contribution margin = Units sold$810,000 − $270,000 = $540,000; $540,000 / $6 = 90,000 units(3) Contribution margin / Sales = Contribution margin ratio=0.70$504,000 / $720,000。

Chapter 1IntroductionDiscussion Questions1.In the domestic case, accounting is an information service that provides financialinformation about a domestic entity to domestic users of that information. Internationalaccounting is distinctive in that the entity being reported on is either a multinationalcompany with operations and transactions that transcend national boundaries or involves an entiiy with reporting obligations to readers who are located outside the reportingentity’s country of domicile.2.Advantage: Some might argue that measurement, disclosure, and external auditing arethree distinct (although related) processes, involving different members of the company.For example, corporate attorneys often are involved in disclosure issues, but seldomintervene in measurement issues. The Board of Directors works with the external auditors but not necessarily with the comptroller s office. Thus, discussion of accountingrequirements and voluntary accounting choices in different jurisdictions is simplified by focusing on the three components of accounting. Disadvantage: measurement, disclosure and auditing are interdependent, and should not be viewed in isolation of one another. A company choosing to disclose as little as possible, for example, may use accountingmeasurement approaches that reduce the information content of financial statements, and select an external auditor who will be relatively lenient in enforcing accountingrequirements. One alternative classification might include accounting (measurement and disclosure), and auditing. A second classification might include financial reporting(annual and interim reporting, regulatory filings) and ad hoc disclosure (press releases,analyst meetings, etc). Any classification is arbitrary, and potentially useful depending on its purpose.3.Factors contributing to the internationalization of the subject of accounting include: thegrowth and spread of multinational operations around the world, the phenomenon ofglobal competition, the increasing number of cross-border mergers and acquisitions thatoccur almost daily, continued advances in information technology, and theinternationalization of the world’s capital markets.4.International trade involves importing and exporting activities. The major accountingissue associated with foreign trade involves accounting for foreign currency transactions.Foreign direct investment, on the other hand, involves conducting operations abroad.This activity exposes accountants to a new set of issues that run the gamut from having to consolidate foreign currency accounts based on diverse measurement rules to issues ofevaluating the performance of foreign subsidiary managers.5.Students will overwhelmingly argue in favor of harmonization. This is probably a goodstarting point for the course. After they are introduced to the chapters leading up toChapter 8, some may no longer feel that harmonization is necessarily the answer to all of their international accounting problems.6.Recent developments such as the growth and spread of multinational operations,Internationalization of the world’s capital markets, increased cross border mergers andacquisitions, the phenomenon of global competition and financial innovation haveincreased reader dependence on foreign financial statements. An understanding ofaccounting differences and their effect on reported measures of profitability, efficiency, solvency and liquidity are critical if proper decisions are to be made. Internationalaccounting issues have become more complex in recent years for several reasons.Financial transactions are becoming more complex, affecting both national andinternational accounting. For example, the use of complex financial instruments anddeveloping accounting standards for these exotic instruments has been problematic.Global financial markets also are becoming more volatile, leading to large changes in asset and balance sheet amounts (such as related to investments) and major sources of income and expense. The related accounting issues are difficult. The growinginternationalization of business also promotes complexity. Foreign currency transactions and translation have been troublesome accounting issues for years, and are becoming more important as cross-border business and finance increase. Also, differences innational accounting principles potentially are more troublesome as business becomes more international. However, as convergence efforts worldwide accelerate, and more and more companies and countries adopt International Financial Reporting Standards (IFRS), complexity arising from differences in national accounting principles will decrease.7.Examples of external reporting issues include:a. Does translation from one set of measurement rules to another change theinformation content of the original message?b. Should accounts of foreign operations be translated to parent currency whenconsolidated statements are prepared?c. Which exchange rates should be employed when translating from one currency toanother?Examples of internal reporting issues include:a. Which exchange rates should be used for budgeting purposes?b. Should foreign managers be evaluated in terms of parent currency or the localcurrency of the country in which the manager operates?c. Which prices should one use when transferring goods or services betweenmembers of the multinational enterprise- cost, market, cost-plus or some othermetric?8.Global capital market activities and transactions reach beyond single political or legaljurisdictions. For example, global capital market transactions include the following: (1) an American tourist buying Australian dollars for travel purposes in the South Pacific; (2)a Japanese insurance company buying German government bonds as an investment; and(3) a Nigerian agricultural development project receiving cash subsidies from theEuropean Union (EU).The international equities market is one global capital market. A second such market covers foreign exchange transactions, that is, when one national currency is exchanged into, traded forward, hedged, swapped, or otherwise converted to another nationalcurrency. This market is estimated at hundreds of billions of U.S. dollars per day. The total world foreign exchange market is the largest market on earth. The international bond market is still another global capital market. The bonds constituting this market areunderwritten by international syndicates of banks and are marketed and traded all over the world. Global capital markets are a vital part of the world economy.9.English should be designated as the formal international accounting language. Technicalaccounting terms ( terms of art) do not travel well internationally. Since technicalaccounting terms often have attributed meanings (for example, generally acceptedaccounting principles are neither generally accepted nor principles ), it is difficult orimpossible to translate these terms into other languages and retain their original meanings.In other disciplines, such considerations have caused the establishment of Latin as the universal language for botanical classifications, Italian as the language for specifying the tempo (and other matters of interpretation) of musical compositions, and English as the language of electronic computing. Since accounting is used worldwide, a singleworldwide language for accounting makes sense.Why should English be the worldwide language for accounting? English already hasbecome the language of world commerce and multinational business. Thus, the universal use of English in accounting would parallel a well-established business practice. Also, the accounting discipline was in many respects developed as an offshoot of Anglo-American economics, which means that the language roots of many accounting terms and concepts are English. Among non-English speaking people, English is the mostcommon second language. The vast majority of the world’s accounting literature iswritten in English, and nearly all international accounting conventions and conferences use English as the official language. Multinational corporations generally use English in their accounting and financial operating manuals, as well as for corporatecommunications, without regard to national domiciles. Therefore, the worldwide benefits of adopting English as the universal language of accounting are likely to be greater than for any other language, and the worldwide costs are likely to be less.10.Emerging markets are those whose financial systems are emerging from state dominationthrough a process of liberalization. Developed countries are those with liberalizedfinancial systems. Many people believe that liberalization is highly beneficial to sustained economic growth. Many different classifications of developed versus emerging market countries are used, and often the terms are not defined, although no one correct set of definitions for developed and emerging markets exists.Students should be encouraged to suggest their own criteria as to what constitutes adeveloped as opposed to an emerging market. The emerging market countries are in geographic regions that are generally not highly industrialized. But one cannot generalize here as extensive economic liberalization is taking place in these countries (in some more than in others). For example, entry barriers to foreign businesses, government regulation of banking operations, and credit controls have been eased in many of the countries once classified as “emerging.”11.Privatizations of state-owned corporations have had dramatic effects on global capitalmarkets. Often, the privatized entities are large, well-known companies in which thenational government retains a large ownership interest, and retail (individual, non-institutional) investors often are encouraged to buy shares in newly privatized entities. Asa result, the shareholder base in the market grows dramatically, investors become moreactive market participants, and market capitalization increases.Privatizations also mean that management must now compete in the market place formarket share, external capital and corporate control. In such a world, accounting systems must properly motivate managers to work toward the accomplishment of theorganization’s overall goals in an efficient manner while putting together credibleexternal financial statements that will enable it to secure the necessary capital to financecorporate growth. Many of these external and internal reporting issues are covered in the balance of the chapters in this book.12.Those opposed to outsourcing see it as a threat to domestic jobs and a form ofexploitation by companies engaged in the practice. Some even see it as a moral issue.However, they miss the point of international trade. While outsourcing may reduce jobs in one sector, they reflect differences in comparative advantage, which ultimately makes possible greater employment in other sectors and or lower consumer prices whichincreases real wealth. One need only look at higher education in America. Whereasstenographers in the U.S. may be losing jobs to stenographers in India, more and moreIndian families are sending their children to the U.S. for their higher education,increasing the demand for support services in the higher education sector.A look at Exhibit 1.2 shows that over time, countries with greater exports than importseventually become net importers and vice versa. The importance of internationalaccounting will not diminish. Countries have been trading with each other since antiquity and will continue to do. Even if the volume of trade were to diminish, an unlikely event, the network of trading partners continues to expand globally and with it accounting issues associated with international trade.Exercises1.For steps one and two in which the idea for the Proliant ML150 is spawned in Singaporeand approved in Texas, differences in legal practices regarding rights and compensationschemes for intellectual property development may vary between the U.S. and Singapore as the latter’s legal system has been influenced by the U.K. system. Internat ional taxissues also surface in terms of royalty payment arrangements and their tax consequences in both Singapore and the U.S.For step 4, language communications between Singapore and Taiwan could pose someissues of interpretation. Production in Taiwan raises internal reporting issues such asshould exchange rate fluctuations between the Taiwanese dollar and the U.S. dollar beincorporated into the cost of production or accounted for separately as a non-operatingforeign exchange gain or loss. In evaluating the creditworthiness of the Taiwanesemanufacturer, should the financial statements of the Taiwanese manufacturer betranslated to U.S. GAAP or not. If a ratio analysis is performed, should Taiwaneseliquidity and solvency ratios be interpreted based on U.S. financial norms or Taiwanesenorms?For step 5, should clients in Southeast Asian countries be charged identical prices orshould prices be flexed for differences in exchange rates, transportation arrangements and “facilitating” payments. What legal issues are raised in the case of bribes expected on the part of commercial buyers and how would these payments be treated under the U.S.Foreign Corrupt Practices Act?2. A suggested index might look like the following. The instructor should focus on thestudent’s rationale for his or her rating as some students may have more knowledge ofspecific country developments than others and students will naturally exhibit differentdegrees of risk-aversion.Industrialized CountriesUnited States 1Canada 1Japan 1United Kingdom 1France 1Germany 1Italy 1Australia 2New Zealand 2East AsiaHong Kong 1Indonesia 3South Korea 2Malaysia 2Phillipines 1Singapore 1Taiwan 3Thailand 2Latin AmericaArgentina 2Brazil 2Chile 2Colombia 2Mexico 1Peru 1Venezuela 2Middle East and AfricaEgypt 3Israel 2Morocco 2South Africa 1Turkey 2South AsiaBangladesh 2India 2Nepal 3Pakistan 3Sri Lanka 33.The compounded annual growth rate for merchandise exports from 1985 to 2005 wasapproximately 8.7%. The growth rate for merchandise imports was also 8.7% . The comparable growth rates for exports of services was 9.6% over the same 20 year period.It was 9.2% for imports. The outlook for accounting services to travel internationally are very good. Students interested in accounting careers should take note.4.The purpose of this exercise to get students to check out the wealth of stock relatedinformation available on the web. They will probably choose the five whose countriesare most familiar to them. Their exchanges will probably be located in highlyindustrialized economies and which afford access to relatively deep pools of capital. As one example, Luxembourg has long been popular because of its accommodating listingrequirements. However, students should note that the numbers of foreign companieslisted in markets other than the NYSE have been declining. This suggests that manyissuers question the benefits of such listings, and that the benefits of a foreign listinggenerally are greater in the United States. In particular, the U.S. represents a well-established market with strong investor protection. This is especially important in adown economy, as stringent disclosure requirements help to minimize perceivedinformation risk which, in turn, reduces price volatility.5.This exercise will require that students combine certain geographic categories ofmerchandise exports to achieve some comparability with Henekin’s disclosures. It would be interesting to poll students’ ex ante predictions of the correlations and have themponder reasons for any differences they find.Geographic Region Merchandise Exports Geographic Sales for HeinekenAfrica and Middle East 7.9% 12.6%Asia 29.2% 9.1%Europe 41% 65.5%Americas 17.6% 12.7%While correlations between percentage geographic distributions of merchandise exportsand beer sales are closer for Africa and the Middle East and for the Americas, there arebig differences in beer sales and merchandise export patterns for Asia and Europe.Obviously one cannot generalize microeconomic behavior from macroeconomic data.However, some students will be inclined to hypothesize similar patterns given thepopularity of beer consumption around the world. It will be fun brainstorming reasonsfor the observed differences. Might observed differences be due to national differencesin consumer tastes, import restrictions and perhaps the success of national advertisingcampaigns? More important, this exercise should reinforce the notion of environmentaldifferences as explanatory variables.6.The geographic spread of Heineken’s revenue streams suggest that the co mpany isexposed to foreign exchange rate risk. This complicates the process of forecasting thecompany’s future earnings and resultant cash flows. Moreover, the numbers beingreported are the results of a consolidation process. The cardinal rule to remember here is that when exchange rates change, data in parent currency may change even though local currency amounts may not. For managerial accountants, the conduct of foreignoperations raises numerous issues of financial control. For example, which currencyshould be used to evaluate foreign subsidiary performance, the parent currency or thelocal currency? In preparing operating budgets, which exchange rate combination should be used to translate original budgets and subsequently track performance? Whenplanning capital expenditures, how do you factor inflation, foreign exchange rate risk and sovereign risk into measures of future project cash flows, cost of capital estimates andplanned investment outlays? Should capital budgeting decisions be made from theproject’s perspective or a company perspective? Again, this exercise is designed to raise questions that will be addressed in subsequent chapters.7.Issues triggered by Exhibit 1-5 include :a. What criteria are used to determine when a foreign affiliate is to be consolidatedwith that of the parent company? While majority ownership is one criterion forconsolidation, do other criteria exist internationally and why?b. When consolidating the accounts of a foreign affiliate with that of the parentshould accountants first restate the accounting measurement rules of the foreignaffiliate to the reporting requirements of the parent company or should thereporting requirements of the affiliate’s country of domicile prevail? Whichmethod produces the more meaningful information for statement readers?c. When consolidating the accounts of a foreign affiliate should the accountanttranslate the currency of the affiliate to the reporting currency of the parentcompany? If so, which exchange rates should be employed for each balancesheet account? For each income statement account?d. If fluctuating exchange rates produce foreign currency gains and losses duringthe consolidation process, how should these gains and losses be accounted for?8.The ROE ratios for Electrolux based on IFRS and U.S. GAAP was derived as follows:IFRS U.S. GAAPROE 1,763/25,888 + 23,636 1,518/25,057 + 23,5672 2= 1,763/24,762 =1,518/24,3129.For this exercise, we consider information provided by three stock exchanges: TheLondon Stock Exchange, the Deutsche Boerse and the Tokyo Stock Exchange. TheLondon Stock Exchange Web site () provides highly useful information. However, under the U.K. regulatory structure, the Financial Services Authority, not the LSE, is responsible for the admission of securities to official listing and continuing obligations of listed companies.The Deutsche Boerse ()has a 117-page document covering insider trading and required ad hoc disclosure, but nothing in any detail concerning periodic financial disclosures. There is a bar chart that claimed to show the relative transparency of the various Deutsche Boerse exchanges. Without even the most basic frame ofreference, it s hard to describe such a chart as anything but opaque.It might be well to advise students not to investigate financial disclosure requirements for the Tokyo Stock Exchange (www.tse.or.jp). The TSE does not have independentfinancial disclosure requirements. Rather, companies must conform with therequirements of Japan’s Securities and Exchange Law and regulations. The TSE provides this brief summary: Under the Securities and Exchange Law, the registrants are required to file annual and semi-annual reports with the Ministry of Finance, with copies to the stock exchanges where the securities are listed. The financial statements to be included in security registration statements and annual reports must comply with a wide range of formats and contents relating to disclosures prescribed in the regulations. The regulations require both the consolidated financial statements and non-consolidated financialstatements of the registrant. The financial statements prepared under the Securities and Exchange Law and relevant regulations are in major areas equivalent to those prevailing internationally.This summary obviously raises many more questions than it answers. The TSE alsoprovides a flow chart showing which documents are required to be filed, and their filing deadlines, but nothing concerning the required contents of these documents.For an illustrative example, consider the Deutsche Boerse and the London StockExchange. Note that Web sites change continuously. Therefore, the responses shown below are indicative only.Ratings (obviously) will be subjective. Students should be evaluated on the thoroughness and thoughtfulness of their evaluations10.If we divide the total foreign company listings for each region by the total listings for thatregion as one measure of foreign listings, we would obtain the following results: The Americas: 1,174/3,758 = 31.2%Asia-Pacific: 274/2,375 = 11.53%Europe-Africa-Middle-East 1,188/10,383 = 11.4%Student answers to the second part of the question will vary depending on which region of the world they expect to experience the most rapid growth in the years ahead.11.In addition to eliciting a variety of investment strategies, this question should drive homethe connection between accounting information and international investing. Theaccounting issues that will influence country investment allocations will be the extent oftransparency of a company’s accounts, the degree to which its accounting standards areoriented toward investor decisions and the quality of the audit functions in each country. Case 1-1E-Centives, Inc.e-centives, Inc. — Raising Capital in Switzerland1. Possible factors (from Exhibit 1.7) relevant in e-centives decision to raise capital and list on the Swiss Exchange s New Market:•Ease of raising capital (point 3). The Swiss Exchange s New Market has simple listing requirements designed to appeal to small companies. The contrast with the complex,detailed listing and reporting requirements in the United States is striking.•Availability of capital (point 4). Switzerland has a large, well-developed capital market.•Reputation of the exchange (point 5). The Swiss Exchange is well known for providing a high quality, efficient trading environment.•Corporate profile and brand identity (point 6). A listing on the New Market would dovetail with the company s possible expansion into Switzerland by giving it a higherprofile in the Swiss market. While e-centives is interested in expanding into Switzerland, it also is considering Germany and the United Kingdom, which have much largerconsumer markets. Therefore, this is not an overwhelming point in Switzerland s favor.•Regulatory environment (point 7). It is highly likely that e-centives chose Switzerland because its regulatory environment is unlike that of the United States.•Availability of investors (point 9). e-centives might be interested in possible investment from large Swiss pension funds, but it s not likely that such funds would invest in aspeculative, start-up enterprise.2. a. Possible reasons why e-centives chose not to raise public equity in the United States:•One possible reason would be to avoid the complex and expensive process of registering securities with the U.S. Securities and Exchange Commission and keeping up with theCommission’s periodic reporting requirements.•e-centives probably would not satisfy the listing requirements of a U.S. stock exchange (such as Nasdaq or a regional stock exchange).•Management might think that raising money in Switzerland rather than the U.S. might give them an appearance of quality, cleverness, and exclusivity that would not bepossible with a U.S. listing. (Your authors believe that such reasoning is far-fetched, but it s not unknown.)b. Possible drawbacks to not raising capital in the U.S. public markets.•Lack of access to the largest pool of investment capital in the world.•Lack of following by U.S. investment analysts, and lack of access to individual U.S.investors.•Trading volume on the Swiss Exchange New Market is much smaller than on the U.S.exchanges.•Listing in Switzerland does little to establish the reputation or raise the profile of e-centives in the United States.•The degree to which (mostly European) investors in the New Market would be interested in a struggling U.S. start-up certainly can be questioned.3. Advantages and disadvantages to e-centives of using U.S. GAAP.Advantages: U.S. accounting standards are highly credible and well known, which is important to a new company seeking investment capital, and would be much more familiar to the company’s management, outside auditors, and investors domiciled in the U.S. than any other set of standards. Use of U.S. GAAP would eliminate some suspicions of the company trying to put something over on investors by using some other set of GAAP, and U.S. GAAP is accepted explicitly by the Swiss Exchange.Disadvantages: U.S. accounting standards are not particularly well known to investors participating on the Swiss Exchange, who would be expected to know Swiss GAAP, GAAP of other major European markets, and possibly IAS (International Accounting Standards). Compliance with U.S. GAAP is more complex and expensive than compliance with other standards (such as IAS), and the company might see some cost savings by avoiding U.S. GAAP if it isn’t required to use them.4. Should the Swiss Exchange require e-centives to prepare its financial statements using Swiss accounting standards?This is a debatable point. One would expect that investors on the Swiss Exchange would be more familiar with Swiss accounting standards than with any other, and that requiring Swiss accounting standards would make financial disclosures more easily understood toth em than any others. This wouldn’t be true, however, for non-Swiss investors participating on the exchange, and ignores the fact that IAS increasingly are becoming a common language for financial accounting disclosures. Accepting IAS almost certainly would increase the pool of investors that would be able readily to understand disclosures by listed companies, and this would give the exchange a powerful reason to accept IAS in addition to (if not instead of) Swiss accounting standards.5. What are listing and financial reporting requirements of the Swiss Exchange s New Market? Does e-centives appear to fit the profile of the typical New Market company?From the case: The New Market is designed to meet the financing needs of rapidly growing companies Listing requirements are simple. For example, companies must have an operating track record of 12 months [note: not necessarily a profitable operating track record], [and] the initial public listing must involve a capital increase. All of these conditions apply well to e-centives, and on that basis the company does appear to fit the profile of the typical New Market company. The uniqueness of e-centives is in its decision to skip the U.S. capital markets.Case 1-2Infosys Technologies LimitedThis case is designed to get students into reading non-domestic financial statements. Many students will be surprised at the information content of Infosys’ financial statements as the company does not fit the typical stereotype of sub-par financial reporting in emerging markets. Indeed the company illustrates how competitive the world of business has become and the success that accrues to firms that base their futures on innovative thinking and adaptability. Students unused to seeing the report form of balance sheet will find it at odds with the classified balance sheet format that they were taught in class. Other things they will note include but are not limited to: use of a fiscal as opposed to a calendar year, the fact that the financial statements。

Chapter 8Global Accounting and Auditing Standards Discussion Questions1.A rgument for measurement:•Discrepancies in international measurement may produce accounting amounts that are vastly different (even where financial transactions and position are identical), leading to incorrectcomparisons. Here it doesn’t matter what is disclosed; no reliable comparisons are possibleanyway.Arguments for disclosure:•If companies do not disclose complete information, they can hide losses or future problems from financial statement users. For example, losses can be hidden by offsetting them against gains.Expected future problems related to loss contingencies can be hidden simply by not disclosingthem. Thus, if disclosure is incomplete, even the application of similar measurement principleswill lead to incorrect comparisons.Clearly, international accounting convergence requires that both measurement and disclosure be made comparable.2. The term convergence is associated with the International Accounting Standards Board. Beforethe IASB, harmonization was the commonly used term. Harmonization means that standards are compatible; they do not contain conflicts. Harmonization was generally taken to mean the elimination of differences in existing accounting standards, in other words, finding a common ground among existing standards. Convergence means the gradual elimination of differences in national and international accounting standards. Thus, the terms harmonization and convergence are closely aligned. However, convergence might also involve coming up with a new accounting treatment not in any current standards.3.a. Reciprocity, or mutual recognition, exists when regulators outside of the home country accept aforeign firm’s financial statements based on the home country’s principles, or perhaps IFRS. For example, the London Stock Exchange accepts U.S. GAAP-based financial statements in filings made by non-U.K. foreign companies. Reciprocity does not increase cross-country comparability of financial statements, and it can create an unlevel playing field in that foreign companies may be allowed to apply standards that are less rigorous than those used by domestic companies.b. With reconciliation, foreign firms can prepare financial statements using the accountingstandards of their home country or IFRS, but also must provide a reconciliation between accounting measures (such as net income and shareholders’ equity) of the home country and the country where the financial statements are being filed. Reconciliations are less costly than preparing a full set of financial statements under a different set of accounting principles, but provide only a summary, not the full picture of the enterprise.c. International standards are a result of either international or political agreement, or voluntary (orprofessionally encouraged) compliance. When accounting standards are applied through political, legal, or regulatory procedures, statutory rules typically govern the process. All other international standards efforts in accounting are voluntary in nature.a.A growing body of evidence indicates that the goal of international convergence of accounting,disclosure and auditing has been widely accepted.b.A ll dimensions of accounting are becoming converged worldwide.c.Increasing numbers of highly credible organizations strongly support the goals of the IASB.d.N ational differences in the underlying factors that lead to variation in accounting, disclosure, andauditing practices are narrowing as capital and product markets become more international.e.International standards will improve the comparability of international financial information.f.Time and money will be saved on international consolidations, the components of which now aresubject to different national laws and practices.g.T here may be a tendency for accounting standards throughout the world to be raised to the highestpossible level.h.W idespread application of IFRS might also result in:•Improved managerial decision making within multinational enterprises.•Improved allocations of corporate investment money worldwide.•Better international understandability of financial statements.•Cost reductions in accounting information processing and financial disclosure costs for multinational enterprises.•Greater international credibility for published financial statements.a.Accounting has built-in flexibility. Its ability to adapt to widely different situations is one ofits most important features. Critics doubt that international standards can be flexible enoughto handle differences in national backgrounds, traditions, and economic environments, andmay be a politically unacceptable challenge to sovereignty.b.It is claimed that international accounting standard setting is a tactic of the large internationalaccounting service firms to expand their market share.c.International standards may create standards overload for companies that do businessinternationally.d.National political concerns frequently intrude on accounting standards. International politicalinfluences would compromise international accounting standards.e.International standards are not suitable for small and medium-sized companies, particularlyunlisted ones with no public accountability.f.Risks of misinformation — uniform standards may give the appearance of similarities whenin fact countries and companies may be highly dissimilar.g.Political costs of the necessary international treaties on financial accounting and reportingwhich would have to be negotiated to enforce the use of IFRS.6.Evidence indicating wide acceptance of IFRS around the world:a.Growing numbers of companies are adopting IFRS voluntarily and refer to their use of IFRSin their annual reports.b.Dozens of countries base their national accounting standards on IFRS.c.Some 7,000 EU listed companies now use IFRS in their consolidated financial statements.d.Many international organizations, such as IOSCO, endorse the use of IFRS.e.IFRS are used as an international benchmark in many major industrialized countries.f.IFRS are accepted by many stock exchanges and securities regulators.g.IFRS are recognized by the European Commission (EC) and other supranational bodies.h.Norwalk Agreement committed FASB and IASB to convergence.7. The International Accounting Standards Board is overseen by the International Accounting Standards Committee, consisting of 22 trustees: six from North America, six from Europe, six from the Asia-Pacific region, and four from any area. The trustees appoint the members of the IASB. The IASB receives advice from the Standards Advisory Council on its agenda and priorities. The SAC consists of around 30 members appointed by the IASC trustees and they represent a diversity of geographic and professional backgrounds.The IASB consists of 14 members, 12 full-time and two part-time. It follows a due process in setting accounting standards. For each standard, the board normally publishes a discussion paper that sets out the various possible requirements for the standard and the arguments for and against each one. Later, the board publishes an exposure draft for public comment, and it then examines the arguments put forward in the comment process. A final standard is issued when nine of the 14 board members have voted in its favor.8.Accounting harmonization in the EU is just one element of the overall project of harmonizing the legal and economic systems of the member states, and is part of the process of harmonizing company law. The Fourth Directive illustrates the concept of harmonization, and specifies accounting measurement (valuation) and disclosure requirements. It provides format rules for the balance sheet and the profit and loss account. The true and fair view is the overriding requirement and holds for footnote disclosures aswell as the financial statements. The Fourth Directive also sets out the requirements for financial statement audits.The Seventh Directive addresses consolidated financial statements. It requires consolidations for groups of companies above a certain size, specifies disclosures and notes, and requires a directors’ report. When it was issued in 1983, consolidated financial statements were the exception rather than the rule in Europe. The Eighth Directive addressed various aspects of the qualifications of professionals authorized to carry out legally required (statutory) audits. Now referred to as the Statutory Audit Directive, it was substantially amended in 2006. The new directive tightens oversight of the audit profession and has standards for, among other points, auditor appointment and rotation, and continuing professional education.The EU abandoned its approach to harmonization to one favoring the IASB for practical and political reasons. The Fourth and Seventh Directives were incomplete and essentially remained as they were issued. Improvements to them proved difficult to achieve and the directives did not achieve the comparability expected. Some saw a set of Europe-wide standards as an unnecessary redundancy given the emergence of comprehensive IFRS. Others saw U.S. GAAP as a rival to IFRS. The EU cannot influence U.S. GAAP, but can influence IFRS. By putting its weight behind the IASB, the EU could serve as a counterweight to U.S. GAAP.9.International accounting harmonization/convergence should address many, if not most, investor concerns about cross-national differences in accounting practices. The key issue here is comparability –investors want to make “apples to apples” comparisons of financial statements of companies from countries around the world. However, converged standards are only the beginning. Standards must also be comparably applied and they must be rigorously enforced. The financial statements must also be similarly audited to ensure comparable reliability.10.Convergence of auditing standards will help ensure that audit quality will reach acceptable levels worldwide. Auditing convergence may be less difficult to achieve than accounting convergence because auditing is more technically oriented and there is wider agreement as to what constitutes best practices in auditing than there is for accounting principles.IFAC is a worldwide organization of over 160 member organizations in 120 countries. Its mission includes establishing and promoting adherence to high-quality auditing and other professional standards, and furthering the international convergence of such standards. Its work is done through standard setting boards and standing committees. Among its standard setting boards are:•International Accounting Education Standards Board•International Auditing and Assurance Standards Board•International Ethics Standards Board for AccountantsIts work spans the entire array of professional responsibilities of auditors and includes standards covering professional education, the conduct of the audit, and professional ethics.11.IOSCO consists of securities regulators from more than 100 countries. Together, IOSCO members are responsible for regulating more than 90 percent of global securities markets. One of IOSCO’s objectives is promoting “high standards of regulation in order to maintain just, efficient, and sound markets.” IOSCO has worked extensively on international disclosure and accounting standards to facilitate the ability of companies to raise capital efficiently in global securities markets. It has a technical committeewhose sole focus is multinational disclosure and accounting. Model disclosure standards were published in 1998 and 2002.IOSCO’s disclosure harmonization work is important because it has established a set of high quality disclosure standards, globally recognized, that serves as a model for nations around the world as they develop national requirements for cross-border offerings and initial listings.12.The UN and OECD now play supporting roles in harmonizing accounting and auditing standards. The IASB and IFAC are now the clear leaders in this endeavor, but in the 1970s and 1980s, both the UN and OECD were potential rivals. Most of the effort of the UN and OECD is directed toward providing technical accounting assistance to developing countries. For example, the UN has focused much attention on Russia and countries of the former Soviet bloc, and on African countries.Exercises1.One of the main problems with mutual recognition (or reciprocity) is that it actually may make financialstatements within the home market noncomparable. If many different accounting standards are acceptable, then companies domiciled in countries with rigorous standards (such as the United States) would be at a disadvantage to companies whose home country standards are not as stringent, but still would be acceptable. Investors also would face the difficult task of having to master many sets of accounting principles in order to be able to understand the associated financial statements.The U.S. SEC considers reconciliation to be a cost-effective means to allow foreign firms to list on a domestic exchange. With reconciliation, differences between accounting standards are identified and quantified without the need to prepare a second set of financial statements. However, significant differences between domestic and foreign accounting principles can increase the burdens associated with reconciliation, and reconciliations do not provide a full picture of the enterprise as would result from a second set of financial statements.The use of International Financial Reporting Standards would provide many benefits for cross-border listings. Companies would have to provide only one set of financial statements for all nondomestic capital markets, and investors would have to be familiar with only one set of accounting principles to properly understand and interpret nondomestic financial statements. However, as with reconciliation, domestic companies required to comply with domestic standards still would compete for capital with nondomestic companies that would be required to comply with a different (and possibly less stringent) standard.Preferred approaches from perspectives of different groups:a.Investors might prefer international standards, as they would increase the ease in understandinginformation from nondomestic companies. Knowledge of only one set of standards would berequired to understand all nondomestic statements. However, there is also a case forreconciliation, which presents in an economical manner the significant differences betweennondomestic and domestic financial statements and does not require investors to be familiar withany set of accounting standards other than the home country.b.C ompany management might prefer mutual recognition, as it does not require a company to prepareany additional information and requires no additional expense or time commitments. However,companies in some countries might adopt IFRS voluntarily to increase their credibility withinvestors and increase the overall quality of their financial reporting.c.Regulatory authorities might prefer reconciliation as it places the burden on companies yet providesadequate disclosure and investor protection.d.S tock exchanges might prefer convergence as it is the only method that provides truly complete andidentical information disclosure from companies outside the home market.e.Professional associations will take positions according to their constituents –associations ofstockbrokers might prefer convergence to the extent that it would make company informationeasier to understand, whereas associations of company executives might prefer reciprocity.2.The following discussions are based on the respective organizations’ Web sites at the time of writing.International Federation of Accountants (IFAC)IFAC, an organization of national professional accountancy organizations, plays a critical role in the convergence of auditing standards and other international auditing initiatives. The organization has over 160 member organizations in 120 countries, representing more than 2.5 million accountants. Organizedin 1977, IFAC’s goal is to develop the accountancy profession and converge its professional standards worldwide to enable accountants to provide services of consistently high quality in the public interest.To achieve its objective, IFAC develops and promotes technical, professional and ethical standards for accountants, provides leadership on emerging issues, and serves as a voice for the world’s accountants on issues of public and professional concern. IFAC fosters the advancement of strong national professional accountancy organizations, and works closely with regional accountancy organizations and outside agencies to accomplish this.The IFAC Council, comprised of one representative from each member body, provides overall leadership of IFAC. The council elects the IFAC Board, and is responsible setting policy and overseeing IFAC operations, the implementation of programs, and the work of IFAC’s standard setting groups and committees. The Public Interest Oversight Board (PIOB), an independent board, provides additional oversight. Day-to-day administration is provided by the IFAC chief executive located in New York, which is staffed by accounting professionals from around the world.IFAC’s professional work is done through its standard setting boards and standing committees. IFAC standard setting boards are:•International Accounting Education Standards Board•International Auditing and Assurance Standards Board•International Ethics Standards Board for Accountants•International Public Sector Accounting Standards BoardIFAC standing committees are the following:•Compliance Advisory Panel•Developing Nations Committee•Nominating Committee•Professional Accountants in Business Committee•Small and Medium Practices Committee•Transnational Auditors CommitteeIFAC issues standards in these key areas: auditing, assurance, and related services; education; ethics; and public sector accounting. IFAC’s International Auditing and Assurances Stan dards Board issues International Standards on Auditing (ISA), which are intended for international acceptance. ISAs deal with topics such as auditors’ respo nsibilities, risk assessment and evidence, and audit reporting.IFAC has close ties with organizations such as the IASB and IOSCO, and its pronouncements are receiving growing recognition for their quality and relevance. Financial statements of companies around the world are increasingly being audited in conformity with International Standards on Auditing.United Nations Intergovernmental Working Group of Experts on International Standards of Accounting and Reporting (ISAR)ISAR was created in 1982 and is part of the United Nations’ Conference on Trade and Development (UNCTAD). ISAR is the only intergovernmental working group devoted to accounting and auditing at the corporate level. Its objective “is to promote the transparency, reliability and comparability of corporate accounting and reporting as well as to improve disclosures on corporate governance by enterprises in developing countries and countries with economies in transition. ISAR achieves thisthrough an integrated process of research, intergovernmental consensus building, information dissemination and technical cooperation.”In recent years, ISAR focused on important topics that other organizations were not yet ready to address, such as environmental accounting. It has also conducted technical assistance projects in a number of areas such as accounting reforms and retraining in the Russian Federation, Azerbaijan and Uzbekistan, and designing and developing a long-distance learning program in accountancy for French-speaking Africa. Topics discussed at recent ISAR conferences include practical implementation of IFRS, corporate responsibility reporting, and corporate governance disclosures.Organization for Economic Cooperation and Development (OECD)OECD is the international organization of 30 (mostly industrialized) market economy countries. It functions through its governing body, the OECD Council, and its extensive network of committees and working groups. Its publication Financial Market Trends, issued two times each year, assesses trends and prospects in the international and major domestic financial markets of the OECD area.The OECD often publishes reports on the structure and regulation of securities markets, and has played a leading role in promoting improved corporate disclosure and governance around the world. With its membership consisting of larger, industrialized countries, the OECD is often a counterweight to other bodies (such as the United Nations and the International Confederation of Free Trade Unions) that have built-in tendencies to act contrary to the interests of its members.3.As an example, consider the Financial Accounting Standards Board (FASB) in the United States. The FASB’s Web site presents detailed information on the FASB’s international activities, including an overview, convergence with IASB, cooperative efforts with other standards setters, and the FASB/IASB memorandum of understanding.The FASB’s objective for participating in international activities is to increase the international comparability and the quality of standards used in the United States. This objective is consistent with the FASB’s obligation to its domestic constituents, who benefit from comparability of information across national borders. The FASB pursues that objective in cooperation with the International Accounting Standards Board (IASB) and national standard setters.The FASB believes that the ideal outcome of cooperative international accounting standard-setting efforts would be the worldwide use of a single set of high-quality accounting standards for both domestic and cross-border financial reporting. At present, a single set of high-quality international accounting standards that is accepted in all capital markets does not exist. In the United States, for example, domestic firms that are registrants with the SEC must file financial reports using U.S. GAAP. Foreign firms filing with the SEC can use U.S. GAAP, their home country GAAP, or international standards – although if they use their home country GAAP or international standards, foreign issuers must provide a reconciliation to U.S. GAAP.The FASB engages in a variety of activities in pursuit of the goals of high-quality international standards and increased convergence of the accounting standards used in different nations. Almost every FASB project is a matter of interest in some other country or with the IASB.4. a. Comparison of standard-setting proceduresEuropean UnionAccounting and auditing requirements are established under EU company law directives, which are legal instruments that member countries must implement. Thus, all accounting and auditing standards in EU directives become legally enforceable. The EU comprises several key organizations that need to be understood in order to understand how EU directives come into being. Briefly, the European Commission initiates EU p olicy and acts in the community’s general interest. Commissioners are completely independent and may not seek or take instructions from governments or interest groups. The Council of the European Commission is the EU’s decision-maker. Here, the member states legislate for the EU, deciding some matters by majority vote and others unanimously. The European Parliament represents the EU’s citizens. Its main functions are to enact legislation and to scrutinize and control the use of executive power. The Trea ty of European Union of 1993 strengthened the European Parliament’s responsibilities. Only the Commission can propose new directives. Proposals typically undergo many drafts. Proposed directives are submitted to the Council of the European Commission, which first seeks opinions of the Economic and Social Committee and the European Parliament. Next, a working party set up by the Council discusses the proposal. Member countries typically are allowed several years to implement a new directive after its final adoption. (Note to instructors: The information contained in this paragraph is based on information on the EU’s Web site at the time of writing.)IASBThe IASB follows due process in setting accounting standards. For each standard, the Board may publish a discussion paper that sets out the various possible requirements for the standard and the arguments for and against each one. Subsequently, the Board publishes an exposure draft for public comment, and then examines the arguments put forward in the comment process before deciding on the final form of the standard. An exposure draft and final standard can be issued only when nine (of 14) members of the board vote in favor of it.IFACThe standard setting boards of IFAC also follows a due process procedure. Meetings to discuss the development and approval of standards are open to the public and, where practicable, are broadcast over the Internet. Issues papers and draft standards are published on the IFAC Web site along with updated project summaries and meeting highlights. New projects are based on a review of national and international developments and comments from interested observers. An advisory group is consulted to determine priorities and activities. Task forces are usually assigned the responsibility for the development of new standards. These task forces conduct research and consult interested parties on the issues under consideration. One or more public forums or roundtables may be held before an exposure draft is issued. Re-exposure is sometimes necessary. Final standards are issued after considering comments to the exposure draft. (Note to instructors: The information contained in this paragraph is taken from IFAC’s Web site at the time of writing.)a.At what types and sizes of enterprises are their standards primarily directed?EU company law directives apply both to public and private companies in the EU, withoutrespect to size.IFRS are financial reporting standards for business whose applicability depends on thecontext. For example, if IFRS are adopted as national accounting standards in a particularcountry, their applicability depends on the type of entities that are subject to those nationalstandards.IFAC’s standards are directed toward the audits of both public and private companies.In summary, all three sets of standards are meant to apply to most (if not all) enterprises,without regard to size or whether the enterprises are private or public.b.B rief critique of statementIt is true that IFRS are particularly useful to companies that operate in more than one country,because IFRS are widely recognized and are acceptable in many different countries and stockexchanges. However, as stated in the text, IFRS also are used as the basis for nationalaccounting standards in many countries, and these national standards typically apply to a widerange of companies, not just multinational companies.5. Following is a sample essay on the 1995 European Commission adoption of a new approach to accounting harmonization. The essay is based on material in articles by Gerhard G. Mueller, "Harmonization: Efforts in the European Union," in Frederick D.S. Choi, ed., International Accounting and Finance Handbook, New York: John Wiley & Sons, 1997, page 11.28; and Peter Walton, “European Harmonization,” in Frederick D.S. Choi, ed., International Finance and Accounting Handbook, New York: John Wiley & Sons, 2003, page 17.7Beginning in the early 1990s, the Commission examined a number of alternative harmonization strategies. These included, among others, substantive revisions of the existing accounting Directives, creation of a Europe-wide accounting standards-setting board, exempting certain European companies from all EU accounting requirements so that these companies might apply accounting standards of other jurisdictions, or re-enforce its earlier push for mutual recognition.The reality of international pressures and the need of European multinationals to be listed on several stock exchanges finally made it clear that the creation of a strong European regional level of accounting regulation was simply adding an unnecessary third tier, sandwiched between national regulations and the international capital markets.In the end, the European Commission adopted a new accounting harmonization strategy on November 14, 1995 and forwarded respective recommendations to the European Council and to the European Parliament. The essence of the recommendation is that the EU will support the IASC/IOSCO initiatives and work to bring EU accounting requirements in line with International Accounting Standards (IAS). The Commission decided, after many years of hesitation, to participate in IASC standard setting, although only as an observer.In addition, the new harmonization strategy concentrated on consolidated financial statements. It had come to be realized that harmonization of individual company accounts is not necessarily very useful. This decision endorsed a break of the link between individual company accounts and consolidated accounts.The new European Commission’s strategy for EU accountin g harmonization is a major change from the EU accounting harmonization policies that had been in place over the preceding twenty-five years.6.Note to Instructors: Exhibit 8-3 is current at the time of writing. It would be best for you to log on to the IASB Web site, , and complete this exercise yourself before assigning it to students.。

Chapter 5Reporting and DisclosureDiscussion Questions1. Accounting measurement is the process of assigning numerical symbols to events or objects.Disclosure, on the other hand, is the communication of accounting measurements to intended users. Advances in financial disclosure are likely to outpace those related to accounting measurement for a number of reasons. First, many would argue that financial disclosure is a less controversial area than accounting measurement. Second, changes in disclosure requirements are more rapidly implemented than changes in accounting measurement rules. Finally, whereas a single set of accounting measurement rules may not serve users equally well under different social, economic and legal systems, a company can disclose without necessarily sacrificing its accounting measurement system.2.Four reasons why multinational corporations are increasingly being held accountable toconstituencies other than traditional investor groups:a.The development and growth of the influence of trade unions.b.The growing recognition of the view that those who are significantly affected bydecisions made by institutions in general must be given the opportunity to influence thosedecisions.c.The rejection by many governments of classical economic premises such as the beliefthat the regulated pursuit of private gain maximizes society’s welfare.d.The increasing concern over the social and economic impact of multinationalcorporations in host countries.3.Arguments in favor of equal disclosure include:a.The absence of equal disclosure would create an unfair playing field for U.S. companies.Non-U.S. companies would have a competitive advantage in that they would not have todisclose the same information and so would not incur the costs involved in generatingand publishing it.b.Investors in non-U.S. companies have the same information needs as those who invest inU.S. companies. A market concerned with investor protection would make sure thatinvestors have timely and material information on all listed companies, not just thosedomiciled in the United States.c.Unequal disclosure might impede cross-company comparisons involving U.S. and non-U.S. companies.Possible reasons against equal disclosure include:a.The high cost of meeting equal disclosure requirements may deter foreign issuers fromlisting in the United States.b.The extra costs involved work against the benefits of listing to the foreign companies.Evaluation of arguments:All of these arguments have merit. There is no unambiguously correct answer as to what disclosure requirements should be imposed on foreign issuers, and there has been a contentious debate on this subject in the U.S. in recent years. In practice, fairness arguments often carry great weight in public debate, even when objective economic analysis does not support them.4.Managers in Continental Europe and in Japan have for many years strongly objected to disclosinginformation about business segment financial results. These managers have argued that the information can be used by their competitors. In addition, Continental Europe and Japan have had traditions of low disclosure.Requirements for disclosure about segment results have become more stringent in Japan, France, and Germany in response to strong investor and analyst demand for the information. More generally, the three countries are striving to improve the quality of their financial reporting standards in order to improve the reputation and credibility of their capital markets.5.The simple answer is that mandatory disclosures are corporate disclosures made in response toregulatory requirements (for example, rules issued by national regulators or stock exchanges), and that voluntary disclosures are purely discretionary in nature. The distinction between mandatory and voluntary disclosures can be ambiguous in some settings, however. For example, the requirement that U.S. companies must file Form 10-Ks with the U.S. Securities and Exchange Commission is straightforward. However, measurement and disclosure approaches for some of the items in the Form 10-K are not. Similarly, there are widely divergent views concerning what types of press announcements are mandatory versus voluntary.Two possible explanations for differences in managers’ voluntary disclosure practices are: (1) Managers in highly competitive industries may be less forthcoming than managers in less competitive industries due to the expected cost of releasing information of potential use to their competitors. (2) Managers are expected to be more forthcoming when there is good news to disclose, than when there is bad news, particularly when the news can be expected to affect share prices.Two explanations for differences in managers’ mandatory disclosure practices are: (1) Cross-jurisdictional differences in disclosure requirements. (2) Differences in the extent of compliance with disclosure rules due to cross-jurisdictional differences in enforcement.6. Triple bottom line reporting refers to reporting on a company’s eco nomic, social, andenvironmental performance. It is a form of social responsibility reporting designed to demonstrate good corporate citizenship. So-called “sustainability” reports are an increasingly popular means of triple bottom line reporting. There is substantial variation in social reporting today. More regulation would improve comparability, but it might also stifle reporting innovations. The usefulness of social reporting to outside parties, particularly investors, needs to be demonstrated before implementing more regulation for it.6.Often we expect to observe less voluntary disclosure by companies in emerging market countriesthan by those in developed countries:a.Equity markets are relatively less developed in many emerging market countries,resulting in lower total demand for company information by investors and analysts.b.In many emerging market countries, most financing is supplied by banks and insiderssuch as family groups. This also leads to less demand for timely, credible publicdisclosure, and in these markets enhanced disclosure may have limited benefits.8. In general, for the same reasons as in Discussion Question 7, we expect to observe fewerregulatory disclosure requirements in emerging market countries than in developed countries.The equity markets and disclosure requirements in many emerging market countries are not yet well developed, and accounting and auditing systems in emerging market countries are less well developed than in more developed market countries.9. The two broad objectives of investor-oriented equity markets are investor protection and marketquality. In the absence of investor protection, investors will not be willing to participate in a market. However, in the absence of market quality, markets will not function satisfactorily.Many would consider the objectives equally important.10. It certainly is possible that more required disclosure will further encourage investorparticipation in capital markets by providing more and better information on which to base investment decisions. Benefits of increased investor participation include increased liquidity, reduced transaction costs, and more accurate and efficient market pricing. However, it can also be argued that in some situations disclosure requirements are excessive. In markets where disclosure requirements are considered too stringent, companies may be deterred from publicly listing their shares, and may choose to use secondary markets (such as the over-the-counter market in the United States) that lack the investor protections of regulated stock exchanges, and which provide investors with lower liquidity and higher transaction costs. Thus, more required disclosure is not necessarily better than less.11. Forecasts of revenues and income are relatively uncommon because there can be legalrepercussions if forecasts are not met. Forecasts rely on subjective estimates of uncertain future events, making them unreliable in many situations. Vaguer forms of forward looking information are more common than precise forecasts. For example, directional forecasts (up or down) of revenues and income are more common than range forecasts which are, in turn, more common than precise forecasts of these amounts.12. Corporate governance refers to the structure of relationships and responsibilities amongshareholders, board members, and corporate managers. Investors and financial analysts use information about a company’s corporate governance (for example, whether an audit committee’s members are independ ent, and responsibilities and remuneration of board members) to better assess the level of investor protection (and therefore, expected cash flows to investors) at the company.Exercises1. a. Transparent financial reporting means that timely and accurate disclosures are made onall important matters affecting a company’s financial position and performance. Itimplies openness, communication, and accountability.b. Transparent financial reporting protects investors because nothing is hidden from them.Investors can better assess the risks of owning securities when information is truthfuland complete. Transparent financial reporting also improves market quality. Itenhances investor confidence. Open communication creates markets that are fair,orderly, efficient, and free from abuse and misconduct.c. The financial reporting requirements on the Hong Kong Exchange promote transparentfinancial reporting and they protect investors and promote market quality. For example,they require a complete set of audited financial statements, including a balance sheet,income statement, cash flow statement, and explanatory notes. Substantial disclosuresare also required, including segments and forward looking information discussed in thechapter. Reports must include a management discussion and analysis. Accountingprinciples may be either Hong Kong Financial Reporting Standards or InternationalFinancial Reporting Standards. Both sets of standards are known for their high quality.All reports must be in English. There are requirements on corporate governance.Timely disclosure of price sensitive information is required. Annual reports must bepublished within four months of year-end and half-yearly reports must be publishedwithin three months. Overall, the reporting requirements are substantial and complete. 2.Schering AG provides a qualitative forecast of one-year-ahead and two-year-ahead net sales.One-year-ahead net sales are expected to increase in the “mid to high single-digit” range. From this, an investor would likely infer growth of between 6 and 8 percent. Two-year-ahead sales are expected to increase further. Thus, this forecast is directional (up). There are similar forecasts of net sales for certain products and for certain regions. For example, Yasmin® is expected to experience “double-digit” growth, while Betaferon® is expected to grow at “high single-digit” rates. Net sales in Europe are expected to grow at “mid single-digit” rates, while those in the United States are forecast to be “above average.” Schering also forecasts an operating margin of 18 percent for the next year. This is a precise forecast. There is no forecast of net income.Investors should find this information useful, but specific growth percentages would be even useful. Investors are concerned about a company’s future prospects. Management’s expectations guide users’ own forecasts. Investors would also find a forecast of net income useful.3. IFRS 8 requires that the following items be disclosed for each reportable segment:a.Profit or loss.b.Assets.c.Particular income and expense items if such measures are regularly provided to the chiefoperating decision maker.d.Reconciliations of reportable segment revenues, profit or loss, assets, and liabilities toconsolidated totals.(A reportable segment is an operating segment about which separate financial information isavailable that is evaluated regularly by management in assessing segment performance and deciding how to allocate resources to operating segments.)In addition to the above items, information must also be disclosed about:a.Revenues derived from products or services.b.Revenues derived from countries.c.Major customers.d.How operating segments are determined.Lafarge discloses that its reportable segments are its four product lines. The company discloses all of the items required to be disclosed by reportable segment. Operating income, assets, and individual income and expense items are reported. Segment revenues, operating income, assets, and liabilities are reconciled to consolidated totals.Lafarge also discloses revenues by selected countries and regions of the world. In addition, capital expenditure and capital employed by selected countries and regions are disclosed. There is no information about major customers, but Lafarge may have a large, diversified customer base.Overall, Lafarge complies with the requirements of IFRS 8 and even goes beyond its requirements in some cases.4. a. Overall headcount has increased between the two years. Both of its divisions(pharmaceuticals and diagnostics) show increased levels of employment. With theexception of Latin America, all regions of the world also show increased levels ofemployment. Roche attributes these increases to the fact that it has been expanding fasterthan its competitors.b.“Regretted losses” refers to “fluctuations not initiated by Roche,” presumably employeeswho quit the company on their own accord. While the overall percentage of employeeslost (“fluctuation”)has increased between the two years, the percentage of regrettedlosses has decreased.c.Roche states that it “places a high value on diversity and seeks to benefit from it….”Roche seems to have had some success in improving diversity in the company. Rochenotes that it employs people from over 190 countries and that the 336 employees in itsCorporate Center come from 23 countries. General managers from the local country head60 percent of its affiliates, and the trend is rising. Data presented on women in theworkplace all show improvements.d.Outside investors may find this information useful because it speaks to the welfare ofcompany employees. For example, satisfied employees will work harder to achieve acompany’s goals than unsatisfied ones will. The information is also useful in judgingwhether companies comply with employment laws, such as those dealing withnondiscriminatory hiring.5. The overall conclusion is that Roche’s safety record worsened while its environmental recordimproved.Safety:Note that Roche’s total number of workdays increased by 17 percent, while the total number of employees grew by 6 percent. Accidents and other measures of safety can be expected to increase, but not at rates higher than these. Occupational accidents increased by 14 percent, while work-related accidents per million working hours decreased 3 percent. These measures suggest that accident rates are about the same between the two years. There were no work-related fatalities in either year. Workdays lost due to work-related accidents increased by 31 percent, occupational illnesses increased by 60 percent, illnesses per million working hour increased 36 percent, and workdays lost due to occupational illnesses increased 42 percent. These measures indicate a worsening safety record. Transport accident per metric ton transported decreased. In general, most measures got worse.Environmental:Energy consumption increased by 5 percent and TOC t/year increased 36 percent. However, the other pollution measures (such as CO2t/year and NO2t/year) decreased. Figures later in the disclosure compare eco-efficiency measures for 2005, 2004, and 1992. Long-term trends (92/05) of all measures beside the one for CO2show significant decreases. In genera l, Roche’s environmental record has improved.6. a. According to the Web site, the objective of the International Auditing and AssuranceStandards Board (IAASB) is to serve the public interest by:∙setting, independently and under its own authority, high quality standards on auditing, quality control, review, other assurance, and related services, and ∙facilitating the convergence of national and international standards,thereby enhancing the quality and uniformity of practice throughout the world andstrengthening public confidence in the global auditing and assurance profession.b.According to this Web site, auditing standards refer to the audit or review of historicalfinancial information, while assurance standards refer to engagements dealing withsubject matters other than historical financial information.c.PricewaterhouseCoopers states that Roche’s internal sustainability reporting guidelinesare properly applied, that its data collection system is functioning as designed, and that its“social dim ension reporting provides an appropriate basis for the disclosure of socialdimension information…” Thus, Roche has received a “clean opinion”on itssustainability reporting.7. a. Corporate social responsibility is about how companies conduct themselves in relation to“stakeholders,” such as workers, consumers, and the broader society in which firmsoperate.b.Some argue that “the business of business is business.” In conducting their business,companies provide huge and critical contributions to society. Among these areproductivity gains, innovation and research, employment, and human capitaldevelopment. In poor countries, companies often contribute critical capital, technology,and skills that reduce poverty. Companies that compete and prosper make society betteroff. Under this view, the proper guardian of the public interest is government, notbusiness. Another view is that social issues (and social responsibility) are not tangentialto business but fundamental to it. Companies that ignore public sentiment makethemselves vulnerable to attack. Ignoring social issues turns a blind eye to forces thatmay alter a company’s strategic future. Thus, companies ought to do more than the lawrequires since social issues ultimately feed into shareholder value.c.Whether companies ought to report on their social responsibility activities probablydepends on one’s view of corporate social responsibility. Nevertheless, a strong case canbe made that proactive disclosure of a company’s societal contribu tions can positivelyaffect its image and ultimately its bottom line.d.As noted in c., the relevance of CSR disclosures for outside investors is that a company’ssocietal contributions can positively affect its image and ultimately its bottom line.8. a. The performance indicators recommended in the GRI guidelines are as follows:Economic Performance IndicatorsCore IndicatorsAdditional IndicatorsDirect Economic ImpactsCustomersEC1. Net sales.EC2. Geographic breakdown of markets.For each product or product range, disclosenational market share by country where this is 25% or more. Disclose market share and sales for eachcountry where national sales represent 5% or moreof GDP.SuppliersEC3. Cost of all goods, materials, and servicespurchased.EC11. Supplier breakdown by Organization and country. List all suppliers from which purchases in the reporting period represent 10% or more of total purchases in that period. Also identify all countries where total purchasing represents 5% or more of GDP. EC4. Percentage of contracts that were paid in accordance with agreed terms, excluding agreed penalty arrangements. Terms may include conditions such as scheduling of payments, form of payment, or other conditions. This indicator is the percent of contracts that werepaid according to terms, regardless of the details ofthe terms.EmployeesEC5. Total payroll and benefits (including wages,pension, other benefits, and redundancy payments)broken down by country or region. This remuneration should refer to current payments andnot include future commitments.Providers of CapitalEC6. Distributions to providers of capital brokendown by interest on debt and borrowings, anddividends on all classes of shares, with any arrearsof preferred dividends to be disclosed. Thisincludes all forms of debt and borrowings, not only long-term debt.EC7. Increase/decrease in retained earnings at endof period.Public SectorEC8. Total sum of taxes of all types paid broken down by country. EC12. Total spent on non-core business infrastructure development. This is infrastructureEC9. Subsidies received broken down by country or region. This refers to grants, tax relief, and other types of financial benefits that do not represent a transaction of goods and services.Explain definitions used for types of groups.built outside the main business activities of the reporting entity such as a school, or hospital for employees and their families.E10. Donations to community, civil society, andother groups broken down in terms of cash and in-kind donations per type of group.Indirect Economic ImpactsEC13. The Organization’s indirect economicimpacts. Identify major externalities associated withthe reporting Organization’s products and services .Environmental Performance IndicatorsCore Indicators Additional IndicatorsMaterialsEN1. Total materials use other than water, by type.Provide definitions used for types of materials.Report in tons, kilograms, or volume.EN2. Percentage of materials used that are wastes(processed or unprocessed) from sources external to the reporting Organization. Refers to both post-consumer recycled material and waste fromindustrial sources. Report in tons, kilograms, orvolume.EnergyEN3. Direct energy use segmented by primary source. Report on all energy sources used by the reportingOrganization for its own operations as well as for the production and delivery of energy products (e.g., electricity or heat) to other Organizations. Report in joules.EN17. Initiatives to use renewable energy sources and to increase energy efficiency. EN18. Energy consumption footprint (i.e., annualized lifetime energy requirements) of major products. Report in joules. EN4. Indirect energy use. Report on all energy used to produce and deliver energy products purchased by the reporting Organization (e.g., electricity or heat). Report in joules.EN19. Other indirect (upstream/downstream) energy use and implications, such as Organizational travel, product lifecycle management, and use of energy-intensive materials. WaterEN5. Total water use. EN20. Water sources and relatedecosystems/habitats significantly affected by use ofwater. Include Ramsar-listed wetlands and theoverall contribution to resulting environmentaltrends.EN21. Annual withdrawals of ground and surfacewater as a percent of annual renewable quantity ofwater available from the sources. Breakdown byregion.EN22. Total recycling and reuse of water.Include wastewater and other used water (e.g.,cooling water).BiodiversityEN6. Location and size of land owned, leased, or managed in biodiversity-rich habitats. EN23. Total amount of land owned, leased, or managed for production activities or extractive use. EN24. Amount of impermeable surface as apercentage of land purchased or leased.EN7. Description of the major impacts onbiodiversity associated with activities and/or products and services in terrestrial, freshwater, and marine environments. EN25. Impacts of activities and operations on protected and sensitive areas (e.g., IUCN protectedarea categories 1-4, world heritage sites, and biosphere reserves).EN26. Changes to natural habitats resulting fromactivities and operations and percentage of habitatprotected or restored.Identify type of habitat affected and its status.EN27. Objectives, programs, and targets forprotecting and restoring native ecosystems andspecies in degraded areas.EN28. Number of IUCN Red List species withhabitats in areas affected by operations.EN29. Business units currently operating orplanning operations in or around protected orsensitive areas.Emissions, Effluents, and WasteEN8. Greenhouse gas emissions. (CO2, CH4, N2O, HFCs, PFCs, SF6). Report separate subtotals for each gas in tons and in tons of CO2 equivalent for the following: - direct emissions from sources owned or controlled by the reporting entity - indirect emissions from imported electricity heat or steamEN30. Other relevant indirect greenhouse gas emissions. (CO2, CH4, N2O, HFCs, PFCs, SF6). Refers to emissions that are a consequence of the activities of the reporting entity, but occur from sources owned or controlled by another entity Report in tons of gas and tons of CO2 equivalent. EN9. Use and emissions of ozone-depletingsubstances. Report each figure separately in accordance with Montreal Protocol Annexes A, B, C, and E in tons of CFC-11 equivalents (ozone-depleting potential).EN31. All production, transport, import, or export of any waste deemed “hazardous” under the terms of the Basel Convention Annex I, II, III, and VIII.EN10. NOx, SOx, and other significant air emissions by type. Include emissions of substances regulated under: - local laws and regulations - Stockholm POPs Convention (Annex A, B, and C) –persistent organic pollutants - Rotterdam Convention on Prior Informed Consent (PIC)- Helsinki, Sofia, and Geneva Protocols to the Convention on Long-Range Trans-boundary Air Pollution EN32. Water sources and related ecosystems/habitats significantly affected by discharges of water and runoff. Include Ramsar-listed wetlands and the overall contribution to resulting environmental trends. See GRI Water Protocol.EN11. Total amount of waste by type anddestination.“Destination” refers to the method by w hich wasteis treated, including composting, reuse, recycling,recovery, incineration, or land filling. Explain typeof classification method and estimation method.EN12. Significant discharges to water by type.EN13. Significant spills of chemicals, oils, and fuelsin terms of total number and total volume.Significance is defined in terms of both the size ofthe spill and impact on the surroundingenvironment.SuppliersEN33. Performance of suppliers relative toenvironmental components of programmer andprocedures described in response to GovernanceStructure and Management Systems section. Products and ServicesEN14. Significant environmental impacts ofprincipal products and services.Describe and quantify where relevant.EN15. Percentage of the weight of products soldthat is reclaimable at the end of the products’ usefullife and percentage that is actually reclaimed.ComplianceEN16. Incidents of and fines for non-compliancewith all applicable internationaldeclarations/conventions/treaties, and national, sub-national, regional, and local regulations associatedwith environmental issues. Explain in terms ofcountries of operationTransportEN34. Significant environmental impacts oftransportation used for logistical purposes.OverallEN35. Total environmental expenditures by type.。