Internationalization of the introductory financial accounting course

Journal of Accounting Educaron. Vol. 6, pp. 159-181, Printed m the USA, All rights reserved.

Teaching

1988 Copyright

and Educational

074%5751188 $3.00 + .oO 0 I988 Pergamon Press plc

Note

INTERNATIONALIZATION OF THE INTRODUCTORY FINANCIAL ACCOUNTING COURSE Malcolm M. McClure ILLINOIS STATE UNIVERSITY Abstracf: This note describes the method used at Illinois State University to add an international perspective to the introductory financial accounting course. It discusses the materials distributed to the faculty and gives suggestions for integrating them with textbook material.

The American Assembly of Collegiate Schools of Business (AACSB) has called for the addition of a “worldwide dimension” to the curriculum of schools of business seeking accreditation. The AACSB suggests several methods by which such a dimension could be added. They are: 1. Include an international dimension in some or all of the core courses. 2. Institute an international course in some or all of the functional areas, Some other possibilities are: 3. Institute an international exchange program. 4. Require students to participate in methods two or three. 5. Some combination of the above. Prior to 1985, the College of Business at Illinois State University (ISU) had some international coverage in core courses and had instituted methods two and three. Methods two and three were realized through an active College of Business exchange program with the Ecole Supdrieure des Sciences Commerciales d’Angiers in Angiers, France and the Universitat Paderborn in Paderborn, Germany, international courses in all the functional areas at the undergraduate level, and a major in international business. All these efforts, however, did not satisfy the 1979 interpretation of the AACSB standard, which said that “. . . every student should be exposed to the international dimension through one or more elements of the curriculum” (Nehrt, 1981, p. vii). ISU’s program provided extensive international exposure for those students who chose to take advantage of it, but still allowed the majority of the students to complete the business program with less than the desired amount of international coverage. In 1985, the committee on international 159

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M. M. McClure

business of the College of Business observed that the College of Business faculty who had international interests normally included international materials in the courses which they taught in their functional areas. The committee requested that some of those professors prepare international materials that could be used in the introductory courses in their departments to insure adequate international coverage by faculty members with no international background. The materials for internationalization of the introductory financial accounting course were completed during the fall semester of 1985, and a workshop was held to familiarize those who would be teaching the course in the spring semester of 1986 with the materials. Since that time, the materials have been distributed at the beginning of each semester. Several other authors have examined the internationalization of the accounting curriculum (e.g., Burns, 1979; Gernon & Diamond, 1982; Mintz, 1980; and Sherman, 1987) and Meek (1985) provided specific material for internalization of the introductory managerial accounting course. The purpose of this note is to provide faculty at other institutions with specific information about one method of internationalization used at ISU which they might use in their own financial accounting courses. OBJECTIVES

OF INTERNATIONALIZATION

The AACSB states that the need for internationalization of the accounting curriculum is due to the increasing international involvement of business in the United States, both direct and indirect (AACSB, 1979, p. 1). Thus, in the case of accounting, accountants may need to produce financial statements under different sets of rules acting as accountants in multinational companies, they may need to interpret such financial statements in making credit decisions or in advising clients in investment decisions, or they may need to audit such statements. Consequently, an important objective of adding an international dimension to accounting courses is to develop student skills in preparing and interpreting financial statements prepared according to differing accounting procedures. A second objective of internationalization of accounting courses is to show students that accounting rules are not natural laws but can and do vary legitimately from country to country (and over time), depending on the cultural values of the society in which they are used. In pursuit of the second objective, it is also useful to include materials from the history of accounting to suggest that accounting is a continually evolving system, responding to changes in its environment. PROBLEMS

IN INTRODUCING

INTERNATIONAL

MATERIALS

At the 1978 meeting of the AACSB on internationalization, the accounting section decided that the internationalization of the required introductory financial accounting course would prove too difficult to be worth the effort

Internationalization

of the Introductory

Financial

Accounting

(AACSB, 1979, p. 25). At ISU also, there was a number against introducing international aspects of accounting financial accounting course, such as the following:

Course

161

of good arguments in the introductory

1. The course is divided into sections taught by a large number of different teachers [four regular faculty, four lecturers (temporary faculty), six graduate teaching assistants, and six lab teaching assistants in the fall of 19861, most of whom lack international expertise. 2. There is a large amount of material which must be dealt with in the course and a limited amount of time to cover it. The most common response of faculty members when it was suggested that international material be inserted in the course was that there is not sufficient time to cover the material needed for the students to understand the U.S. accounting system. This complaint was common to all the introductory courses being internationalized at ISU and seems to be common to the disciplines represented at the AACSB’s 1978 meeting as well (for example, see AACSB, 1979, p. 13). 3. The students in the introductory course possess inadequate practical and academic backgrounds (about half of them have not even had high school bookkeeping) and could become confused between the United States and the foreign methods presented. This was the main objection presented to the AACSB (1979, p. 25). The ISU International Business Committee decided that the introductory courses in the various functional areas should be internationalized despite these difficulties since these courses frequently represent students’ only contact with a functional area in which they are not majoring. The internationalization packages developed at ISU were designed with these difficulties in mind. The accounting package in particular addressed the difficulties as follows: 1. The ISU international accounting materials were constructed so they did not require actual international experience on the part of the faculty using them. For those who lack interest in international aspects of accounting, the materials provide masters for overheads and commentary about them which can be used in the course easily. For those faculty members who become interested in improving their international knowledge, the materials include references which will allow a more thorough approach. This design was also used to motivate faculty members to enhance their own international skills. It was intended that, as faculty members used the materials, their interest would increase and they would be stimulated to learn more about international accounting. 2. To meet the objection that there is not sufficient time to include any extra material, the international materials were prepared to be used to illustrate points about the U.S. system by showing a contrast to

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M. M. McClure

some other system. For the most part, the contrast can be made in perhaps less than one minute of class time. Thus, the international materials are not intrusive, but rather serve to amplify the regular class material. Nehrt (198 1, p. 70) refers to this approach as the “spread style” as opposed to the “block style” where all the international material appears as a single lump, typically at the end of the course. Since the material was prepared to be inserted at specific spots in the lecture, it is keyed to the textbook used at ISU (Welsch, Anthony, & Short, 1984). 3. The committee decided that the materials in the internationalization package would not confuse any student who was paying even minimal attention since they are presented as contrasts, rather than as major lecture elements.

INTERNATIONALIZATION

MATERIALS

The author believes it is more convincing to present foreign materials in their original format. Therefore, although some condensed versions of the materials are presented in the appendices, it is recommended that those who would like copies of the complete ISU financial accounting internationalization package request a copy directly from the author. The materials used in the internationalization package are the following: 1. The balance sheet and income statement of the International Development Association (a division of the World Bank) in Arabic and in English. (See Appendix 1.) These statements can be used to illustrate the need for intelligibility of accounting reports as mentioned by the Financial Accounting Standards Board (FASB) in Statement of Financial Accounting Concepts 2 (1980). Since the Arabic statements are clearly useless to non-Arabic speakers, they can be used when the need for intelligibility is mentioned [typically in the first chapter of a textbook (Welsch et al., 1984, p. 7)]. The Arabic statements can also be used to lead into a discussion of GAAP by saying that since accounting is a language, it is necessary that financial statement users understand the language of the statements, so the statements need to be prepared under the same (or similar) rules (GAAP) and that the current source of these rules in the United States is the FASB. To be used in this way, the materials can be inserted where the textbook discusses sources of GAAP [also typically the first chapter (Welsch et al., 1984, p. 14)]. 2. The balance sheet of an Indian firm, The Jay Engineering Works Limited. (See Appendix 2.) This statement can be used to demonstrate that the format used in the standard U.S. balance sheet is not the only possible one. The statement is a British-style balance sheet and has its categories completely reversed from the standard U.S. balance

Internationalization

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Accounting

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163

sheet, beginning with Share Capital and ending with Current Assets. It can be used when classified balance sheets are discussed (Welsch et al., 1984, p. 52). 3. The balance sheet of Nest1e’S.A. (a Swiss corporation). (See Appendix 3.) U.S. accounting tends toward conservatism in the basic structure of its rules. For example, lower of cost or market rules for inventories and marketable securities require that assets be written down to reflect unrealized losses, but do not allow them to be written up to reflect unrealized gains (other than “recovery of unrealized losses” on marketable equity securities). Many theorists have complained about the conservatism of U.S. accounting rules (e.g., Sterling, 1967), but many other countries have more conservative accounting rules. For example, in Switzerland it is allowable to expense property, plant, and equipment as it is purchased. Thus Nestle’, a huge Swiss-based multinational firm, records only one Swiss franc of property, plant, and equipment. Their balance sheet can be compared to that of Hershey, a U.S.-based multinational of similar size dealing in similar markets. Note also that Swiss companies must disclose the insurance carried on their fixed assets since their balance sheets typically understate asset values. These Nestle statements can be used to illustrate extreme conservatism or a failure to match costs and revenues properly (Welsch et al., 1984, pp. 65, 365). They can also be used to illustrate differences in accounting for the acquisition of fixed assets or differences in asset lives used for depreciation. 4. The balance sheet and selected footnotes of N.V. Philips’ Gloeilampanfabrieken (a Dutch corporation). (See Appendix 4.) In U.S. accounting, historical cost is the appropriate basis for entry into the accounting system. The historical cost is rarely altered, and then only to write down assets. In the Netherlands “most major companies on the stock exchange use current value accounting" (Arpan & AlHashim, 1984, p. 106). This example shows that Philips’ property, plant, and equipment are disclosed at current value and includes Philips’ discussion of current value. This example can be used in the theoretical discussion of historical cost, in the discussion of depreciation of fixed assets (especially where the author states that depreciation is not intended to be a process of valuation but only of allocation), or in the discussion of objectives of financial accounting (Welsch et al., 1984, pp. 22, 65, 404). It is also useful to point out that, according to many theorists (e.g., Sterling, 1967), this use of current value accounting makes Dutch accounting information more useful to investors than U.S. accounting disclosures. Enthoven (1982) discusses Philips’ accounting in detail. 5. A short outline of the history and objectives of several accounting systems. (See Appendix 5.) It has been widely stated [e.g., by Arpan

164

M. M. McClure

& Radebaugh (1984, chap. 2); the FASB in Statement of Financial Accounting Concepts 1 (1978); Fantl (1971); Gaertner & Rueschhoff (1980); and Mueller, Gernon, & Meek (1987, chap. l)] that accounting is shaped by its environment. More specifically, an accounting system is driven by its objectives which are derived from culture. Thus, the divergent cultures of different countries give rise to different accounting methods and different disclosure conventions. This material can be used where the textbook discusses objectives of accounting (Welsch et al., 1984, pp. 7, 64) or keyed to the specific accounting method discussed. 6. The one-sentence audit report of Volkswagenwerk AG (a German corporation). (See Appendix 6). The difference between the legalistic approach to accounting and the investor-oriented approach can be illustrated by the one-sentence audit report used in Germany which focuses on compliance with the accounting laws and ignores whether the numbers have any economic reality. The German audit report can be compared to the standard U.S. audit report which claims that the financial statements “present fairly” the facts. This material can be used where the textbook presents a sample U.S. audit report (Welsch et al., 1984, p. 71). 7. Treatment of discount or premium on bonds payable in Mexican accounting. In Mexican accounting, discounts on bonds payable are accounted for as an asset, “prepaid interest,” and are classified under deferred charges. Premiums on bonds payable are accounted for as deferred credits. Their amortization and the effect on interest expense is the same as in U.S. accounting although their balance sheet presentation is different (Pozo Mariscal, 1975, p. 251). Many claim that the U.S. balance sheet treatment is preferable since “Discount on bonds payable is not an asset because it does not provide any future economic benefit” (Kieso & Weygandt, 1986, p. 583). A Mexican accountant would argue that the discount represents the right to pay less cash interest than one would expect to pay on a liability of a given face value, given the market interest rate at issuance, and that this right represents a future economic benefit. This argument seems as valid as that given in the United States for inclusion of deferred taxes as an asset. The strongest objection to the Mexican treatment seems to be that their “prepaid interest” account is directly connected to the bonds and should be disclosed in the same place. This material can be covered when the textbook discusses bond premiums and discounts (Welsch et al., 1984, p. 518). 8. Foreign Currency Receivables and Payables (See Appendix 7.) This material differs from the rest of the package in two ways. First, it is strictly U.S. accounting (FASB 52) and second, it requires a significant amount of class time to cover. It is included because an increasing number of U.S. companies are involved with foreign trading

Internationalization

of the Introductory

Financial

Accounting

Course

165

partners, and therefore need to be able to record foreign currency transactions. The material also illustrates one of the few places in U.S. accounting where true current value reporting is used, even to the extent of allowing unrealized gains to be included in the income statement. In the foreign currency receivables example, a sale takes place denominated in German Marks. The sale is recorded, the year-end adjusting entry is prepared, and the final collection of the receivable is recorded. The foreign currency payables example presents the mirror image of the receivables example. The foreign currency receivables and payables examples may each be presented separately with the textbook’s separate discussion of accounts receivable (Welsch et al., 1984, p. 360) and accounts payable (Welsch et al., 1984, p. 455). However, the author presents both foreign receivables and payables when discussing accounts payable (Welsch et al., 1984, p. 455), handing out copies of the materials and using 10 to 15 minutes of class time to discuss them. A quiz on the receivables and payables is given several days later. The students generally perform well on the quiz. If foreign currency receivables and payables are covered together, hedging is easier to illustrate. For example, one can point out that if a company has a receivable and a payable for the same amount in the same currency due at the same time then the gains and losses cancel each other, producing a perfect hedge. STUDENT

REACTIONS

TO THE INTERNATIONAL

MATERIAL

Informal surveys (both oral and using an open-ended questionnaire) were conducted with faculty members and teaching assistants who used the international materials in teaching the introductory financial accounting course at the beginning of the semester following their use. Most of them responded that the internationalization materials, especially the foreign financial statements, were used heavily early in the course, in essence converting the approach to block style. According to the teachers who have used the materials, the student responses ranged from a complete lack of comment to interested but not wildly enthusiastic. The international materials have not been mentioned either positively or negatively in the course evaluations which all students complete at the end of each semester. The same materials were used in teaching intermediate accounting while they were being developed and several of the intermediate students commented favorably on them in the course evaluations. CONCLUSION The AACSB requires business schools seekmg accreditation to add a worldwide dimension to their curriculum. This note has described the method used by Illinois State University to internationalize its introductory financial

166

M. M. McClure

accounting course in conformity with the AACSB’s requirement. The method used is that known as the spread style, where international materials are introduced throughout the course to provide a contrast to the U.S. method under discussion, rather than in one easily omitted lump at the end of the course. This style of coverage makes the international materials a useful adjunct to the course, aiding in the teaching of U.S. accounting while simultaneously providing an international perspective, rather than an intrusive unit, consuming scarce class time. The note also discusses the materials which are distributed to teachers of introductory financial accounting at ISU, including guidelines regarding how to integrate them with textbooks and appendices showing some of the materials. Note that the materials are designed to be used by faculty who lack experience in international accounting. An increasing number of accounting departments are coming under pressure to internationalize their courses due to the AACSB requirement. ISU’s methods and materials presented here will be useful to other universities which are just beginning to introduce an international element. It is also hoped that those schools which have already begun a program of internationalization will be able to share ideas for improving international coverage in all universities.

REFERENCES American Association of Collegiate Schools of Business (AACSB). (1979). The internationalization of the business school curriculum. (AACSB, 1979). St. Louis, MO: Author. Arpan, J. S., & AlHashim, D. D. (1984). Infernational dimensions of accounting. Northridge, CA: Kent. Arpan, J. S., & Radebaugh, L. H. (1984). Internarionalaccouniingandmultinationalenterprises (2nd ed.). New York: Wiley. Burns, J. (1979). A study of international accounting education in the U.S. Internafional Journal ojdccounfing, Education and Research, Fall, 1355145. Enthoven, A. J. H. (1982). Currenr value accounting: Its concepts and practice al N. V. Philips Industries, the Netherlands. Dallas, TX: Center for International Development, University of Texas at Dallas. Fantl, I. L. (1971). The case against international uniformity. Management Accounting, May, 13-16. Financial Accounting Standards Board (FASB). (1978). Statement of financial accounting concepts 1, Objectives of financial reporting by business enterprises. Stamford, CT: Author. Financial Accounting Standards Board (FASB). (1980). Statement of financial accounting concepts 2, Qualitative characteristics of accounting information, Stamford, CT: Author. Gaertner, J. F., & Rueschhoff, N. (1980). Cultural barriers to international accounting standards. CA Magazine, May, 36-39. Gernon, H., & Diamond, M. (1982). Giving your accounting program an international dimension. Working paper, University of Oregon. Kieso, D. E., & Weygandt, J. J. (1986). Intermediate accounting (5th ed.). New York: Wiley. Kollaritsch, F. P. (1984). Managerial accounting problems of multinational corporations. In H. Peter Holzer (Ed.), International accounting (pp. 173-204). New York: Harper and Row.

Internationalization

of the Introductory

Financial

Accounting

Course

167

An overview of Rumanian accounting. The In~ernaiional Journal 131-156. McComb, D. (1982). International accounting standards and the EEC Harmonization Program: A conflict of disparate objectives. The International Journal of Accounting, Spring, 35 48. Meek, G. K. (1985). Adding an international dimension to the introductory managerial accounting course. Journal of Accounting Education, 3, 57-68. Mintz, S. M. (1980). Internationalization of the accounting curriculum. International Journal ofAccounring, Fall, 137-151. Most, K. S. (1984). Accounting in France. In H. Peter Holzer (Ed.), lnrernational accounting (pp. 2955314). New York: Harper and Row. Mueller, G. G., Gernon, H., & Meek, G. (1987). Accounting, an international perspective. New York: Irwin. Nehrt, L. C. (1981). Case studies of inrernationalization of the business school curriculum. St. Louis, MO: AACSB. Pozo Mariscal, G. (1975). El desarrollo de la reoria contable en Mexico. Instituto Mexican0 de Contadores Ptfblicos, A.C. Sherman, W. R. (1987). Internationalizing the accounting curriculum. Journal ofAccounting Education, 5, 259-275. Sterling, R. (1967). Conservatism: The fundamental principle of valuation in traditional accounting. Abacus, 3, 1099132. Welsch, G., Anthony, R. N., & Short, D. G. (1984). Fundamentals of financial accounting (4th ed.). New York: Irwin. McClure,

M. M. (1985).

of Accounting, Fall,

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M. M. McClure

APPENDIX 1: THE BALANCE SHEET OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION (IN ARABIC AND ENGLISH) Assets

Internationalization

of the introductory

Financial

Liabilities and Equity

Accounting

Course

169

170

M. M. McClure

Auditor

Report

1801 K Street, NW Washington.DC 20006

PriceWbterhouse

Telephone202 296 0800

Internationalization

of the Introductory

Financial

Accounting

Statements of condition June 30, 1986 and June 30, 1985 Expressed I” thousands of US dollars-see

Appendix A

Notes to Financial

Statements,

Appendix

F

Assets

~--1986

DUE FROM BANKS Unrestricted c”rr~oc~es available for drsbursements (r~cludrRg mterest-bearmg demand deposits $27.268-1986, $1.574-1985)~ Unrestricted currencies not immediately available lor disbursements-Note A Currencies subject to restrIctlons-Noie A :

$

187,367

INVESTMENTS-Note C Obilgatrons of governments and their rnstrumentalrtles lime deposits and other obhgatwns of banks and fmanclal mstitut!onS

210.286 41,082

648,364 85,461 733.825

RECEIVABLES ON ACCOUNT OF SUBSCRIPTIONS AND SUPPLEMENTARY RESOURCES-Note A Nonoegotlabie. non-Interest-bearing demand obligatrcns Unrestrrcted Subject to restrlcbons. Amounts due on addmonal subscrlp;tons and supplementary reso;rCes .., Amounts required to malntaln value of currency holdmgs-Note 6

10.632.774 59,873 189,619 1,369 10.883 635

DEVELOPMENT CREDITS OUTSTANDING (see Appendrx 5) Total development creUds Less development credits approved but not yet efiectwe Less undisbursed balance of efiectwe deveioomeni credits

OTHER ASSETS Nottonal amounts hoidlngs-NOES Mlscellaneo~s

requtred

to mamtaln

A and 8

value of currency

F

____1985

$

438.m

RECEIVABLES-OTHER lnternalronal Bank tor Reconsir~ction and 5evelo~menl-Na!e Accrued charges on de~elooment credits Accrued Interest on mvestmenls

171

Course

314.285 96.490 41.891 452.666

106.172 -__ 126.990 233.162

8.539.258 59,720 204.571 58 8.803.607

611.365

1.142,339 63,141 2.381 1.208.061

25.845.529

33.997,301 2.697.742 9,304,162 21.995.397

-.- 155.557 $38.668.646

104.583 79,665 124,248 $32.817.141

324,920

79,428 7,017

39.592.134 2.141.647

--~11.604,958

135,545 20.012

M. M. McClure

172

Liabilities, Transfers,

Subscriptions, Supplementary Resources, and Accumulated Surplus (Deficit)

1986

___

1985

LIABILITIES Accounts payable Nottonal amounts holdlnqs-Notes

SUBSCRIPTIONS (See Appendtn

CONTRIBUTION

and olher llabil~ties required to maintain A and B

s value

2 231

AND SUPPLEMENTARY RESOURCES E and Appendix F Note E)

BY SWITZERLAND-Note

TRANSFERS FROM INTERNATIONAL DEVELOPMENT-Note F

36.038

568

51 173

D

BANK

85440

$

36.143

of currency

FOR RECONSTRUCTION

ACCUMULATED SURPLUS (DEFICIT) (see Appendix Accumulated net Io~s-No~~ G Cumulattve translation adjustments on development

5,310

31 272 741

51.173

AND 2 139 095

1.989.095

B) $ credlls

(355.3961 (181.925)

(340.916) 693.055 352.139 $38 668.646

(537.321) $32.817.141

Internationalization

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Financial

Accounting

173

Course

Report of Independent Accountants

1801 K Street NW Washington. DC 20006

Telephone202 296 0800

Rice Wiiterhouse July 30, 1986 President and Board of Governors, lnlernational Development Association We have examined the financial statements of the lnternahonal Development Association appearing in Appendices A through F. Our examinations of these statements were made in accordance with generally accepted auditing standards and accordingly included such tests of the accounting records and wch other auditing procedures as we considered necessary in the circumstances. As described in the Summary of Significant Accounting and Related Policies in the notes to the financial statements, no decision has been made as to the standard of value to be substituted for the 1960 dollar in determining the repayment obligations of certain of the Association’s development credits. Pending a decirion on this matter, the financial statements have been presented using $1.20635 as the standard of value in measuring these development credit repayment obligations. The amount of any adjustment that might be required as a result of a decision on the standard of value cannot be determined. In our opinion, subject to the effects on the financial statements of such adjustments, if any, as might have been required had the outcome of the uncertainty referred to in the preceding paragraph been known, the financial statements examined by us present fairly, in terms of United States dollars, the financial position of the International Development Association at June 30, 1986 and 1985, the results of its operations and the changes in its resources available for commitment for the years then ended, in conformity with generally accepted accounting principles consistently applied.

FinancialStatements Covered by the ForegoingReporl Statements

of Condition

Statementsoflncome Statements Statements Summary Statement Notes to

....................................................

.......................................................

................... .................. Statement of Development Credits ................................... of Voting Power, and Subscriptions and Supplementary Resources ....... Financial Statements. ............................................... of Changes in Accumulated Surplus (Deficit). of Changes in Resources Available for Commitment

.Appendix

A

Appendix

B

Appendix .Appendix

B C

.Appendix

D

.Appendix

E

.Appendix

F

174

M. M. McClure

APPENDIX 2: THE BALANCE SHEET OF THE JAY ENGINEERING WORKS (INDIA) LIABILITIES & ASSETS

BALANCE As at 30th Schedule

SHEET

September,

As at 30.9.1981

1981

As at 31.3.1981

~-Rs.

Rs Liabilities Share capital

2,79,38.750

2,47,43,750

Reserves

2,42,54,926

2,51,55.019

12.97,88,900

16,84,45,712

9,96,66,064

12,97.04,868

& surplus

Loans Current

liabilities

& provisions

28,16,48X40

34,80,49.34;

Assets Fixed assets Investments Current assets, loans & advances

5.38.82.057

5,31,11,868

4,91,000

4.91,ooo

22,72,75,583

29,44.46,481

28.16.48.640

34,80,49,349

Notes to accounts

CHARAT

RAM

B K GHAI R”

BAPAT

P BHOGILAL ML KHAtTAN SD KHOSLA K.N. MOOKERJEE BN PODDAR S C TRIKHA THE JAY ENGINEERING

WORKS

LIMITED

Internationalization

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Accounting

175

Course

APPENDIX 3: THE BALANCE SHEET OF NESTLEI, SA (SWITZERLAND) (ASSETS ONLY)

Balance sheet at 3 1stDecember 1986 1906 ASS&.3

I985

Ft..

Cash

Fr

1759407060

Securltles

710 870 378

x20212545

AfTlmted company debtors: Current OCCO”“tS less prowon for ,ncome not currently collectable

13a lobas 4m6806

219 585 204 134omo44

7 992 740

2II

592464

Sundry debtors

45343803

23 622 929

Bank depcmts (R mue of reserved shares)

lOOOOooO

20 ax, 003

Partlwatlons I” and loans to at&ted compames~ Parmpotrons (see Note LC.WlS

I)

Trademarks and other lndustrlal property rights

3013220468 1474769769

3 192 173 I19 2 573 240 I5

I

s4alml37 dQooooam

5 765 413 234 9mcmLm

I

FIX& assets (see Note 2)

8326973690

7631 499036

176

M. M. McClure

APPENDIX FOOTNOTES

4: THE BALANCE SHEET AND SELECTED OF N. V. PHILIPS’ GLOEILAMPANFABRIEKEN (NETHERLANDS)

Consolidated Balance of the Philips Group

Sheets

as of December 3 1

after proposed distribution of income

ASSETS

1986

1985

Fixed assets Intangible

fixed assets (8)

Tangible

24

fixed assets (9)

Unconsolidated

companies

Other non-current

financial

8

18,247 (10) assets (11)

18,219

2,526

2,237 1,649

1,666

22,113

22,463 Current assets Inventories

(12)

Accounts

12,85

receivable

Marketable

(13)

securities

Liquid assets

(14)

(I 5)

1

13,992

15,094

214

226

1,110

Total

LIABILITIES

13,942

AND EQUITY

1,508 28,167

30,770

50,630

52,883

1985

1986

Group equity Stockholders’equity Minority

(16)

interests

(17)

15,858

16,151 2,430

2,479 18,337

18,581

Long-term

provisions

(18)

4,801

5,351

Short-term

provisions

(18)

1,970

2,133

Long-term

liabilities

9,039

9,258

16,483

17,560

50,630

52,883

Current

liabilities

(19)

(20)

Total

in millions of guilders

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Financial

Accounting

Course

177

NOTESTOTHEBALANCESHEETS (9)TANGIBLE

FIXED

ASSETS

The book value of the tangible fixed assets went up from f 18,219 million to f 18,247 million at year-end 1986. A breakdown of the book value and of changes in the book value is given below. The investments shown under the changes in 1986 include capitalized interest amounting to f 11 million. Also included in the tangible fixed assets are the assets made available by way of limited rights of use such as long-term leases for the use of land, building rights, rent-purchase agreements or finance lease contracts. The book values of these assets as of December 31, 1986 are as follows: other limited finance lease

factory and office buildings, dwellings and premises

rights of use

81 180 23 1

installations and machinery miscellaneous other tangible fixed assets pre-payments and under development no longer productively employed

80 1 -

291

The financial

obligations

arising

from these contractual

38,801

13,862

are included

in liabilities.

factory

balance as of January

total

and office buildings, dwellings and premises

agreements

81

and machinery

miscellaneous other tangible fixed assets

17,462

5,496

installations

pre-payments on purchases and under construction

no longer productively employed

I, 1986:

value depreciation and write-downs new

-20.582

-10,764

-6,222

1,594

387 -228

-3,368

Book value based on

cwrcntVllue changes in the book value: investments retirement and sales net investments revaluation depreciation write-downs due to decline in value

reversal of previous write-downs translation differences new and discontinued consolidations total result of the changes balance as of December 3 I, 1986: new value depreciation and write-downs BOOkVdllt~Oll elmvM value Accumulated total of revaluation adjustments included in the book value

18,219

7,640

4,667 -375 4,292

753 -134 619

1,192 -3,086

480 -399

-54

-22

-

-

14 -1,903

-765

-421 28

-191 -278

38,487

13,024

-20,240

6,698

-5,662

2,128

1,594

159

1,439 -80 1,359

301 -11 290

7 -23 -16

547 - 1,627

110 -1,059

48 -

7 -1

-16

-6

2,167 -127 2,040

-

12 -808 -

-10 -

-

2 -203

-106

-21

-39

-31 172

-13 219

-46

17,173

6,095

1,813

382

-187

10,514

-

3,795

-4

-269

L

18,247

7,362

6,659

2,300

1,813

3,925

2,814

909

141

61

113

-

178

M. M. McClure

Accounting Policies Followed in Valuation and Income Calculation Current Value The valuation of physical assets - tangible fixed assets and inventories - as well as the depreciation and/ or consumption of such, is based on current value, which in order to maintain continuity is in general equal to their replacement value. In certain instances, however, the lower business value or net realizable value is regarded as the current value. The replacement value is determined by taking into consideration such factors as the use and the location of the assets, as well as the influence of technological developments. The replacement value of physical assets is calculated using current prices for specific assets or, if this is not possible, using price indices for categories of assets which have been subjected to the same price influences. In the case of assets generated by using the group’s own facilities this is done by means of standard calculations which include allowances for indirect costs of manufacturing, product or process development and handling, taking into account the place and stage of processing of the assets. In the case of tangible fixed assets the interest over the period of manufacture is also included. The business value of a tangible fixed asset is determined based on the expected net income to be derived from the productive employment of that asset during its remaining useful life, plus the net realizable value upon discontinuation of productive employment of that asset. The current value of a tangible fixed asset is equal to the business value in the event that the business value is lower than the replacement value and it has been decided that an activity in which that asset is employed will be discontinued only in the long term. The net realizable value of an asset is the amount for which that asset can be sold. The current value of a tangible fixed asset is equal to the net realizable value in the event that the net realizable value is lower than the replacement value and it has been decided that the activity in which that asset is employed will be discontinued in the near future. Inventories are valued based on net realizable value when the net realizable value is lower than the replacement value. Changes in replacement value which have resulted from fluctuations in the local price level of physical assets (i.e., revaluation) are charged or credited to the revaluation surplus account. In the event that the stockholders’ equity is greater than the total capital invested in physical assets, an amount is added to revaluation surplus and charged to the income account in order to preserve a properly leveraged financial structure. To the extent that revaluation surplus is not considered necessary for maintaining a properly leveraged financial structure, a deferred gearing adjustment is temporarily included in revaluation surplus in the stockholders’ equity section. The deferred gearing adjustment is credited to the income account in proportion to the use and/or depreciation of the relevant assets. Tangible fixed assets. Tangible fixed assets are valued based on the current value. The net book value of tangible fixed assets valued on the basis of their replacement value is arrived at by reducing the gross book value by the amount of accumulated depreciation based on fixed percentages which depend on the type of asset and its expected economic life. In certain instances the asset is depreciated at a rate corresponding to the expected future use. The book value of tangible fixed assets which are not valued on the basis of their replacement value is equal to either the business value or the net realizable value.

Internationalization

of the Introductory

Financial

Accounting

Course

179

APPENDIX 5: THE ENVIRONMENT OF ACCOUNTING IN VARIOUS COUNTRIES United States The overriding objective in U.S. general purpose external financial reporting is “to provide information that is useful to those who make economic decisions about business enterprises and about investments in, or loans to, business enterprises” (FASB, 1978, p. 8).

Germany German industry has a history of being family owned and managed, with banks providing both equity capital and loans. This situation, combined with the close linkage of financial accounting with income tax accounting, has lead German accounting to place a higher emphasis on informing creditors and to have a conservative balance sheet orientation, which insures that the actual net asset values of the company are at least as great as reported (McComb, 1982, pp. 40-41). The fact that the financial statements misrepresent the status of the company is unimportant because the stockholders (in their capacity as management) and the banks, (represented on the board of directors) have separate access to information about the firm apart from the external accounting reports.

Maintenance of full employment is an important objective in Swedish culture. Swedish accountants play their part in pursuit of this goal by an active policy of income smoothing to make profits seem uniform from year to year. Hidden reserves are created in good years and are drawn down in bad years. It is believed that such income smoothing instills confidence in the populace and “contributes heavily to the economic stability of their nation” (Fantl, 1971, p. 14).

Rumania Rumanian accounting is highly oriented toward prevention of theft and thus reports stewardship of assets. The Rumanian system features frequent audits and inventory counts and emphasizes the balance sheet to such an extent that the income statement is a relatively minor appendix of the balance sheet (McClure, 1985, pp. 142-143).

France ‘G

the prevailing characteristics of French accounting are extreme conservatism and the dominance of form over substance. As to the former, it is important to note that the French legal system places many restrictions on a business and its officers that render officers personally responsible, to a great extent, for the consequences of business bankruptcy. This has influenced the directors of French companies to create secret reserves - by overestimating depreciation, by establishing reserves for contingencies such as future losses, and by undervaluing assets generally. As to the dominance of form over substance, this results partly from the detailed and complex commercial and company laws, and partly from the tax laws” (Most, 1984, p. 307). French accountants are also involved in the disclosure of social information which in the United States would be considered outside their particular area of expertise. “In France, since 1978 all companies employing more than 750 people have been required to produce an annual ‘social report’ that details such matters as pay, conditions of health and safety, absenteeism, training, industrial relations, and hours worked” (Kollaritsch, 1984, p. 180).

180

M. M. McClure

APPENDIX 6: THE AUDIT REPORT OF VOLKSWAGEN AG (GERMANY) “According annual report

to our legally required audit, the accounting, the financial statements and the comply with statutory provisions and the Company’s articles of association.”

APPENDIX 7: FOREIGN CURRENCY RECEIVABLES AND PAYABLES Foreign Currency Receivables If a company sells to a foreign customer on credit and agrees to be paid in foreign currency, it acquires a foreign currency receivable. Such receivables must be recorded in dollars at the time of the sale and gains or losses due to foreign currency fluctuations recorded. For example, ABC Co. sold merchandise to a German customer for 120,000 Deutschmarks on December 1, 1984, when the exchange rate was 3 DM to the dollar. On December 31, 1984, the DM had fallen to 4.8 to the dollar. On January 31, 1985, when the receivable was collected and the cash converted into dollars, the DM had recovered to 4 to the dollar. The journal entries to reflect these events are: 12/l/84 Accounts Sales

Receivable

$40,000 $40,000

To record

sales for 120,000 DM at the exchange

12/31/84 Loss on Foreign Currency Accounts Receivable

rate of 3 to I.

15,000 15,000

To record the decline in value of the receivable from $40,000 to $25,000 due to the fall of the DM from 3: 1 to 4.8: 1. l/31/85 Accounts Receivable Gain on Foreign Currency Cash Accounts

5,000 5,000 30,000

Receivable

30,000

To record the increase in value of the receivables from $25,000 to $30,000 due to the recovery of the DM and to record its collection. The adjustment puts the loss into the year when it actually receivable at its actual value on the 12/31/84 balance sheet.

Foreign

Currency

happened

and

records

the

BayabIes

If a company buys from a foreign supplier on credit and agrees to pay in foreign currency, it acquires a foreign currency payable. Such payables must be recorded in dollars at the time of the purchase and gains or losses due to foreign currency fluctuations recorded. For example, CBA Co. purchased merchandise from a German supplier for 120,000 Deutsehmarks on December I, 1984, when the exchange rate was 3 DM to the dollar. On December 31, 1984, the DM had fallen to 4.8 to the dollar. On January 31, 1985, when the payable was paid, the DM had recovered to 4 to the dollar. The journal entries to reflect tbesc events are:

Internationalization 12/i/84 Purchases Accounts

of the Introductory

Financial

Accounting

181

Course

%40,000 Payable

$40,000

To record the purchase of merchandise for 120,000 DM at an exchange rate of 3: 1. 12/31/84 Accounts Payable Gain on Foreign

15,000 15,000

Currency

To record the decline in value of the payable from $40,000 to $25,000 due to the fall of the DM from 3: 1 to 4.8: 1. l/31/85 Loss on Foreign Currency Accounts Payable Accounts Cash

Payable

5,000 5,000 30,000 30,000

To record the increase in value of the payable from $25,000 to $30,000 due to the recovery of the DM and to record its payment. Note that there is a foreign currency use different currencies. This risk must German companies in these examples had then they would have been carrying the changes in exchange rates.

risk in any transaction between companies which be carried either by the buyer or the seller. If the been willing to denominate the transaction in dollars, risks and they would have had to account for the