INTERNATIONAL ACCOUNTING Marcin Jędrzejczyk (jedrzejm@uek.krakow.pl) http://www.jedrzejczyk.com.pl/ina - working :) http://janek.uek.krakow.pl/~zkrach http://gat.uek.krakow.pl

Environmental Influences Examples Political/legal statutory audits-accounting reports/tax issues Economic sources of capital Cultural budgetary control Infrastructure communication infrastructure education of population

External Accounting Reports Standard Setters, Preparers and Users Underlying Institutional Structures Required reports Internal Accounting Reports Decision Rights Assignment Planning and Control Performance Measurement and Evaluation

Environmental Matrix

External Accounting-Environment Standard Setting Process U.S. -- FASB - Private-www.accounting.rutgers.edu/raw/fasb/ Japan -- Ministry of Finance -www.jicpa.or.jp/ International Accounting Standards Board /www.iasb.org.uk/ Use of comment letters Users of Statements legal/cultural driven

External Accounting External Reporting Differences U.S., U.K., Poland -- Tax  Financial Japan, Germany -- Tax = Financial Differences in Debt and Equity Differences in goodwill treatment Differences in asset revaluation

Internal Accounting Decision Rights Assignment Planning and Control Complications of Global Operations Co-location of Knowledge and Rights Performance Evaluation Multiple Currency Issues Cross-border Decision Rights Issues

International Accounting Key to Understanding International Accounting Political, Economic, Cultural and Infrastructure Influences on: External Reporting Taxes/Capital Markets/Gov. Regulation/Standard Setting/Reporting Requirements Internal Reporting Planning and Decision Making Control Differences Performance Evaluation Differences

CONSOLIDATION OF THE FINANCIAL STATEMENTS Marcin Jędrzejczyk (jedrzejm@uek.krakow.pl) http://www.jedrzejczyk.com.pl/ina http://janek.uek.krakow.pl/~zkrach http://gat.uek.krakow.pl

HOLDING COMPANY Subsidiary (subsidiaries) CAPITAL GROUP An enterprise that is controlled by another enterprise CONTROL: over more than a half of voting rights among investors, power to govern the financial and operating policies under a statue or an agreement, power to appoint or move majority of the members of the board, power to cast the majority of votes at meetings of the board of directors of the governing body CAPITAL GROUP

Consolidated accounts – an overview GROUP FINANCIAL STATEMENTS JOINTLY CONTROLLED ENTITY ASSOCIATE SUBSIDIARY

Consolidated accounts – an overview ASSOCIATE JOINTLY CONTROLLED ENTITY SUBSIDIARY Features Significant influence over the financial and operating policy decisions Joint control over the financial and operating policy decisions Control – power to govern the financial and operating policies Accounting treatment Equity method (IAS 28), share of net assets and profits Proportionate consolidation (benchmark) or equity method (IAS 31) IAS 22, IAS 27

Short revision: value and measure 1 2 3 ACCOUNTING

FINANCIAL STATEMENT MEASURE of particular assets, liabilities, profits, losses or cash flows - depending on the statement - presented as a systematically ordered sum of all separately recorded values

BALANCE SHEET . . . . . .

Accounting treatment of the subsidiaries Consolidation of 100% of assets Cancellation of intra-group items Minority interest shown separately Uniform accounting policies (ACQUISITION METHOD, UNITING OF INTERESTS)

Accounting treatment of the subsidiaries ACQUISITION UNITING OF INTERESTS Features: Not a merger/acquiring a company’s benefit Features: Combine control with mutual sharing of risks and benefits Accounting treatment: adjustments to fair value, post acquisition results only are consolidated, goodwill arises Accounting treatment: Pooling of resources at book value, comparatives restated, difference on consolidation adjusted against equity

CONSOLIDATION The process of adjusting and combining financial information from the financial statements of the parent undertaking and its subsidiary undertaking to prepare consolidated financial statements that present financial information for the group as a single enterprise

Consolidated Balance Sheet Purpose: To show assets and liabilities which it controls and the ownership of those assets and liabilities Assets and liabilities: Always 100% Parent plus 100% of the BOOK VALUE of Subsidiary Share capital: Parent ONLY Reserves: 100% Parent plus group share of post acquisition retained reserves of Subsidiary plus/less consolidation adjustments Minority interest: minority % x book value of the acquiree’s identifiable assets less liabilities, ignoring fair value adjustments and any goodwill on the acquisition of subsidiaries

Consolidated Balance Sheet The company „Parent” acquired 100% of „Subsidiary” for $40000m. Ordinary Share Capital was equal to $25000m. Providing that pre-acquisition revenue reserves of „Subsidiary” stood at $6000m, there were no intra-group transactions and no intra-group dividends paid, prepare a consolidated balance sheet of the new capital group at the acquisition date using the acquisition method. (100%)

  Parent ($) Subsidiary ($) ASSETS 115000 65000 Tangible Assets 50000 40000 Intangible Assets Investment in „Subsidiary” company  - Inventory 3000 18000 Receivables 20000 7000 Cash 2000 LIABILITIES Share Capital 45000 25000 Reserves 12000 5000 Revenue Reserves 30000 23000 Current Liabilities 28000

Calculating the goodwill Cost of investment 40000 Ordinary Share Capital 25000 Capital reserves on acquisition 5000 Revenue reserves on aquisition 6000

  Consolidated ($) ASSETS 144000 Tangible Assets 90000 Intangible Assets 4000 Inventory 21000 Receivables 27000 Cash 2000 LIABILITIES Share Capital 45000 Reserves 12000 Revenue Reserves 47000 = 17000 + 30000 Current Liabilities 40000

Consolidated Balance Sheet - Cancellation The company „Parent” acquired 100% of „Subsidiary” for $40000m. Ordinary Share Capital was equal to $40000m. Providing that there were no pre-acquisition revenue reserves of „Subsidiary” stood at $6000m, there was no intra-group dividends paid, prepare a consolidated balance sheet of the new capital group at the acquisition date using the acquisition method. NOTE: Receivables of „Subsidiary” ($2000m) cancels with „Parent” liability payables ($2000m).

  Parent ($) Subsidiary ($) ASSETS 100000 66000 Tangible Assets 35000 45000 Intangible Assets Investment in „Subsidiary” company 40000  - Inventory 16000 12000 Receivables 8000 9000 Cash 1000 LIABILITIES Share Capital 70000 Reserves 19000 Revenue Reserves Current Liabilities 14000 7000

  Consolidated ($) ASSETS 124000 Tangible Assets 80000 Intangible Assets Inventory 28000 Receivables 15000 Cash 1000 LIABILITIES Share Capital 70000 Reserves 35000 Revenue Reserves Current Liabilities 19000

THE AREAS OF TRANSLATION Language Accounting concepts Currency

CURRENCY TRANSLATION “restating an amount of foreign currency in terms of equivalent number of dollars” (Meigs, 1986, p. 521) In consolidated statements it means also restating all the assets and liabilities present in the balance sheet into dollars

Subsidiary (€) Parent (zloty)

Subsidiary (zloty) Parent (€)

TRANSLATION in Consolidated Balance Sheet – Case Study The company „Poland” located in Poland acquired 100% of „USA” for 136000m złotych. Ordinary Share Capital of „USA” was equal to $25000m. Providing that there was no intra-group transactions and no intra-group dividends paid, prepare a consolidated balance sheet of the new capital group at the acquisition date using the acquisition method (exchange rate 3,4 zł/$).

  Parent (zł) Subsidiary ($) ASSETS 249000 65000 Tangible Assets 50000 40000 Intangible Assets Investment in „Subsidiary” company 136000  - Inventory 3000 18000 Receivables 20000 7000 Cash LIABILITIES Share Capital 179000 25000 Reserves 12000 5000 Revenue Reserves 30000 23000 Current Liabilities 28000

Calculating the goodwill ($) Cost of investment 40000 Ordinary Share Capital 25000 Capital reserves on acquisition 5000 Revenue reserves on acquisition 6000

  Consolidated (zł) ASSETS 368000 Tangible Assets 186000 Intangible Assets 34000 Inventory 64200 Receivables 43800 Cash 40000 LIABILITIES + OE Share Capital 179000 Reserves 12000 Revenue Reserves 108200 Current Liabilities 68800

  Consolidated (zł) ASSETS 293 450 Tangible Assets 100 800 Intangible Assets 97 900 Inventory 25 860 Receivables 28 890 Cash 40 000 LIABILITIES + OE Share Capital 179000 Reserves 12000 Revenue Reserves 59 210 Current Liabilities 43 240