Chapter 3

Chapter 3: Additional Financial Reporting Issues

Exercise 1:
Sorocaba Company is located in a highly inflationary country and in accordance
with IAS 29 prepares financial statements on a general purchasing power
(inflation-adjusted) basis through reference to changes in the general price index
(GPI). The company had the following transactions involving machinery and
equipment in its first two years of operations.
Date Transaction Cost Useful life GPI
January 15, Year 1 Purchase 20,000 4 years 100
Machine X
March 20, Year 1 Purchase 55,000 5 years 110
Machine Y
October 10, Year 1 Purchase 130,000 10 years 130
Machine Z
December 31, Year 140
1
April 15, Year 2 Sold Machine X 160
December 31, Year 180
2
Determine the amount that would be reported as machinery and equipment in
accordance with IAS 29 on the December 31, Year 1, and December 31, Year 2,
balance sheets.
December 31, Year 1 Original Restated
Purchase Historical Restatement Historical
Date Item Cost Ratio Cost
T1/15/Y1 Machine X $ 20,000 140/100 $ 28,000
3/20/Y1 Machine Y 55,000 140/110 70,000
10/10/Y1 Machine Z 130,000 140/130 140,000
$205,000
$238,000
December 31, Year 2 Original Restated
Purchase ,Historical Restatement Historical
Date Item Cost Ratio Cost
3/20/Y1 Machine Y $ 55,000 180/110 $ 90,000
10/10/Y1 Machine Z 130,000 180/130 180,000
$185,000
$270,000
Alternatively, the restated historical cost at December 31, Year 2 could be
determined as follows:
December 31, Year 2 Restated Restated
Historical Historical
Purchase Cost Restatement Cost
Date Item (12/31/Y1) Ratio (12/31/Y2)
3/20/Y1 Machine Y $ 70,000 180/140 $ 90,000
10/10/Y1 Machine Z 140,000 180/140 180,000
 $210,000
$270,000

Ignoring depreciation, machinery and equipment would be reported on the

balance sheet at:
12/31/Y1 $238,000
12/31/Y2 $270,000
Exercise 3:
Doner Company Inc. begins operations on January 1, Year 1. The companys
unadjusted financial statements for the year ended December 31, Year 1, appear
as follows:
Balance Sheets 1/1/Y1 12/31/Y1
Cash and receivables $20,000 $35,000
Fixed assets, net 50,000 45,000
Total $70,000 $80,000
Payables $15,000 $15,000
Contributed Capital 55,000 55,000
Retained earnings - 10,000
Total $70,000 $80,000
Income statement, Year 1
Revenues $50,000
Depreciation (5,000)
Other expenses (35,000)
Income $10,000
Revenues and expenses occur evenly throughout the year, revenues and other
expenses are realized in terms of monetary assets (cash and receivables).
General price indexes for year 1 are as follows: 1/1/Y1 = 100, Average Y1 = 120,
12/31/Y1 = 150.
a) Calculate Doner Companys Year 1 purchasing power gain or loss on net
monetary items.
Calculation of Purchasing Power Loss
Net monetary assets, 1/1/Y1 $5,000 x 150/100 = $ 7,500
Plus: Increase in net monetary assets 15,000 x 150/120 = 18,750
Net monetary assts, 12/31/Y1 $20,000 $26,250
20,000
Purchasing power loss $ 6,250
b) Determine Doner Companys Year 1 income on a general purchasing power
basis (ignore income taxes)
GPP Income Statement
Year 1
Revenues $50,000 x 150/120 = $ 62,500
Depreciation (5,000) x 150/100 = (7,500)
Other expenses (incl. income taxes) (35,000) x 150/120 = (43,750)
Purchasing power loss (6,250)

Net income $ 5,000

Exercise 5:
Auroral Company had the following investments in shares of other companies on
December 31, Year 1:
Name of Countr % Voting Comments
Company y Rights
Accurcast Domest 100% Operations are dissimilar from those of the
ic parent and other subsidiaries
Bonello Domest 45 No other shareholders owns more than 0.1%
ic of voting shares
Cromos Foreign 30 Cromos has incurred a net operating loss three
years in a row
Fidelis Domest 100 Fidelis is under jurisdiction of bankruptcy court
ic
Jenna Domest 100 Operations are immaterial to those of the
ic parent
Marek Domest 40 Management control contract provides Auroral
ic with effective control
Phenix Domest 90 Parent intends to sell one-half of its
ic investment in the company but is not yet
actively seeking a buyer
Regulus Foreign 50 Regulus is jointly owned with Coronal
Company
Synkron Foreign 15 No other shareholder owns more than 10% of
voting shares.
Tiksed Foreign 70 Foreign government no longer allows
dividends to be repatriated to foreign parent.
Ypsilon Domest 51 Remaining 49% is owned by Borealis Inc.
ic
Determine the appropriate method for including each of these investments in
Auroral Companys consolidated financial statements: a) in accordance with IFRS,
and b) in accordance with U.S. GAAP
Name of % Voting
Company Rights IFRSs U.S. GAAP
Accurcast 100% Full consolidation Full consolidation
Bonello 45% Equity method unless there is evidence Equity method
that Auroral exercises effective control
Cromos 30% Equity method Equity method
Fidelis 100% Do not consolidate fair value method Do not consolidate fair
value method
Jenna 100% Full consolidation Full consolidation
Marek 40% Full consolidation Equity method
Phenix 90% Full consolidation Full consolidation
Regulus 50% Proportional consolidation or equity method Equity method
Synkron 15% Fair value method Fair value method
Tiksed 70% Full consolidation Full consolidation
Ypsilon 51% Full consolidation Full consolidation
Exercise 9:
Geographic segment information can be used to determine how multinational a
company is and the extent to which a company is diversified internationally. Refer
to the geographic segment information provide by three U.S. companies in
Exhibit 9.9.
a) Develop a measure of each companys degree of multi-nationality.
A commonly used measure of multinationality is the percentage of total sales
that are generated in countries other than the United States: Foreign
Sales/Total Sales. This ratio can be calculated for each company by
subtracting U.S. sales from total sales and then dividing by total sales:
IBM ($96,293 - $35,637) / $96,293 = 63.0%
Johnson & Johnson ($47,348 - $27,770) / $47,348 = 41.3%
 General Motors ($193,517 - $134,380) / $193,517 = 30.6%
Based on this measure, IBM is the most multinational company among the
three in Exhibit 8.8.

b) Evaluate the extent to which each company is diversified internationally.

International diversification refers to the extent to which a companys operations
are spread across different countries and regions of the world. General Motors
appears to be concentrated in a relatively small number of countries, and is
therefore not very diversified internationally. Almost 90% of GMs sales are
generated from operations in only eight countries (U.S., Canada and Mexico,
France, Germany, Spain, U.K., and Brazil). From Johnson & Johnsons segment
disclosure, it is impossible to know the number of countries in which the company
has operations. For example, Europe could imply operations in anywhere from
one to 30+ countries. One can determine that about 50% of IBMs revenues are
generated in only two countries (U.S. and Japan), but it is impossible to know
where in the world the remaining 40% of its sales are generated. We do know
that there are no other countries in which IBM believes it has a material amount
of revenues, because it would be required to disclose this country separately.
This exercise demonstrates the difficulty in assessing international diversification
given current segment reporting practices.

Exercise 10:
The following geographic segment information is provided in the 2012 annual
report by two German automakers, BMW and Volkswagen:
BMW AG
Annual Report
2012
Information External revenues Noncurrent assets
by region
million 2012 2011 2012 2011
Germany 12,186 12,859 22,954 21,519
USA 13,447 11,516 11,195 10,073
China 14,448 11,591 15 10
Rest of Europe 22,971 20,956 9,887 9,066
Rest of the 2,824 2,771 1,548 1,345
Americas
Other 10,972 9,128 1,137 961
Eliminations -- -- (3,720) (2,939)
Group 76,848 68,821 43,016 40,035
Volkswagen AG
Annual Report
2012
By region
million German Europe North South Asia/ Total
y and Americ Americ Ocean
Other a a ia
Regions
Sales revenue from external 34,600 69,291 17,553 14,910 22,983 159,3
customers 37
Intangibles assets, property,
plant and equipment, leasing and
rental assets, and investment 30,705 26,144 9,651 3,556 962 71,01
property 7
Sales revenue from external 37,734 77,650 25,046 18,311 33,936 192,6
customers 76
Intangible assets, property,
plant, and equipment, leasing and
rental assets, and investment 73,075 30,084 10,930 3,640 1,321 119,0
property. 49
Use the 2012 segment information provided by BMW and Volkswagen to answer
the following questions:
a) Which company is more multinational?
A commonly used measure of multinationality is the percentage of total sales
that are generated in countries other than the home country: Foreign Sales/Total
Sales. This ratio can be calculated for each company by subtracting sales in
Germany from total sales and then dividing by total sales:
BMW (44,335 11,961) / 44,335 = 73.0%
Volkswagen (88,963 24,504) / 88,963 = 72.5%
Based on this measure, BMW is slightly more multinational than Volkswagen.
Both companies rely very heavily on sales made outside of Germany.
Note that the internationality of the two companies can be directly compared by
collapsing VWs North America and South America segments into one region
America and by collapsing its Africa and Asia/Oceania segments into one region
Africa, Asia, Oceania.
b) Which company is more internationally diversified:
One way to measure international diversification is the extent to which sales are
spread out over different regions of the world. Column C in the table shows that;
- BMWs Sales are more evenly spread over its segments than are VWs. Whereas
VW generates its sales mostly in Europe. International diversification is important
because different regions have different growth prospects and risks (economic,
financial, political). In order to reduce the risk and benefit opportunities in terms
of growth, companies should diversify their operations.
External Sales External
Revenues
Year-to-year
BMW % 2011 % % change
Germany 15,86% 12,859 18,86% -5,23%
USA 17,5% 11,516 16,73% 16,77%
China 18,8% 11,591 16,84% 24,65%
Rest of Europe 29,89% 20,956 30,45% 9,62%
Rest of the Americas 3,67% 2,771 4,03% 1,91%
Other 14,28% 9,128 13,26% 20,20%
100% 68,821 100% 11,66%

Volkswagen
Germany 21,71% 37,734 19,58% -8,31%
Europe, other regions 43,49% 77,650 40,30% -10,76%
North America 11,02% 25,046 13,00% -29,92%
South America 9,36% 18,311 9,50% -18,57%
Asia/Oceania 14,42% 33,936 17,61% -32,28%
100% 192,6771 100% -17,30%
 c) In which region(s) of the world did each company experience the greatest
growth from 2011-2012? The greatest decline?
Volkswagen experienced negative growth sales in 2012, -17,30%.