Global Financial Reporting(1) 2k1x2p

Unit 5

Global Financial reporting

Objectives of ing in global context • To standardize ing methods , procedures, and treatments. • To lay down principles for preparation and presentation of financial statement uniformly. • To establish benchmark for evaluating the quality of earnings and reporting internationally. • To ensure that international community of s of financial statements get creditable financial information.

Efforts towards Global Harmonisaton • • • •

There are two bodies working for this concept. International ing Standard Board(IASB) Institute of Chartered ants of India(ICAI) International Financial Reporting Standards(IFRSs) and International ing Standards are issued by IASB.

Difference between IAS/IFRS and GAAP(Indian and U.S.) • There are so many dissimilarities in these three aspects. • Contents of Financial Statements. • Cash and Cash equivalents. • Classification of Assets and liabilities • Classifications of incomes and expenditure • Preparation of cash flow statement • Spin off/carve Out ing • Fixed Assets

Cont… • • • • • • • • •

Depreciation Miscellaneous Expendeture Revenue Recognisation: Changes in policy or rule Intrime Financial reporting. Post balance sheet events. Contengenses Earning per Share Correction of fundamental errors.

Need for uniform Global Financial Reporting. • Globlisation of Economies • Companies are collecting capital from overseas • Investors invest money globally. • Harmonisation required in MNCs. • Incearsing corporate awareness • Corporates having future plans to raise capital from oversees.

Benefits and strength of US GAAP • Most developed economy. • Sets benchmark • Except the balance sheet other annual financial statemnts are also requuired to be submited • Multi step income statement presentation as an option. • Detailed ing Standards for ing of spin off, specific industries,etc. • Upward valuation of any fixed Asset is not permissible.Deferral of expenses , except ment is not permitted.

Benefits • Wider aceptability among the investor community. • Better international credit rating • Internationalization of company’s brand. • Reduced cost of capital • Improved internal decision making process. • Improved financial discipline.

Foreign Currency ing,

• When companies using different currencies transact business, at least one of the companies will have to translate a foreign currency into its home currency. For sales made in cash, this can be done at the time of sale.

Cont… • When the sale is made on credit , the company will have to record an receivable or payable until the is settled. During the interim, the relative values of the currencies could change. The ing treatment for such changes is governed by International ing Standard (IAS) 21 and U.S. Financial ing Standard (FAS) 52. The treatment is the same under either method.  At the time of sale, the sale is recorded at the current exchange rate and an equivalent value asset or liability is created.  If balance sheets are prepared prior to collection, the asset or liability must be restated to the then-current exchange rate value. The change is recognized as an unrealized exchange rate gain/loss on the income statement.  When the is collected, the asset or liability is removed and any previously unrecognized gain/loss is recognized on the income statement.

Foreign Exchange Risk Management • Transaction exposure – Change in the value of financial position created by foreign currency changes between establishment and settlement of contract

• Translation exposure – Potential change in value of a company’s financial position due to exposure created during consolidation process

• Economic exposure – Potential for value of future cash flows to be affected by unanticipated exchange rate movements

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Transaction Exposure: Hedging • Hedging – process to reduce or eliminate financial risk

• Forward market hedge – Foreign currency contract sold or bought forward in order to protect against foreign currency movement

• Currency option hedge – Option to buy or sell specific amount of foreign currency at specific time to protect against foreign currency risk

• Money market hedge – Method to hedge foreign currency exposure by borrowing and lending in domestic and foreign money markets 21-14

Transaction Exposure: Swaps • Swap contract – Spot sale/purchase of asset against future purchase/sale of equal amount in order to hedge financial position

• Bank Swap – Swap made between banks to acquire temporary foreign currencies

• Currency Swap – Exchange of debt service of loan or bond in one currency for debt service of loan or bond in another currency

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Transaction Exposure: Swaps

cont’d.

• Interest Rate Swap – Exchange of interest rate flows to manage interest rate exposure

• Spot and forward market swaps – Use spot and forward markets to hedge foreign currency exposure

• Parallel Loans – Matched loans across currencies made to cover risk

21-16

Translation Approaches – Current rate method • Current assets and liabilities are valued at current spot rates and noncurrent assets and liabilities are translated at historic exchange rates – Temporal method • Monetary s are valued at spot rate and s carried at historical cost are translated at historic exchange rates

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Inflation ing,

Inflation • Monetary inflation occurs when the money supply of a country is increased over and above the demand and need for currency (“too much money chasing too few goods”). This results in depreciation in the value of currency. • The impact of monetary inflation on prices is usually not evenly distributed across all goods and services within an economy.

Inflation • Inflation distort, or eradicates, the meaning of financial statement numbers. • As such, when inflation is a substantial problem, its effects need to be removed/adjusted so that financial reports remain useful.

Inflation ing – Conceptual Issues Impact of inflation on financial statements • • • •

Understated asset values. Overstated income and overpayment of taxes. Demands for higher dividends. Differing impacts across companies resulting in lack of comparability.

Learning Objective 1

Inflation ing • Inflation creates two basic reporting “mistakes” when traditional ing methods are alone employed: – Purchasing power gains/losses are not detected and reported. – Historical cost numbers lose their relevance.

Inflation ing – Conceptual Issues Impact of inflation on financial statements • Historical cost ignores purchasing power gains and losses. – Purchasing power losses result from holding monetary assets, such as cash and s receivable. – Purchasing power gains result from holding monetary liabilities, such as s payable.

• The two most common approaches to inflation ing are general purchasing power ing and current cost ing.

Learning Objective 1

Inflation ing -- Methods General Purchasing Power (GPP) ing • Updates historical cost ing for changes in the general purchasing power of the monetary unit. • Also referred to as General Price-Level-Adjusted Historical Cost ing (GPLAHC). • Nonmonetary assets and liabilities, stockholders’ equity and income statement items are restated using the General Price Index (GPI). • Requires purchasing power gains and losses to be included in net income. Learning Objective 1

Inflation ing -- Methods Current Cost (CC) ing • Updates historical cost of assets to the current cost to replace those assets. • Also referred to as Current Replacement Cost ing. • Nonmonetary assets are restated to current replacement costs and expense items are based on these restated costs. • Holding gains and losses included in equity.

Learning Objective 1

Human Resource ing,

• Men, materials, machines, money and methods are the resources required • for an organization. These resources are broadly classified into two categories,viz., animate and inanimate (human and physical) resources. Men, otherwiseknown as the human resources, are considered to be animate resources. Others,namely, materials, machines, money and methods are considered to be inanimate or physical resources.

• “Human Resource ing is an attempt to identify and report investments made in human resources of an organization that are presently not ed for in conventional ing practice. Basically it is an information system that tells the management what changes over time are occurring to the human resources of the business.”

Importance of Human Resource ing:

• Human Resource ing helps the management in the Employment, locating and utilization of human resources. • It helps in deciding the transfers, promotion, training and retrenchment of human resources. • It provides a basis for planning of physical assets vis-à-vis human resources. • It assists in evaluating the expenditure incurred for imparting further education and training in employees in of the benefits derived by the firm. • It helps to identify the causes of high labour turnover at various levels and taking preventive measures to contain it. • It helps in locating the real cause for low return on investment, like improper or under-utilization of physical assets or human resource or both. • It helps in understanding and assessing the inner strength of an organization and helps the management to steer the company well through most adverse and unfavourable circumstances. • It provides valuable information for persons interested in making long

Limitations of Human Resource ing: • There is no proper clear-cut and specific procedure or guidelines for finding cost and value of human resources of an organization. The systems which are being adopted have certain drawbacks. • The period of existence of human resource is uncertain and hence valuing them under uncertainty in future seems to be unrealistic.

• As human resources are not capable of being owned, retained and utilized, unlike the physical assets, there is problem for the management to treat them as assets in the strict sense. • In spite of all its significance and necessity, tax laws do not recognize human beings as assets. • As far as our country is concerned human resource ing is still at the developmental stage. Much additional research is necessary for its effective application.

Environment ing,

• Environmental ing is an important tool for understanding the role played by the natural environment in the economy. Environmental s provide data which highlight both the contribution of natural resources to economic well-being and the costs imposed by pollution or resource degradation. • "Environmental ing" - sometimes referred to as "green ing", "resource ing"

What Environmental ing Is And Is Not: • It is: a set of aggregate national data linking the environment to the economy, which will have a long-run impact on both economic and environmental policy-making. • It is not: valuation of environmental goods or services, social cost-benefit analysis of projects affecting the environment, or disaggregated regional or local data about the environment.

ing depends on two crucial factors: • First, it must be focused on answering important policy questions. This ensures that the ing work responds to a real demand for policy guidance, and is not driven simply by a desire to build databases. • Second, it must bring in the major players in the areas of environmental policy, economic policy, national income ing, and the development of information systems on the environment, the economy, and the population. This ensures that people who could either use or provide the data required will cooperate with and the project.

Responsibility ing.

Meaning.. • Responsibility ing is a management control system based on the principles of delegating and locating responsibility. The authority is delegated on responsibility centre and ing for the responsibility centre. • Responsibility ing is a system under which managers are given decisions making authority and responsibility for each activity occurring within a specific area of the company.

Significance of Responsibility ing • • • • •

Easy Identification: Motivational Benefits : Data Availability : Planning and Decision Making: Delegation and Control:

Principles of responsibility ing • The main features of responsibility ing are that it collects and reports planned and actual ing information about the inputs and outputs of responsibility ing.

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Objectives of Responsibility ing : Responsibility ing is a method of dividing the

organizational structure into various responsibility centers to measure their performance. • 1. To determine the contribution that a division as a subunit makes to the total organization. • 2. To provide a basis for evaluating the quality of the divisional managers performance. Responsibility ing is used to measure the performance of managers and it therefore, influence the way the managers behave. • 3. To motivate the divisional manager to operate his division in a manner consistent with the basic goals of the organization as a whole.

Problems in Responsibility ing • • • • •

Classification of costs Inter-departmental Conflicts Delay in Reporting Overloading of Information Complete Reliance will be deceptive

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