Case Study 7 and International
Business
Part
One:
The general accounting concepts
require the double-entry systems of recording transactions, where assets (Soenen, 2010),
debts and purchase are recorded on the debit side of the book entry while
liabilities, sales or revenues earned and creditor’s information recorded on
the credit side of the book entry. For a balance of payment transaction, the
same guidelines are followed but now with reference to cash inflows and cash
outflows. In this relation, any transaction that leads to cash receipt is
recorded on the credit side of the journal entry while a transaction any
transaction leading to cash outflow is recorded on the debit side of the
journal entry (Soenen, 2010).
In our case, we are presented with the following items to be recorded in the
BOP journal.
US resident purchases
Mercedes Benz C230- the Mercedes Benz Company is a US based car manufacturing
company and therefore the purchase by a US resident is considered domestic
consumption of a local product. The transaction cannot be recorded in the in
the BOP purchase journal.
US resident Purchases
Chevelot Impala- the Chevelot Impala is a US modelled racer car and therefore
the purchase by a US resident is considered domestic consumption of a local
product. The transaction cannot be recorded in the in the BOP purchase journal
Foreigner Purchase GE
dryer- the purchase of GE dryer by a foreigner results into cash receipt
(Sales) on the side of US. This is a BOP transaction entry on the credit side
of the journal.
US resident purchase UK
stock- the purchase of UK stock by a US resident results in cash outflows
(purchases) from US. This is a BOP transaction entry on the debit side of the
journal.
US resident borrows
funds from British broker to purchase stock- A US resident borrowing funds from
British Broker to purchase stock makes the country liable in which case the cash
receipt is recorded on the credit side of the BOP journal.
Part
Two:
Question 19-3
GAAP
outlines the globally accepted accounting principles that businesses can use to
prepare standardized financial statements. An investor comparing the financial
results of the Gap, Inditex and H&M expects no difference in those financial
statements even if the reporting is done according to different GAAP (Broll,
2003).
This is because, even though the recording is done at on different
guidelines, the GAAP principles will only recognize those statements developed
within the time framework of the accounting cycle and its impact on the
financial statement like the period within which the transaction was recorded (Broll,
2003). According to the disclosure
principles, the GAAP outlines the specific number and type of information that
is to be presented in the financial statement and this means that there would
be no wide gap in the information setting for the company’s safe for the
arrangement of the items contained in the financial statement (Daniels, Radebaugh
& Sullivan, 2015).
However, there would be a big differences between
the US GAAP as used by the Gap and IFRS as used by the H&M and Inditex.
When comparing the GAAP to IFRS, the first difference is that the US GAAP provides
more detailed rules than the IFRS, which also has limited industry specific
guidance (Daniels, Radebaugh & Sullivan, 2015). Even though there have been
noticeable differences between the US GAAP and the IFRS, the longstanding
projects developed between the IASB and the FASB has been reducing such
differences. The existing differences have significant effect on the company’s
reporting results following the facts and financial circumstances surrounding
the company’s industry (Daniels, Radebaugh & Sullivan, 2015). Other than
the mentioned differences it also good to note that IFRS does not permit the
concepts of LIFO, which are important when establishing stock of inventories in
the company. Also noted is the fact that the IFRS uses a single step rather
than the two step write-downs followed in US GAAP, and this makes the
write-downs more likely. The final important difference is that the IFRS
requires capitalization of establishment costs once the company has met certain
qualifying procedures while the US GAAP requires the establishment costs to be
expensed once incurred safe for the costs relating to developing computers
software.
Question 19-4
The sources of influence on
accounting standards and practices are the groups of stakeholders such as
consumers, government, investors, private stakeholders and related companies
who continuously demand details about the company’s financial systems, sources
of deliveries and detailed accounts on financial performances. According to the
case provided, the quality, safety, ethics and environmental concerns are all
factors to keep the stakeholders worried about the company’s future operations,
and therefore the needs to keep proper records of business operations is just
one of the precautions towards making the company’s activities over the past
years traceable in case of a tragedy.
Even though the company’s accounting standards
are closely monitored by the internal and external users who require a single
set of high-quality (Giddy & Dufey, 2009),
understandable and enforceable global accounting standards, it is quite common
that the accounting practices must correspond to the business culture. H & M
cultural values of secrecy and transparency defines the degree of information
disclosure, and in this context the company’s culture allows H & M
accountants to value assets and recognize them in income in response to
economic situations (Giddy & Dufey, 2009).
At times, the company can undervalue its assets and income in order to meet
specific economic targets, or may overvalue the assets and income to meet the
expectations of financers for continued investment. In general, the company’s
accounting standards and practices are influenced by general factors like the
business culture, changes in capital markets, changes in regional and global
accounting standards, business management practices and level of experience on
the side of accountants (Giddy & Dufey, 2009).
The type of
exposure
The CFO of the company in the US
could be subjected to economic exposure since there could be unexpected
currency fluctuations on H & M future cash flows, rather alteration in
market values (Burgi-Schmelz, Ducharme, Heath & International Monetary
Fund, 2014). The fact that the is based in Sweden and its financial statements
prepared according to IFRS affects its competitive position in global markets.
One important factor is that the company’s financial reporting does not
correspond to the US GAAP systems, meaning that the statements are considered
lesser detailed and not responsive to the US economic climate (Burgi-Schmelz,
Ducharme, Heath & International Monetary Fund, 2014).
The operational
hedging strategies that may offset exposure
The operational hedging strategies
that can be used to offset exposure for the case of payments or liabilities
diversifying the production facilities and market segments for the range of
products or finances in case of an exchange market (Burgi-Schmelz, Ducharme, Heath
& International Monetary Fund, 2014). The diversification process is known
mitigate all the risks associated with production facilities or sales that
could be concentrated in one or specific markets. This requires the
participants to forgo their economies of scale and concentrate on those factors
that will offset the extreme economic imbalance in respective markets
(Burgi-Schmelz, Ducharme, Heath & International Monetary Fund, 2014). The
second offsetting condition require the market participants to have alternative
sources of key input in case the market exchange rates move in way that raises
the cost of inputs. This process of offsetting exposure is known as sourcing
flexibility and allows the market participants to match inputs and input costs
(Burgi-Schmelz, Ducharme, Heath & International Monetary Fund, 2014). There
is also need to diversify the financing process win which case the ability to
access capital markets in different nations will give the trading company the
flexibility to increase capital in that foreign market at the cheapest cost of
borrowing.
References
Broll, U.
(Eds.). (2003). Foreign production and international hedging in a multinational
firm. Open economies review, 4(4), 425-432.
Burgi-Schmelz,
A., Ducharme, L. M., Heath, R. M., & International Monetary Fund. (2014). BPM6
compilation guide: Companion document to the sixth edition of the Balance of
payments and international investment position manual. Washington, D.C.:
International Monetary Fund.
Daniels,
J.D., Radebaugh, L.H., & Sullivan, D.P. (2015) international business:
Environments and operations (15th ed.). Upper Saddle River, NJ: Pearson
Education.
Giddy, I.
H., & Dufey, G. (Eds.). (2009). The management of foreign exchange risk. New
York.
Soenen,
L. A. (Eds.). (2010). Efficient market implications for foreign exchange
exposure management. De Economist, 127(2), 330-339.
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