Incoterms 2010 and International Business - 101
International Business: Environments and Operations, 15e (Daniels et al.)
CHAPTER NINETEEN: INTERNATIONAL ACCOUNTING AND FINANCE ISSUES
CHAPTER NINETEEN: INTERNATIONAL ACCOUNTING AND FINANCE ISSUES
OPENING CASE: Parmalat: Europe’s Enron
This case gives an overview of the accounting manipulations that were at the center of one of Europe’s most massive corporate scandals. Parmalat, which started as a family-owned Italian dairy company, grew into a large multinational with over 32,000 employees. In the 1990s, Parmalat was reporting healthy profits that turned out to actually be created by accounting fraud rather than real operations. The fraudulent practices included double billing of Italian supermarkets and other retailers, “off-balance sheet financing” that involved the creation of three phony shell companies based in the Caribbean, and the issuance of bonds backed up by falsified assets. The schemes allowed the company to report profits every year between 1990 and 2003, even though the company should have reported operating losses for each of these years. The fraud was discovered when the company’s auditor discovered that a bank account reported by the company did not exist. Further investigations revealed the full extent of the fraud. The CEO resigned, was arrested, and was sent to prison. The company filed for bankruptcy, and a flood of lawsuits have been filed against the company, its former management, and auditors. Parmalat restructured and has risen from the ashes. They adopted International Financial Reporting Standards and hired PricewaterhouseCoopers as their auditing firm. Parmalat is now listed on the Milan stock exchange and is Italy’s biggest listed food company, certainly a better outcome than Enron.
Questions
19-1 How much of Parmalat’s problems were due to bad accounting, and how much were due to fraud on the part of individuals in the company?
The Parmalat situation started out fairly standard, where accounting managers used various accounting tricks to avoid disclosing sizeable losses. The CEO resigned, was arrested and sent to prison. (LO: 1, Learning Outcome: To examine the major factors influencing the development of accounting practices in different countries, AACSB: Analytical Skills)
19-2 In the chapter, we discuss the differences in accounting standards in the U.S. and the rest of the world through IFRS. Do you think it made a difference that Parmalat used IFRS instead of U.S. GAAP?
Few of the differences between the two alternatives are likely to cause major changes in any of the company’s reported results. A company with great results under GAAP won’t look terrible under IFRS, unless it got those results with an extraordinary item, which is an event that does not occur on a regular basis such as a merger or corporate restructuring. And because extraordinary items are disclosed, someone looking at the financial statements would be able to make the adjustments easily. (LO: 2, Learning Outcome: To examine the global convergence of accounting standards, AACSB: Dynamics of the Global Economy)
CLOSING CASE
H&M: The Challenges of Global Expansion and the Move to Adopt International Financial Reporting Standards
This case explores the accounting standards of Hennes & MauritzAB (also known as H&M), the Swedish MNE that is a trend setter in the latest fashion trends, with the goal of giving customers unbeatable value by offering fashion and quality at the best price. H&M must comply with the accounting standards of its home country, Sweden, as well as the accounting standards of the European Union. The case traces the changes H&M makes in its reporting standards over the past few years. Prior to the move to IFRS in 2006, H&M reported its results in compliance with Swedish GAAP. In this case H&M is dealing with multiple reporting issues and questions of compliance.
QUESTIONS
19-3 If an investor wants to compare the financial results of the GAP, Inditex, and H&M, what difference does it make that their financial statements are prepared according to a different GAAP? Would you expect there to be a big difference between U.S. GAAP as used by the Gap and OFRS as used by H&M and Inditex?
Sweden is more driven by conservatism and tax issues, and therefore one would expect that Ericsson’s income under Sweden’s GAAP would be more conservative than if reported under U.S. GAAP. Presumably this would be true as well under IFRS. (LO: 1, Learning Outcome: To examine the major factors influencing the development of accounting practices in different countries, AACSB: Analytical Skills)
19-4 What are the major sources of influence on H&M accounting standards and practice?
H&M must comply mainly with the accounting standards of the Swedish government and the European Union. Of secondary importance perhaps is the influence of the IASB and the FASB. H&M has, however, been able to use EU IFRS because in its case (assuming the annual report is correct) there is not any significant difference between EU IFRS and the IFRS of the IASB. In 2009, Ericsson is now registered with the SEC using IFRS, so it doesn’t provide a reconciliation report to U.S. GAAP. (LO: 1, Learning Outcome: To examine the major factors influencing the development of accounting practices in different countries, AACSB: Analytical Skills)
19-5 What type of IFRS did H&M decide to disclose in its financial statements in 2005? In 2007?
Prior to the move to IFRS, in 2006, H&M reported its financial results in compliance with Swedish GAAP. (LO: 3, Learning Outcome: To explain how companies account for foreign-currency transactions and translate foreign-currency financial statements, AACSB: Reflective Thinking)
19-6 H&M says in its accounting policies that it uses IFRS as issued by the IASB for its consolidated accounts and, since its parent company is a company within the EU, only IFRS as approved by the EU are used in financial statements. What difference does it make whether or not the financial statements are prepared according to full IFRS or IFRS as approved by the EU? Why does the EU insist on having veto power over IFRS?
This is a judgment call for the company. While the EU standards offer a degree of flexibility, eventually full implementation will probably be required. The difference is mainly whether or not Ericsson is concerned about any short-term reporting differences that may adversely influence investor perceptions of the company. (LO: 4, Learning Outcome: To discuss different forms of performance evaluation of foreign operations and how foreign exchange can complicate the budget process, AACSB: Analytical Skills)
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