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International Accounting IssuesPresented By : Bagthariya Niraj (11202)Anaghan Mahesh (11245)Modasiya Hiren (11266)Mohammad Salim(112)

Introduction to International AccountingInternational Accounting is one of the functional areas that is critical for the operations of the MNEsThe controller must be concerned about a broader range of issues dealing with corporate strategy than just accounting issues

Accounting for International DifferencesAccounting standards and practices vary around the worldBoth the form and the content of financial statements are different in different countriesUS companies uses balance format and European companies uses analytical format

Accounting Objectives The accounting process identifies, records, and interprets economic events.Accounting information useful for three purpose:1.Investment and credit decisions2.Assessment of cash flow prospects3.Evaluation of enterprise resources, claims to those resources and changes in them

Cultural Differences in Accounting Culture can have a strong influence on the accounting dimensions of measurementThe cultural values of secrecy and transparency refer to the degree of disclosure of informationThe cultural values of optimism and conservatism refer to the valuation of assets and the recognition of income

Financial StatementsFinancial statements differ in terms of:LanguageCurrencyType of statements (income statement, balance sheet, etc.)Financial statement formatGAAP usage

International Accounting Standards and Global Convergence Convergence is the process of bringing different national Generally Accepted Accounting Principles (GAAP) into line with International Financial Reporting Standards (IFRS) issued by the IASB.

Major forces leading to convergenceInvestor orientation.Global integration of capital markets.MNEs need for foreign capital.Regional political and economic harmonization.MNEs desire to reduce accounting and reporting costs.Convergence efforts of standards-setting bodies.

International Financial Reporting Standards (IFRS)The IASB is attempting to harmonize accounting standards through issuing International Financial Reporting Standards (IFRS)The EU and other countries have agreed to require IFRS for publicly listed companiesFASB and IASB are trying to converge their standards through a variety of different activitiesEnforcement of IFRS is a major concern

Recording Foreign Currency TransactionsForeign-currency receivables and payables give rise to gains and losses whenever the exchange rate changes. Transaction gains and losses must be included in the income statement in the accounting period in which they arise.The FASB requires that U.S. companies report foreign currency transactions at the original spot exchange rate and that subsequent gains and losses on foreign-currency receivables or payables be put on the income statement. The same procedure must be followed according to IFRS.

Translating Foreign-CurrencyFinancial StatementsTranslation: the process of restating foreign-currency financial statements.Consolidation: the process of combining the translated financial statements of a parent and its subsidiaries into one set of financial statements.

Translation MethodsThe functional currency is the currency of the primary economic environment in which the entity operates.The current-rate method applies when the local currency is the functional currency.The temporal method applies when the parents reporting currency is the functional currency.

Disclosing Foreign-Exchange Gains and LossesWith the current-rate method, the translation gain or loss is recognized in comprehensive income rather than net income, and therefore it goes to owners equity.With the temporal method, the translation gain or loss is recognized in the income statement.

Management Accounting IssuesPerformance evaluation and controlThe impact of transfer pricing on performance evaluationThe use of the balanced scorecard

Performance Evaluation And ControlDifferent measures are used to evaluate performance of foreign operations, including ROI, sales, cost reduction, quality targets, market share, profitability, and budget to actual.When using a budget, management must select a currency to set the budget and a currency to evaluate performance.The most widely used approaches to translate budgets and compare with performance use forecasts of the exchange rate.

Transfer Pricing And Performance EvaluationTransfer pricing refers to prices on intracompany transfers of goods, services, and capital.There are conflicting reasons for setting transfer prices that make it difficult for top management to select the correct price.

The Balanced ScorecardThe balanced scorecard is an approach to performance measurement that closely links the strategic and financial perspectives of a business.Using the balanced scorecard helps management avoid using only one measure of performance.BSC provides a framework to following perspectives:FinancialCustomerInternal Business processesLearning and Growth

Corporate GovernanceThe external and internal factors designed to safeguard the assets of a company and protect the rights of shareholders.External control mechanismInternal control mechanismCorporate governance practices worldwide are partly a function of the legal environment in the countries where companies operate.

PARMALAT

Parmalat is a huge dairy product company in Italy. It is in charge of almost 50% of the dairy products in Italy. Not only run in Italy, but it is an international businessThe company's founder and CEO is a man Calisto Tanzi. Parmalat started using new pasteurization technology that allowed milk to stay fresh for months without refrigeration.Tanzi also discovered the power of sport marketing, which resulted in Parmalat becoming known as Champions MilkIn 1989 the firm was acquired by a holding company and changed its name to Parmalat Finanziaria SpA

PARMALAT CASE Parmalat Boards of DirectorThe Milan Stock Exchanges listing rules require listed companies to illustrate their corporate governance system.The Code recommends the appointment of independent directors. In its first report, dated 2001, Parmalat declared that four of its thirteen directors were independent, but did not mention the relevant names.It gave the names in 2002 were mostly family members

As far as 2003 is concerned, amongst Parmalats thirteen directors, eight were executives: they were Calisto Tanzi (CEO) and his son Stefano, his brother Giovanni, his nephew Paola Visconti, the companys CFO Fausto Tonna and the top managers Luciano Del Soldato, Alberto Ferraris, and Francesco Giuffredi.

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PARMALAT CASE The Fraud

Financial statements had been falsified for a long timeParmalat hid losses, overstated assets or recorded non-existent assets, understated its debt, and diverted company cash to Tanzi family members.It was losing more than 300 million annually in Latin America only They came up with the idea of Off-Balance-Sheet Financing. Executives set up three shell companies based in the Caribbean pretending to sell their products (170 Subsidaries). They would obtain loans to pay the previous ones

PARMALAT CASE Parmalats collapseThe Parmalat, collapsed in December 2003 when failed to make a 150 million bond paymentThe auditor discovered by contacting Bank of America to confirm a letter held by Bonlat certifying 3.50 billion in cash A Parmalats employee who had disobeyed instructions to destroy sensitive documents helped investigationIts collapse had been labelled as European Enron led to questioning Italian financial standards It had been suggested (Financial Times, 22 December 2003: 18) that part of the problem was that Parmalat was a family-owned

The consequencesColisto resigned and was detained by Italian authorities and sent to prison on 24 Dec 2003Also accused of wrongdoing Fausto Tonna, CFO during most of the investigation periord; Giovanni, Stefano, and Francesca Tanzi, brother, son and daughter of Calisto Tanzi and some other key employees believed to be involved in the scheme.

If convictedIt was thought misstatement were created only to hide operating losses but Tanzi family financially benefitted from fraud. Tanzi revealed that $ 638 million was moved to a family owned businessTwo separate trials are occurring: (1) held in Milan involving Tanzi and 15 others accused of market manipulation, obstructing regulators investigation and falsifying audits. Tanzi may face 5 year prison (2) another trial trial in Parma in bringing about Parmalats bankruptcy by falsifying docs. If convicted may face 15 years imprisonmentEnrico Bondi was appointed as CEO to direct recovery efforts. He has brought lawsuits against auditors and banks

Lawsuits, Round I and IILawsuits accuse the banks of ignoring the fraud to obtain fees from doing business with ParmalatParmalat in turn has been sued by investors, banks and other organizations. In the United States SEC filed complaint against Parmalat alleging it that fraudulently raised money in US.

Restructuring Besides legal battles Bondi makes aggressive changes in the Parmalat narrowing its markets in Italy, Canada, Australia, South Africa, Spain, Portugal, Russia, and Romania and pull out of other regionsLatin America with strong and profitable position would remainParmalat would cut its employees from 32,000 to 17,000 and brands from 120 to 30 only

Repercussion in the industryNot only employees and investors were affected, dairies across Europe and Latin America faced uncertainty about sales of milkGLP of France was owed 1.25 million by ParmalatHungarian Cooperative which sold 80 million liters of milk a year to Parmalat was left wondering Parmalat controlled 10% of countrys pasteurized milk market and a quarter of its long-life UHT milk market and 40% of market for long-life carton-packaged cream

So what happened?European Commission suggested it would like to strengthen auditing standards One of the reform was more transparency in the bond market In accounting prospective Parmalat adopted IFRS published by the IASBIn addition Parmalats independent auditors are now the global auditing firm, PricewaterhouseCoopersA new law concerning capital markets, a sort of Italian Sarbanes-Oxley Act drafted

Ericson: The Challenges on global capital market and adopting IFRSThe case traces the changes Ericsson makes in its reporting standards over the past few years. Prior to 2005, Ericsson reported its financial results in compliance with Swedish GAAP. The company had to report its financial results starting in 2005 according to IFRS of the EU, which are somewhat different than the IFRS of the IASB. In this case Ericsson is dealing with the multiple reporting issues and questions of compliance.Most of its sales come from outside Swedan, only 3% is generated in Swedan Major competitors are Nokia, Motorolla, Cisco System and Alcatel

The gap between u.s.gaap and Swedish gaapMajor Differences: Treatment of capitalization of development expensesProvision for restructuringPension costsHedge accountingGoodwill

The gap between u.s.gaap and Swedish gaapOne would expect Swedish GAAP income to be more conservative than U.S. GAAP income

But the result implies that Swedish GAAP income was less conservative. Under US GAAP the cost of developing new product must be expensed in the period it occurs which lowers income.

U.S. GAAP earnings Swedish GAAP earnings U.S. GAAP earnings(14,386 19024)14,386Index=1-Index=1-= 1.3224

The gap between u.s.gaap and Swedish gaapEcirson: Net Income Reconciliation, 2004 200420032002Net income as reported per Swedish GAAP19,024-10,844-19,013Net income as reported per U.S. GAAP14,386-10,597-19,918

In addition to Ericson mentioned in its report that in 2004 it had adopted new accounting standard issued by US Consolidation of Variable Interest Entities) and planned to adopt two others as wellShare Based PayentInventory Costs

Future reconciliation to US GAAPEU is not allowing companies to list on European exchanges if preparing reports solely in conformance with U.S. GAAP so;They have to report financial results in both US GAAP and IFRS, the cost would be large but comparatively less cost than firms that reconcile from IRFS to U.S. GAAP or vis-a-versa Ericson reports showed less difference between IFRS net income and U.S. GAAP than Swedish GAAP net income and U.S. GAAP in 2004

QuestionsSources of influence to Ericson reporting?Impact of London Stock Exchange on Ericson..?What type of IFRS did Ericsson decide to disclose in its financial statements in 2006?How it would affect Ericsson for conservatism? Comparison of conservatism? What does that tell?Should Ericsson adopt full IFRS or IFRS as adopted by the EU?