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To read the case study below, you must first log into the myCSU Student Portal and access the General OneFile database found in the CSU Online Library.
Read the case study indicated below, and answer the following questions:
James, M. L. (2010). Accounting for business combinations and the convergence of International Financial Reporting Standards with U.S. Generally Accepted Accounting Principles: A case study. Journal of the International Academy for Case Studies, 16(1), 95-108.
What key financial ratios will be affected by the adoption of FAS 141R and FAS 160? What will be the likely effect?
Could any of the recent and forthcoming changes affect the company’s acquisition strategies and potentially its growth?
What were FASB’s primary reasons for issuing FAS 141R and FAS 160?
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Allied Academies International Conference
ACCOUNTING FOR CONSOLIDATED ENTITIES AND
THE CONVERGENCE OF U.S. GAAP AND
INTERNATIONAL FINANCIAL REPORTING
STANDARDS
Marianne L. James, California State University – Los Angeles
CASE DESCRIPTION
The primary subject matter of this case concerns changes in accounting for consolidated
entities and the convergence of International Financial Reporting Standards (IFRS) with U.S.
Generally Accepted Accounting Principles (GAAP). The case focuses on the effect of the changes
on financial statements of global entities, as well as strategic decisions made by company
executives.
Secondary, continuing significant differences between U.S. GAAP and IFRS and
future potential developments in accounting for consolidated multinational entities are explored.
This case has a difficulty level of three to four and can be taught in about 50 minutes. Approximately
two hours of outside preparation is necessary to fully address the issues and concepts. This case can
be utilized in an Advanced Accounting course, either on the graduate or undergraduate level to help
students understand changes in and differences between U.S. GAAP and IFRS. Two sets of questions
address U.S. GAAP and IFRS and include some researchable questions that are especially useful
for a graduate level course. The case has analytical, critical thinking, conceptual, and research
components and can enhance students’ oral and written communication skills.
CASE SYNOPSIS
Financial reporting in the U.S. is changing dramatically. Consistent with the Securities and
Exchange Commissions’s proposed “Roadmap” (SEC, 2008), the U.S. likely will join the more than
100 nations worldwide that currently utilize International Financial Reporting Standards (IFRS),
and require the use of IFRS in the U.S.
Because of the globally widespread use of IFRS, multinational entities with subsidiaries that
prepare IFRS-based financial statements already have to be knowledgeable about IFRS as well as
the current differences between U.S. GAAP and IFRS. Fortunately, the Financial Accounting
Standards Board (FASB) and the International Accounting Standards Board (IASB) are working
together to bring about convergence between the two sets of accounting standards.
Recently, FASB and the IASB issued new and revised several existing standards that
eliminate many differences between U.S. GAAP and IFRS with respect to business combinations and
consolidated financial statements. However, some significant differences persist. Until the SEC
makes a final decision regarding mandatory use of IFRS and during the proposed multi-year
transition period, current and future accounting professionals must continue to keep abreast of
changes in U.S. GAAP, be knowledgeable about differences between U.S. GAAP and IFRS, and, at
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the time, prepare for the likely transition to IFRS. In addition, company executives should be
cognizant of developments that may affect their strategic decisions as the U.S. moves toward a likely
adoption of IFRS during the next five years.
This case focuses on the effect of changes in financial reporting for consolidated entities.
Changes as well as continuing differences between U.S. GAAP and IFRS are explored. Secondarily,
strategic decisions arising from the changes and the likely future adoption of IFRS are addressed.
This case, which can be utilized in Advanced Accounting on either the graduate or undergraduate
level can enhance students’ analytical, technical, critical thinking, research, and communication
skills.
KLUGEN CORPORATION – CASE *
* This is a fictitious case. Any similarities with real companies, individuals, and situations are solely
coincidental.
Irma Kuhn, CPA, CMA holds the position of Chief Financial Officer (CFO) of Klugen
Corporation, a global telecommunications company. Klugen is a consolidated entity headquartered
in the U.S. with four majority-owned European subsidiaries. The company has expanded primarily
by acquiring majority interests in European companies and holds between 51% and 70% of the
outstanding voting stock of its subsidiaries.
Consistent with current accounting rules, Klugen consolidates all four of its subsidiaries. In
addition, Klugen also holds financial interests in several unconsolidated entities and accounts for
those as investments.
Klugen’s European subsidiaries currently prepare their financial statements consistent with
International Financial Reporting Standards (IFRS), which are promulgated by the International
Accounting Standards Board (IASB). Klugen, the parent company, issues consolidated financial
statements, which include the results of its majority-owned subsidiaries in conformity with U.S.
GAAP. Preparation of Klugen’s consolidated financial statements requires that Irma and her staff
convert the subsidiaries’ IFRS-based financial statements into U.S. GAAP prior to consolidating the
numbers. This process is quite complex and requires many of the accounting departments’ resources.
Irma is well aware of efforts between the FASB and the IASB to bring about convergence
between U.S. GAAP and IFRS. She expects that consistent with the SEC’s “Roadmap,” (SEC, 2008)
within the next five years, U.S. public companies likely will have to apply IFRS, rather than U.S.
GAAP. Irma welcomes this development and believes that in the long-run, use of IFRS by the parent
company as well as its subsidiaries will preserve and strengthen the company’s global financial
competitiveness. In addition, she believes that it will simplify the accounting and consolidation
process significantly and, in the long-run, reduce financial reporting costs. She is aware, however,
that in the short-run many challenges, such as conversion of the accounting and IT systems and
extensive staff training will increase costs. Knowing that the SEC’s Roadmap proposes a phased-in
adoption by public companies between 2014 and 2016, Irma plans to recommend adoption of IFRS
at the earliest permitted time.
As the person who ultimately is responsible for financial reporting, Irma is very
knowledgeable about current and proposed changes in U.S. GAAP as well as IFRS. She knows that
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Allied Academies International Conference
the IASB and FASB have issued new and revised standards applicable to business combinations that
affect the company’s consolidated financial statements. After in depths analysis of the new and
revised standards she determined that many of the past differences between U.S. GAAP and IFRS
where eliminated when the FASB issues FAS 141R “Business Combinations” and FAS 160
“Non-controlling interest in consolidated financial statements” (FASB, 2007) and the IASB revised
IFRS 3 “Business Combinations” and IAS 27 “Consolidated and Separate Financial Statements”
(IASB, 2008). She also realizes that some significant differences still persist. Klugen Corporation
has properly adopted FAS 141R and FAS 160 for the 2009 fiscal period and its forthcoming annual
report will reflect those changes.
Irma regularly conducts in-house seminars to instruct her accounting staff regarding new
developments in financial reporting. Since in about five (5) months, Klugen Corporation will issue
its consolidated financial statements, which will, for the first time, incorporate FAS 160 and FAS
141R, Irma decides to schedule a seminar on “Business Combinations – Consolidated Financial
Statements” for October 15, 2009. The seminar will be highly beneficial for staff members who are
currently involved or planning to become involved in critical aspects of financial reporting and also
for those who want to develop their knowledge of IFRS.
The CPE Seminar
Irma discusses the most important changes in accounting and financial reporting for
consolidated entities consistent with FAS 141R and FAS 160. She prepares a handout consisting of
a comparative table that contrast the new rules (effective for the 2009 financial statements) with the
prior rules for the seminar participants.
Table I
Recent Changes to U.S. GAAP – effective 2009 – FAS 141R and FAS 160
Issue
Effective 2009 Financial Statements
Pre-2009 Financial Statements
Subsidiaries’ assets and liabilities
Are fully revalued to fair market
value at acquisition date.
Revalued based on the percentage
ownership of the parent company.
Negative goodwill
Recognized as gain during the year
of acquisition.
Recognized as a proportionate
reduction of long-term assets
Balance sheet classification of
non-controlling interest (NCI)
NCI is classified as equity.
NCI was recognized as liability,
equity, or between liabilities and
equity.
Income statement presentation of
NCI’s share of income
Presented as a separate deduction
from consolidated income to derive
income to controlling stockholders.
NCI was presented as part of
“Other income, expenses, gains &
losses”
NCI valuation
Is carried at fair market value of
subsidiaries’ net assets, multiplied by
the NCI percentage.
Carried at book value of
subsidiaries’ net assets, multiplied
by NCI percentage.
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Issue
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Effective 2009 Financial Statements
Pre-2009 Financial Statements
Cost of business combinations
Direct costs are expensed
immediately.
Direct costs were capitalized as part
of acquisition cost.
In process R&D
Is capitalized at time of acquisition
Could be expensed at time of
acquisition
Acquisition in Stages
Previously acquired equity interest is
remeasured when acquiring company
achieves control; gain or loss is
recognized in income statements.
Measurement was based on values
at time of individual equity
acquisition.
Next, Irma highlights continuing significant differences between U.S. GAAP and IFRS. This
information is particularly important for staff involved in the consolidation process and also for staff
who wish to prepare for the future adoption of IFRS. The following table represents a handout based
on Irma’s PowerPoint presentation:
Table II
Summary of Differences Between U.S. GAAP and IFRS
Issue
U.S. GAAP
IFRS
Definition of control
Defined as “controlling financial
interest” usually interpreted as
majority voting interest.
focuses on the “power to govern
financial and operating policies”
(IFRS 3, 19)
Shares considered for determining
control
Only existing voting rights
May include exercisable shares
Calculation of non-controlling
interest
Non-controlling interest is
measured at fair value of total net
assets.
Choice between (1) fair value and
(2) proportionate share of fair value
of identifiable net assets.
Contingent assets and liabilities initial measurement
Contractual contingent assets or
liabilities at fair market value
Non-contractual contingent assets
and liabilities that meet ‘more
likely than not test’ are accounted
for consistent with SFAC 6
Recognition of contingent liability
assumed at acquisition date if:
Present obligation arises from past
event and is reliably measured
Contingent liability is recognized
even if it is does not meet the
‘probable’ test.
Calculation of goodwill at time of
acquisition
Goodwill (if it exists) also includes
share attributed to NCI.
If second option is chosen,
goodwill is only attributed to
controlling interest (i.e., parent).
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Issue
Goodwill impairment test
U.S. GAAP
Two-step approach:
(1) Compare book value of
reporting unit to fair market value.
of reporting unit; If book value is
larger, impairment is measured as
book value less implied fair value
of goodwill implied fair value.
IFRS
One-step approach
Compare book value to larger of
cash generating unit’s (a) fair value
less selling cost and (b) value in
use.
At the end of the seminar, many questions arise from the staff and some from the CEO, who
attended the second half of the seminar. Irma answers as many questions as possible and promises
to provide a short question/answer briefing sheet to all those who were present. During the seminar
she summarizes the following questions as shown in the assignments section of the case.
ASSIGNMENTS
U.S. GAAP Questions:
1.
How will adoption of the new accounting standards (FAS 141R and FAS 160) affect Klugen
Corporation’s financial statements in (a) the forthcoming reporting period and the (b)
long-run?
2.
What key financial ratios will be affected by FAS 141R and FAS 160? What will be the
likely effect?
3.
What additional estimates have to be made consistent with the new accounting standards?
4.
Could any of the recent changes affect the company’s acquisition strategies and potentially
its growth?
5.
What were FASB’s primary reasons for issuing FAS 141R and FAS 160? (Research
question)
6.
FASB and IASB issued an updated memorandum of understanding. Retrieve the
memorandum and identify several issues that the two standard setting boards are jointly
focusing on. (Research question).
IFRS Questions:
1.
From the consolidation perspective, what would be the likely overall effect of adopting IFRS
on the company’s financial statements?
2.
What potential effect would arise if Klugen were to select the option under IFRS 3 to value
non-controlling interest at the proportionate share of its subsidiaries’ net identifiable assets?
3.
Do you believe that an impairment of goodwill would be more likely under IFRS or under
U.S. GAAP? Why, or why not?
4.
What opportunities and challenges would arise for the accounting staff if the company
adopts IFRS?
5.
As indicated in the case, Irma previously highlighted some other significant differences
between IFRS and U.S. GAAP. Research the issue and find three (3) differences, other than
those related to business combinations.
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6.
7.
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Assume that the SEC provides a choice in the timing of adoption of IFRS. What ethical
issues could arise for the CFO in deciding when to adopt IFRS. (Research question)
Review comment letters received by the SEC regarding it’s Roadmap (available at
www.sec.gov). List two concerns mentioned by those offering comments. (Research
question)
REFERENCES
Financial Accounting Standards Board (2007, December). FASB Statement No. 160. Non-Controlling Interest in
Consolidated Financial Statement. Retrieved on January 5, 2008, from http://www.fasb.org.
Financial Accounting Standards Board (2007, December). FASB Statement No. 141R. Business Combinations.
Retrieved on January 5, 2008, from http://www.fasb.org.
International Accounting Standards Board. (2008). International Financial Reporting Standard No. 3. Business
Combinations. London, England: IASB.
International Accounting Standards Board. (2008). International Accounting Standard No. 27. Consolidated and
Separate Financial Statements. London, England: IASB.
Securities and Exchange Commission (2008). Roadmap for the Potential Use of Financial Statements Prepared in
Accordance With International Financial Reporting Standards by U.S. Issuers. Other Release No.: 3458960;
File No. S7-27-08, November 2008. Retrieved on November 29, 2008, from http://www.sec.gov.
Proceedings of the International Academy for Case Studies, Volume 16, Number 2
Las Vegas, 2009
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UNIT VII STUDY GUIDE
Managing International Operations, Part 2:
Accounting and Financial Issues
Course Learning Outcomes for Unit VII
Upon completion of this unit, students should be able to:
9. Compare the accounting concepts of Generally Accepted Accounting Principles (GAAP) and
International Financial Reporting Standards (IFRS).
Reading Assignment
In order to access the following resource(s), click the link(s) below:
Fuller, C., & Crump, R. (2016). There may be trouble ahead. Financial Director, 30–33. Retrieved from
https://libraryresources.columbiasouthern.edu/login?url=http://search.ebscohost.com/login.aspx?direc
t=true&db=bth&AN=113496250&site=ehost-live&scope=site
Herz, R. (2015). U.S. financial reporting: How are we doing? Compliance Week, 12(142), 39–41. Retrieved
from http://link.galegroup.com/apps/doc/A434530135/ITBC?u=oran95108&sid=ITBC&xid=c5c69fe6
Mishler, M. D. (2015). Don’t let foreign currency fluctuations impair performance measurements. Journal of
Accountancy, 220(6), 60–66.Retrieved from
https://libraryresources.columbiasouthern.edu/login?url=http://search.ebscohost.com/login.aspx?direc
t=true&db=bth&AN=111314570&site=ehost-live&scope=site
Click here to view the Unit VII Presentation. Click here to access a PDF of the presentation, which includes
slide images and audio transcript.
Unit Lesson
International Accounting Issues
In a corporation’s senior management, the finance and accounting functions fall under the same person. Both
the treasurer and the controller report to the chief financial officer (CFO). The treasurer is responsible for
finance, while the controller handles the accounting side.
So, what does the controller control? While they are responsible for accounting standards and procedures,
their job duties go much further. They provide data to evaluate potential acquisitions abroad, disposition of
assets, managing cash flow, hedging currency, internal auditing, tax planning, preparation of financial
statements, and assistance in implementing corporate strategy. A large combination of these duties may only
be found in large multinational enterprises (MNEs), but even small companies that import or export will have
to occasionally handle foreign currency transactions or conduct currency hedging strategies.
One of the big headaches that controllers have to deal with is the differences in the presentation of the
financial information. Under normal conditions, each branch or subsidiary is required to have a financial
statement completed on their operations so that local taxes are computed and paid. Each country has its own
type of accounting procedures that an MNE must follow. Financial statements written in the local language
show financial transactions stated in the local currency. Other considerations include the statement layout and
the Generally Accepted Accounting Principles (GAAP) provided by the local government’s comptroller’s office.
MBA 6601, International Business
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It is important to note that both the United States and global authorities have organizations
that
have issued
UNIT x STUDY
GUIDE
standardized accounting rules.
Title
U.S. Accounting: The Financial Accounting Standards Board (FASB) is the organization that
establishes the accounting standards for the private sector in the United States. Its rules are the
Generally Accepted Accounting Principles (U.S. GAAP).
Global Accounting: The International Accounting Standards Board (IASB) is the organization that
establishes accounting standards for the global community. Its rules are the International Ffinancial
Reporting Standards (IFRS).
U.S. GAAP is to FASB as IFRS is to IASB. In a few international countries, neither IFRS nor U.S. GAAP are
required; in a few other international countries, either IFRS or U.S. GAAP is required. However, as many as
120 countries currently require or permit IFRS use (Solomonzori, 2013).
Global Convergence to International Standards
Prior to the rise of global capital markets, many foreign countries accepted U.S. accounting standards as a
qualified substitute. Both the U.S. and other global nations mutually recognized accounting standards from
the other. Since the 1970s, efforts have been made to harmonize accounting standards that anyone in the
world could use. Several trends have come together to push this convergence:
Capital markets have spread throughout the world as evidenced by over 60 stock markets.
MNEs have the ability to sell equity and debt at lower transaction costs in foreign countries.
Foreign countries need standard accounting data for tax purposes.
There is pressure from investors, MNEs, and foreign governments for more uniform standards in
financial reporting that are easier to understand.
In the early 2000s, FASB and IASB began working together to eliminate differences in accounting standards.
While there is some similarity between the two accounting standards, it is still felt by the U.S. Securities
Exchange Commission that FASB needs to be stringent and transparent as it relates to U.S. corporations;
characteristics that IASB has yet to embrace for international MNEs.
Transactions in Foreign Currencies
Subsidiaries and branches that operate in foreign countries must convert all of their transactions in foreign
currencies to the currency of the home office at the end of the accounting year. For example, an importer
purchases the service of a freight forwarder to assist with freight going through customs in the foreign country.
The importer will sell its domestic currency to purchase the foreign currency of the freight forwarder.
Depending on the fluctuations of the currency, the importer might gain or lose on the transaction. Those gains
or losses translate into the net income of the importer (Financial Accounting Standards Board, 1981).
The process of restating those gains or losses into the currency of the importer is translation. In the United
States, translation is a two-step process. First, for each country in which the importer was conducting
business, the importer would need to convert the foreign financial statement to a GAAP financial statement in
U.S. dollars. Second, now that all of the financial statements are in U.S. dollars, the importer would combine
them into one financial statement. This combination process is consolidation of all individual operations
(Financial Accounting Standards Board, 1981).
Even in this process, there are similarities between FASB and IASB. For U.S. companies, this process is
outlined in Financial Accounting Statement Number 52 (Financial Accounting Standards Board, 1981). This
same process is outlined for other global companies in the International Accounting Standard Number 21
(Deloitte, 2015).
International Financial Issues
Earlier, we discussed the functions that fall under the accounting side; the treasury side is no less important.
Treasury functions include capital budgeting, cash management, and foreign exchange risk management.
MBA 6601, International Business
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Capital Budgeting in a Global Context
UNIT x STUDY GUIDE
Title
Every company, big or small, has projects that it would want to complete if it had the resources to do so.
Some projects increase revenues, some decrease costs, and some, like capital maintenance expenditures,
allow the company to keep operating. Companies may not have enough money to pay for all of the projects,
thus they must prioritize them and only finance the top ones that they can afford. Each project gets its ranking
in one of three ways.
Payback method: One method is to determine how long the project will take to repay the initial investment.
For example, a project with an investment of $100,000 and an estimated $20,000 return each year would
have a payback of five years. When compared with other similar projects, the one with the shortest payback is
preferred. The disadvantages of this method are that it ignores the benefits after year five and that it ignores
the time value of money.
Net present value method (NPR): This method estimates the free cash flow for each accounting period of
the project’s economic life and discounts that cash flow by a specified hurdle rate. The discounted cash flows
must exceed the initial cost of investment, or the project is not economically viable. The hurdle rate or
discount rate is the expected rate of return for similar projects with the same amount of risk. An example
would be a small machine costing $75,000 to get it up and running with an expected free cash flow of $20,000
at the end of each year for five years. If the hurdle rate is 10%, then NPV is $75,815 or $815 to the positive.
The disadvantages to this method lie in the forecasts. Forecasting sales and costs is difficult—especially for
factories and plants and especially forecasting 10-20 years into the future. There is more to forecast and more
to go wrong.
Internal rate of return method: The IRR method is similar to the NPR method. The difference is the variable
being calculated is the discount rate. The initial investment is known, and the free cash flow per accounting
period is known. What is not known is the discount rate that will make the free cash flow equal to the initial
investment. For example, using the previous example, if a small machine costing $75,000 will generate free
cash flows of $20,000 per year for five years, what is the discount rate that makes the free cash flow equal to
the initial investment? The answer is 10.42%. Using this method to compare capital projects will allow the
user to compare discount rates on capital. Higher discount rates mean more return on your investment.
Again, the main problem with the method is forecasting revenues and expenses far into the future.
As the methods pertain to global expenditures, it is difficult to know whether foreign currencies will strengthen
or weaken. Capital projects usually span long periods, and while domestic capital projects have economic
risk, foreign projects have economic and political risk.
Cash Management
One responsibility of the treasurer is to determine whether capital project financing should come from internal
sources of funds or external sources of funds such as debt or equity. Large companies can move resources
and assets between branches and subsidiaries. Internal funds grow when deferring payment on expenses.
Taxes decline when payments to the parent company are loans and not dividends. In other words, funds
become available by knowing how to legally declare and transfer assets.
Foreign Exchange Risk Management
If foreign currencies did not constantly strengthen or weaken, companies would not need risk management.
However, the movement of currencies in relation to a company’s domestic currency constantly occurs. A
change in the exchange rate causes a currency risk. That is, a company may lose money due to foreign
exchange losses. This risk exposure is broken down into three categories:
Translation exposure: It is normal practice to create financial statements in the subsidiary’s foreign location.
That means the financial statements post its value in foreign currency. At the end of the accounting period,
the parent company has to consolidate all of the financial statements, which means that the foreign currencies
convert into domestic currency. Generally, there is a gain or a loss from currency translation. That gain or loss
is the translation exposure.
MBA 6601, International Business
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An example would be if a Japanese subsidiary sold some products to anotherUNIT
Japanese
company
and had a
x STUDY
GUIDE
profit of 1,133,530 yen. At the time of the transaction, the exchange rate was 113.5300
yen to the dollar. The
Title
parent company, in the United States, would need to consolidate all financial statements at the end of the
accounting period. When the time came to consolidate, the yen’s exchange rate was 118.0260 to the dollar.
The parent company would show $9,584.06 profit on its operating statement and a currency loss of $414.94
under its expenses. In actual practice, the company still has the original yen in the bank, so the loss is not an
actual loss; it does not become an actual loss until the yen convert to dollars.
Transaction exposure: Actual transactions that occur between businesses in the international market can
show losses when payment is made in a devaluing currency. Transaction exposure is the risk incurred when
exchange rates change for the worse after the financial obligation has occurred.
For example, a U.S. company sells product to a Japanese company with payment to be in U.S. dollars upon
delivery. The sales contract calls for a $10,000 price, so the Japanese company can immediately buy $10,000
in U.S. currency at an exchange rate of 113.530 yen per dollar or it can wait until closer to delivery. As it turns
out, upon delivery, the exchange rate is 118.0260 yen per dollar. If the Japanese company waited to buy the
U.S. currency, it would lose 44,960 yen or about $381. Transaction exposure measures cash (realized) gains
and losses from a change in exchange rate.
Economic exposure: International companies have cash flows from their different subsidiaries and
branches. These cash flows are subject over time to exchange-rate fluctuations. For example, a company
with factories in countries with weak currencies will make more money when it sells its product in countries
with strong currencies. However, if the countries with weak currencies become strong, and its currency
becomes strong, the product costs will increase. Increasing product cost will change the value of the cash
flow and even the value of the company itself.
An example of this comes from Volkswagen AG. To take advantage of the strong euro versus the U.S. dollar,
in 2011, Volkswagen opened an automobile factory in Chattanooga, TN. Volkswagen found that exporting
cars from Germany to the U.S. was costly. Manufacturing costs were in euros while revenues were in dollars.
Manufacturing cars in the U.S. cut Volkswagen’s economic exposure and boosted its earnings (Ramsey,
2011).
Exposure Management
International companies with exposure to foreign currency exchange have developed sophisticated methods
to protect themselves. The steps are outlined below:
1. Forecast the degree of transaction exposure by currency.
2. Forecast the trend of exchange rates. Short-term trends (weekly and monthly) are difficult to forecast,
but long-term forecasts (yearly) are easy.
3. Report all currency-exchange purchases when they occur. This is an advantage of a centralized
organization structure. Have all subsidiaries report their currency-exchange transactions to a
centralized point.
4. Have the strategic planning department share its plans to expand subsidiaries in the international
market with the treasury department.
5. Formulate hedging strategies.
Transaction hedging strategies: Have sales contracts denominate the price and payment in the subsidiary’s
home currency. A secondary plan would be to denominate any purchases in a weak currency and
denominate any sales in a strong currency. If just the opposite occurs, the corporate office can take out
forward contracts or spot agreements to balance the inflows and outflows.
A lead strategy is another transaction hedging strategy that includes providing incentives to pay early when
collecting receivables. A lag strategy is just the opposite. When collecting receivables in a foreign currency
that is expected to strengthen, provide incentives to delay payment. The lead and lag concepts work for
paying off payables as well.
MBA 6601, International Business
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Operational hedging strategies: As described previously in the Volkswagen example,
the strategy
is to build
UNIT x STUDY
GUIDE
products in countries with weak currencies and sell the product in countries with
strong currencies. In that
Title
manner, costs are lower but revenues are higher.
Another operational hedging strategy is the use of forward contracts and options, as discussed in the Unit IV
lesson.
Exposure management is a form of risk management that international companies use to protect themselves
from currency exchange losses.
References
Bank for International Settlements. (2013). Triennial central bank survey. Retrieved from
http://www.bis.org/publ/rpfx13fx.pdf
Deloitte. (2015). IAS 21–The effects of changes in foreign exchange rates. Retrieved from
http://www.iasplus.com/en/standards/ias/ias21
Financial Accounting Standards Board. (1981). Statement of financial accounting standards No. 52. Retrieved
from
http://www.fasb.org/jsp/FASB/Document_C/DocumentPage?cid=1218220126851&acceptedDisclaime
r=trueRamsey, M. (2011, May 23). VW chops labor costs in U.S. The Wall Street Journal. Retrieved
from http://www.wsj.com/articles/SB10001424052748704083904576335501132396440
Solomonzori. (2013). Who pays and who free rides? International free rider reporting standards or
International Financial Reporting Standards. Retrieved from http://governancexborders.com/tag/ifrs/
MBA 6601, International Business
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