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Question: The scene is a conference room on


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 A.M. meeting concerns reporting issues associated with a potential sales contract for the stock exchange in the Slovak Republic, which wants to upgrade its technology to effectively participate in the globalization of financial markets. In attendance are
Anthes Enterprise’s COO Shevon Estwick, Controller Sy Jones, Treasurer, Bebi Karimbaksh, and Vice President of Marketing Autherine Allison.
SHEVON: Thank you for agreeing to meet on such short notice.
Autherine, are you ready to give us an update on
Slovakia?
AUTHERINE: You mean the Slovak Republic.
SHEVON: Yes.
AUTHERINE: I think there is a 90 percent chance we’ll land the contract. Things move a little slowly over there and they’re still concerned about some of the legal details of our sales contract. I think they find the legalese a bit intimidating and I can’t say I blame them. I’ve scheduled another trip next month to go over contract details. This time I’m taking our legal counsel and have asked him to prepare another draft expressed in terms that are easier to understand. They’re also waiting for approvals from their Central Bank, which has to approve major transactions such as this one.
SHEVON: Good. Are we prepared to deliver on the contract?
AUTHERINE: Yes, we’ve lined up the financing; have done our credit checks, and the equipment and installation teams are ready to proceed on two week’s notice.
SHEVON: Given the size of the contract, are we hedged against the possibility of a devaluation?
BEBI: Yes, we’ve written a put option on the koruna for 90 days.
SHEVON: Do we think we’ll close on the deal before then?
BEBI: Autherine doesn’t think so, but you never know. The problem is no one will write an option for a longer term. We’ll renew the option as we have other transactions of this extended duration.
SHEVON: Sy, are we all right on the reporting front?
SY: Not really.
SHEVON: How’s that?
SY: It looks like we’re up against a reporting standard that requires that gains or losses on cash flow hedges whose maturities do not match that of the underlying be recognized in current earnings.
SHEVON: Come again?
SY: The bottom line is that we won’t be able to treat gains or losses on our put options as a part of comprehensive income, but we’ll have to recognize them in current earnings.
SHEVON: Won’t that mess up our bottom line?
SY: I’m afraid so. There would be no offsetting gain or loss from our anticipated sale.
BEBI: It’s taken me a whole year to get to know the right people and win their trust and
friendship. I now have that. There’s no doubt in my mind that this sale is a done deal and I anticipate closing the transaction within the next six to nine months.
SY: That may be, but we just can’t find anyone who’s willing to write an option for more than 90 days at a time.
SHEVON: I don’t want to think about what the accounting will do to our stock price! I mean, we’re about to float our first Euro-equity issue. A lower offering price would be disastrous at this stage of our development, not to mention the effect on our shareholders.
AUTHERINE:Given the nature of our business, I don’t think the transactions
side of our business will change much.
SHEVON: Do you think it would be worthwhile having a consultant advise us on this one?
SY, AUTHERINE, AND BEBI (IN UNISON)
Why not?
SHEVON: When you do, would you show that individual the following pages that I ripped out from an nnual report I just received as a shareholder and see if it has any information value? (see attachment)

Required:
As a consultant for Anthes Enterprises, identify what you believe are promising hedge accounting options.
Attachment: Torn Pages from the Annual Report of a Major U.S. Manufacturer First page: Note 10:
We are exposed to the risk of loss arising from adverse changes in:
• Commodity prices, affecting the cost of our raw materials and energy,
• Foreign exchange risks,
• Interest rates,
• Stock prices, and
• Discount rates affecting the measurement of our pension and retiree medical liabilities. In the normal course of business, we manage these risks through a variety of strategies, including the use of derivatives. Certain derivatives are designated as either cash flow or fair value hedges and qualify for hedge accounting treatment, while others do not qualify and are marked to market through earnings.
For cash flow hedges, changes in fair value are deferred in accumulated other comprehensive loss within shareholders’ equity until the underlying hedged item is recognized in net income. For fair value hedges, changes in fair value are recognized immediately in earnings, consistent with the underlying hedged item. Hedging transactions are limited to an underlying exposure. As a result, any change in the value of our derivative financial instruments would be substantially offset by an opposite change in the value of the underlying hedged items. Hedging ineffectiveness and a net earnings impact occur when the change in the value of the hedge does not offset the change in the value of the underlying hedged item. If the derivative instrument is
terminated, we continue to defer the related gain or loss and include it as a component of the cost of the underlying hedged item. Upon determintation that the hedged item will not be part of an actual transaction, we recognize the related gain or loss in net income in that period. We also use derivatives that do not qualify for hedge accounting treatment. We account for such derivatives at market value with the resulting gains and losses reflected in our income statement. We do not use derivative instruments for trading or speculative purposes and we limit our exposure to individual counterparties to manage credit risk.

Commodity Prices We are subject to commodity price risk because our ability to recover increased costs through higher pricing may be limited in the competitive environment in which we operate. This risk is managed through the use of fixed-price purchase orders, pricing agreements, geographic diversity and derivatives. We use derivatives, with terms of no more than two years, to economically hedge price fluctuations related to a portion of our anticipated commodity purchases, primarily for natural gas and diesel fuel. For those derivatives that are designated as cash flow hedges, any ineffectiveness is recorded immediately. However our commodity cash flow hedges have not had any significant ineffectiveness for all periods presented. We classify both the earnings and cash flow impact from these derivatives consistent with the underlying hedged item. During the next 12 months, we expect to reclassify gains of $24 million related to cash flow hedges from accumulated other comprehensive loss into net income.

Foreign Exchange Our operations outside of the U.S. generate over a third of our net revenue of which Mexico, the United Kingdom and Canada comprise nearly 20%. As a result, we are exposed to foreign currency risks from unforeseen economic changes and political unrest. On occasion, we enter into hedges, primarily forward contracts with terms of no more than two years, to reduce the effect of foreign exchange rates. Ineffectiveness on these hedges has not been material. (rest of page torn off)
Partial second page:

Our Divisions We manufacture or use contract manufacturers, market and sell a variety of slaty, sweet and grain-based snacks, carbonated and non-carbonated beverages, and foods through our North American and international business divisions. Our North American divisions include the United States and Canada. The accounting policies for the divisions are the same as those described in Note 2, except for certain allocation methodologies for stockbased compensation expense and pension and retiree medical expense, as described in the unaudited information in “Our Critical Accounting Policies.” Additionally, beginning in the fourth quarter of 2005, we began centrally managing commodity derivatives on behalf of our divisions. Certain of the commodity derivatives, primarily those related to the purchase of energy for use by our divisions, do not qualify for hedge accounting treatment. These derivative hedge underlying commodity price risk and were not entered into for speculative purposes. Such derivatives are marked to market with the resulting gains and losses recognized as a component of corporate unallocated expense. These gains and losses are reflected in division results when the divisions take delivery of the underlying commodity. Therefore, division results reflect the contract purchase price of the energy or other commodities. Division results are based on how our Chairman and Chief Executive Officer evaluates our divisions. Division results exclude certain Corporate-initiated restructuring and impairment charges, merger related costs and divested businesses. For addition unaudited information on our divisions, see “Our Operations” in Management’s Discussion and Analysis.


> 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

> 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

> 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?

> 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

> Refer again to Exhibits 9-5 and 9-6. Show how you would modify the consolidated funds statement appearing in Exhibit 9-5 to enable an investor to get a better feel for the actual investing and financing activities of the Norwegian subsidiary. EXHIBI

> Based on the balance sheet and income statement data contained in Exhibit 9-5, and using the suggested worksheet format shown in Exhibit 9-20 or one of your own choosing, show how the statement of cash flows appearing in Exhibit 9-5 was derived. EXH

> Condensed comparative income statements of Señorina Panchos, a Mexican restaurant chain, for the years 2009 through 2011 are presented in Exhibit 9-18 (000,000’s pesos). You are interested in gauging the past trend in div

> One interpretation of the popular efficient markets hypothesis is that the market fully impounds all public information as soon as it becomes available. Thus, it is supposedly not possible to beat the market if fundamental financial analysis techniques a

> Revisit Exhibit 1-5 and show how the ROE statistics of 33.8 percent and 29.5 percent were derived. Which of the two ROE statistics is the better performance measure to use when comparing the financial performance of Infosys with that of Verizon, a leadin

> What are the four main steps in doing a business strategy analysis using financial statements? Why, at each step, is analysis in a cross-border context more difficult than a single-country analysis?

> What is internal control, how do internal auditors relate to it, and how does this process relate to the analysis of financial statements?

> What role does the attest function play in international financial statement analysis?

> ABC Company, a U.S.-based MNC, uses the temporal translation method (see Chapter 6) in consolidating the results of its foreign operations. Translation gains or losses incurred upon consolidation are reflected immediately in reported earnings. Company XY

> 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?

> Investors can cope with accounting principles in different ways. Can you suggest two methods of coping and which of the two you find most appealing?

> 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

> Exhibit 1-4 lists the number of majority owned foreign affiliates in each country that Nestle includes in its consolidated results. What international accounting issues are triggered by this Exhibit? Countries in Which Nestle Owns One or More Majori

> One of the accounting development patterns that was introduced in Chapter 2 was the macroeconomic development model. Under this framework accounting practices are designed to enhance national macroeconomic goals. A national policy advocating stable emplo

> Identify three to four criteria that you would personally use to judge the merits of any corporate database. Use these criteria to rate the information content of any Web site appearing in exhibit 9-4 as excellent, fair, or poor. // EXHIBIT 9-4 Free

> The IASB Web site (www.iasb.org) summarizes each of the current International Financial Reporting Standards. Required: Answer each of the following questions. a. In measuring inventories at the lower of cost or net realizable value, does net realizable

> The U.S. Securities and Exchange Commission (SEC) roadmap issued in 2008 may eventually move U.S. issuers to report under International Financial Reporting Standards (IFRS). Consider the following critical questions of such a move: a. IFRS lack detailed

2.99

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