International Accounting

1

• International Accounting
• and Financial Reporting
• Winter 2007
• William F. OBrien, MBA, CPA

2
Session XI-A

• Changing Prices

3
Impact of Inflation

• Avoid assets hold liabilities
• Old costs matched with new revenues leads to
  sense of false income while value of cash dwindles

4
General and Specific Price Increases

• General price level increases (GPI)
• Based on market basket of goods services
• Specific price level increases (SPI)
• Relates to a particular item

5
Tight Money Policy

• Monetary policy influence both inflation and
  economic growth
• See Figure 3.1 on page 87

6
Constant Money Restatement(Current Purchase
Power Accounting)

• Balance sheet
• I/D items as monetary or nonmonetary
• Extend monetary items at their face amount
• Adjust nonmonetary items for changes in
  purchasing power
• Roll-forward prior year balances
• Income statement
• Adjust items based date of occurrence
• Compute depreciation based on adjusted historical
  cost
• Adjust other items based upon weighted average
• Compute cost of goods sold based on adj.
  Inventory items
• Calculate purchasing power gain or loss

7
IASB and Inflation

• IAS 15 Price level accounting disclosures
• IAS 29 Hyperinflation report
• Requirement for IAS countries
• Hyperinflation exists when 3-year cumulative
  inflation exceeds 100 percent
• Restatement for GPI changes in primary financial
  statements
• Hotly debated issue without firm resolution
• Note the number of countries that have added PLA
  standards and then withdraw them (US, UK, Asia
  etc.)

8
Session XI-B

• Managing FX Exposure

9
Foreign Risk Exposure

• Financial
• Transaction
• Conversion
• Translation
• Remeasurement
• Operational
• Economic
• Political
• Monetary

10
FX Risk Exposure

• CA gt CL positive exposure
• CA lt CL negative exposure
• Positive exposure appreciation yields gain
• Negative exposure depreciation yields gain
• FX risk includes both translations and
  transactions

11
Hedging Strategies

• FX forward contract most common
• Currency swap
• FX currency future
• Options
• Puts
• Calls

12
Why Companies Do Nothing

• Failure to understand the issue
• Belief that exposure cannot be measured
• Belief that the hedging of transactions is
  sufficient
• Ignorance of economic risk
• Belief that firm is rewarded for risk
• Accounting hedges are made

13
Financial Strategies

• Derivatives
• FX contracts and options etc.
• Debt

14
Operating Strategies

• Consider location of operations
• Use the portfolio approach
• Use flexible planning
• Use pricing and promotional strategies

15
Generic Risk Mgt. Strategies

• Define and measure exposure
• Implement a reporting system
• Assign responsibility for action
• Formalize strategies for hedging
• Including Board of Directors approval

16
Key Text Examples

• FX hedging using derivatives-p. 362
• DaimlerChryslers Risk Mgt. Disclosure-p. 370