IFM - FINAL EXAM - SUMMARY - 2020-2021

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In this extensive summary (88 pages – including all graphs, figures, and tables):

 I have summarised all six mandatory lectures

 I have included the most important things of what each lecturer has been talking during the six lectures (e.g., further explanations, examples)

 I have added information from the e-book when the explanation in the lecture was not sufficient for understanding the concept

 I have included all tutorial questions and solutions + additional explanations and examples based on what the lecturers has been talking during the tutorials

 I have highlighted the most important aspects of each lecture and tutorial question

 NOTE: Mandatory chapters from the e-book are NOT separately summarised due to the open-book nature of the exam

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2020-2021 INTERNATIONAL FINANCIAL MANAGEMENT (EBB627A05) FINAL EXAM SUMMARY In this extensive summary (88 pages – including all graphs, figures, and tables):  I have summarised all six mandatory lectures  I have included the most important things of what each lecturer has been talking during the six lectures (e.g., further explanations, examples)  I have added information from the e-book when the explanation in the lecture was not sufficient for understanding the concept  I have included all tutorial questions and solutions + additional explanations and examples based on what the lecturers has been talking during the tutorials  I have highlighted the most important aspects of each lecture and tutorial question  NOTE: Mandatory chapters from the e-book are NOT separately summarised due to the open-book nature of the exam NOTE: This document is prepared by Vladislav Dimitrov, a third year IB student at RUG. The document is a mere summary of the mandatory materials for the course IFM (EBB627A05) for the academic year 2020-2021. This document cannot replace the original lectures, tutorials, and mandatory chapters from the book. Therefore, the author will not be liable for any kind of typos, mistakes or misunderstandings. This document does not provide 100% guarantee for passing the exam or having a high grade. Please consult the original materials. This material is subject to copyright. © International Financial Management WEEK 1: How does worldwide accounting diversity challenge multinational corporations? - Q&A sessions and Discussion Board are especially important - The duration of the exam will be 2hours (MCqs and short-answer questions) - The exam (open-book > everything can be used) will be 75% of the final grade; 25% will come from the group project (due January 8th) - IMPORTANT!! International Financial Management is the activity of management which is concerned with the planning, procuring and controlling of the firm's financial resources globally!!! > it is about how companies do with the financing, investing, and the strategic problem when they are doing business globally - The aim of the course is to: Address the significant accounting (week 1&2), financing (the most challenging part as it concerns companies’ day to day operations) (week 5&6) and strategic problems (week 3&4) that multinational corporations (MNCs) may experience and propose methods to solve these problems. 1. Worldwide Accounting Diversity - Learning Objectives:  Provide evidence of the diversity that exists in accounting internationally.  Describe the major environmental factors that influence national accounting systems and that lead to accounting diversity  Explain the problems caused by accounting diversity  Solving the accounting diversity by reconciling foreign financial statements with each other (most important) 2. Multination Corporations (MNC) - The definition of MNCs: a multinational corporation is a corporate organization that owns or controls production of goods or services in one or more countries other than its home country (Pitelis et al., 2000) e.g. Shell > IMPORTANT a. Why do we focus on MNCs? - MNCs are the major participants of the IFM:  Top 10 MNCs’ revenues account for the sum of more than 180 countries’ GDP, including developed countries such as Ireland and South Korea (Independent, 2017)  Top 100 MNCs account for over 1/3 R&D investments worldwide (UNCTAD, 2019) - The purpose of accounting is to understand how to collect and verify information, before we make any kind of decision b. What are the main Accounting and Control issues/problems that a MNC can face? IMPORTANT - Subsidiaries spread across the globe > the financial information of that subsidiary has to be prepared in accordance with the accounting standards in that country > different accounting standards (this is an issue as the information collected from the subsidiary will be different from the one of the parent company) NOTE: This document is prepared by Vladislav Dimitrov, a third year IB student at RUG. The document is a mere summary of the mandatory materials for the course IFM (EBB627A05) for the academic year 2020-2021. This document cannot replace the original lectures, tutorials, and mandatory chapters from the book. Therefore, the author will not be liable for any kind of typos, mistakes or misunderstandings. This document does not provide 100% guarantee for passing the exam or having a high grade. Please consult the original materials. This material is subject to copyright. © - Exposure to different accounting systems > if the subsidiary and the parent operate under different accounting systems, this will cause a problem and is an issue - Complexity of accounting and control systems > the difference will create complexity as the information e.g. from the subsidiary will have to be “transferred” to the accounting system of the parent company which takes time and money - MNCs face the problem of accounting diversity 3. Evidence of Accounting Diversity (IMPORTANT) - Presentation differences (Format of statements) > e.g. the way things are organised for example in the income statement differes > one source of diversity - Terminology differences (names of accounts) > the name of the accounts could be different across countries > second source of diversity - !!! Differences in recognition (how do we determine the nature of the transaction > does the transaction leads to a revenue, expense or to nothing) and measurement rules (it is about the money and the numbers > e.g. how much of the revenue will be recognised) (definition of accounts)!!! > the most important difference - Recognition = refers to the decision as to whether an item should be reported in the financial statement or not - Measurement = refers to the determination of the amount to be reported - Recognition and measurement procedures affect the amounts reported in the balance sheet and income statement - Presentation differences - example: 1. In British accounting, accounts are sorted in the reverse order of liquidity (i.e. non- current assets to current assets; non- current liabilities to current liabilities; in the U.S. the order is to the contrary) > this is an important example that can be used to provide evidence for the accounting diversity - The most illiquid asset – “goodwill” has been ranked first in the British system, while the most liquid one – “cash” has been put at the bottom (the most common way) 2. PPE (plant, property, equipment) presentation (gross or net?) > in the US system we can see the gross and the net values, while in the British we can only see the net values 3. Footnotes are marked on the financial statements or not? > footnotes are very important as using footnotes you can see how the values were calculated (e.g. in the US form the footnotes are not presented in the balance sheet) - Terminology differences – example: NOTE: This document is prepared by Vladislav Dimitrov, a third year IB student at RUG. The document is a mere summary of the mandatory materials for the course IFM (EBB627A05) for the academic year 2020-2021. This document cannot replace the original lectures, tutorials, and mandatory chapters from the book. Therefore, the author will not be liable for any kind of typos, mistakes or misunderstandings. This document does not provide 100% guarantee for passing the exam or having a high grade. Please consult the original materials. This material is subject to copyright. © different terminology can be used Terminology variation can lead to problems to understand a given statement > go to the footnote section - Differences in Recognition and Measurement Rules (example): WARNING + IMPORTANT - This is the major problem - LIFO = last item first out (the inventories that were most recently purchased will have to be expensed first) IMPORTANT - FIFO = first item first out (when you recognise expenses you should recognise the inventories that were purchased first) - The difference between the two lies in the way in which you will recognise the cost of the inventories - According to the matching rule you should recognise the expenses at the time of making the revenue (however the timing of purchasing the inventory might not be the same with the time of selling) > mismatch - !!! Consequences of differences in recognition and measurement rules for internal management decisions: distortion in planning, controlling and performance management - What are the consequences of replacing FIFO with LIFO? (A higher COGS due to the inflation effect and a lower gross margin; low tax paid and low dividend due) > expenses under LIFO will be typically higher > net income will be lower > lower taxes (lower income leads to lower taxes to be paid) > whether you are allowed to use LIFO or not will result in differences in the financial statements - Some countries that want to collect higher taxes, might be reluctant to allow LIFO, as under LIFO, companies usually declare a lower income and pay lower taxes 4. Sources of Accounting diversity a. Institutional Characteristics 1. Legal System  CODE LAW (also called Civil Law) – continential Europe, everything has to be legislated - Accounting in code law countries is legislated; therefore, accounting professions may have less influence over the accounting rules - Accounting rules tend to be general (as the legislators tend to have low accounting knowledge) - Information disclosures tend to be low  COMMON LAW (also called Anglo-Saxon Law) – relies mainly on previous precedent NOTE: This document is prepared by Vladislav Dimitrov, a third year IB student at RUG. The document is a mere summary of the mandatory materials for the course IFM (EBB627A05) for the academic year 2020-2021. This document cannot replace the original lectures, tutorials, and mandatory chapters from the book. Therefore, the author will not be liable for any kind of typos, mistakes or misunderstandings. This document does not provide 100% guarantee for passing the exam or having a high grade. Please consult the original materials. This material is subject to copyright. © - Accounting rules in common law countries are generally determined by the non-government accounting professions; therefore, their accounting rules are more specific (as the accounting rules and regulations are discussed with accounting professionals) - Accounting rules in common law countries are characterized with fair presentation, high transparency and full disclosure Common Law characteristics: (i) there is not always a written constitution or codified law; (ii) Judicial decisions are binding – decisions of the highest court can generally only be overturned by that same court or through legislation; (iii) Extensive freedom of contract - few provisions are implied into the contract by law (although provisions seeking to protect private consumers may be implied); and (iv) generally, everything is permitted that is not expressly prohibited by law. Code (Civil) Law characteristics: (i) it is a codified system of law (e.g., civil code, codes covering corporate law, administrative law, tax law and constitutional law) enshrining basic rights and duties; administrative law is however usually less codified and administrative court judges tend to behave more like common law judges; (ii) only legislative enactments are considered binding for all. There is little scope for judge-made law in civil, criminal and commercial courts, although in practice judges tend to follow previous judicial decisions; constitutional and administrative courts can nullify laws and regulations and their decisions in such cases are binding for all. (iii) less freedom of contract - many provisions are implied into a contract by law and parties cannot contract out of certain provisions. Examples of Common Law Countries: The United States, England, India Examples of Civil Law Countries: Germany, France, Spain, Netherlands 2. Taxation (very important factor, and very important concept) - In some countries, published financial statements form the basis for taxation, whereas in other countries, financial statements are adjusted for tax purposes and submitted to the government separately from the reports sent to stockholders > IMPORTANT - In some countries accounting serves for taxation (e.g. Germany, Poland) > in these countries, the difference between financial accounting and taxation accounting is nothing - Example: in the USA companies are allowed to use accelerated depreciation for example (they are goven more flexibility) which leads to higher expenses in the first years, lower income and lower taxes - However, in the for example Germany, the financial accounting has to follow the taxation accounting and companies are not given any flexibiity - If accounting rules or principles align with tax rules (financial accounting follows taxation accounting), then: !!!!  The net income may lose its ability to reflect the economic reality  Think about a case of car depreciation 3. Providers of Financing NOTE: This document is prepared by Vladislav Dimitrov, a third year IB student at RUG. The document is a mere summary of the mandatory materials for the course IFM (EBB627A05) for the academic year 2020-2021. This document cannot replace the original lectures, tutorials, and mandatory chapters from the book. Therefore, the author will not be liable for any kind of typos, mistakes or misunderstandings. This document does not provide 100% guarantee for passing the exam or having a high grade. Please consult the original materials. This material is subject to copyright. © differences from where the capital is coming from (debtors or equity) - Debtholders and shareholders have different interests to the company - The debtors will care only about the principal and the interest (they are biggest threat is the bankruptcy) - The shareholders will care more about the dividends and the share price (they do not care about bankruptcy) - !!! In countries where the main source of capital are the debtholders, companies will disclose more information on the balance sheet statement where the liabilities are present - !!! In counties where the main source of capital is coming from the shareholders, companies will not only disclose information about the balance sheet statement but also about the income statement - Additionally, due to the fact that very often debt providers stay at the board of directors as well and they are able to communicate on a private basis with the management of the company, they might not care much about public disclosure of financial information. - However, shareholders will care more about the financial disclosure of information 4. Inflation (more on this next week) > could be a very big problem in some countries - Double or Triple inflation renders historical cost accounting useless - Countries use adjusting accounting records to correct the distorted accounting numbers in financial statements - Without any adjustments, during inflation periods, in countries where accounting serves for taxation, companies will pay taxes on fictitious profits 5. Political and Economic Ties - Accounting is a technology that is borrowed from or imposed on another country > countries that have similar political and economic ties have the same accounting principles - Historical events shaping the political arena; e.g. colonialism, trade relations - Examples: India and United Kingdom (there is a historic link); Dutch Antilles and The Netherlands; Mexico and United States b. Culture - Culture is also widely considered to influence accounting systems and their implementation - Culture is the way we think, act and interact (think about Hofstede) - Based on the cultural variations, Gray (an accounting professor) classified four accounting sub- cultures dimensions from countries: IMPORTANT  Professionalism versus Statutory Control: a preference of using individual professional judgement and the maintenance of professional self-regulation as opposed to compliance with statutory control > whether accounting rules and practice will be determined by accounting professionals or by legislators  Uniformity versus Flexibility: a preference of uniforming accounting processing for all firms vs. flexibility (The Germany’s case of depreciation treatment in financial and tax accounting) > US (flexibility) vs Germany (no flexibility) NOTE: This document is prepared by Vladislav Dimitrov, a third year IB student at RUG. The document is a mere summary of the mandatory materials for the course IFM (EBB627A05) for the academic year 2020-2021. This document cannot replace the original lectures, tutorials, and mandatory chapters from the book. Therefore, the author will not be liable for any kind of typos, mistakes or misunderstandings. This document does not provide 100% guarantee for passing the exam or having a high grade. Please consult the original materials. This material is subject to copyright. ©  Conservatism versus Optimism: a preference of cautious measurement to financial performance vs. more opportunistic methods (conservatism refers to what is your attitude towards future revenue and expenses that are still uncertain)  Secrecy versus Transparency: a preference of confidentiality and restriction to public disclosures vs. more transparent, open and publicly accountable approach (preference of disclosure) > do people prefer public disclosure or more secrecy - The accounting diversity can be presented in terms of differences in disclosure, measurement, enforcement, and authority - At the top is culture which influences both accounting sub- culture and institutional characteristics 5. Problems due to accounting diversity - Preparation of consolidated statements > the first-hand financial information from the subsidiaries will be based on the local accounting rules and regulations > the parent company will have to consolidate the financial of the subsidiary - Access to foreign capital markets or financing abroad > if the accounting rules in your own country and in the target, country are very difference, investors will find it very difficult to understand the accounting statements which might prevent him from investing - Comparability of financial statements- in terms of understanding the financial performance and situation > when the accounting standards are very different, you will not be able to make comparisons - Lack of high-quality disclosure standards in some parts of the world > this is a problem - Example 1: Philips - EU follows the IFRS system, while US uses GAAP - Net income under IFRS ≠ Net income under US GAAP ≠ Net income under Dutch GAAP > reconsiliation is needed - Example 2: the Credit Rating of Public Foreign Bonds - How do foreign firms issue public bonds in the U.S.? > (1) Deliver financial statements to the U.S. regulator (SEC). Financial reports must follow either U.S. GAAP or IFRS + (2) Require a credit rating from credit rating agencies (CRAs) - IMPORTANT: Credit ratings measure the probability that the borrower cannot payback the interests and/or the principal of the bond in the future (determined by Moody’s, S&P Global, and Fitch Ratings) > best rating is: AAA, lowest is D NOTE: This document is prepared by Vladislav Dimitrov, a third year IB student at RUG. The document is a mere summary of the mandatory materials for the course IFM (EBB627A05) for the academic year 2020-2021. This document cannot replace the original lectures, tutorials, and mandatory chapters from the book. Therefore, the author will not be liable for any kind of typos, mistakes or misunderstandings. This document does not provide 100% guarantee for passing the exam or having a high grade. Please consult the original materials. This material is subject to copyright. © - A higher credit rating means that the bond is safe - Higher risk = discount of the price - The bond spread is determined by the credit rating - Rating Criteria of the CRAs:  Analyse Prime Solution’s financial statement;  Compare Prime Solution to other retailing firms: How comparable is the accounting performance of Prime Solution to that of other retailing peers?  Accounting comparability: A is comparable to B, if A and B produce similar earnings given similar macroeconomic situation  Challenge: since Prime Solution is a foreign issuer, who are the appropriate benchmark for Prime Solution, U.S. retailing firms or Dutch retailing firms? - Accounting diversity leads to higher cost of capital as credit ratings are based on financial statements which differ across countries 6. Solving the accounting diversity by reconciling foreign financial statements with each other - Recognition and measurement discrepancies across countries / accounting standards > e.g. how to compare apples with oranges > there is a convergence trend (IFRS) a. How to solve this problem? - Analysts can overcome the accounting diversity problem by performing the reconciliation (restatement) of financial statements - Reconciliation of financial statements: converting financial statement from one GAAP to another - Example: Case of Arcot - Revaluation of property, plants and equipment (a case of reconciliation) > Revaluation of PPE - We propose a firm who has to prepare its financial statement in accordance with two accounting principles where:  Under local GAAP, the revaluation of PPE (long-term assets) is allowed  Under U.S. GAAP the value of PPE is recorded at historic cost and revaluations are not allowed - In accounting there are generally two ways to recognise the value of PPT:  Historic accounting = once you purchase a long-term asset, then the value of the PPE should be recognised as the purchased price  Fair value accounting system = the companies can revalue the PPT based on the current price in the market > if the value of PPT is higher after one year, companies are allowed to recognise the change in value on the balance sheet as well - How to reconcile the two standards? EXAM QUESTION: NOTE: This document is prepared by Vladislav Dimitrov, a third year IB student at RUG. The document is a mere summary of the mandatory materials for the course IFM (EBB627A05) for the academic year 2020-2021. This document cannot replace the original lectures, tutorials, and mandatory chapters from the book. Therefore, the author will not be liable for any kind of typos, mistakes or misunderstandings. This document does not provide 100% guarantee for passing the exam or having a high grade. Please consult the original materials. This material is subject to copyright. © - Background info: Arcot purchased an equipment ($100m) at the beginning of 2015. The life of the equipment is five years, and the residual value is zero. Arcot used straight-line depreciation and the depreciation started from 2015; During 2015, the fair value of the equipment was revalued to $120m; - Question: What were the amount of depreciation expense and the balance sheet value of the equipment at the end of 2016 and 2017, under the local GAAP and U.S. GAAP, respectively? IMMPORTANT: - Balance sheet is a snapshot of a company's financial condition at specific moment in time, usually at the close of an accounting period. - If Arcot has to reconcile its financial statements at the end of 2017, then it means Arcot not only has to reconcile its BS (balance sheet) at the end of 2017, but also its BS at the end of 2016 and 2015 to reflect the impact of the PPE revaluation at different points of time. - Assuming that Arcot is going to IPO in Nasdaq in 2018 and therefore it must reconcile its financial statements from 2015 to 2017 under the U.S. GAAP. - Therefore, Arcot needs to reduce the value of PPE by $8M in the year of 2017 and increase the net income by $4M in the year of 2017. - How does this reconciliation affect the ROE: ROE = Net income/ Equity > income will increase (lower expense leads to higher income); equity will decrease as when assets decrease on the left- hand side of the equation (Assets = liabilities + stockholders’ equity), the equity must decrease as well 7. Recent Changes in Europe - Convergence of accounting to IFRS – International Financial Reporting Standards - Interfaces between financial accounting and management accounting are stronger in IFRS, therefore it become more popular among MNCs. - However, having a IFRS will not mitigate all diversity 8. Benefits of Using IFRSs for MNCs - More relevant financial information for all stakeholders, - Enhanced comparability, - Improved transparency, - Increased ability to access foreign markets - Better management of global operations, - Decreased cost of capital. NOTE: This document is prepared by Vladislav Dimitrov, a third year IB student at RUG. The document is a mere summary of the mandatory materials for the course IFM (EBB627A05) for the academic year 2020-2021. This document cannot replace the original lectures, tutorials, and mandatory chapters from the book. Therefore, the author will not be liable for any kind of typos, mistakes or misunderstandings. This document does not provide 100% guarantee for passing the exam or having a high grade. Please consult the original materials. This material is subject to copyright. © Tutorial 1 Exercises Exercise 1: (Exercise 1 from the e-book, pp. 35) Refer to the income statements presented in Exhibits 2.9, 2.10, 2.11, 2.12, and 2.13 for Callaway Golf Company, Südzucker AG, Meliá Hotels International S.A., Thai Airways Limited, and Tesco PLC. a) Calculate gross profit margin (gross profit/revenues) and operating profit margin (operating profit/revenues) for each of these companies for the most recent year presented. If a particular ratio cannot be calculated, explain why not. NOTE: This document is prepared by Vladislav Dimitrov, a third year IB student at RUG. The document is a mere summary of the mandatory materials for the course IFM (EBB627A05) for the academic year 2020-2021. This document cannot replace the original lectures, tutorials, and mandatory chapters from the book. Therefore, the author will not be liable for any kind of typos, mistakes or misunderstandings. This document does not provide 100% guarantee for passing the exam or having a high grade. Please consult the original materials. This material is subject to copyright. ©

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Specificaties

Niveau: Universiteit
School: Rijksuniversiteit Groningen
Opleiding: International Business and Management
Vaknaam: IFM
Vakcode: EBB627A05
Studiejaar: Third
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Rubriek: Samenvattingen
Gemaakt op: 24-12-2020
Bijgewerkt op: 24-12-2020
Type: .pdf
Pagina's: 89
Taal: English
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Hello everyone,

My name is Vladislav Dimitrov and I am a second-year IB student at the University of Groningen. I am highly motivated and diligent student who likes to study in an effective and systematised way. In order to achieve this goal I always prepare my summaries by myself and always study from them after completion. The fact that I had a GPA of 8.33 for the first year supports my diligence and the quality of the materials which I prepare.

My summaries are very detailed and the information is clearly, aesthetically and systematically summarised. In the summaries I always underline the most important concepts and ideas which makes them easier to read and memorise. When I prepare the summaries I always strictly follow the structure and layout of the original sources.

My aim is to share my notes with you in an attempt to help you better prepare for the exams in exchange for a nominal amount of money.

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