International Accounting and Multinational Enterprises 5e By Lee
International Accounting and Multinational Enterprises 5/e By Lee H. Radebaugh and Sidney J. Gray 9/10/2020 Power. Point Presentation by Kent W. Meyer, Ph. D
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International Business Combinations, Goodwill and Intangibles Chapter Seven
International Business Combinations, Goodwill, and Intangibles Consolidated Financial Statements Relatively few countries have developed legal and professional requirements for related enterprises, u The quality and quantity of consolidated information varies considerably between and within the countries u Some countries provide both parent company and worldwide consolidated information u Proportionate consolidation is an alternative to full consolidation (Appropriate for Joint Ventures) 1
International Business Combinations, Goodwill, and Intangibles (Cont. ) u Consolidated Financial Statements (Cont. ) The Equity Method is used where one firm does not control another but has a significant interest, u u u In some countries only the owner’s actual dividends received are counted The Equity Method is used where one firm does not control another but has a significant interest Different methods of consolidation have a different effect on the income statement and balance sheet. 2
Purchase vs. Pooling-of-Interests Accounting u u u Countries differ considerably in the methods allowed for full consolidations. Purchase and Pooling are the usual alternatives: Purchase: u u Assets valued at fair market, Goodwill may result, and Acquired company profits count only after acquisition. Pooling: u u Assets and liabilities are combed at book values, No Goodwill, Profits combined at pre-acquisition amounts, and Pooling allowed in few countries, not allowed in U. S. 3
Treatment of Non-Consolidated Subsidiaries u u If a subsidiary is not consolidated, Equity Method will generally result in higher reported earnings than Cost Method, Equity Method required in: u u Not required in: u u Japan, United States, and United Kingdom. Australia, Sweden, and Switzerland. Japan is a special case where legal relationships do not define actual influence or control. 4
Fair Value Adjustments Some countries require acquisitions be reported at Fair Value, others require Book Value. 5
Accounting for Goodwill The majority of countries treat Goodwill as an asset subject to amortization, while some: u Require immediate write-off, u Retain it as a permanent asset, and u Provide for a write-off period. 6
International Accounting Standards u u u IAS 27 and 28 require information about a group’s member and associated corporations, Associates are accounted for using the Equity Method, and IAS 22 states that Goodwill is an asset that must be amortized over its useful life. 7
Funds and Cash Flow Statements u u u Shows the inflow of funds from operations, loans, equity, and asset sales, and outflow from dividends, loan payments, and new investment; Funds are not necessarily cash; May have limited use in a global consolidated statement; Globally, MNE’s are voluntarily creating cash flow statements at an increasing rate; IAS 7 now requires a Cash Flow Statement; and Produced using the Direct or Indirect Methods. 8
Problems and Prospects u u The Funds Flow Statement, while considered to be an innovation in many countries, is rapidly being seen as being an essential element of business information; and It is not required by the European Union. 9
Joint Ventures Accounting u u Different cultural and accounting traditions in a global context have made accounting for joint ventures difficult; Centralized systems produced rules quite different than those in market driven systems The increasing number of joint ventures has posed a variety of questions; IASC 31 provides guidance in this area; and Joint Ventures take three basic forms: u u u Jointly controlled operations, Jointly controlled assets, and Jointly controlled entities. 10
Accounting for Purchased Goodwill Selected Countries Australia Brazil Canada France Germany Greece Hong Kong India Asset w/ Amortization Yes - Max. 20 years Yes - Max. 40 years Yes Yes Yes - Max. 5 years Immediate Write-Off Against Reserves No No Yes Yes No 11
Accounting for Purchased Goodwill (Cont. ) Selected Countries Italy Japan Kenya Philippines South Africa Spain Sweden Switzerland Asset w/ Amortization Yes - Max. 20 years Yes - Max. 40 years Yes Yes - Max. 20 years Yes Immediate Write-Off Against Reserves Yes No No Yes 12
Accounting for Purchased Goodwill (Cont. ) Selected Countries Thailand United Kingdom United States European Union IASC Asset w/ Amortization Yes - Tests required No - Held for resale Yes - Max. 20 years Immediate Write-Off Against Reserves Yes No No Yes No 13
International Accounting Standards IASC in IAS 22 eliminated immediate write-off and adopted the asset-with-amortization method. 14
Brands, Trademarks, Patents and Related Intangibles u u Accounting for brands, trademarks, etc. is often associated with accounting for Goodwill; Some countries provide for capitalization of brand names both purchased and self-produced: u u u This treatment restores equity in that it separates brands from the immediate write-off of Goodwill by some countries, Capitalizing also enhances borrowing capacity, and Capitalization also may help companies increase their values and avoid takeovers. 15
International Accounting Standards u u Intangibles, such as brands, can be recognized only if their future benefits to the entity are probable and their cost can be reliably measured, and If recognized, cost is recovered by systematic amortization. 16
Research and Development u u Include Direct and Indirect Costs related to creation and development of new processes, techniques, applications, and products; Three categories of expenses: u u u Pure research, Applied research, and Development. 17
Comparative National Practices Selected Countries Australia Brazil Canada France Germany Greece Hong Kong India Asset w/ Amortization Yes - Max. 20 years Yes Development Costs Yes No Yes - 5 Years Yes Development Costs Immediate Write-Off Against Earnings Yes Yes 18
Comparative National Practices Selected Countries Italy Japan Kenya Malaysia Netherlands Philippines South Africa Spain Asset w/ Amortization Yes Yes Development Only Yes Immediate Write-Off Against Earnings Yes Yes 19
The Significance of Intangible Assets u Intangible assets have grown tremendously insignificance relates to tangible assets due to: u u u International mergers, Pursuit of global market leadership, Growth of Information Technology, and Growth in international financial markets. Thus, problems related to accounting for intangibles have become particularly significant: u Solving these problems in an international context will require a level of international research, experimentation and development that has not yet been achieved. 20
Goodwill u The dramatic growth of international mergers and major expansion of service industries has highlighted problems of accounting for Goodwill; u u u Goodwill = Purchase Price - Net Book Value of Assets Goodwill is unique in that it incorporates the value of future earnings and the value of the business as a whole, Controversy exists as to whether Goodwill is an asset and if it should amortized, immediately written off or preserved at historic cost indefinitely. 21
Comparative National Practices u Most countries are fairly flexible: u u u Asset with systematic amortization, Immediate write-off against equity. Only a few countries allow capitalization without amortization. 21
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