Tiếng anh chuyên ngành kế toán part 42 pot

398 Planning and Forecasting 4. Among costs deferred by EP were research and development. These costs must be expensed as incurred under U.S. GAAP. 5. The line item for “Pension and other post-retirement benefits” highlights the current consistency between Portuguese and U.S. GAAP in recognizing the associated expense. However, the adjustment in Exhibit 12.27, shareholders’ equity reconciliation, reveals a continuing difference in the recognition of the associated benefit liability. EP had recognized a larger liability, and charged this amount against shareholders’ equity, than would be required under U.S. GAAP. This explains the increase in shareholders’ equity in Exhibit 12.27. 6. Prior to 1995, EP reduced income in recording an accrual for self- insurance that was not permitted under U.S. GAAP. 7. Termination benefits were accrued by EP in 1997 that would not have been accrued in that year under U.S. GAAP. The necessary adjustments are a $102,755,000 increase in Portuguese GAAP net income and a $132,985,000 increase in shareholders equity. 8. EP’s policy of recognizing bad debts on accounts receivable results in their being recorded at a later point in time than would be true under U.S. GAAP. 9. EP records income taxes based upon the amount of taxes currently payable as determined by government tax regulations. U.S. GAAP requires that income taxes be recorded on the basis of earnings reported in the shareholder income statement as opposed to earnings in the income tax return. This results in an overstatement of the Portuguese-GAAP net income for 1998 and a cumulative understatement of shareholders’ equity at the end of 1998. 44 The differences between Portuguese GAAP net income and shareholders’ equity are fairly substantial, but differences between foreign and U.S. GAAP in other countries may be far greater. EP’s 1998 net income would have been about 35% higher under U.S. GAAP. However, shareholders’ equity would have been about 32% lower. This difference between the effects on net income and shareholders’ equity result from the overstatement of assets (overstates depreciation and understates current earnings) and understated liabilities (understates expenses and overstates earnings). For a single year, an asset overstatement may under- state net income because a portion of the asset overstatement is amortized as an additional expense in the income statement. Shareholders’ equity remains overstated because asset net overstatements remain on the balance sheet. Domestic users of foreign financial statements need to be aware of the differences in financial reporting practices, and also have some information on the effect of these differences on such key financial statistics as earnings- per-share and shareholders’ equity. For example, security analysts use ratios of market price to earnings-per-share (the price/earnings or P/E ratio) as one way Global Finance 399 to judge whether a stock might be either over or undervalued. Electricidade de Portugal’s P/E ratio is higher under Portuguese GAAP because its earnings per share are lower than they would be under U.S. GAAP. Under Portuguese GAAP Electricidade de Portugal would appear to be more conservatively valued than under U.S. GAAP. Similarly, bankers use the relationship of total debt to stockholders’ equity to judge the capacity of firms to handle service and repay their borrowed funds. By this statistic, Electricidade de Portugal will appear to be less highly leveraged because its stockholders’ equity is much higher under Portuguese GAAP. The differences between U.S. and Portuguese GAAP, revealed in Ex- hibits 12.26 and 12.27, are multiplied if one adds to the types of companies and numbers of countries. As the markets for securities become more global, some claim that there is the absence of a level playing field because of these GAAP differences. If the efforts of the International Accounting Standards Committee (IASC) are fruitful, then the playing field should become much more level in the future. However, in the meantime there remains a great deal of international diversity in GAAP. GAAP Differences and the Level Playing Field Some argue that international competitiveness can be impaired if earnings and financial position under local GAAP appear weaker than they would under the GAAP of major competitor countries. That is, the playing field will not be level. As an example, concern has been expressed about international GAAP differences that deal with acquisition (of other companies) accounting. A typi- cal acquisition will include the payment of a premium, in some cases involving billions of dollars, for what is collectively termed goodwill. This amount con- sists of the difference between the purchase price and the current value of the net assets acquired, as in the following example: Purchase price $1,000 Current fair value of net assets acquired (Assets − Liabilities) 700 Goodwill $ 300 It has been a common practice in some countries to deduct immediately the goodwill recorded in an acquisition from shareholders’ equity. (This is one of the practices that the IASC hopes to see eliminated under its harmonization project discussed earlier.) U.S. GAAP has for several decades required that goodwill be amortized through the income statement. This causes the post- acquisition earnings of a U.S. firm to appear weaker than a comparable firm in a country that permits the immediate write-off of goodwill. If a foreign firm, located in a country where the immediate write-off of goodwill is permitted, and a U.S. firm were both bidding for the same company, the foreign firm would forecast a stronger post-acquisition earnings pic- ture. This results because the foreign firm would deduct the goodwill 400 Planning and Forecasting immediately, whereas the U.S. firm would take the charge through its future income statements. 45 It could be argued that the profit differences that result from the dispar- ity in accounting for goodwill are purely cosmetic, and that they should not cause a U.S. bidder to be at a disadvantage in the acquisitions market. That is, the impact of the acquisition on the bidder’s future cash flow should be the central issue. Differences in accounting policy should not have a direct impact on future cash flow. However, it is well to remember that, cash flow aside, the reported numbers take on a significance in their own right to the extent they are (1) a factor in determining managerial compensation or (2) are used by lenders to monitor compliance with debt agreements. The U.S. GAAP requirements for goodwill accounting appear to be on the verge of major changes in 2001. The requirement to amortize goodwill would be eliminated in favor of a policy that would require goodwill write-offs only in cases where the goodwill is considered to be impaired: From the date of issuance, all goodwill would be accounted for using an im- pairment approach. Under that approach, goodwill would be reviewed for im- pairment, that is written down and expensed against earnings, only in the periods in which the recorded value of goodwill is more than its fair value. 46 Some countries may criticize this change in goodwill accounting as contribut- ing to international GAAP diversity. The change will also be seen as roughing up and not smoothing out the playing field. The issue of international competitiveness was also raised with respect to the FASB statement on postretirement benefits accounting, SFAS No. 106, Employers’ Accounting for Postretirement Benefits Other Than Pensions. 47 The Statement requires companies to apply accrual accounting to what are termed other postretirement benefits, mainly health and life insurance. When pro- posed, there was fierce lobbying against issuing the statement. Some excerpts from a statement to the FASB by the then Chief Financial Officer of Chrysler Corporation make the key points: 48 This higher cost recognition will depress reported profitability, and thereby ultimately discourage capital formation in job-creating enterprises in the U.S. There will be a powerful incentive to move our employment base to Canada, Europe and Third World countries. Foreign based companies will not be forced to adopt your new rules—all other things being equal, a European or Japanese company will report a billion dollars more profit doing the same business as Chrysler. In that environment, we will simply be unable to compete fairly for investor capital. Ultimately, I be- lieve you will have added to the trend of foreign ownership of our U.S. indus- trial base. One can only hope for the success of the IASC program to increase international harmony in reporting practices, if the arguments concerning the anti- competitive potential of diversity in international GAAP are meritorious. Global Finance 401 EVALUATING THE PERFORMANCE OF FOREIGN SUBSIDIARIES AND THEIR MANAGEMENT With the acquisition of its Danish subsidiary, Fashionhouse is faced with the need to report and evaluate the performance of the subsidiary as an economic entity, as well as the performance of the subsidiary’s management. The discussion here will focus only on those differences that result from the foreign char- acter of the subsidiary. Aside from this, performance evaluation should be fundamentally the same as for a domestic firm. The fact that, after the translation process, financial statements are available in both the domestic currency (krone in the case of Fashionhouse) and the U.S. dollar is an important difference. Should performance of the subsidiary and its management be judged on the basis of the krone or dollars results? Moreover, the earnings performance of the Fashionhouse subsidiary will be affected each year by (1) the movement of the krone against the dollar and (2) prices set (a transfer price) on the goods sold to Fashionhouse in the United States. Impact of Exchange Rate Movements on Performance Evaluation A number of years ago, an issue arose concerning the incentive compensation of the manager of a Netherlands subsidiary of a major U.S. heavy equipment manufacturer. A strong profit performance was produced in the European currency, but the translated results were a loss (note: translation followed the tem- poral and not the all current method). After lengthy consideration by senior management, a decision was made that no incentive compensation was to be awarded. Management held that failure of the Netherlands subsidiary to earn a profit in dollars resulted in its making no contribution to the parent, whose goal was to maximize the dollar earnings of the consolidated entity. The manager of the Netherlands subsidiary was not pleased. A central precept of performance evaluation is that managers should only be held responsible for results that incorporate variables over which they exer- cise some reasonable control. Depending upon the circumstances, this might mean that in judging the performance of a department foreman, the quantity of material used is considered controllable but not its price. For performance evaluation purposes, the material used would be priced at some prearranged standard and not its actual cost. On the other hand, the vice president of manufacturing might well be held responsible for actual material cost on the basis that he or she has been assigned responsibility for the price of material used, as well as its quantity. Applied to evaluating the performance of the management of foreign subsidiary, the concept of a controllable performance indicator would call for either (1) using the profit results from the foreign-currency statements or (2) using the translated dollar earnings, after adjustments designed to remove 402 Planning and Forecasting the effects of changes in the value of the dollar, that is, the price of the dollar. As (1) involves no unique adjustments related to foreign subsidiary status, only (2) will be considered further. Consider the income statements in Exhibit 12.28 in foreign currency (FC) and the U.S. dollar. Assume that in the following year, domestic results are as given in Exhibit 12.28 and that the foreign currency has depreciated to an average rate of $0.50 for the year (recall that income statement amounts are translated at the average rate under the all-current method). The new translation would now be as outlined in Exhibit 12.29. Net income in year two, in the foreign currency, increased by 65% over Year 1 (from FC180 to FC 297). However, the income improvement on a translated dollar basis was less than half this amount, only 32% ($112 to $148). The impact of the change in exchange rates needs to be removed if the translated income statement is to be used to evaluate performance of the subsidiary’s management—on the assumption that management has no control over exchange rates. Net income can be adjusted as follows: Year 2 net income in the foreign currency FC297 Translate at year 1 exchange rate × 0.62 Year 2 net income at constant exchange rate $184 EXHIBIT 12.28 Year 1 income statement (in foreign currency and dollars). FC Exchange Rates U.S. Sales 1,000 $0.62 $620 Less cost of sales 600 0.62 372 Gross margin 400 248 Less SG&A 100 0.62 62 Pretax profit 300 186 Less tax provision 120 0.62 74 Net income 180 $112 EXHIBIT 12.29 Year 2 income statement (in foreign currency and dollars). FC Exchange Rates U.S. Sales 1,200 $0.50 $600 Less cost of sales 660 0.50 330 Gross margin 540 270 Less SG&A 115 0.50 58 Pretax profit 425 212 Less tax provision 128 0.50 64 Net income 297 $148 Global Finance 403 The previous adjustment holds constant the value of the foreign currency in measuring net income for purposes of performance evaluation. In judging the subsidiary itself as an economic unit, translation at the depreciated value of the foreign currency may still be appropriate. The dollar value of the net income produced is indeed lower because of the currency depreciation in the subsidiary’s country. 49 An alternative approach that is sometimes used is to evaluate the performance of management is to use budgeted foreign exchange rates. This is simi- lar to the above in that it holds the exchange rate constant. However, the constant rate is a budgeted exchange rate and not simply the rate from the previous year. There is ample evidence in U.S. annual reports of adjustments to control for the impact of foreign-exchange changes on performance. It is standard for the Management’s Discussion and Analysis of Operations section, an SEC requirement, to include commentary on the impact of exchange rate changes on revenues, though far less frequently on earnings. However, Philip Morris does identify the effect of exchange-rate changes on both revenues and the income of operating companies. Three recent examples follow: Johnson & Johnson Inc. (1999) Sales by international companies were $12.09 billion in 1999, $11.15 billion in 1998 and $10.93 billion in 1997. This represents an increase of 8.4% in 1999, 1.9% in 1998 and 1.5% in 1997. Excluding the impact of foreign currency fluc- tuations over the past three years, international company sales increased 12.4% in 1999, 7.1% in 1998 and 9.6% in 1997. Philip Morris Companies Inc. (1999) Currency movements decreased operating revenues by $782 million ($517 million, after excluding excise taxes) and operating companies income by $46 million during 1999. Praxair Inc. (1999) The sales decrease of 4% in 1999 as compared to 1998 is due primarily to unfa- vorable currency translation effects in South America. Excluding the impact of currency, sales grew 2%. Changes in exchange rates present a clear challenge in evaluating the performance of both the economic units, such as the foreign subsidiaries, as well as the management of these organizations. The emphasis on foreign operations is on results in the domestic and not the foreign currency. This can create obvious problems in the evaluation of the management of foreign subsidiaries because their results in the foreign currency may improve or decline while their performance expressed in the domestic (parent’s) currency declines or improves. If foreign entity managers have little control over their results in the parent’s currency, then judging their performance in that currency presents clear problems. Performance evaluation in the domestic versus the foreign currency should require that unit management have currency risk management as part 404 Planning and Forecasting of their responsibilities. At least in the case of transactional exposure, Black & Decker managers have in the past had this as part of their duties. However, this would still leave open the effect of translation exposure on results and performance evaluation. As Black & Decker reports: Foreign currency transaction and commitment exposures generally are the responsibility of the Corporation’s individual operating units to manage as an integral part of their business. Management responds to foreign exchange movements through many alternative means, such as pricing actions, changes in cost structure, and changes in hedging strategies. 50 The goal of the above discussion is to highlight how the evaluation of foreign subsidiaries and their management represents a special challenge because of the ways in which exchange rate movements can affect measures of financial performance. Another factor that also affects such performance evaluation is the issue of transfer pricing. These are the prices charged when goods are transferred between related foreign and domestic firms. The issue of transfer pricing is discussed next. Transfer Pricing and the Multinational Firm The prices at which goods or services are transferred between related entities, such as parents and subsidiaries and divisions of the same firm, are referred to as transfer prices. Transfer prices could be a major factor in determining the profits of the Fashionhouse Danish subsidiary because much of its product is shipped to its U.S. parent. As in the previous case, the discussion here will focus on the dimensions of transfer pricing that are influenced by the foreign status of the subsidiary. The general topic of transfer pricing has been hotly debated over many years. The setting of transfer prices, to both encourage optimal decision- making and to facilitate performance evaluation, is not yet a settled matter. Transfer prices are generally based upon cost, cost plus some markup, or some approximation of market. Firms with international operations typically disclose their method of pricing transfers of goods and services among different taxing jurisdictions—typically countries. Some recent examples of transfer pricing policies are presented in Exhibit 12.30. The levels at which transfer prices are set is influenced by a wide range of sometimes conflicting objectives. These include maximizing worldwide profits after taxes, maintaining flexibility in the repatriation of profits, encouraging optimal decision making by profit center management, providing profit data that are reliable indicators of managerial performance and entity profitability, building market share, and maintaining competitiveness in foreign markets. 51 There is some variation in the transfer pricing policies used by U.S. firms, with the key distinction being market value versus cost-based transfer prices. Moreover, these policies can have a major impact on measures of financial performance of the foreign subsidiary. They become another factor, in addition to changing exchange rates, that must be considered in evaluating financial performance of a foreign subsidiary and its management. Global Finance 405 Taxes and Transfer Pricing A major issue surrounding transfer prices in the international arena is their effect upon the total tax burden of parent firms. The levels of income taxes and tariffs vary considerably across countries. Corporate income tax rates range from the middle teens up to 50% in some countries. This presents the possibil- ity that transfer prices may be set in part to minimize a firm’s worldwide tax bill. Establishing the reasonableness of international transfer prices is the principal defense against a charge of transfer price manipulation. Ignoring other factors bearing on the setting of transfer prices, assume that the objective is to minimize worldwide income taxes. Assume that the income tax rate of the parent is 40% and that of the foreign subsidiary is 30%. Further, the parent is the manufacturer and transfers are made to the foreign subsidiary. The total cost of the product is $100 per unit and it can be sold by the foreign subsidiary at insignificant additional cost for an amount equal to $150. Therefore, the total worldwide pretax profit to be recognized is $50. While the parent would not have unlimited flexibility in setting the transfer price, tax minimization would call for recognizing as much of the profit as possible in the earnings of the subsidiary. This is because the subsidiary’s tax rate is only 30% while the parents is 40%. Tax minimization is accomplished by setting a relatively low transfer price as illustrated in Exhibit 12.31. EXHIBIT 12.30 Alternative transfer-pricing policies. Company Transfer-Pricing Policy Arch Chemicals Inc. (1999) Prevailing market prices Transfers between geographic areas are priced generally at prevailing market prices. Conoco Inc. (1999) Estimated market values Transfers between segments are on the basis of estimated market values. Dow Chemical Company Cost and market-based prices (1999) Transfers between operating segments are generally valued at cost. Transfers of products to the Agricultural Products segment from the other segments, however, are generally valued at market-based prices. Pall Corporation (2000) Cost plus a markup on cost Transfers between geographic areas are generally priced on the basis of a markup of manufacturing costs to achieve an appropriate sharing of profit between the parties. Tenneco Inc. (1998) Market value Products are transferred between segments and geographic areas on a basis intended to ref lect as nearly as possible the market value of the products. SOURCES : Companies’ annual reports. The year following each company name designates the annual report from which each example is drawn. 406 Planning and Forecasting The tax authorities of countries are well aware that multinationals have strong incentives to shift profits into low-rate counties. Recent years have seen governments increasingly willing to challenge tax computations that they be- lieve are based upon the use of unreasonable transfer prices. Therefore, the example above simply shows how total tax payments can be influenced by alternative transfer prices. The degree of flexibility shown above may or may not be available. Notice, in the above example that no change in policy would result if the foreign country also had an ad valorem tariff. Worldwide taxes would still be minimized by a low transfer price because this would also minimize the tariff. However, circumstances would differ if the parent’s income tax rate were less than that of the subsidiary. Setting a high transfer price would cause more of the profit to be taxed at the lower income tax rate of the parent. But, this benefit is offset to some extent by the higher tariff in the subsidiary’s country. The analysis would need to be extended to include tariffs in the total taxes to be minimized. Other Inf luences on Transfer Pricing Policy and Potential Conf licts Factors other than tax minimization also bear on the establishment of transfer prices. An effort to build market share or to respond to severe price competi- tion might call for low transfer prices. However, this could be in conflict with a tax minimization objective if income tax rates in the country receiving the transferred goods (transferee country) were higher than the income tax rates of the country from which the transfer was made (transferor country). Transfer pricing policy may sometimes be employed to circumvent re- strictions on the repatriation of profits by charging high transfer prices. This effectively involves taking out profits in the form of payments for the goods EXHIBIT 12.31 International transfer pricing and tax minimization. Low Transfer Price High Transfer Price Parent revenue $110 $140 Cost 100 100 Pretax profit 10 40 Income tax (40%) 4 $ 4 16 $16 Subsidiary revenue 150 150 Cost (transfer price) 110 140 Pretax profit 40 10 Income tax (30%) 12 12 3 3 Worldwide tax $16 $19 Composite tax rate 32% 38% Global Finance 407 shipped. There are, of course, some potential offsetting disadvantages from this practice: 1. Charging higher transfer prices will increase ad valorem tariffs. 2. Charging higher transfer prices will lower profits of the transferee firm and potentially present problems in evaluating the profit performance of the unit and its management. 3. Charging higher transfer prices might impair the competitive position of the transferee firm. 4. Charging higher transfer prices lowers profits of the transferee firm and could reduce its apparent financial strength in the eyes of lenders and other users of its financial statements. This enumeration of factors bearing on the setting of transfer prices is not exhaustive. However, it should be sufficient to highlight the inherent complexity of setting transfer prices. This complexity is magnified as the global reach of multinational firms extends into a greater numbers of countries with wide variations in taxes, competitive conditions, business practices, types of govern- mental control, variability in exchange rates, and rates of inflation. This last factor, rates of inflation, is discussed next in terms of its impact on measuring the financial performance of domestic firms as well as foreign subsidiaries. IMPLICATIONS OF INFLATION FOR FINANCIAL PERFORMANCE As Fashionhouse continued its evolution as a global firm, it considered locating manufacturing capacity in countries with low labor costs. However, in many cases high rates of inflation were linked to low labor costs. Judging performance in highly inflationary environments presents special problems. At some point, financial statements prepared from unadjusted (historical) cost data lose their ability to provide reasonable indicators of either the financial performance or status of firms. Several different approaches have been developed to adjust historical cost financial statements. The principal methods can be clas- sified as involving either (1) general price level or (2) current cost adjustments. These two methods are illustrated below and contrasted with historical-cost statements as the baseline. To provide some useful background, current management commentary on the impact of inflation on financial performance is presented. Management Commentary on the Impact of and Response to Inf lation Management’s Discussion and Analysis, a section of the annual report required by the SEC, often includes commentary on the implications of inflation for financial performance. This commentary provides useful insight into manage ment’s . management as part 404 Planning and Forecasting of their responsibilities. At least in the case of transactional exposure, Black & Decker managers have in the past had this as part of their. control. Depending upon the circumstances, this might mean that in judging the performance of a department foreman, the quantity of material used is considered controllable but not its price. For. $600 Less cost of sales 660 0.50 330 Gross margin 540 270 Less SG&A 115 0.50 58 Pretax profit 425 212 Less tax provision 128 0.50 64 Net income 297 $148 Global Finance 403 The previous adjustment