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INTERNATIONAL ACCOUNTING Marcin Jędrzejczyk ([email protected]) http://www.jedrzejczyk.com.pl/ina - working :) http://janek.uek.krakow.pl/~zkrach http://gat.uek.krakow.pl 1 Environmental Influences Examples Political/legal Economic sources of capital Cultural statutory audits-accounting reports/tax issues budgetary control Infrastructure communication infrastructure education of population External Accounting Reports Standard Setters, Preparers and Users Underlying Institutional Structures Required reports Internal Accounting Reports Decision Rights Assignment Planning and Control Performance Measurement and Evaluation Environmental Matrix External Internal Accounting Accounting Political Regulatory Structure Economic Capital Acquisition Cultural Infrastructure Market Entry Choice/tax impacts Risk Management Secrecydisclosure Budgeting Availability of Auditors Cost Drivers External Accounting-Environment Standard Setting Process U.S. -- FASB - Privatewww.accounting.rutgers.edu/raw/fasb/ Japan -- Ministry of Finance -www.jicpa.or.jp/ International Accounting Standards Board /www.iasb.org.uk/ Use of comment letters Users of Statements legal/cultural driven External Accounting External Reporting Differences U.S., U.K., Poland -- Tax Financial Japan, Germany -- Tax = Financial Differences in Debt and Equity Differences in goodwill treatment Differences in asset revaluation Internal Accounting Decision Rights Assignment Planning and Control Complications of Global Operations Co-location of Knowledge and Rights Performance Evaluation Multiple Currency Issues Cross-border Decision Rights Issues International Accounting Key to Understanding International Accounting Political, Economic, Cultural and Infrastructure Influences on: External Reporting Taxes/Capital Markets/Gov. Regulation/Standard Setting/Reporting Requirements Internal Reporting Planning and Decision Making Control Differences Performance Evaluation Differences CONSOLIDATION OF THE FINANCIAL STATEMENTS Marcin Jędrzejczyk ([email protected]) http://www.jedrzejczyk.com.pl/ina http://janek.uek.krakow.pl/~zkrach http://gat.uek.krakow.pl 9 HOLDING COMPANY Subsidiary (subsidiaries) An enterprise that is controlled by another enterprise CONTROL: over more than a half of voting rights among investors, power to govern the financial and operating policies under a statue or an agreement, power to appoint or move majority of the members of the board, power to cast the majority of votes at meetings of the board of directors of the governing body CAPITAL GROUP 10 Consolidated accounts – an overview GROUP FINANCIAL STATEMENTS SUBSIDIARY ASSOCIATE JOINTLY CONTROLLED ENTITY 11 Consolidated accounts – an overview Features ASSOCIATE JOINTLY CONTROLLED ENTITY Significant influence over the financial and operating policy decisions Joint control over the Control – power to financial and operating govern the financial policy decisions and operating policies Accounting Equity method (IAS 28), share of net assets and treatment profits Proportionate consolidation (benchmark) or equity method (IAS 31) SUBSIDIARY IAS 22, IAS 27 12 Short revision: value and measure m: X R x X , r R z R m( x) r m( x) z r z 1 x X m( x) 0 2 XX mm((xx1 1x2x)2 )mm x11,, xx22 ( x(1x)1) m(mx(2 x) 2 ) 3 X , Y R X Y m( x) m( y) FINANCIAL STATEMENT MEASURE of particular assets, liabilities, profits, losses or cash flows - depending on the statement - presented as a systematically ordered sum of all separately recorded values BALANCE SHEET A1 m( A1 ) A2 m( A2 ) A3 m( A3 ) . . . L1 m( L1 ) L2 m( L2 ) L3 m( L3 ) . . . An m( An ) n A i 1 i Ln m( Ln ) n L i 1 i Accounting treatment of the subsidiaries Consolidation of 100% of assets Cancellation of intra-group items Minority interest shown separately Uniform accounting policies (ACQUISITION METHOD, UNITING OF INTERESTS) 16 Accounting treatment of the subsidiaries ACQUISITION UNITING OF INTERESTS Features: Not a merger/acquiring a company’s benefit Features: Combine control with mutual sharing of risks and benefits Accounting treatment: adjustments to fair value, post acquisition results only are consolidated, goodwill arises Accounting treatment: Pooling of resources at book value, comparatives restated, difference on consolidation adjusted against equity 17 CONSOLIDATION The process of adjusting and combining financial information from the financial statements of the parent undertaking and its subsidiary undertaking to prepare consolidated financial statements that present financial information for the group as a single enterprise 18 Consolidated Balance Sheet Purpose: To show assets and liabilities which it controls and the ownership of those assets and liabilities Assets and liabilities: Always 100% Parent plus 100% of the BOOK VALUE of Subsidiary Share capital: Parent ONLY Reserves: 100% Parent plus group share of post acquisition retained reserves of Subsidiary plus/less consolidation adjustments Minority interest: minority % x book value of the acquiree’s identifiable assets less liabilities, ignoring fair value adjustments and any goodwill on the acquisition of subsidiaries 19 Consolidated Balance Sheet The company „Parent” acquired 100% of „Subsidiary” for $40000m. Ordinary Share Capital was equal to $25000m. Providing that pre-acquisition revenue reserves of „Subsidiary” stood at $6000m, there were no intra-group transactions and no intra-group dividends paid, prepare a consolidated balance sheet of the new capital group at the acquisition date using the acquisition method. (100%) 20 Parent ($) ASSETS Subsidiary ($) 115000 65000 50000 40000 0 0 40000 - 3000 18000 20000 7000 2000 0 115000 65000 Share Capital 45000 25000 Reserves 12000 5000 Revenue Reserves 30000 23000 Current Liabilities 28000 12000 Tangible Assets Intangible Assets Investment in „Subsidiary” company Inventory Receivables Cash LIABILITIES 21 Calculating the goodwill Cost of investment Ordinary Share 25000 Capital Capital reserves 5000 on acquisition Revenue reserves 6000 on aquisition 40000 22 Consolidated ($) ASSETS 144000 Tangible Assets 90000 Intangible Assets 4000 Inventory 21000 Receivables 27000 Cash LIABILITIES 2000 144000 Share Capital 45000 Reserves 12000 Revenue Reserves 47000 = 17000 + 30000 Current Liabilities 40000 23 Consolidated Balance Sheet - Cancellation The company „Parent” acquired 100% of „Subsidiary” for $40000m. Ordinary Share Capital was equal to $40000m. Providing that there were no pre-acquisition revenue reserves of „Subsidiary” stood at $6000m, there was no intra-group dividends paid, prepare a consolidated balance sheet of the new capital group at the acquisition date using the acquisition method. NOTE: Receivables of „Subsidiary” ($2000m) cancels with „Parent” liability payables ($2000m). 24 Parent ($) ASSETS Subsidiary ($) 100000 66000 35000 45000 0 0 Investment in „Subsidiary” company 40000 - Inventory 16000 12000 Receivables 8000 9000 Cash 1000 0 100000 66000 Share Capital 70000 40000 Reserves 16000 19000 Revenue Reserves 0 0 Current Liabilities 14000 7000 Tangible Assets Intangible Assets LIABILITIES 25 Consolidated ($) ASSETS Tangible Assets Intangible Assets 124000 80000 0 Inventory 28000 Receivables 15000 Cash LIABILITIES 1000 124000 Share Capital 70000 Reserves 35000 Revenue Reserves 0 Current Liabilities 19000 26 THE AREAS OF TRANSLATION • Language • Accounting concepts • Currency 27 CURRENCY TRANSLATION “restating an amount of foreign currency in terms of equivalent number of dollars” (Meigs, 1986, p. 521) In consolidated statements it means also restating all the assets and liabilities present in the balance sheet into dollars zl vUSA [$] ER[ ] vPoland [ zl ] $ 28 Parent (zloty) Subsidiary (€) 29 Subsidiary (zloty) Parent (€) 30 TRANSLATION in Consolidated Balance Sheet – Case Study The company „Poland” located in Poland acquired 100% of „USA” for 136000m złotych. Ordinary Share Capital of „USA” was equal to $25000m. Providing that there was no intra-group transactions and no intra-group dividends paid, prepare a consolidated balance sheet of the new capital group at the acquisition date using the acquisition method (exchange rate 3,4 zł/$). 31 Parent (zł) ASSETS Subsidiary ($) 249000 65000 50000 40000 0 0 136000 - 3000 18000 Receivables 20000 7000 Cash 40000 0 LIABILITIES 249000 65000 Share Capital 179000 25000 Reserves 12000 5000 Revenue Reserves 30000 23000 Current Liabilities 28000 12000 Tangible Assets Intangible Assets Investment in „Subsidiary” company Inventory 32 Calculating the goodwill ($) Cost of investment Ordinary Share 25000 Capital Capital reserves 5000 on acquisition Revenue reserves 6000 on acquisition 40000 33 Consolidated (zł) ASSETS 368000 Tangible Assets 186000 Intangible Assets 34000 Inventory 64200 Receivables 43800 Cash 40000 LIABILITIES + OE 368000 Share Capital 179000 Reserves 12000 Revenue Reserves 108200 Current Liabilities 68800 34 Consolidated (zł) ASSETS 293 450 Tangible Assets 100 800 Intangible Assets 97 900 Inventory 25 860 Receivables 28 890 Cash 40 000 LIABILITIES + OE 293 450 Share Capital 179000 Reserves 12000 Revenue Reserves 59 210 Current Liabilities 43 240 35