Question: Review the operating data incorporated in Exhibit
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 expected returns from the Russian investment for the first two years of its operations.
The U.S. parent company is only allowed to receive 70 percent of its affiliate’s reported net income, after Russian corporate income taxes, as dividends. However, U.S. tax law provides a credit against U.S. taxes for any foreign income taxes paid.
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EXHIBIT 10-3Cash Flows from Russian Subsidiary Year 1 Year 2 Sales (units) 100,000 100,000 Domestic 110,000 Foreign 110,000 Price (per unit) Domestic RUB2,020 RUB2,424 Foreign RUB2,020 RUB2,444 Gross revenues Domestic RUB202,000,000 RUB266,640,000 Foreign RUB202,000,000 RUB268,640,000 (HUF2,020,000,000) (HUF2,444,000,000) Total RUB404,000,000 RUB535,480,000 Raw materials (cost per unit) Domestic RUB400 RUB480 Foreign RUB400 RUB462 ($20) ($22) Labor (cost per unit) RUB200 RUB240 RUB1,000 RUB200,000,000 Variable cost (per unit) RUB1,182 RUB260,040,000 Total variable costs Licensing fees, royalties, etc. RUB40,400,000 RUB53,548,000 Depreciation expense RUB60,000,000 RUB60,000,000 Selling and administrative expenses RUB48,000,000 RUB55,200,000 Total RUB348,400,000 RUB428,788,000 Net operating income RUB33,360,000 RUB64,016,000 Corporate income tax (40%) RUB22,240,000 RUB42,676,000 Net income RUB33,360,000 RUB60,000,000 RUB64,016,000 RUB60,000,000 +Depreciation Net cash flow (rubles) RUB124,016,000 $ 5,905,000 RUB93,360,000 Net cash flow (dollars) $ 4,668,000 Exchange rates: RUBO.1 = HUF1 RUBO.11 = HUF1 RUB20 = $1 RUB21 = $1
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> 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.
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> Compare and contrast the role of transfer pricing in national versus international operations.
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> 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:
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> 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 $0.90 = CHF 1. The Swiss franc payable is due on September 1. To mini
> The Volkswagen Group adopted International Accounting Standards (IAS, now International Financial Reporting, or IFRS) for its 2001 fiscal year. The following is taken from Volkswagen’s 2001 annual report. It discusses major differences
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> Trojan Corporation USA borrowed 1,000,000 New Zealand dollars (NZ$) 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
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> 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
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> 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
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> 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.
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> Explain how a company might use a currency swap to hedge its foreign exchange risk on a foreign currency borrowing.
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> 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
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> 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?
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> State the unique difficulties involved in designing and implementing performance evaluation systems in multinational companies.
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> 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
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> If you were asked to provide the five most important recommendations you could think of to others analyzing nondomestic financial statements, what would they be?
> How does the translation of foreign currency financial statements differ from the foreign currency translation process described in Chapter 6?
> What are common pitfalls to avoid in conducting an international prospective analysis?
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> Describe the impact on accounting analysis of cross-country variations in accounting measurement and disclosure practices.
> Marissa Skye and Alexa Reichele, tire analysts for a global investment fund located in Manhattan, are examining the 20X0 earnings performance of two potential investment candidates. Reflecting the company’s investment philosophy of pick
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> The biographies of current IASB board members are on the IASB Web site (www.iasb.org). Required: Identify the current board members (including the chair and vice-chair). Note each member’s home country and prior affiliation(s). Which board members have
> Exhibit 8-3 identifies current IASB standards and their respective titles. Required: Using information on the IASB Web site (www.iasb.org) or other available information, prepare an updated list of IASB standards. EXHIBIT 8-3 Current IASB Standard
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> The text discusses the many organizations involved with international convergence activities, including the IASB, EU, and IFAC. Required: a. Compare and contrast these three organizations in terms of their standard-setting procedures. b. At what types a
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> What international reporting issues are triggered by AKZO NOBEL’s foreign operations disclosures appearing in Exhibit 1-3 for investors? For managerial accountants? Selected 2008 Foreign Operations Data for AKZO Nobel (Euro million
> Exhibit 8-1 presents the Web site addresses of many major international organizations involved in international accounting harmonization. Consider the following three: the International Federation of Accountants (IFAC), the United Nations Intergovernment
> Three solutions have been proposed for resolving the problems associated with filing financial statements across national borders: (1) reciprocity (also known as mutual recognition), (2) reconciliation, and (3) use of international standards. Required:
> Compare and contrast the following proposed approaches for dealing with international differences in accounting, disclosure, and auditing standards: (1) reciprocity, (2) reconciliation, and (3) international standards.
