3.99 See Answer

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:
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?
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?





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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

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> 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

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> 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

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> 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

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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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> Explain, in your own words, the difference between a multicurrency translation exposure report and a multicurrency transactions exposure report.

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> Compare and contrast the terms translation, transaction, and economic exposure. Does FAS No. 52 resolve the issue of accounting versus economic exposure?

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3.99

See Answer