Question: The Volkswagen Group adopted International
The Volkswagen Group adopted International Accounting Standards (IAS, now International Financial Reporting, or IFRS) for its 2001 fiscal year. The following is taken from Volkswagen’s 2001 annual report. It discusses major differences between the German Commercial Code (HGB) and IAS as they apply to Volkswagen.
General
In 2001 VOLKSWAGEN AG has for the first time published its consolidated financial statements in accordance with International Accounting Standards (IAS) and the interpretations of the Standing Interpretations Committee (SIC). All mandatory International Accounting Standards applicable to the financial year 2001 were complied with. The previous year’s figures are also based on those standards. IAS 12 (revised 2000) and IAS 39, in particular, were already complied with in the year 2000 consolidated financial statements. The financial statements thus give a true and fair view of the net assets, financial position and earning performance of the Volkswagen Group.
The consolidated financial statements were drawn up in Euros. Unless otherwise stated, all amounts are quoted in millions of Euros (million€ ).
The income statement was produced in accordance with the internationally accepted cost of sales method.
Preparation of the consolidated financial statements in accordance with IAS requires assumptions regarding a number of line items that affect the amounts entered in the consolidated balance sheet and income statement as well as the disclosure of contingent assets and liabilities.
The conditions laid down in Section 292a of the German Commercial Code (HGB) for exemption from the obligation to draw up consolidated financial statements in accordance with German commercial law are met. Assessment of the said conditions is based on German Accounting Standard No. 1 (DSR 1) published by the German Accounting Standards Committee. In order to ensure equivalence with consolidated financial statements produced in accordance with German commercial law, all disclosures and explanatory notes required by German commercial law beyond the scope of those required by IAS are published.
Transition to International Accounting Standards
The accounting valuation and consolidation methods previously applied in the financial statements of VOLKSWAGEN AG as produced in accordance with the German Commercial Code have been amended in certain cases by the application of IAS.
Amended accounting, valuation and consolidation methods in accordance with the German Commercial Code
• Tangible assets leased under finance leases are capitalized, and the corresponding liability is recognized under liabilities in the balance sheet, provided the risks and rewards of ownership are substantially attributable to the companies of the Volkswagen Group in accordance with IAS 17.
• As a finance lease lessor, leased assets are not capitalized, but the discounted leasing installments are shown as receivables.
• Movable tangible assets are depreciated using the straight-line method instead of the declining balance method; no half-year or multi-shift depreciation is used. Furthermore, useful lives are now based on commercial substance and no longer on tax law. Special depreciation for tax reasons is not permitted with IAS.
• Goodwill from capital consolidation resulting from acquisition of companies since 1995 is capitalized in accordance with IAS 22 and amortized over its respective useful life.
• In accordance with IAS 2, inventories must be valued at full cost. They were formerly capitalized only at direct cost within the Volkswagen Group.
• Provisions are only created where obligations to third parties exist.
• Differences from the translation of financial statements produced in foreign currencies are not recorded in the income statement.
• Medium- and long-term liabilities are entered in the balance sheet including capital take-up costs, applying the effective interest method.
Amended accounting, valuation and consolidation methods that differ from the German Commercial Code
• In accordance with IAS 38, development costs are capitalized as intangible assets provided it is likely that the manufacture of the developed products will be of future economic benefit to the Volkswagen Group.
• Pension provisions are determined according to the Projected Unit Credit Method as set out in IAS 19, taking account of future salary and pension increases.
• Provisions for deferred maintenance may not be created.
• Medium- and long-term provisions are shown at their present value.
• Securities are recorded at their fair value, even if this exceeds cost, with the corresponding effect in the income statement.
• Deferred taxes are determined according to the balance sheet liability method. For losses carried forward deferred tax assets are recognized, provided it is likely that they will be usable.
• Derivative financial instruments are recognized at their fair value, even if it exceeds cost. Gains and losses arising from the valuation of financial instruments serving to hedge future cash flows are recognized by way of a special reserve in equity. The profit or loss from such contracts is not recorded in the income statement until the corresponding due date. In contrast, gains and losses arising from the valuation of derivative financial instruments used to hedge balance sheet items are recorded in the income statement immediately.
• Treasury shares are offset against capital and reserves.
• Receivables and payables denominated in foreign currencies are valued at the middle rate on the balance sheet date, and not according to the imparity principle.
• Minority interests of shareholders from outside the Group are shown separately from capital and reserves.
The adjustment of the accounting and valuation policies to International Accounting Standards with effect from January 1, 2000 was undertaken in accordance with SIC 8, with no entry in the income statement, as an allocation to or withdrawal from revenue reserves, as if the accounts had always been produced in accordance with IAS.
The reconciliation of the capital and reserves to IAS in shown in the following table:
Required:
1. Based on the information provided in the chapter, describe the basic features of German accounting at the time Volkswagen adopted IAS. What developmental factors cause these features?
2. What differences between the accounting requirements in the HGB and IAS are highlighted in
Volkswagen’s disclosure? Are the German requirements consistent with your characterizations in requirement 1?
3. What is the relevance of Volkswagen’s adoption of IAS to the classifications studied in this chapter?
Transcribed Image Text:
million € Capital and reserves according to the German Commercial Code as at January 1, 2000 9,811 Capitalization of development costs 3,982 Amended useful lives and depreciation methods in respect of tangible and intangible assets 3,483 Capitalization of overheads in inventories Different treatments of leasing contracts as lessor Differing valuation of financial instruments Effect of deferred taxes Elimination of special items 653 1,962 897 -1,345 262 Amended valuation of pension and similar obligations -633 Amended accounting treatment of provisions Classification of minority interests not as part of equity Other changes 2,022 -197 21 Capital and reserves according to IAS as at January 1, 2000 20,918 Source: Volkswagen AG Annual Report 2001, pp. 84-86.
> As an analyst for a securities firm, you are aware that accounting practices differ around the world. Yet you wonder whether these differences really have any material effect on companies’ financial statements. You also know that the SEC in the United St
> As an analyst for a securities firm, you are aware that accounting practices differ around the world. Yet you wonder whether these differences really have any material effect on companies’ financial statements. You also know that the SEC in the United St
> The ethical climate in the Czech Republic has improved since the early days, but we still have a long way to go,” said Josef Machinka, an economic adviser to the Ministry of Finance, while attending an investment seminar sponsored by the Prague Stock Exc
> Think ahead 10 years from now. Prepare a classification of accounting systems that you think will exist then. What factors motivate your classification?
> Consider the development factors in the following five countries: France, India, Japan, the United States, and the United Kingdom: Required: Based on the information provided in this chapter, prepare a profile of accounting in each of the countries.
> Many countries permit or require their domestic listed companies to use International Financial Reporting Standards (IFRS) in their consolidated financial statements for investor reporting. Required: Consider the following 10 countries: China, the Czec
> Refer to Exercise 6. Required: a. Go to Hofstede’s Web site (www.geerthofstede. com/hofstede_dimensions. php) and find the uncertainty avoidance scores for the same 10 countries. b. Characterize the uncertainty avoidance scores as high, medium, or low. c
> Gray proposed a framework linking culture and accounting. He predicts four accounting values (professionalism, uniformity, conservatism, and secrecy) based on Hofstede’s four cultural dimensions (individualism, uncertainty avoidance, po
> Describe in two short paragraphs how foreign direct investment activities differ from international trade and the implications of this difference for accounting.
> Refer to Exercise 4. In May 2004, the EU expanded to incorporate 10 Central and East European nations: Cyprus, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Slovakia, and Slovenia. Bulgaria and Romania joined in January 2007. R
> The European Union (EU)—formerly known as the European Community and, at its start, as the European Common Market—was founded in 1957 and had 15 members at the end of 2003: Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxe
> Go to the World Federation of Exchanges Web site (www.world-exchanges.org) and obtain the latest annual report. The market statistics section on equity markets has information on the numbers of domestic and foreign companies listed on member stock exchan
> Consider the following countries: (1) Belgium, (2) China, (3) the Czech Republic, (4) Gambia, (5) India, (6) Mexico, (7) Senegal, and (8) Taiwan. Required: Where would they be classified based on legal system? Where would they be classified bas
> The chapter identifies seven economic, historical, and/or institutional variables that influence accounting development: sources of finance, legal system, taxation, political and economic ties, inflation, level of economic development, and education leve
> How do cultural values influence accounting? Are there parallel influences between the factors identified in Question 1 and the cultural factors identified here?
> The chapter identifies seven economic, sociohistorical, and institutional factors believed to influence accounting development. Explain how each one affects accounting practice.
> What are the prospects of a convergence or harmonization of national systems of accounting and financial reporting? What factors might be influential in promoting or inhibiting change?
> The authors contend that a classification based on fair presentation vs. legal compliance describes accounting in the world today better than one based on common law and code law legal systems. Do you agree? Why or why not?
> Why does the chapter contend that many accounting distinctions at the national level are becoming blurred? Do you agree? Why or why not?
> What contemporary factors are contributing to the internationalization of the subject of accounting?
> What are the major accounting classifications in the world? What are the distinguishing features of each model?
> What is the purpose of classifying systems of accounting? What is the difference between a judgmental and an empirical classification of accounting?
> Countries that have relatively conservative measurement practices also tend to be secretive in disclosure, while countries that have less conservative measurement practices tend to be transparent in disclosure. Why is this so?
> The partial income statement of the Lund Manufacturing Company, a Swedish-based concern producing pharmaceutical products, is presented below: During the year, short-term interest rates in Sweden averaged 7 percent, while net operating assets averaged SE
> Lumet Corporation, a manufacturer of cellular telephones, wishes to invoice a sales affiliate located in Fontainebleau for an order of €10,000 units. Wanting to minimize its exchange risk, it invoices all intracompany transactions in euros. Relevant fact
> Drawing on the background facts in Exercises 6 and 7, assume that the manufacturing cost per unit, based on operations at full capacity of 10,000 units, is $60, and that the uncontrolled selling price of the unit in Country Ais $120. Costs to transport t
> Using the facts stated in Exercise 6, what would be the tax effects of the transfer pricing action if corporate income tax rates were 30 percent in Country Aand 40 percent in Country B?
> The four approaches to accounting development discussed in the chapter were originally outlined in 1967. Do you think these patterns will persist in the future? Why or why not?
> Global Enterprises has a manufacturing affiliate in Country A that incurs costs of $600,000 for goods that it sells to its sales affiliate in Country B. The sales affiliate resells these goods to final consumers for $1,700,000. Both affiliates incur oper
> Alubar, a U.S. multinational, receives royalties from Country A, foreign-branch earnings from Country B, and dividends equal to 50 percent of net income from subsidiaries in Countries C and D. There is a 10 percent withholding tax on the royalty from Cou
> Sweden has a classical system of taxation. Calculate the total taxes that would be paid by a company headquartered in Stockholm that earns 1,500,000 Swedish krona (SEK) and distributes 50 percent of its earnings as a dividend to its shareholders. Assume
> Ajewelry manufacturer domiciled in Amsterdam purchases gold from a precious metals dealer in Belgium for € :2,400. The manufacturer fabricates the raw material into an item of jewelry and wholesales it to a Dutch retailer for 4,000. Required: Compute t
> Kowloon Trading Company, a wholly owned subsidiary incorporated in Hong Kong, imports macadamia nuts from its parent company in Honolulu for export to various duty-free shops in the Far East. During the current fiscal year, the company imported $2,000,00
> A Chinese manufacturing subsidiary produces items sold in Australia. The items cost the equivalent of $7.00 to produce and are sold to customers for $9.50. A Cayman Islands subsidiary buys the items from the Chinese subsidiary for $7.00 and sells them to
> What philosophies and types of taxes exist worldwide?
> What is tax neutrality? Are taxes neutral with regard to business decisions? Is this good or bad?
> What is an advance pricing agreement (APA)? What are the advantages and disadvantages of entering into an APA?
> Explain the arm’s-length price. Is the U.S. Internal Revenue Service alone in mandating such pricing of intracompany transfers? Would the concept of an arm’s-length price resolve the measurement issue in pricing intracompany transfers?
> Are national differences in accounting practice better explained by culture or by economic and legal factors? Why?
> Identify the major bases for pricing intercompany transfers. Comment briefly on their relative merits. Which measurement method is best from the viewpoint of the multinational executive?
> The pricing of intracompany transfers is complicated by many economic, environmental, and organizational considerations. Identify six major considerations described in the chapter and briefly explain how they affect transfer pricing policy.
> Multinational transfer pricing causes serious concern for various corporate stakeholders. Identify potential concerns from the viewpoint of a. minority owners of a foreign affiliate, b. foreign taxing authorities, c. home-country taxing authorities, d. f
> Compare and contrast the role of transfer pricing in national versus international operations.
> Carried to its logical extreme, tax planning implies a conscientious policy of tax minimization. This mode of thinking raises an ethical question for international tax executives. Deliberate tax evasion is commonplace in many parts of the world. In Italy
> Consider the statement “National differences in statutory tax rates are the most obvious and yet least significant determinants of a company’s effective tax burden.” Do you agree? Explain.
> Muscle Max–Asia, a wholly owned affiliate of a French parent company, functions as a regional headquarters for operating activities in the Pacific Rim. It enjoys great autonomy from its French parent in conducting its primary line of business, the manufa
> Do accountants share the blame for Third World poverty? A report by the U.K.-based Christian Aid says so.31 It attacks accounting firms for helping to perpetuate poverty in the developing world through their aggressive marketing of tax-avoidance schemes:
> In June, Mu Corporation, a U.S. manufacturer of specialty confectionery products, submits a bid to supply a prestigious retail merchandiser with boxed chocolates for the traditional Valentine’s Day. At the time the spot rate for francs was $0.89 = CHF1.
> On June 1, ACL International, a U.S. confectionery products manufacturer, purchases on account bulk chocolate from a Swiss supplier for 166,667 Swiss francs (CHF) when the spot rate is $0.90 = CHF 1. The Swiss franc payable is due on September 1. To mini
> On April 1, Anthes Corporation, a calendar-year U.S. electronics manufacturer, invests 30 million yen in a three-month yen-denominated CD with a fixed coupon of 8 percent. To hedge against the depreciation of the yen prior to maturity, Anthes designates
> Trojan Corporation USA borrowed 1,000,000 New Zealand dollars (NZ$) at the beginning of the calendar year when the exchange rate was $0.60 = NZ$1. Before repaying this one-year loan, Trojan learns that the NZ dollar has appreciated to $0.70 = NZ$1. It di
> Refer to Exercise 5. Assume that the shekel is forecast to devalue such that the new exchange relationship after the devaluation is (£ /$/ILS = 1/2/8). Required: Calculate the consolidated gain or loss that would result from this exchange rate movement
> Following is the consolidated balance sheet (000s omitted) of Worberg Bank, a U.S. financial institution with wholly owned corporate affiliates in London and Jerusalem. Cash and due from banks includes ILS100,000 and a £ 40,000 bank overdraf
> Exhibit 11-5 contains a hypothetical balance sheet of a foreign subsidiary of a U.S. MNC. Exhibit 11-6 shows how the foreign exchange loss is determined assuming the parent company employs the temporal method of currency translation. Required: Demonstr
> As one of your first assignments as a new hire on the corporate treasurer’s staff of Global Enterprises, Ltd., you are asked to prepare an exchange rate forecast for the Zonolian ecru (ZOE). Specifically, you are expected to forecast what the spot rate f
> Reexamine the Risk-Mapping Cube in Exhibit 11-3. Provide examples of how the various market risks—foreign exchange, interest rate, commodity price, and equity price—might affect the value driver: current assets. E
> Refer to Exhibit 11-1 which discloses the risk management paradigm for Infosys Technologies. Explain in your own words what each step of the cycle entails, including the feedback loop from the last to the first step. EXHIBIT 11-1 Risk Management Cyc
> Your company has just decided to purchase 50 percent of its inventory from China and purchases will be invoiced in Chinese yuan. What four processes do you need to consider in designing a foreign exchange risk protection system?
> What is market risk? Illustrate this risk with a foreign exchange example.
> Consider the following statements by David Cairns, former secretary-general of the International Accounting Standards Committee.26 When we look at the way that countries or companies account for particular transactions and events, it is increasingly dif
> The notion of an “opportunity cost” was perhaps first introduced to you in your first course in microeconomics. Explain how this notion can be applied in evaluating the effectiveness of FX risk hedging programs.
> All hedging relationships must be “highly effective” to qualify for special accounting treatment. What is meant by the term highly effective and why is its measurement important for financial managers?
> Identify three major types of hedges recognized by IAS 39 and FAS 133 and describe their accounting treatments.
> What is a financial futures contract? How does it differ from a forward exchange contract?
> Explain how a company might use a currency swap to hedge its foreign exchange risk on a foreign currency borrowing.
> Explain, in your own words, the difference between a multicurrency translation exposure report and a multicurrency transactions exposure report.
> List 10 ways to reduce a firm’s foreign exchange exposure for a foreign affiliate located in a devaluation-prone country. In each instance, identify the cost–benefit trade-offs that need to be measured.
> Compare and contrast the terms translation, transaction, and economic exposure. Does FAS No. 52 resolve the issue of accounting versus economic exposure?
> The scene is a conference room on the 10th floor of an office building on Wall Street, occupied by Anthes Enterprises, a small, rapidly growing manufacturer of electronic trading systems for equities, commodities, and currencies. The agenda for the 8:00
> You have just landed a summer internship (congratulations) with the management information services group of Pirelli, the Italian global tire manufacturer. Management is acutely aware of the importance of risk management and the market’
> If you had a nontrivial sum of money to invest and decided to invest it in a country index fund, in which country or countries identified in Exhibit 1-7 would you invest your money? What accounting issues would play a role in your decision? Ten Exch
> Parent Company establishes three wholly owned affiliates in countries X, Y, and Z. Its total investment in each of the respective affiliates at the beginning of the year, together with year-end returns in parent currency (PC), appear here: Parent Compa
> Exhibit 10-9 contains a performance report that breaks out various operating variances of a foreign affiliate, assuming the parent currency is the functional currency under FAS No. 52. Using the information in Exhibit 10-9, repeat the variance analysis,
> To encourage its foreign managers to incorporate expected exchange rate changes into their operating decisions, Vancouver Enterprises requires that all foreign currency budgets be set in Canadian dollars using exchange rates projected for the end of the
> In evaluating the performance of a foreign manager, a parent company should never penalize a manager for things the manager cannot control. Given the information provided in Exercise 6, prepare a performance report identifying the relevant elements for e
> Global Enterprises, Inc. uses a number of performance criteria to evaluate its overseas operations, including return on investment. Compagnie de Calais, its Belgian subsidiary, submits the performance report shown in Exhibit 10-13 for the current fisca
> Assume the following: • Inflation and Zambian kwacha (ZMK) devaluation is 30 percent per month, or 1.2 percent per workday. • Foreign exchange rates at selected intervals for the current month are: 1/1 ……………………………………………….100.0 1/10 ……………………………………………..10
> Assume that management is considering whether to make the foreign direct investment described in Exercise 3. Investment will require $6,000,000 in equity capital. Cash flows to the parent are expected to increase by 5 percent over the previous year for e
> Review the operating data incorporated in Exhibit 10-3 for the Russian subsidiary of the U.S. parent company. Required: Using Exhibit 10-3 as a guide, prepare a cash flow report from a parent currency perspective identifying the components of the expe
> Slovenia Corporation manufactures a product that is marketed in North America, Europe, and Asia. Its total manufacturing cost to produce 100 units of product X is 2,250, detailed as follows: Raw materials ………………………………………………………………………€500 Direct labor ………
> Explain the difference between a standard costing system and the Kaizen costing system popularized in Japan.
> Referring to Exhibit 1-6, which geographic region of the world, the Americas, Asia-Pacific, or Europe-Africa-Middle East is experiencing the most activity in foreign listings? Do you expect this pattern to persist in the future? Please explain. EXHI
> How does value reporting differ from the financial reporting model you learned in your basic accounting course? Do you think this is a good reporting innovation?
> List six arguments that support a parent company’s use of its domestic control systems for its foreign operations, and six arguments against this practice.
> This chapter identifies four dimensions of the strategic planning process. How does Daihatsu’s management accounting system, described in this chapter, conform with that process?
> Foreign exchange rates are used to establish budgets and track actual performance. Of the various exchange rate combinations mentioned in this chapter, which do you favor? Why? Is your view the same when you add local inflation to the budgeting process?
> State the unique difficulties involved in designing and implementing performance evaluation systems in multinational companies.
> Refer to Exhibit 10-7 which presents the methodology for analyzing exchange rate variances. Describe in your own words what this methodology accomplishes. EXHIBIT 10-7 Three-Way Analysis of Exchange Rate Variance Computation Exchange Rate Operating
> As an employee on the financial staff of Multinational Enterprises, you are assigned to a three-person team that is assigned to examine the financial feasibility of establishing a wholly owned manufacturing subsidiary in the Czech Republic. You are to co
> Companies must decide whose rate of return (i.e., local vs. parent currency returns) to use when evaluating foreign direct investment opportunities. Discuss the internal reporting dimensions of this decision in a paragraph or two.
> General Electric Company’s worldwide performance evaluation system is based on a policy of decentralization. The policy reflects its conviction that managers will become more responsible and their business will be better managed if they are given the aut
> You are the CFO of Marisa Corporation, a major electronics manufacturer headquartered in Shelton, Connecticut. To date, your company’s operations have been confined to the United States and you are interested in diversifying your operat
> Stock exchange Web sites vary considerably in the information they provide and their ease of use. Required: Select any two of the stock exchanges presented in Appendix 1-1. Explore the Web sites of each of these stock exchanges. Prepare a table that c
> Investors, individual, corporate and institutional, are increasingly investing beyond national borders. The reason is not hard to find. Returns abroad, even after allowing for foreign currency exchange risk, have often exceeded those offered by domestic
> Examine Exhibit 9-9. On the basis of the information provided there, which opinion gives you the most comfort as an investor in nondomestic securities?
> Assume you are a member of an international policy setting committee and are responsible for harmonizing audit report requirements internationally. Examine Exhibit 9-8. Based on the varying requirments you observe, what minimum set of requirements would
> Refer to Exhibit 9-3. This exhibit presents P/E ratios for public companies in various countries. What factors might explain the differences in P/E ratios that you observe? EXHIBIT 9-3 International Price/Earnings Ratios Country Index P/E Canada SPT
> The following sales revenue pattern for a British trading concern was cited earlier in the chapter: Required: a. Perform a convenience translation into U.S. dollars for each year given the following year-end exchange rates: 2009 £1 = $2.10
> Read Appendix 9-1. Referring to Exhibit 9-14 and related notes, assume instead that Toyoza’s inventories were costed using the FIFO method and that Lincoln Enterprises employed the LIFO method. Provide the adjusting journal entries to r
> Infosys Technologies, introduced in Chapter 1, regularly provides investors with a performance measure called economic value-added (EVA). Originally pioneered by GE, EVA measures the profitability of a company after deducting not just the cost of borrowi
