Documenti di Didattica
Documenti di Professioni
Documenti di Cultura
ACCOUNTING
ASSIGNMENT
Submitted To:
10
Acknowledgement
I would like to pay my sincere thanks to, University of Delhi, South Campus for
endowing me with the precious insights needed for working out this Project. He
has been very instrumental in communicating the core of this project study and
thus without his direction, the very inception of this work would not have been
possible.
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Q1. Whether a country’s capital market is debt –oriented or equity
oriented has a significant impact on the financial reporting that
develops in the country, both at the cosmetic and at the substantive
level. Choose a equity oriented country and a debt oriented country,
and obtain two corporate annual reports from each. Comment on the
similarities and the differences of the reports
In many other countries i.e. France, Germany, Japan and emerging market
countries shareholding remains highly concentrated and Banks traditionally have
been main source of corporate financing. Structures are in place to protect
incumbent management. Banks and other insiders provide discipline. These
banks, insiders and others are closely informed about the company’s financial
position and its activities. Public disclosures is less developed in these markets
and large differences in the amount of information given to large shareholders
and creditors vis-a-vis the public may be permitted.
As investors around the world demand more detailed and timely information,
voluntary disclosures levels are increasing in both highly developed and
emerging market countries.
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Balance Sheet Does not prescribe a particular Entities may present either a
format. A current/non current classified or non -classified
presentation of assets and balance sheet. Items on the
liabilities is used, unless a face of the balance sheet are
liquidity presentation provides generally presented in
more relevant and reliable decreasing order of liquidity.
information. Certain minimum SEC registrants should follow
items are presented on the SEC regulations.
face of the balance sheet.
Exceptional Does not use the term but Similar, but individual
items requires separate disclosures significant items are presented
of items that are of such size, on the face of the income
incidence or nature that their statement and disclosed in the
separate disclosures is items.
necessary to explain the
performance of the entity.
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Changes in Reported in income statement Similar
accounting in the current period and
estimates future, if applicable.
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Q2. The proximity or distance between accounting regulations and
accounting practice often depends on the level of enforcement. Select
two countries and discuss the level of enforcement of financial
reporting regulations in each country. Identify the agencies and
organisations in place that are responsible for enforcing the financial
reporting requirements. How do they compare to one another?
SPAIN
There are three specific oversight institutions, the DGSFP, BE and CNMV
as well as the ICAC oversighting institutions and issuing accounting
standards which are compulsory within its specific supervision area.
Audit Technical Rulings in Spain are issued by the ICAC and they are
published in the ICAC Bulleting, but the corporations which represent
auditors and audit firms participate in the elaboration process.
There is a formal control in Spain with the aim to increase the information
transparency and back the oversight work of accounting standards, which
consists of the obligation of depositing the accounts of every Spanish company
in the Mercantile Register. These accounts have to contain financial statements,
which will be audited in case of being demanded by law1.
If the company does not deposit theirs accounts in the Mercantile Register it will
be penalized, the next year, with the closure of the registry, which in spite of not
being a monetary sanction is especially effective, because the company isn’t
allow to registry any mercantile action such as inscription of new statutes,
members of a council, economic transactions and so on, thereby strongly
limiting the company activity. Furthermore the ICAC, as stated by law, could
penalise the company with a monetary sanction of up to 50 million pesetas.
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(Jefatura del Estado Espanol 1996)
b.1) Oversight of auditors and audit firms
The first role has been explained previously, that’s why this section will deal the
ICAC’s role in relation with the audit profession.
The mechanisms of enforcement used by the ICAC to oversight and control the
auditors and audit firms are principally reactive, and consist of: a) technical
controls which are completed promptly to oversight specific audit work in
defence of public interest, b) keeping and managing the Audit Official Registry
(Registro Oficial de Auditores de Cuentas- ROAC) and c) monitoring, overseeing
and keeping the guaranty incorporate by the recognised auditors. (Jefatura del
Estado Espanol 1988a)
From the Financial law, 2002, a proactive revision mechanism has been
incorporated; thereby the ICAC is accomplishing quality controls, where the
audit work on listed companies will be supervised at least each six years.
Furthermore the corporations which represent auditors continue realizing quality
controls and they must send theirs results to the ICAC each ended year.
Moreover, from the Financial law, 2002, with the aim to assist in their oversight
role of the ICAC, the audit firms and auditors must be communicate to the ICAC,
the hours and fee invoice to the client, differing between audit works and other
services.
Under the Financial law, 2002, an Auditing Fee per auditing reports has been set
up to achieve this proactive activity of oversight. Before this fee the ICAC was
financed mainly with the general state budgets.
If the ICAC detect wrong auditing services, it may impose disciplinary action,
which ranges from a fine to the expulsion from the ROAC and the disablement as
an auditor. From the Financial law, 2002, the sanctions are imposed only to the
responsible auditors, and will be published in the ICAC Bulleting when the
sanctions are either very strong or strong.
The ICAC investigate cases which affect public interest thought technical
controls. Theses cases, which might be a liable to ICAC’s disciplinary action, are
selected thanks to quality controls achieved by either corporations which
represent auditors or the ICAC and denouncements of any member of the society
(CNMV or other Institutions)(Gonzalo Angulo, 2002). Before the Financial Law,
2002, it was enough a denouncement realised by a part legality interest to the
ICAC investigate a case, but with the new law this has been suppress.
The REA and REGA are expert bodies which depend, repectivaly, of the following
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corporations the “Consejo General de Economistas” and the “Consejo de
Titulados Mercantiles y Empresariales”. The IACJCE is an independent
corporation, which is found upon to the Economy and Taxes Minister, and it is
the only Spanish corporation with representation in international audit bodies, as
a member of the IASB.
Every auditors and audit firms must be registered in one of these three
corporations, which are recognised under the Audit Law, 1988 as Statutory
recognised professional audit corporations. Their responsibilities, besides the
continued formation2 of their members are:
The big four audit firm are registered in different corporations which represent
auditors. Deloitte and Ernst & Young are registered in the REA, and KPMG and
Price Waterhouse Coopers in the IACJCE. Likewise all of them are under the
oversight of the ICAC, because they are registered in the ROAC.
In spite of the fact that the ICAC is the most significant institution to secures the
compliance with the accounting standards in Spain, there are four specifics
oversight institutions to definite areas: 1) The Directorate-General of Insurances
and Mutual
Fund Industry (Dirección General de Seguros y Fondos de Pensiones- DGSFP),
which oversights and monitors insurance companies 2) The Bank of Spain (El
Banco de España- BE), which oversights and monitors banks and financial
institutions, and 3) The National Securities and Exchange Comission (Comisión
Nacional del Mercado de Valores- CNMV), which oversights and monitors the
capital market and the companies with capital market activities 4) The State
Auditing Agency (Intervención General de la Administración del Estado- IGAE) It
is the body which oversights and monitors public sector entities. Besides
preparing their financial statement under the 1990 PGC, they also do it under
1994 PGC for public sector entities.
The CNMV’s roles are oversighting and monitoring the stock market activities
such as insurance of securities, takeover bids, trading in futures and options and
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so on; also regulating and oversighting and monitoring investment firms such as
listed companies, mutual funds, stockbroker companies and so on. Within this
last CNMV’s function is to guarantee the compliance of listed companies’
financial information with the accounting standards.
The types of sanctions ranges from a fine to the suspension the company’s
securities, if the company does not sent the information.
With the aim to protect the investor rights this information is disclose, for this,
the CNMV possess its own registry. In addition there are public registries for
other kind of listed companies’ information such as prospectuses, sanctions,
relevant information and takeover bids.
Moreover the CNMV may review this financial information, which is selected
principally, thought qualified audit opinions (CNMV 2004b). Furthermore the
CNMV could initiate an investigation either for own initiative or when relevant
data is presented by any member of the society to department of investor
rights, others oversight institutions, press comments and so on.
In particular, the CNMV does not usually analyze the whole of the financial
statements, only the problems referred in qualified audit opinions. For the
correct revision of the qualified audit opinions, the CNMV may require additional
information from the company about why they have decided to present their
financial statements with a qualified audit opinion and how they are going to
solve those problems referred to by the auditors. Moreover the amplification of
information contained in the memory may be demanded. This required additional
information may be found in the web page of the CNMV.
On the other hand, it is compulsory that auditors send a special audit report for
each qualified audit report of listed companies. Theses “Special audit reports”
are published in one of the CNMV official registries and inform us if the company
has or has not solved the problems referred to by the auditors at the close of the
first six month period of the next exercise.
From 2000 the CNMV have published a report where the study of the audit
qualifications is explain. This report contents a general summary of audit
qualifications of listed companies and its general features of the audit
qualifications, but does not explain whether the company has been sanctioned
by accounting irregularities or whether it has restated its information by CNMV
demand or voluntary action.
In addiction from the Financial Law, 2002, is compulsory that a report on its
oversight functions is published, within it a small part describes the actions and
procedures achieved to secure the compliance of listed companies’ financial
information with the accounting standards.
In spite of the fact that the sanctions imposed by the CNMV, are predominantly
related with infractions related with fraudulent stock market operation such as
accomplishment of disallowed activities, manipulation of prices, using of
privileged information and so on. The non compliance of investment firms’
financial information with the accounting standards could be penalised. In 2003
1 in 23 very strong sanctions and 2 in 29 strong sanctions, were imposed for
accounting irregularities and in 2004, 0 in 25 very strong sanctions and 1 in 23
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strong sanctions were imposed. (CNMV 2004a)
The sanctions may be imposed to any physic and juridical person who had
unfulfilled law. There are sanctions very strong, strong and light. The sanctions
range from monetary sanctions and/or the disqualification of directors to the
suspension the company’s securities (Jefatura del Estado Espanol 1988b)
From the Financial Law, 2002, the very strong and strong sanctions must be
published in the Official State Bulletin and furthermore the CNMV publish them
within one of its own registries which is found on its own web page. Strong
infractions completed before 2002 might not be published. The light sanctions
are never published. (Jefatura del Estado Espanol, 2002).
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Austria
The following sections focus on the role of the courts and the tax authorities in
the regulation and enforcement process by means of providing an analysis of the
type and extent of their involvement.
Reporting
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by means of analyzing court rulings and interpretations. Due to the
interrelationship between financial and fiscal reporting in Austria, the sections of
the Austrian Income Tax Law, which are interrelated with financial reporting
(§§4–14), also have to be included in the analysis.20 The inclusion of the latter is
important since it causes the Administrative Court (Verwaltungsgerichtshof) to
be involved in the interpretation of financial and fiscal reporting regulations. This
is a direct result of the particular structure of both German and Austrian Income
Tax Law, which is interrelated with the Commercial Code on three different levels
(Beisse, 1980, p. 637):
(1) Income Tax Law contains financial reporting regulations which are being
transformed into fiscal reporting regulations. This leads to the influence of
financial on fiscal reporting.
(2) It further includes fiscal reporting regulations which are congruent with
financial reporting regulations.21 This entails another influence of financial on
fiscal reporting.
Due to this particular structure of Income Tax Law, interpretations and rulings of
the Administrative Court concerning both financial (1 and 2) and fiscal (3)
reporting regulations impact on the interpretation and advancement of financial
reporting regulations. Beisse (1980, p. 645) describes the nature of the
involvement of the Administrative Court in the regulation and enforcement of
financial reporting regulations in the German context:23
However, it should be noted that this relationship between financial and fiscal
accounting is limited to individual accounts (HGB, §§189–243), which are the sole
basis for tax calculation.
Conclusion
In Austria, regulation takes place through the law, the courts, and the academic
and professional community. These regulatory instruments are interrelated, with
the law having an impact on both legal interpretations and academic and
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practical research, and research influencing the judicial interpretations and
rulings. The involvement of courts in the regulation and enforcement of
accounting regulations has been found to occur infrequently and mainly as a by-
product of company litigation issues.What is more, almost fifty percent of court
cases are not concerned with the enforcement of accounting regulations, but
with the enforcement of filing regulations. The Administrative Court, in its role as
the highest court of appeal in tax matters, emerges as by far the most active
enforcement agent in Austria. Thus, the majority of enforcement activity takes
place indirectly through the enforcement of fiscal requirements. This is due to
the strong economic incentives of both parties involved. These results might be
attributed to Austria’s creditor-orientated accounting system in which the
verification of inside information to outside parties does not have the same
importance as in a shareholder-orientated system.
Q3. Obtain the annual reports of three companies (from the same
industry) that prepare their financial statements using international
accounting standards (IASs). Compare the disclosures, accounting
policies and practices, and informational content between the three
companies. In your opinion, are they truly comparable? Based on this
comparison, are IASs an effective global standard?
2. The financial statements have been drawn up from the accounting records
of the Company under the historical cost convention, except for certain
available for sale investments which are stated at fair value.
3. The Company classifies its expenses using the nature of expense method.
Hotel revenue
1. Receivables are recorded at cost, being the fair value of services rendered
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1. Inventory is valued at lower of cost and net realisable values with due
allowance being made for damaged and deteriorated items. Cost is
determined on a weighted average basis and includes expenditure
incurred in acquiring inventories and bringing them to their existing
location and condition. Net realisable value is the estimated selling price
in the ordinary course of business, estimated selling expenses.
Monetary assets and liabilities are translated into Bahraini Dinars at year
end exchange rates. Transactions in foreign currencies during the year are
converted at the rate ruling at that time. Foreign exchange gains and
losses are recognized in the income statement. Translation differences for
non-monetary items, such as equities classified as available-for-sale
investments, are included in a fair value reserve in equity.
Property and equipment held for operational purposes are carried at cost
less accumulated depreciation and any impairment losses. The cost of the
properties and equipments includes the cost of bringing them to their
present location and condition. Direct costs are capitalized until
properties and equipments are ready for use. Capital work-in-progress
comprises the cost of properties and equipments that are not yet ready for
their intended use on the reporting date. The cost of additions and major
improvements are capitalised.
Depreciation
The assets’ residual values and useful lives are reviewed, and adjusted if
appropriate, at each reporting date. When an item of property and
equipment is sold or discarded, the respective cost and accumulated
depreciation relating thereto are eliminated from the statement of
financial position, the resulting gain or loss being recognized in the income
statement.
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Impairment of Assets.
Segmental Reporting
2. The financial statements have been drawn up from the accounting records
of the Company under the historical cost convention, except for certain
available for sale investments which are stated at fair value. The Company
classifies its expenses
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Receivables
1. Trade receivables are stated at original invoice amount less a provision for
any uncollectible amounts. An estimate for doubtful debts is made when
collection of the full amount is no longer probable. Bad debts are written
off when there is no possibility of recovery.Net realisable value is based on
estimated selling price less any further costs expected to be incurred on
completion and disposal.
Inventories
Inventories of food and beverage are stated at the lower of cost and net
realisable value. Inventories of maintenance stores are stated at cost less
provision for obsolescence. Costs are those expenses incurred in bringing
inventories to their present location and condition and are determined on
a first-in-first-out basis.
Depreciation
- Buildings 25 to 40 years
The carrying values of property, plant and equipment are reviewed for
impairment when events or changes in circumstances indicate the
carrying value may not be recoverable.
Impairment of Assets
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recognised in the statement of income. Impairment is determined as
follows:
Segmental Reporting
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Segment assets include all operating assets used by a segment and
consist primarily of property, plant and equipment, inventories,
available for sale investments, managed portfolios and accounts
receivable. Whilst the majority of the assets can be directly attributed to
individual business segments, the carrying amounts of certain assets
used jointly by two segments is allocated to segments on a reasonable
basis.
Basis of consolidation
Revenue recognition
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Revenue on sale of condominiums is recognised on the basis of
percentage completion using the certificate provided by the independent
lead consultants of the respective projects
Impairment of Assets
Depreciation
Buildings 50 years
Yacht 10 years
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Tax
Segmental Reporting
Since the companies follow IFRS, the core principles remaining consistent, the
reports are the comparable in the basic theme. The methods of disclosures, the
type of reporting procedure and the tools and methods used are true to the
once promulgated by IFRS.
However, there are differences in various areas because of Company Law of the
jurisdiction, the tax law practices in particular countries and also the segment
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and geography the companies operate. Also the type of operation methodology
followed by companies leaves a distinct flavour to the reports prepared.
The IAS because of several similarities makes the reports comparable and
consistent across various jurisdictions. Leaving aside political and social factors,
the analysis of report leads to better result in lesser effort. Therefore, the step
towards adoption of IAS by countries is a useful step which would boast
efficiency and ease the analysis and comparability of the reports.
Singapore-Harmonisation
The Actors
In Singapore, the private sector body, ICPAS, has been at the forefront of
standard setting activities. Beside ICPAS, many other organization participate
directly or indirectly in accounting standard setting, such as the Registrar of
Companies and Business, the Monetary Authority of Singapore, the Public
Accountant Board, the Stock Exchange of Singapore, and the Singapore
Federation of Chambers of Commerce and Industry.
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Accountants Act 1987. The ICPAS promulgates the accounting standards and
auditing standards in Singapore
The ICPAS' network of members span the globe and its international outlook and
connections are reflected in its membership of regional and international
professional organizations such as the AFA, IASB and IFAC.
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to transact and clear financial products. The SES owns and operates the only
integrated securities exchange and derivatives exchange in Singapore and their
related clearinghouses. Its exchanges have a presence and prominence that
extends beyond the borders of Singapore.
As the securities agency, the MAS monitors whether companies prepare financial
reports in accordance with securities market regulations. The MAS, based on its
mandate under the Banking Act and the Securities Industry Act, has specified
disclosure requirements for financial institutions and companies issuing their
own securities to the public. The MAS also requires companies to
be audited by a licensed CPA The role of other private sector groups in
accounting standard setting and preparation of financial statements and user
groups, appears minimal . However, these groups influence standard setting
activities in Singapore. These groups mainly influence the consultative process
adopted by ICPAS. This process is designed, in part, to accommodate the
concerns of the business community. For this reason, drafts are often sent to the
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national chamber of commerce and industry groups, and then this body gives
comments. The other way by which a preparer of financial statements could
influence standard setting outcomes indirectly is through explanation made by
public accountants who, in view of their association with their clients, are aware
of the likely impact of new accounting standards on companies.
Due Process
ICPAS is governed by a Council comprised of eight elected practicing members,
eight elected non-practicing members (e.g. commerce, industry, education), and
three members nominated by the Singapore Government and appointed by the
Minister for Finance. The Council may appoint members of the Institute to be a
co-opted member of the Council but no more than two coopted
members can hold office in the Council at any one time .The particular
committee of the professional body takes charge of preparing proposed
accounting standards.
This committee generally is comprised of representatives from public practice,
government, commerce and industry, and education, all of whom must be
members of the professional accounting body.
All IAS standards are examined for their propriety of adoption in the Singapore
context, and most had been adopted by the end of 1995. Some IAS standards
have been amended to be more relevant in the Singapore context, but the
amendments generally are not significant and the essence of each IAS statement
has been retained. In Singapore, IASs are heavily adopted, but with minor
modifications in some cases, as Statements of Accounting Standards. Although
Singapore is a country that adopts IASs as national standards, SASs are not
limited to IASs. There is no IAS on earnings per share yet, but there has been an
SAS on this since 1983. More recently, with the introduction of the goods and
services tax (GST) in Singapore, an SAS on accounting for GST was added. Both
of these SASs are based on UK standards.
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the members to adopt IAS. Accounting standards in Singapore include all of the
professional releases issued by the ICPAS. All members of ICPAS, whether in
preparing or auditing financial statements, are required to observe these
accounting standards. Some of the professional releases include SAS, Provisional
Statements of Accounting Standards, and Statements of Recommended
Accounting Practice.
The ICPAS is continuing its policy of harmonizing SAS with IAS. The ICPAS has
announced their plan to simultaneously issue exposure drafts and standards with
the IASB and to make the standards effective in the quarter following adoption.
The ICPAS has issued five new accounting standards, which became effective on
the 1st of April, 2001.
In late 2000, the Disclosure and Accounting Standards Committee (DASC) of the
ICPAS was formed to propose changes to the Singapore Companies Act. This
committee announced its recommendation that Singapore adopt the IAS and US
standards as the only acceptable accounting standards in Singapore. If this were
done, Singapore accounting standards would be eliminated. The table
below shows the SAS number that comply with IAS:
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34 Intangible Assets (IAS 38) October 1, 2000
35 Discontinuing Operations (IAS 35) October 1, 2000
36 Impairment of assets (IAS 36 October 1, 2000
37 Information reflecting the effect of April 1, 2001
changing prices (IAS 15)
38 Financial Reporting in hyperinflationary April 1, 2001
economies (IAS 29)
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Q5. As multinational companies continue to expand globally managing
the risk related to fluctuating currency exchange rates has become a
strategic challenge usually resulting in use of financial derivatives.
Obtain the annual report of a company and describe the different types
of derivative financial instruments the company utilizes.
Arcelor Mittal
The Company utilizes certain instruments to manage interest rate risks. Interest
rate instruments allow the Company to borrow long-term at fixed or variable
rates, and to swap the rate of this debt either at inception or during the lifetime
of the loan. The Company and its counter-party exchange, at predefined
intervals, the difference between the agreed fixed rate and the variable rate,
calculated on the basis of the notional amount of the swap. Similarly, swaps may
be used for the exchange of variable rates against other variable rates.
Interest rate derivatives used by the Company to manage changes in the value
of fixed rate loans qualify as fair value hedges.
The Company is exposed to changes in values arising from foreign exchange rate
fluctuations generated by its operating activities. Because of a substantial
portion of ArcelorMittal’s assets, liabilities, sales and earnings are denominated
in currencies other than the U.S. dollar (its reporting currency), ArcelorMittal has
an exposure to fluctuations in the values of these currencies relative to the U.S.
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dollar. These currency fluctuations, especially the fluctuation of the value of the
U.S. dollar relative to the euro, the Canadian dollar, Brazilian real and South
African rand, as well as fluctuations in the other countries currencies in which
ArcelorMittal has significant operations and/or sales, could have a material
impact on its results of operations.
ArcelorMittal faces transaction risk, where its businesses generate sales in one
currency but incur costs relating to that revenue in a different currency. For
example, arcelorMittal’s non-U.S. subsidiaries may purchase raw materials,
including iron ore and coking coal, in U.S. dollars, but may sell finished steel
products in other currencies. Consequently, an appreciation of the U.S. dollar will
increase the cost of raw materials; thereby impacting negatively on the
Company’s operating margins.
Following its Treasury and Financial Risk Management Policy, the Company
hedges its net exposure to exchange rates through forwards, options and swaps.
ArcelorMittal faces translation risk, which arises when ArcelorMittal translates the
statement of operations of its subsidiaries, its corporate net debt and other items
denominated in currencies other than the U.S. dollars, for inclusion in the
ArcelorMittal Consolidated Financial Statements.
The Company also uses the derivative instruments, described above, at the
corporate level to hedge debt recorded in foreign currency other than the
functional currency or the balance sheet risk incurred on certain monetary assets
denominated in a foreign currency other than the functional currency.
Changes in the fair value of a derivative that is highly effective and that is
designated and qualifies as a fair value hedge, along with the gain or loss on the
hedged asset, liability, or unrecognized firm commitment of the hedged item
that is attributable to the hedged risk, are recorded in the statement of
operations.
Changes in the fair value of a derivative that is highly effective and that is
designated and qualifies as a cash flow hedge are recorded in equity. Amounts
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deferred in equity are recorded in the statement of operations in the periods
when the hedged item is recognized in the statement of operations and within
the same line item.
Available for sale financial assets classified as Level 1 refer to listed securities
quoted in active markets. The total fair value is either the price of the most
recent trade at the time of the market close or the official close price as defined
by the exchange on which the asset is most actively traded on the last trading
day of the period, multiplied by the number of units held without consideration of
transaction costs.
The following table summarizes the reconciliation of the fair value of the
conversion option classified as Level 3 with respect to the €1.25 billion
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convertible bonds and the 800 convertible senior notes for the year ended
December 31, 2009 respectively until the waiver of the cash settlement option:
Portfolio of Derivatives
The Company manages the counter-party risk associated with its instruments by
centralizing its commitments and by applying procedures which specify, for each
type of transaction and underlying, risk limits and/or the characteristics of the
counter-party. The Company does not generally grant to or require from its
counter-parties guarantees over the risks incurred. Allowing for exceptions, the
Company’s counter-parties are part of its financial partners and the related
market transactions are governed by framework agreements (mainly of the
International Swaps and Derivatives Association agreements which allow netting
in case of counter-party default).
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Q6. The revolution in information technology has seen the convergence
of a large number of high-tech and internet companies. Choose a high-
tech company from each of three different countries and compare their
accounting policy for research and development costs.
Development expenditures that meet the criteria for recognition, i.e. that it is
probable that the expected future economic benefits that are attributable to the
asset will flow to the entity and the cost can be measured reliably, are
capitalised. The assets are amortised over their expected useful life once the
asset is available for use. Costs incurred during the research stage of a project,
as well as maintenance and training costs are expensed as incurred.
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Q7. Choose a company that issues both a domestic financial statement
using its own GAAP and one in which it uses a foreign GAAP or IAS/IFRS.
Are there significant differences in the bottom line, policies and
practices, formats etc.? Do the two sets of financial statements lead
you to different conclusions about the operating performance of the
company? Support your answers.
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(Significant items) disclosure or items that
are of such size, incidence
or nature that their
separate disclosure is
necessary to explain the
performance of the entity
Cash flow Standards headings, use Similar to US GAAP
statement- of both direct and indirect
format and method permitted
method
Changes in Comparatives and prior Restatement is not
accounting policy year are restated against required. The effect of
opening retained change is included in the
earnings, unless current year’s income
specifically exempted statement. This impact of
changes is disclosed.
Consolidated Financial Statements
Subsidiary A subsidiary held-for-sale If the entity is acquired
even at the time of and held for resale or if it
acquisition, will be operates in severe long-
consolidated until sold term restrictions which
impair its ability to
transfer funds to the
parent
Associates In consolidated financials, In consolidated financials,
equity method is used. equity method is used.
Share of post-tax results Share of post-tax results
is shown. is shown.
In standalone financials, In standalone financials,
at cost or equity method shown at cost less
is used impairment
Accounting No adjustment to Similar to US GAAP
policies of accounting policies is
associates required if the associate
follows an acceptable
alternative US GAAP
treatment
Joint ventures Equity method required In consolidated financials:
except in specific proportional consolidation
circumstances is used.
In standalone financials, In standalone financials:
at cost or equity method at cost less impairment
is used
Revenue & Expense Recognition
Revenue Based on several criteria, Similar to US GAAP
Recognition which require the
recognition of revenue
when risks and rewards
and controls have been
transferred and the
revenue can be measured
reliably
There is extensive
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detailed guidance for
specific types of
transactions that may
lead to differences in
practice
Depreciation Allocated on a systematic Similar to US GAAP, where
basis to each accounting useful life is shorter as
period over the useful life envisaged under the
of the asset Companies’ Act , the
depreciation is computed
by applying a higher rate
Interest Expense Recognised on an accrual Recognised on an accrual
basis using the effective basis, practice varies with
interest method respect to recognition of
discounts and premiums
Assets
Acquired Capitalised if recognition Similar to US GAAP
Intangible Assets criteria are met,
amortised over useful life
Revaluations are not
permitted
Internally Both R&D costs expensed Research costs expensed
generated as incurred as incurred
intangible assets Development costs
capitalised and amortised
only when specific criteria
are met
Property, Plant Historical Cost is used, Historical cost is used,
and Equipment revaluations are not revaluations are
permitted permitted
Inventories Carried at lower of cost or Carried at lower of cost or
net realisable value net realizable value
LIFO is permitted LIFO prohibited
Reversal of write downs is
prohibited
Financial Assets Held-to-maturity loans or Long term investments,
receivables are carried at loans and receivables are
amortized cost or fair carried at cost less
value impairment
Gains/ losses on fair value Current assets carried at
through profit or loss lower of cost and fair
classification is value
recognised on income Any reduction in the
statement carrying amount or the
Gains and losses on reversal of such reduction
available-for-sale is credited to income
instruments are statement
recognised in equity
Liabilities
Deferred income Full provision method is Full provision method is
taxes used driven by balance used driven by timing
sheet temporary differences
differences Deferred tax asset is
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Deferred tax assets are recognised if realisation is
recognised if recovery is virtually certain or
probable reasonably certain as
applicable for entities with
and without tax carry
forward losses
respectively
Equity
Purchase of own Shown as deduction from Purchase is permitted in
shares Equity limited circumstances
subject to the provisions
under the Companies Act
On purchase such shares
are required to be
cancelled i.e, they cannot
be kept at treasury stock
Dividends Presented as a deduction Presented as an
in the statement of appropriation to the
changes in the income statement.
shareholder’s equity in Dividends are accounted
the period when in the year when
authorised by proposed
shareholders. Dividends
are accounted in the year
when declared
Other accounting concerns
Functional “Currency of primary Functional currency is not
currency economic environment in defined and its
which entity operates” determination is also not
If indicators are mixed, required
judgement is used by It is assumed that an
giving priority to the entity normally uses the
currency that mainly currency of the country in
influences sales prices which it is domiciled in
and currency that mainly recording its transactions
influences direct costs of
providing the goods and
services before
considering other factors
Q8. The risks of investing in Emerging Capital Markets (ECM’s) are not
only associated with structural, political and economic problems, but
also with international problems stemming from the difficulty of
obtaining adequate, reliable and timely information useful for
evaluating investment opportunities in these markets. Research
two/three ECM’s and determine the timeliness and availability of
financial reporting for each. Do publicly listed companies release
quarterly or semi-annual financial statements? Is actual practice
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different from required practice? Briefly summarize your findings for
each.
In a brief research of few companies in the emerging economies, I fund that most
companies prepare their semi annual and quarterly financial statements, though
with a lagged effect. Further, these statememnts are prepared to meet the
informational needs of investors and other stakeholders rather than to fulfill any
regulatory obligation.
India
Brazil
Not all Brazillian companies prepare quarterly and semi- annual reports. Most
publically traded Brazilian companies release an annual report and a
sustainability development report.
China
It is likely that the situation will improve. Chinese companies will likely take less
time to issue their financial statements and annual reports in the years to come.
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There are several reasons for this prediction. For one, the Chinese government is
aware of corporate governance principles as advocated by the OECD, World
Bank, IMF and others. Secondly, Chinese companies are also aware of corporate
governance principles, although they are not always easy to adopt and
implement. But this situation will change over time.
South Africa
In my research, I did not find any South African firm which undertakes quarterly
and semi annual reporting.
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Q9. One factor that can affect investor confidence in financial reporting
is the timeliness of annual reports. Choose an ECM and obtain three
local annual reports all with the same fiscal year end. Critically examine
the auditor’s reports of three companies. When was the audit report
issued (i.e. how long after the year-end date)? Is this period shorter or
longer compared to companies listed in your home country? Explain.
China
Company Auditors Opinion Fiscal Date of Time lag
year end issue
of
auditor
’s
report
st
China Ernst & “In our opinion, the 31 26 April 4 months
Railway Young financial statements give Decembe 2010
Construction a true and fair view of the r
Corporation state of affairs of the
Limited Group and of the
Company as at 31
December 2009 and of
the Group’s profit and
cash flows for the year
then ended in accordance
with IFRSs and have been
properly prepared in
accordance with the
disclosure requirements
of the Hong Kong
Companies Ordinance.”
China KPMG “In our opinion, the 31st 18th 2.5
Petroleum & Huazhen consolidated financial Decembe March months
Chemical statements give a true r 2010
Corporation and fair view of the state
of the affairs of the
Company and of the
group as at 31 December
2009 and of the group’s
profit and cash flows for
the year then ended in
accordance with
International Financial
Reporting Standards and
Hong Kong Financial
Reporting Standards and
have been properly
prepared in accordance
with the Hong Kong
Companies Ordinance.”
Novatek Ernst & “In our opinion, the 31st 26th 1 months
Microelectro Young consolidated financial Decembe January
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nics corp statements give a true r
and fair view of the state
of affairs of the Company
and of the Group as at 31
December 2009 and of
the Group’s profit and
cash flows for the year
then ended in accordance
with International
Financial Reporting
Standards as issued by
the International
Accounting Standards
Board and the disclosure
requirements of the Hong
Kong
Companies Ordinance.”
India
TATA motors DELOITTE “in our opinion and to the 31st 27th 2 months
HASKINS best of our information March May
& SELLS and according to the 2010
explanations given to us,
they said accounts give
the information required
by the Companies Act,
1956 in the manner so
required and give a true
and fair view in
conformity with the
accounting principles
generally accepted in
India:
(i) in the case of the
Balance Sheet, of the
state of affairs of the
Company as at March 31,
2010;
(ii) in the case of the
Profit and Loss Account,
of the profit of the
Company for the year
ended on that date;
(iii) in the case of the
Cash Flow Statement, of
the cash flows of the
Company for the year
ended on that date.”
Reliance DELOITTE “In our opinion and to the 31st April 1 month
Industries HASKINS best of our information March 23rd
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Limited & SELLS and according to the 2010
explanations given to us,
the said accounts read
together with the
Significant Accounting
Policies and notes thereon
give the information
required by the
Companies Act, 1956, in
the manner so required
and give a true and fair
view in conformity with
the accounting principles
generally accepted in
India:
(i) in the case of the
Balance Sheet, of the
state of affairs of the
Company as at March 31,
2010;
(ii) in the case of the
Profit and Loss Account,
of the profit for the year
ended on that date;
(iii) in the case of the
Cash Flow Statement, of
the cash flows for the
year ended on that date.”
Arcelor Mittal
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Foreign currency sensitivity
The Company utilizes certain instruments to manage interest rate risks. Interest
rate instruments allow the Company to borrow long-term at fixed or variable
rates, and to swap the rate of this debt either at inception or during the lifetime
of the loan. The Company and its counter-party exchange, at predefined
intervals, the difference between the agreed fixed rate and the variable rate,
calculated on the basis of the notional amount of the swap. Similarly, swaps may
be used for the exchange of variable rates against other variable rates.
Interest rate derivatives used by the Company to manage changes in the value
of fixed rate loans qualify as fair value hedges.
The Company is exposed to changes in values arising from foreign exchange rate
fluctuations generated by its operating activities. Because of a substantial
portion of ArcelorMittal’s assets, liabilities, sales and earnings are denominated
in currencies other than the U.S. dollar (its reporting currency), ArcelorMittal has
an exposure to fluctuations in the values of these currencies relative to the U.S.
dollar. These currency fluctuations, especially the fluctuation of the value of the
U.S. dollar relative to the euro, the Canadian dollar, Brazilian real and South
African rand, as well as fluctuations in the other countries currencies in which
ArcelorMittal has significant operations and/or sales, could have a material
impact on its results of operations.
ArcelorMittal faces transaction risk, where its businesses generate sales in one
currency but incur costs relating to that revenue in a different currency. For
example, arcelorMittal’s non-U.S. subsidiaries may purchase raw materials,
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including iron ore and coking coal, in U.S. dollars, but may sell finished steel
products in other currencies. Consequently, an appreciation of the U.S. dollar will
increase the cost of raw materials; thereby impacting negatively on the
Company’s operating margins.
Following its Treasury and Financial Risk Management Policy, the Company
hedges its net exposure to exchange rates through forwards, options and swaps.
ArcelorMittal faces translation risk, which arises when ArcelorMittal translates the
statement of operations of its subsidiaries, its corporate net debt and other items
denominated in currencies other than the U.S. dollars, for inclusion in the
ArcelorMittal Consolidated Financial Statements.
The Company also uses the derivative instruments, described above, at the
corporate level to hedge debt recorded in foreign currency other than the
functional currency or the balance sheet risk incurred on certain monetary assets
denominated in a foreign currency other than the functional currency.
Changes in the fair value of a derivative that is highly effective and that is
designated and qualifies as a fair value hedge, along with the gain or loss on the
hedged asset, liability, or unrecognized firm commitment of the hedged item
that is attributable to the hedged risk, are recorded in the statement of
operations.
Changes in the fair value of a derivative that is highly effective and that is
designated and qualifies as a cash flow hedge are recorded in equity. Amounts
deferred in equity are recorded in the statement of operations in the periods
when the hedged item is recognized in the statement of operations and within
the same line item.
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equity until the forecasted transaction occurs. If the hedged transaction is no
longer probable, the cumulative unrealized gain or loss, which had been
recognized in equity, is reported immediately in the statement of operations.
Available for sale financial assets classified as Level 1 refer to listed securities
quoted in active markets. The total fair value is either the price of the most
recent trade at the time of the market close or the official close price as defined
by the exchange on which the asset is most actively traded on the last trading
day of the period, multiplied by the number of units held without consideration of
transaction costs.
The following table summarizes the reconciliation of the fair value of the
conversion option classified as Level 3 with respect to the €1.25 billion
convertible bonds and the 800 convertible senior notes for the year ended
December 31, 2009 respectively until the waiver of the cash settlement option:
Portfolio of Derivatives
The Company manages the counter-party risk associated with its instruments by
centralizing its commitments and by applying procedures which specify, for each
type of transaction and underlying, risk limits and/or the characteristics of the
counter-party. The Company does not generally grant to or require from its
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counter-parties guarantees over the risks incurred. Allowing for exceptions, the
Company’s counter-parties are part of its financial partners and the related
market transactions are governed by framework agreements (mainly of the
International Swaps and Derivatives Association agreements which allow netting
in case of counter-party default).
CISCO
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Foreign currency fluctuations, net of hedging, increased our operating expenses,
categorized as research and development, sales and marketing, and general and
administrative, by approximately 0.2% in fiscal 2010 compared with fiscal 2009
and decreased the operating expenses by approximately 1.8% in fiscal 2009
compared with fiscal 2008. To reduce variability in operating expenses and
service cost of sales caused by non-U.S.-dollar denominated operating expenses
and costs, the company hedges certain foreign currency forecasted transactions
with currency options and forward contracts. These hedging programs are not
designed to provide foreign currency protection over long time horizons. In
designing a specific hedging approach, several factors including offsetting
exposures, significance of exposures, costs associated with entering into a
particular hedge instrument, and potential effectiveness of the hedge are
considered. The gains and losses on foreign exchange contracts mitigate the
effect of currency movements on the operating expenses and service cost of
sales.
The firm enters into foreign exchange forward and option contracts to reduce the
short-term effects of foreign currency fluctuations on receivables, investments,
and payables, denominated in currencies other than the functional currencies of
the entities. The market risks associated with these foreign currency receivables,
investments, and payables relate primarily to variances from forecasted foreign
currency transactions and balances. The forward and option contracts generally
have the following maturities:
DERIVATIVE INSTRUMENTs
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credit risk to the extent that the counterparties may be unable to meet the terms
of the agreement. The Company does, however, seek to mitigate such risks by
limiting its counterparties to major financial institutions. In addition, the potential
risk of loss with any one counterparty resulting from this type of credit risk is
monitored. Management does not expect material losses as a result of defaults
by counterparties.
The fair values of the Company’s derivative instruments and the line items on
the Consolidated Balance Sheets to which they were recorded are summarized
as follows (in millions):
During the years ended July 31, 2010 and July 25, 2009, the amounts recognized
in earnings on derivative instruments designated as cash flow hedges related to
the ineffective portion were not material, and the Company did not exclude any
component of the changes in fair value of the derivative instruments from the
assessment of hedge effectiveness. As of July 31, 2010, the Company estimates
that approximately $40 million of net derivative gains related to its cash flow
hedges included in AOCI will be reclassified into earnings within the next 12
months. The effect on the Consolidated Statements of Operations of derivative
instruments designated as fair value hedges is summarized as follows (in
millions):
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The effect on the Consolidated Statements of Operations of derivative
instruments not designated as hedges is summarized as follows (in millions):
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