AC558: International Accounting Assignment Unit 3 JUDY KIARIE KAPLAN UNIVERSITY

Chapter 5 8. Commonly, firms initially explore foreign markets in response to unsolicited orders from consumers in those markets. In the absence of these orders, companies often begin to export to establish a business that will absorb overhead costs at home and seek new markets when the domestic market is saturated and to make quick profits. Marketing abroad can also spread corporate risk and minimize the impact of undesirable domestic situations, such as recession. It is also argued that since differences exist in levels of economic growth and timing of business cycles among various countries, international diversification can be used as a means of reducing risk. International investing is difficult and not practical for most investors since U.S.-based investors rely primarily on closed-end single country funds and international index funds. Furthermore market indices may not represent easily investible assets due to high costs and entry barriers. However, recent introduction of new products such as exchange traded funds (ETF) have made international investing easier. Therefore, if foreign stock markets continue to outperform the domestic market along with a favorable economic outlook and easier access, it is likely that foreign markets will continue to be attractive to countries or businesses who seek funding in the international markets. Joint ventures have become a common way of companies form of seeking funding from foreign markets with one or more companies already established in the host country. Often the local firm provides expertise on the intended market, while the multinational firm is better able to accomplish general management and marketing tasks. Use of this method of international investing has accelerated dramatically in the past 20 years. One incentive of this progress is reduction of the company's risk by the amount of investment made by the host-country partner. Other potential advantages to seeking funding from international market for multinationals may allow firms with insufficient capital to expand internationally , it may allow the marketer to use the partner's preexisting distribution channels; and take advantage of special skills possessed by the host country partner. While this method of market entry often results in the loss of total control over business operations, it is the only method of foreign investment that some host governments especially less developed countries will accept to fund such investments. 3. Current ratio = Current assets/ current liabilities Volkswagen AG = 72417 / 43062 = 1.68: 1

General Motors Corporation = 286588/422932= 0.68:1 Volkswagen has a higher current ratio of more than 1 which indicates their ability to pay their short term debt obligations. Conversely, General motors has a current ratio less than 1 and is considered to be in financial trouble as they would be unable to meet their current debt obligations if they all came due immediately using just their current assets although they could of course use financing or some other source of funds besides short term assets to meet their short term debt obligations.

Asset Turnover = Sales Revenue / Total Assets

Volkswagen AG =

87,153/119,136 = 0.73

General Motors Corporation = 185,524 / 448,507=0.41 The formula for the asset turnover ratio evaluates how well a company is utilizing its assets to produce revenue. The higher the ratio, the more sales that a company is producing based on its assets. In this case Volkswagen AG has a higher ratio and can be said to be utilizing its assets better to produce revenue than General Motors.

Times Interest Earned Volkswagen AG =

= Earnings before Interest and Tax / Net Interest Expense 1404/125=11.2

General Motors Corporation =2981/9464= 0.31 The times interest earned ratio indicates the extent of which earnings are available to meet interest payments. In this case, general motors has a lower times interest earned ratio which means it has less earnings available to meet interest payments and that the business is more vulnerable to increases in interest rates unlike Volkswagen has a higher times interest ratio.

Debt to Equity ratio = Total Liabilities /Shareholders' Equity Volkswagen AG = 71792 /47344= 1.52 General Motors Corporation =422932/25268=16.7

The Lower the values of debt-to-equity ratio are favorable indicating less risk. Higher debt-to-equity ratio is unfavorable because it means that the business relies more on external lenders thus it is at higher risk, especially at higher interest rates. Currently Volkswagen has a debt-to-equity ratio of 1.52 which means that half of the assets of its business are financed by debts and half by shareholders' equity. General motors value is at 16.7 which means that more assets are financed by debt than those financed by money of shareholders. Earnings per share Earnings per share for General motor = $7.14 Earnings per share for Volkswagen AG = $2.84 This indicates how much every share the common stock earns out of net income. 4. The financial statement I preferred was the General Motors Corporation and subsidiaries, investors are able to make better comparisons of how the business is doing as they are given up to 3 years of information which gives more information and better comparison than what is provided by Volkswagen who provided 2 years of information .

Also the format used by General motors corporation is more understandable in terms of how they distinguished items for instance have assets listed starting with the most liquid assets ending with the fixed assets, when apply ratios its easy for an investor to determine how liquid the business is from first glance, looking at the Volkswagen AG format started with noncurrent assets and one would have to determine what are the current assets and liabilities to see how liquid the business is. All in all, the General motors financial statements provided more data for accounting uses and one is able to follow easily how calculations and totals add up. I would say General motors financial statements were more transparent, more data has been provided for 3 years that one can compare, its more detailed, one is able to follow and understand the each total that comes up from first glance. Volkswagen financial statement is more on the conservative side. Chapter 6 Discussion Question 2 & 5 2. Corporate transparency is defined as the wide-spread availability of relevant, reliable information about the period performance, financial position, investment opportunities, governance, value and risk of publicly traded firms. It has been measured as a combination of many firm- specific and country specific factors for example corporate transparency can be measured from reviewing financial reports, governance of disclosures, availability of annual reports in English, the penetration of ownership of the media in a particular country and the ease with which private information about firms can be collected and disseminated . (Radebaugh, 2006, pg 125-126). There has been a growing need of corporate transparency especially with the aftermath of Enron , WorldCom and other public governance failures resulting to the introduction of a piece of legislature passed on Sarbanes Oxley which requires more disclosures and poses penalties on executives for misreporting. As a result, corporate transparency has increased the rate of accurate information being provided. Corporate transparency matters to firms more so as it helps separate firms that are doing well in reality and firms and firms that are not doing so well but try to hide that fact. Radebaug, (2006) states, Financial reporting transparency matters to regulators for macroeconomic reasons restore confidence in and expand capital markets and to encourage investments in the economy. What we have to ask ourselves then is it sufficient to just disclose the financial information? Disclosure of financial information in regards to corporate transparency is important whether its done voluntarily or as part of requirement by law. Financial statements are a vital source of information to the capital markets and their participants. The quality of investment and voting decisions by investors depends on the accuracy, completeness, and reliability of financial information disseminated to them by public companies. Thus, high-quality financial information improves investor decisions and in turn the efficiency, liquidity, and safety of the capital markets, which may result in prosperity and economic growth for the nation. Therefore, quality financial statements and other financial reporting information are important to the strength of capital markets. It is necessary but at the same time it is not sufficient component of corporate transparency. There still needs to be not only financial transparency but also governance transparency.

Organizations need to consider the effects of many aspects of their operations in addition to financial reporting, such as environmental, social, ethical, and governance performance. Since the effects of organizations in these areas can be significant, many stakeholders benefit from the fact that such additional reporting makes organizations accountable for the effects of their operations in many different areas. 5. The importance and demand of accounting information disclosed continues to grow increase rapidly and multinationals are realizing the importance of releasing this information. The major incentives that managers of this multinationals provide this information comes as a result of responding to a regulation and voluntarily as it would benefit them in return. Disclosing information provides manager with a better and cheaper access to external capital. The additional voluntary information disclosed by managers provides the opportunity for the company to communicate its policy and additional information about the corporation to better inform and encourage investors to invest in their corporation. Also managers realize that when outside users of the financial information, like analysts , investors, shareholders and others is being released voluntarily , it reduces uncertainty about the financial performance and future prospects of the corporation, there is no way a company would openly release both required and not required financial information if its not doing well , they will try to not disclose that . Furthermore , Radebaugh (2006, pg 129) suggests an incentive of managers to release additional information could in a situation whereby , governments and trade union exert an influence over the environment on the multinationals to disclose information to compete with other multinationals for investment opportunities or to exchange it to maintain existing rights or avoid potential constraints on their operations. All in as much incentive there is disclose information, managers have also a responsibility to maintain business confidentiality in sensitive areas to avoid jeopardizing the competitive position. Managers also realize disclosure of information is costly and it only becomes an incentive to them to do it if the benefits would outweigh the costs in the end. In the end, growing globalization of capital markets shows there is an increased pressure of additional information on the operations of multinationals and it does fall to management to make the right choice when it comes to disclosing voluntary information and its overall benefit it will to the corporation.

7 Discussion Questions 5 & 15 5. National differences in accounting and financial reporting are said to be a function of difference in priorities concerning domestic needs which are normally as a result of environmental factors of economic, , political and cultural nature. Therefore in cases of domestic corporations with no significant international operations or financing there is no reason to be concerned that worldwide standards serve international objectives. ( Radebaugh, 2006 pg 182). Global pressures are impacting primarily on companies seeking cross-border listing on sources of finance in international capital markets. Companies who are interested to attract foreign investors or who wish their stock shares to be traded internationally are also subject to international harmonization pressure as are those companies with increasingly multinational operations. Local pressures, on the other hand, arise primarily from government taxation and industrial policy concerns. One way to reconcile these is to provide different financial statements for different purposes as is done in the Anglo-Saxon context and increasingly so by European Companies e.g. in France and Sweden. Thus, consolidated financial statements are becoming more internationally harmonized while the individual company amounts continue to be locally focused. 15. Principle and rule-based accounting reflect different approaches to accounting. Rules-based accounting refers to a general accounting approach that is governed by specific rules or standards. 1This type of approach provides a checklist of specific rules that are capable of providing solutions to common accounting problems and scenarios. A rules-based approach allows accounting professionals to reduce the amount of independent professional judgment that they must exercise, which in turn, reduces exposure to liability. However this approach has been criticized as providing companies with a lot of loopholes engage in potentially deceptive reporting practices a good example can be seen from Enron and WorldCom downfall that took a long time to be realized due to following rule based accounting and circumventing situations through loopholes to their own benefit. On the other side is the Principle based accounting that focuses more emphasis on broader ethical standards for financial reporting. Principles based approach leaves no room for preparers to justify inappropriate interpretations of standards, thereby reducing creative accounting. Under the rule based approach, the rules are normally long and complicated that ends up creating problems for users of accounting and does encourage creative accounting hence forgetting the ethical and objective of fair presentation. Principle based approach is considered to be simpler, focused on objectives and hence user-friendly to the masses.

http://www.ehow.com/info_8715092_rulesbased-accounting.html

Rule based approach is said to provide greater comparability due to application of consistent rules on events and transactions. Furthermore, IFRSs principle-based approach introduces more judgment which gives rise to greater variability in application than a more detailed rule. However, compara bility can be explained under principled based approach with disclosures being made for key judgments decisions. Due to its authoritative and prescriptive nature, rule-based standards approach lowers ambiguity and hence, tends to lower litigation risks for auditors and preparers whereas principle based standards approach involves greater judgment and discretion, hence increasing exposure to litigation risk. However increased documentation may reduce such risks. Rules based standard approach is more widely desired by preparers and auditors as it provides detailed guidance one can say black-and-white solutions to ambiguous issues. This in the end I believe is resulting in the deterioration of quality of the accounting profession. Conversely, Principle based approach allows accountants to apply professional judgment in assessing the substance of a transaction. This approach is substantially different from the underlying box-ticking approach common in rules-based accounting standards. FASB Chair Robert Herz has stated that he believes the professionalism of financial statements would be enhanced if accountants are required to utilize their judgment instead of relying on detailed rules. 2 Both approaches have both the pros and cons , at the end of the day, the accounting profession should be trying to adopt the best of two incorporate into one approach in order to achieve the highest ethical standards and best practices to help accountants regain the lost credibility from the users of accounting information .

Rebecca Toppe Shortridge, and Mark Myring, PhD,(2004). Defining Principles-Based Accounting Standards. The CPA Journal . Retrieved from www.nysscpa.org/cpajournal/2004/804/essentials/p34.htm

References
Krystal Wascher. (2012). Rules-Based accounting. Retrieved from http://www.ehow.com/info_8715092_rulesbased-accounting.html Radebaugh, Gray & Black, Wiley. (2006). International Accounting and Multinational Enterprises, 6E. NJ: John Wiley & Sons, Inc. Rebecca Toppe Shortridge, and Mark Myring, PhD,(2004). Defining Principles-Based Accounting Standards. The CPA Journal. Retrieved from www.nysscpa.org/cpajournal/2004/804/essentials/p34.htm