Case 1: Toyota's Global Expansion

Chapter 1
Case 1: Toyota’s Global Expansion
In November 2004, Hiroshi Okuda, Chairman of Toyota Motor Corp. of Japan, announced that
the company was going to build another factory in North America, raising the number of
factories producing parts or assembling cars and trucks in North America to 14. As of May
2004, Toyota manufactured parts and assembled cars in 51 overseas manufacturing companies in
26 countries/locations. In 1980, the company had only 11 production facilities in 9 countries, so
it was essentially servicing the world market through exports from Japan. Since 1980, however,
the company has committed more energy and resources into foreign production.
Toyota, the second largest auto manufacturer in the world, is moving aggressively to overtake
leader General Motors in terms of volume. In 2004-2005, GM sold 7.4 million vehicles
worldwide, and the company expects to increase sales to 8.5 million vehicles by 2006. Even
though Toyota’s major manufacturing base is in Japan, with 12 plants located closely together
around Toyota City in Aichi Prefecture, it is expanding its manufacturing capabilities to every
corner of the world, including Russia. However, it is clear that Toyota is betting more on
production in countries outside of Japan. Although Toyota hopes to produce 3.8 million vehicles
in Japan by 2006, it plans on doubling its foreign output to 6 million vehicles sometime in the
future. It currently produces more vehicles in Japan than it does in its overseas plants, and it
exports more of its domestic production than is sold inside of Japan.
Toyota is known for its commitment to low cost, high quality, and just-in-time inventory, which
implies that it must be close to its main suppliers. A major reason for the company’s success in
Japan is its close proximity to key suppliers, such as Nippon Denso, which allows it to schedule
the delivery of parts as soon as they are needed in the assembly operations.
One of Toyota’s major advantages is its strong cash position. Its cash and short-term
investments totaled $30 billion in 2004, even though GM’s cash and short-term investments at
the end of the 3rd quarter 2004 were nearly double that at $58.623 billion, down slightly from
the same quarter a year earlier. However, Toyota’s strong earnings and cash positions are in
contrast to GM, which is constrained by weak credit ratings, rising health-care and pension costs,
and losses in its automotive division. Toyota expects to use its strong financial position to
expand operations worldwide and increase its commitment to R&D, especially in safety,
automation, and environmentally friendly vehicles, such as the Prius, one of its hybrid cars.
In spite of its strong commitment to future growth, Toyota has some challenges. Its net profits in
the second quarter of 2004 dropped from ¥301.9 billion a year earlier to ¥297.4 billion. Toyota
reports its financial information in yen, although it reports earnings according to U.S. generally
accepted accounting principles due to its active presence on global capital markets and the
universal acceptability of U.S. GAAP.
Operating in global markets is a challenge for Toyota. Since it is a Japanese company that
reports financial information in Japanese yen, it is subject to exchange rate fluctuations. In
particular, the yen has been strong relative to the U.S. dollar, so earnings of its U.S. operations
have fallen in yen terms in recent years when translated from dollars back to yen. In addition to
the strong yen, Toyota and other companies operating in the U.S. market have struggled with
high gasoline prices and high competition, which have cut into profit margins. Toyota has also
suffered with high raw materials costs, both inside Japan and in its other operations worldwide.
It is important for the company to do well in North America, because it accounts for about two-
thirds of the Japanese car industry’s profits on an operating level. Given Japan’s rapidly aging
population and the sluggish economy, Toyota and other Japanese car manufacturers will have to
do well in the United States to survive.
Toyota services U.S. markets through significant exports from Japan as well as assembly inside
North America. Because Canada, the United States, and Mexico are members of the North
American Free Trade Agreement, parts and final vehicles can be moved from one country to the
other duty-free, as long as the North American content is at least 62.5% of total cost. It has plans
to assemble the Tacoma in Mexico; it assembles the Corolla, Matrix, and RX33 in Canada; and it
assembles the Corolla, Tacoma, Avalon, Camry, Solera, Tundra, Sequoia, and Sienna in the
United States. It is firmly committed to manufacturing cars and trucks in developing countries,
especially Thailand, and it is making a big push to assemble in China. It also has plans to
expand in South America, probably in Brazil where it already produces the Corolla, and it plans
to expand into Russia, which would then join Poland and the Czech Republic as former members
of the Soviet Union that have production facilities.
Another factor influencing Toyota’s growth abroad is the opening of the European Union. In
1999, the EU countries finally opened the doors to Asian car makers, and their market share rose
from 14.8% to 17.4% at the expense of Ford, GM, Volkswagen, and other European
manufacturers. Due to high wages in Europe, which have reached $40.68 per hour for average
wages including health-care costs, Asian auto makers are increasingly establishing assembly
operations in Eastern Europe, where wages are significantly lower. In Poland, for example,
wages are only $8.63 per hour. Thus it appears that Toyota’s strategy of making vehicles in
Poland, the Czech Republic, and Russia makes sense. If the sluggish European market can
recover, Toyota may have a bright future there.
Questions
1. Why do you think Toyota is expanding so aggressively outside of Japan instead of
focusing more on manufacturing in Japan and exporting to other countries?
2. What are the risks it faces in expanding its overseas manufacturing?
3. Where do you think Toyota should put its next plant in North America, and what factors
should it consider in making that decision?
4. What are some of the major accounting issues that Toyota faces as it expands its global
reach?
What are the pros and cons to Toyota of issuing its financial statements according to U.S.
GAAP?
Case 2: Ahold and the Challenges of Going Global
On September 4, 2003, Anders Moberg was appointed CEO of the Dutch company Royal Ahold.
With experience as CEO of IKEA, the Swedish furniture giant, Moberg was seen as the right
man for the right job. One of the main points of his first speech as chief executive was the
following:
Ahold’s reputation is the most precious asset we have... We know that we have a lot to do to
restore your confidence in us. Our highest priority now is to rebuild the value of our
company. We will do everything in our power to create a company of which you can once
again be proud.
Why was Moberg talking about rebuilding value and reputation? What past events led to the
need for such a statement?
Background
Royal Ahold, based in The Netherlands, is a holding company with subsidiaries and joint
ventures mainly in the food services industry. Founded in 1887 as a small local store, the
company was listed in the Amsterdam Stock Exchange by 1948. Between 1977 and 1989, Ahold
expanded into the U.S. by acquiring several supermarkets. The 1990s were a period of very rapid
expansion, with large acquisitions and partnerships in the U.S., Europe, and Latin America. In
each of those regions, Ahold owned some of the most well-known retail food stores, like Stop N’
Shop in the U.S and Disco in South America. By 2003, 71% of Ahold’s revenues came from the
U.S., with a large portion of the remainder coming from other foreign operations.
In the year 2000, Ahold purchased U.S. Foodservice (USF), a distributor based in Maryland.
That acquisition would prove to be the source of the problems Moberg referred to in his first
speech.
The Fraud
On February 24, 2003 Ahold announced that its 2002 earnings would be significantly lower than
anticipated, and that it would restate its financial statements for 2001 and 2000. The
announcement was triggered by Deloitte & Touche’s unwillingness to sign Ahold’s 2002
financial statements due to the discovery of overstated earnings by USF. Following the
announcement, authorities began an investigation which led to the discovery of $829 million in
fraudulently overstated net income between 2000 and 2002.
The fraud consisted mainly of two aspects: “(1) overstatements of vendor allowance income at
USF and (2) the deconsolidation of five current or former joint ventures.” The bulk of the fraud
occurred at USF, where several top executives purposely accelerated or inflated $700 million in
“promotional allowance” revenue, which came from rebates received from vendors in exchange
for a commitment to purchase an agreed-upon amount of goods. The contracts of the involved
executives at USF tied their year-end bonus to meeting certain earnings targets imposed by
Ahold, the parent company.
The second major part of the Ahold fraud was related to “current or former joint ventures.”
When the USF fraud was discovered, Ahold cooperated fully with authorities and began an
internal investigation to “clean up the mess.” The investigation revealed that five joint ventures
had been inappropriately consolidated in financial statements of Royal Ahold with the full
knowledge of top management. After this discovery, the CEO, CFO, and two board members
were dismissed or resigned.
When news of the investigation became public, “Ahold’s stock price plummeted from
approximately $10.69 per share to $4.16 per share.” Faced with the enormous task of picking up
the pieces after such a scandal, Ahold’s board brought in Anders Moberg as the new CEO.
The Consequences
After his speech on September 4, 2003, Moberg and his team got to work and developed a
program named “Road to Recovery”. The program focuses on four key areas: (1) re-engineering
the food retail business; (2) recovering the value of U.S. Foodservice; (3) reinforcing
accountability, controls and corporate governance; and (4) restoring financial health. Some of the
most dramatic measures include aggressively reducing the level of debt through divestments,
improving operational performance, generating cash flow by improving working capital
management and scrutinizing capital expenditures, and reducing costs.
Ahold’s divestments have dramatically changed the face of the company—all operations in
South America (including Brazil, Paraguay, Chile, Argentina, and Uruguay), Spain, Poland,
Malaysia, and Indonesia were or will be divested. In addition, major stores in the southeastern
United States will be divested.
Major changes have also been implemented in the finance department and in corporate
governance practices. Even the company’s headquarters have changed locations.
For the third quarter of 2004, Ahold reported a net loss of €166 million and was still trying to
clean up its image and operating results. As Moberg promised upon his induction as CEO, much
has been done to restore the value of Ahold. Only time will tell if the Dutch giant will recover
from the blow received from one of its subsidiaries.
Questions
1. Most of Ahold’s revenues come from foreign markets, especially the United States. What
major challenges does this operating characteristic represent?
2. Based on the experience of Ahold with USF, what important considerations should firms
make when purchasing existing companies in foreign markets?
3. As an alternative to fully purchasing an existing food distributor such as USF, Ahold
could have started a brand new distributor (this is called a “greenfield investment”). What
are the advantages and disadvantages of such an approach?
4. Ahold has significantly reduced its international presence by divesting many of its
foreign operations. Besides extreme cases like the Ahold fraud, what other circumstances
may call for the divestment of foreign operations?
Chapter 2
Case 1: General Motors and Japanese Convergence vs. Chinese Convergence
General Motors Corp. is the world’s largest automaker and has led the auto industry worldwide
in sales since 1938. GM employs over 324,000 people worldwide, with manufacturing
operations in 32 countries and sales operations in 200 countries.
GM operates its own facilities worldwide, but it also has global partners in Italy, Japan, South
Korea, Germany, France, and China. In Japan, its global partners are Fuji Heavy Industries Ltd.,
Isuzu Motors Ltd. and Suzuki Motor Corporation. In China, it has a vehicle manufacturing
venture with Shanghai Automotive Industry Corp.
A major challenge that GM faces in both Japan and China is that both have financial reporting
and measurement practices that differ from both U.S. GAAP and IFRS issued by the IASB.
Assume you have just been hired by GM as an intern, and your first assignment is to research the
convergence of China’s financial reporting standards with U.S. or IAS GAAP since 1999.
Compare China’s historical path of convergence with Japan’s over the same period of time.
What societal values and economic goals have caused the two Asian countries to develop
different financial reporting standards? What societal values and economic goals have caused
the two Asian countries to develop similar financial reporting standards?
Suggested websites:
www.iasplus.com
www.asb.or.jp
Case 2: Inductive and Deductive Methods Relating Reporting Standards to Cultural
Values
Use the inductive or deductive method to correlate Sweden’s history with its financial reporting
standards.
Suggested websites:
www.cia.gov/cia/publications/factbook/geos/sw.html
Chapter 3
Case 1: Reporting Standards vs. Tax Standards
The Anglo-American countries tend to have substantial differences between their reporting
standards and their tax standards. Yet, little has been done to reconcile these differences because
tax law and reporting law have different objectives. However, having two sets of rules requires
that companies keep two sets of books, which is both time-consuming and costly.
Cardon Company, located in the United States, is frustrated with the costs of maintaining two
sets of books. After some research, top management noticed that some other countries, such as
Japan and Germany, have tax law and reporting standards that closely correlate with each other.
Cardon Company does not understand why the United States does not try to adopt a similar
system. Does the company have a valid argument? In discussing this question, consider the
following questions:
Questions
1. What are the advantages of converging the two systems?

2. What are the disadvantages?
3. What difficulties are likely to arise if such a shift were to take place?
4. Should the Anglo-American countries adopt a similar system?
Case 2: EU Conversion
Spain’s accounting system has historically been heavily tax-oriented. With the EU’s adoption of
IFRS, however, it will be required to have a reporting system substantially different from its tax
system.
La Rodonda Company is trying to anticipate some of the problems it might face with the
conversion to IFRS.
Questions
1. How might its goals of accounting change with the adoption of IFRS?
2. What should it do to aid the transition?
3. What problems is it likely to encounter and how can it mitigate them?
Chapter 4
Case 1: Small GAAP vs. Large GAAP
With countries around the world adopting IFRS, many argue that the IASB should tailor its
standards to meet the needs of small enterprises. One view is that the board should create
standards for SMEs, specifically those that do not have public accountability. Others, however,
believe that full IFRS are suitable for all entities. The board also needs to determine which
entities the IASB SME standards should be intended for. One view is that public accountability
should be the distinguishing factor. Full IFRS, rather than SME IFRS, should be required for
companies that are public. Others believe the IASB should set forth characteristics of SMEs and
let individual countries determine whether the companies qualify as an SME. Another
possibility would be to use a size test to determine the enterprise’s classification.
Questions
1. Should the IASB develop a separate set of standards for SMEs or are existing IFRS
suitable for all companies?
2. If the IASB does create separate standards, how should the board distinguish between
small companies and large companies? Discuss the pros and cons of each method
described.
Case 2: Developing Countries
Belarus attained its independence in 1991 after being a constituent republic of the USSR (now
Russia) for 70 years. However, in 1995, the government reinstated “market socialism” and
issued controls over prices and currency exchange rates. It also gave the state the right to
control private enterprises. Accounting standards have been of little concern in the past.
However, with a struggling economy, it is becoming increasingly important that Belarus develop
accounting practices that will instill confidence in the country’s companies. Many hope that
Belarus will follow its western predecessors and embrace a free-market economy.
Describe the ideal accounting system for Belarus.
Questions
1. What values should the country emphasize with its system?

2. What needs to happen in order for the system to succeed?
Chapter 5
Case 1: Alcatel and Lucent (French/United States)
In April and May 2001, Alcatel SA and Lucent Technologies held merger talks which climaxed
at an offer of $22.8 billion before falling apart. Alcatel is a longstanding French
communications solution provider, focusing on telecommunications and broadband Internet
solutions. Lucent Technologies, based in Delaware, is also a communications consulting
company, providing solutions to government agencies and corporations. Both Lucent and
Alcatel are traded on the NYSE.
Questions:
1. What is Alcatel’s conservatism index when compared with Lucent in 2003? What does it
mean?
2. What is Alcatel’s partial conservatism index for earnings per share?
3. Compare Alcatel’s current ratio and debt-to-equity ratio under French GAAP with the
same ratios under U.S. GAAP. Compare both of these ratios with Lucent’s ratios.
4. If Alcatel were to acquire Lucent in 2003 and record the transaction according to French
GAAP, what would the balance sheet look like? What would happen to the assets,
liabilities, and unassigned positive goodwill in the first year of acquisition and in the
subsequent years? How would the balance sheet look different if the acquisition was done
with stock instead of cash?
5. If Alcatel were to acquire Lucent in 2003 and record the transaction according to U.S.
GAAP, what would the balance sheet look like? What would happen to the assets,
liabilities, and unassigned goodwill in the first year of acquisition and in the subsequent
years? How would the balance sheet look different if the acquisition was done with stock
instead of cash?
6. Given the information in the exhibits, would the merger have been a good idea? Do you
think $22.8 billion was too much to pay for Lucent? Was it too little?
From Consolidated Financials (French GAAP) 2003($) 2003(€) 2002 2001
Ordinary Shares
Basic earnings per share.......................................... (1.84) (1.46) (3.99) (4.29)
From 20-F (US GAAP)

Basic earnings per share: (1.84) (1.46) (3.99) (4.29)
Net income (loss) before cumulative effect of adoption of ($1.79) (1.42) (7.31) (4.05)
new standards
Net income (loss) ($1.79) (1.42) (9.67) (4.26)
Alcatel according to French GAAP
Selected Notes to Financial Statements
Alcatel According to U.S. GAAP
LUCENT TECHNOLOGIES INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in millions, except per share amounts) September 30, September 30,
2003 2002
ASSETS
Cash and cash equivalents 3,821 2,894
$ $
Short-term investments 686 1,526
Receivables, less allowance of $246 in 2003 1,511 1,647
and $325 in 2002
Inventories 632 1,363
Contracts in process, net 33 10
Other current assets 1,150 1,715
Total current assets 7,833 9,155
Property, plant and equipment, net 1,593 1,977
Prepaid pension costs 4,659 4,355
Goodwill and other acquired intangibles, net 188 224
of accumulated amortization of $925 in 2003
and $910 in 2002
Other assets 1,492 2,080
Total assets 15,765 17,791
$ $
LIABILITIES
Accounts payable 1,072 1,298
$ $
Payroll and benefit-related liabilities 1,080 1,094
Debt maturing within one year 389 120
Other current liabilities 2,474 3,814
Total current liabilities 5,015 6,326
Postretirement and postemployment benefit 4,669 5,246
liabilities
Pension liabilities 2,494 2,752
Long-term debt 4,439 3,236
Company-obligated 7.75% mandatorily 1,152 1,750
redeemable convertible
preferred securities of subsidiary trust
Other liabilities 1,367 1,535
Total liabilities 19,136 20,845
Commitments and contingencies
8.00% redeemable convertible preferred 868 1,680
stock
SHAREOWNERS’ DEFICIT
Preferred stock — par value $1.00 per share; — —
authorized shares: 250; issued and
outstanding: none
Common stock — par value $.01 per share; 42 35
Authorized shares: 10,000; 4,170 issued and
4,169 outstanding shares as of September
30, 2003, and 3,491 issued and 3,490
outstanding shares as of September 30, 2002
Additional paid-in capital 22,252 20,606
Accumulated deficit (22,795 (22,025
) )
Accumulated other comprehensive loss (3,738) (3,350)
Total shareowners’ deficit (4,239) (4,734)
Total liabilities, redeemable convertible 15,765) 17,791
preferred stock and shareowners’ deficit $ $
Case 2: Hanson and ICI (United Kingdom)
In May 1991, Hanson, the United Kingdom’s most notoriously acquisitive corporation,
purchased a 2.8 percent stake in ICI, the United Kingdom’s largest manufacturer and the world’s
fourth-largest chemical corporation. Amid speculation about the possibility of a takeover bid, the
comparative performance of the two companies was a significant issue because of the claims of
the respective management concerning their relative efficiency and success.
From an accounting perspective, it is possible to assess performance in terms of both U.S. and
U.K. GAAP because Hanson and ICI are listed in the United States and are required by the SEC,
under Form 20-F, to provide reconciliation data. The comparative data below show net income
and shareholders’ equity data for the period 1998–2002 in accordance with both U.K. and U.S.
GAAP, together with the data for long-term debt.
Questions
1. Calculate the “conservatism” index and returns on equity for Hanson and ICI for the
period 1998–2002 under both U.K. and U.S. GAAP.
2. Does it appear that U.S. GAAP is more or less conservative than U.K. GAAP? What
could be the main reasons for this?
3. To what extent do the results affect your assessments of comparative corporate
performance?
4. Calculate the debt-equity (leverage or gearing) ratio for both corporations under both
U.K. and U.S. GAAPs.
5. To what extent are the results likely to affect your assessment of the comparative
riskiness of investing in Hanson and ICI?
ICI and Hanson: Comparative Data Under U.K. and U.S. GAAP
(in £) 1998 1999 2000 2001 2002
ICI
Net Income
U.K. GAAP 83,000,000 252,000,000 (228,000,000) 80,000,000 179,000,000
U.S. GAAP (44,000,000) 53,000,000 (456,000,000) 13,000,000 9,000,000
Shareholders'
Equity
U.K. GAAP 149,000,000 244,000,000 (216,000,000) (364,000,000) 499,000,000
U.S. GAAP 3,557,000,000 3,373,000,000 2,828,000,000 2,568,000,000 2,805,000,000
Long-term Debt 3,144,000,000 1,503,000,000 1,616,000,000 1,304,000,000 1,709,000,000
Hanson
Net Income
U.K. GAAP 338,500,000 302,200,000 236,400,000 278,800,000 187,400,000
U.S. GAAP 365,100,000 317,900,000 256,700,000 302,300,000 (628,600,000)
Shareholders'
Equity
U.K. GAAP 1,592,300,000 1,847,000,000 2,420,600,000 2,720,800,000 2,660,200,000
U.S. GAAP 2,520,600,000 2,733,200,000 3,369,000,000 3,556,500,000 2,605,800,000
Long-term Debt 1,007,000,000 1,005,700,000 1,634,100,000 1,599,300,000 972,300,000
Chapter 6
Case 1: Infosys Technologies (India)
One of India’s new high-technology companies is Infosys, specializing in software development.

Infosys is now listed on the NASDAQ, the first Indian company to be listed in the United States.
While Infosys discloses more information than most Indian companies, as required by the SEC,
the company voluntarily discloses a substantial amount of additional information, including a
value-added statement, an economic value-added statement, brand valuations, current cost
financial statements, and an “Intangible Assets Score Sheet” (see infosys.com for the most recent
example of the intangible assets score sheet).
Questions
1. Discuss the reasons why Infosys might want to disclose additional information
voluntarily.
2. Explain and discuss the relevance of the information items disclosed in the intangible
assets scoresheet. How would you interpret the changes from 2003 to 2004?
3. Under what circumstances could voluntary disclosures by Infosys give rise to a
competitive advantage rather than disadvantage?
Case 2: Stora Enso and the Veracel Vision – A Model of Sustainability
Stora Enso is a Finnish integrated paper, packaging and forest products company producing
publication and fine papers, packaging boards, and wood products. It employs around 44,000
people in more than 40 countries. Its main markets are in Europe, North America, and Asia. It is
audited by PricewaterhouseCoopers Oy, and its shares are listed in Helsinki, Stockholm, and
New York. The group financial statements of Stora Enso are prepared according to IFRS, and the
individual company statements are prepared according to Finnish rules and regulations. Its
annual report comprises three separate booklets: the Company, the Financials, and Sustainability.
Its website is www.storaenso.com.
In its Sustainability Report, Stora Enso provides information on the environment and corporate
social responsibility. In the report, management notes that they follow the Global Reporting
Initiative (GRI) “as far as it is appropriate and applicable to Stora Enso.” In addition, they
support the nine principles of the UN Global Compact.
In May 2003, Stora Enso announced that it was going to build a pulp mill in the state of Bahia,
which is located in the impoverished northeast area of Brazil. However, the plantation project
had already been established in 1991. The Veracel project attracted a lot of attention, both
positive and negative. Many NGOs strongly criticized the building of the pulp mill and
questioned whether or not it was wise or necessary. Stora Enso decided that the project would be
the leading pulp mill and plantation concept in the world. The Veracel sustainability agenda
focused on six key issues: local welfare generation, employee welfare, support for education and
health care, commitment to global models for sustainable plantations, and minimizing the
environmental impacts of the mill.
In addition to criticism in Brazil, Stora Enso faced significant criticism from its own
shareholders. In its 2003 Sustainability Report, management addressed a number of issues,
including the following:
 Is the Environmental Impact Assessment (EIA) adequate?
 Have the impacts of the new dam along the River Jequitinhonha been taken into
account?
 Does Veracel convert rainforest into plantations?
 Does Veracel plant all the land it owns?
 Does Veracel jeopardize land reform in South Bahia?
 Will the Veracel Project create or destroy jobs?
 How many people have been resettled because of the Veracel Project?
 Do Veracel’s plantations deplete the soil?
In its Sustainability Report, Stora Enso also provides significant information about production,
waste disposal, and emissions at its major sites around the world. However, no information is
provided about the Veracel Project since its pulp production had not yet come on for the 2003
report.
Questions
1. Why does Stora Enso provide a Sustainability Report?

2. What are the costs and benefits of such a report?
3. What are the main provisions of the GRI and the UN Global Compact, and what are the
costs and benefits of providing that information?
4. See if you can find any current information on the status of the Veracel Project. Pull up
the most recent Sustainability Report and see what kinds of issues are discussed in the
Report.
Chapter 7
Case 1: European Adoption of IFRS
Recently, the European Commission approved a proposal for the members of the European
Union to use IFRS for consolidated statements starting in January 2005. Bomfrader, a company
in England, is concerned about implementing the new standards into its company. All of its
accountants are masters in understanding English Accounting Standards, but do not know much
about the new standards that will be implemented in 2005. Imagine you are the CEO of
Bomfrader, Mr. Jackson. You call together a meeting with the CFO and the accounting
department.
Questions
1. What is your agenda for the meeting? In other words, what issues do you feel are most
important to address?
2. Create a task plan for converging to IFRS. Be sure to include the following:
a. What are the most important things to do first?
b. How will you educate your employees on the new standards?
c. Should you converge to IFRS all at once, implement IFRS standards one by one, or
try to use both standards concurrently until you can switch?
d. What other problems are you likely to face and how can you mitigate them?
Case 2: IAS 39
For many, the European Union’s regulation to adopt IFRS as of January 2005 seemed too good
to be true. Until this point, the IASB had experienced limited success with regard to actual
implementation of their standards. Although most countries supported the efforts of the IASB,
many insisted on abiding by their own standards. The European Union’s adoption of IFRS
triggered other countries to follow suit and consider adopting IFRS as their national standards.
Now, more than 90 countries will be adopting IFRS in 2005.
Although this appears to be a big step for the IASB, the harmonization is not perfect. The
European Union has had problems approving all standards for implementation. Specifically, the
French and the Italians will not approve IAS 39 unless certain changes are made to its rules. IAS
39, which addresses financial instruments, requires that banks mark their derivative hedge
positions to market. The French and Italians argue that this requirement will introduce high
levels of false volatility in their earnings because interest rates will be marked to market while
the underlying assets will not. The other European nations were against the idea of creating a
carved-out standard because they believe it undermines the international standardization project.
In spite of these oppositions, the European Commission has created and approved a proposal to
carve out two IAS 39 sections—the prohibition of hedge accounting for core deposits and the
fair value option. Regarding the proposal, the EU said,
“IAS 39 does not sufficiently take into account the way in which many European banks
operate their asset/liability management, particularly in a fixed interest rate environment.
The limitation of hedges to either cash flow hedges or fair value hedges and the strict
requirements concerning the effectiveness of those hedges make it impossible for those
banks to hedge their core deposits on a portfolio basis and would force them to carry out
important and costly changes both to their asset/liability management and to their
accounting system.... Those provisions of IAS 39, which prevent portfolio hedging of
core deposits on a fair value measurement basis, and which can be clearly identified,
should not be adopted because they do not meet the conditions set out in Article 3(2) of
Regulation (EC) No 1606/2002 and in particular the criteria of understandability,
relevance, reliability and comparability required of the financial information needed for
making economic decisions.”
IAS 39 introduces an option to record all financial assets and liabilities at fair value. However,
the IASB has recently published an Exposure Draft (a consultation paper) which proposes an
amendment to IAS 39 in order to restrict the fair value option contained in the standard. The
proposed amendment is a direct response to concerns expressed by the European Central Bank,
by prudential supervisors as well as by securities regulators which fear that the fair value option
might be used inappropriately. This proposed amendment is currently debated in public and a
final version will most likely not be available before the end of 2004. The provisions in IAS 39
relating to that fair value option, which are also distinct and separable from other parts of the
standard, should not be considered applicable, because of the uncertainty surrounding the final
version of those provisions. As soon as the IASB has completed its work on this issue, and
normally no later than by the end of 2005, the Commission will examine the resulting
amendments to IAS 39 with a view to their endorsement, in the light of the conditions set out in
Article 3(2).
The proposed “carve out” not only allows fair value hedging of core deposits, but also extends
the range of items that can be designated as hedged items and relaxes the effectiveness test
requirements for hedges.
Questions
1. Discuss the potential influence that the EU will have over the IASB because of their
decision to adopt IFRS. How does this undermine the goal of the IASB?
2. What are the arguments for the EU adopting IAS 39 as is?
3. What are the arguments for the EU adopting a modified version of IAS 39?
4. Discuss the relative importance of international convergence and country-specific
standards that meet the country’s needs.
5. Do an internet search to determine what the outcome of the situation was. Did the EU
adopt a modified version? Did the IASB modify the statement towards French
preferences? (Helpful sites: www.iasb.org and europa.eu.int)
Chapter 8
Case 1: Multigroup (Switzerland)
Multigroup, a pharmaceuticals MNE based in Switzerland, decided to prepare consolidated

financial statements for the first time. As there were no Swiss legal requirements regarding
consolidation, Multigroup had to decide what accounting principles to use for its subsidiaries,
joint ventures, and associates around the world. Multigroup’s subsidiaries, all majority owned,
were located in the United States, the United Kingdom, France, and Germany. A 50 percent-
owned joint venture was located in the Netherlands. There were also interests in Associated
Corporations at 30, 35, and 40 percent in the United States, the Netherlands, and Japan,
respectively. In addition, there had been the recent acquisition of Bizcorp in the United States for
a cash consideration of 750 million Swiss francs. The book value of the net assets of Bizcorp at
the date of acquisition were 600 million Swiss francs, but at fair value they were valued at 670
million Swiss francs.
Questions
1. Discuss the possible alternative accounting treatments of Multigroup’s subsidiaries,
making special reference to U.S., U.K. and IASB GAAP. What is your recommended
treatment?
2. Discuss the possible alternative accounting treatments of Multigroup’s joint venture in
the Netherlands. What is your recommended treatment?
3. Discuss the possible alternative accounting treatment for Multigroup’s associated
corporations. What is your recommended treatment?
4. Discuss the possible alternative treatments of goodwill in the case of the recent Bizcorp
acquisition, making special reference to U.S. and U.K. GAAP. What is your
recommended treatment?
5. Discuss the likely effects on Multigroup’s financial statements of the decisions made
concerning the treatment of subsidiaries, the joint venture, the associated corporations,
and the recent acquisition. How do you think the securities markets would react to the
disclosure of consolidated information?
Case 2: Vodafone’s Operations
Vodafone, the largest cell phone company in the world, has ownership in a variety of other cell
phone entities. According to generally accepted accounting principles, Vodafone will only
consolidate 6 of the 14 companies in which it has ownership. The rest of the companies will be
consolidated according to the equity method as Vodafone has a controlling/significant influence
on each of their operations, even when Vodafone’s stake is less than 20%. The following is a
chart illustrating Vodafone’s ownership in different subsidiaries.
Operator Country Million of Subscriber Vodafone's

Subscribers¹ Growth, Stake³
Fiscal Year 2004²
Mobifon Romania 4 37% 20%
Vodacom South Africa 10 24 35
China Mobile China 150 21 3
Polkomtel Poland 6 19 20
Verizon U.S. 39 17 45
Wireless
Vodafone Germany 25 9 100
Vodafone Italy 21 9 77
Vodafone Greece 4 9 99
SFR France 14 8 44
Vodafone Spain 10 7 100
Vodafone Japan 15 7 88
Swisscom Switzerland 4 6 25
Mobile
Vodafone U.K. 14 6 100
Belgacom Belgium 4 2 25
Mobile
1
As of March 31, 2004
2
Ended March 31, 2004
3
As of June 30, 2004
Note: Table includes only operations with more than 3.5 million subscribers
(Source: “Vodafone is Challenge for Investors Tracking State of Global Empire.” Wall Street
Journal 2 Sep 2004: C1.)
Vodafone, however, believes that consolidating all of its interests on a proportionate basis
provides a more accurate reflection of their economic circumstances.
Perform an analysis to determine the economic differences between GAAP consolidation and
proportionate consolidation. Vodafone’s consolidated financial information, according to
generally accepted accounting principles, is provided for the fiscal year ending March 31, 2004
(Exhibit 1)1. Create pro forma financial statements from the GAAP financial statements by
consolidating the following 5 companies based on their proportions:
Verizon Wireless 35%

China Mobile 3%
Swisscom Mobile 25%
Vodacom 35%
SFR 44%
The financial information for these five subsidiaries is given in the exhibits below accordingly,
although these numbers do not necessarily represent exact information for Vodaphone for 2004.
Questions
1. Calculate the following ratios for the GAAP financial statements and the pro forma
statements:
a. Debt-to-equity (Total Liabilities/Total Equity)
b. Return on Sales (Net Income/Sales Revenue)
c. Asset Turnover (Sales/Total Assets)
d. Return on Assets (Net Income/Total Assets)
e. Return on Equity (Net Income/Stockholders’ Equity)
2. Explain the economic differences between the two statements as noted by the ratios.
3. Does either method appear too conservative or too aggressive?
4. In your opinion, do the pro forma numbers reveal good information? Which statement
more accurately reflects the operations of the company?
1
Exhibit 1: Vodafone Consolidated Statements (GAAP Basis) 2004
Sales 61,849.0
Cost of Sales (27,647.0)
Gross Operating Profit 34,202.0
Selling and Administrative (10,424.0)
Depreciation/Amortization (32,354.0)
Investment Income -
Other Income (loss) 779.0
Interest Expense (1,316.0)
Pretax Income (9,113.0)
Income Taxes (5,803.0)
Minority Interest (1,500.0)
Net Income (16,416.0)
Cash 2,597.0
Accounts Receivable 5,892.0
Inventory 844.0
Other Current Assets 14,900.0
Investments -
PPE 33,328.0
Intangibles 172,545.0
Other Long Term Assets 41,053.0
Total Assets 271,159.0
Accounts Payable 5,238.0

Other Current Liabilities 3,786.0
Long Term Liabilities 18,669.0
Other NonCurrent Liabilities 31,648.0
Minority Interest 5,542.0
Total Liabilities 64,883.0
Preferred Stock Equity -

Common Stock Equity 206,276.0
Total Stockholder’s Equity 206,276.0
Total Liabilities and Stockholder’s Equity 271,159.0

Exhibit 2: Verizon Wireless Financial Statements (2004)
Sales 67,752.0
Investment Income -
Other Income (loss) 1,647.0
Pretax Income 6,203.0
Minority Interest (1,583.0)
Net Income 3,368.0
Cash 699.0
Inventory 1,283.0
Investments -
PPE 75,316.0

Minority Interest 24,348.0
Preferred Stock Equity


Exhibit 3: China Mobile Financial Statements (2004)
Sales 19,163.0
Investment Income -
Interest Expense (253.0)
Minority Interest -
Net Income 4,295.0
Cash 6,809.0
Accounts Receivable 739.0
Inventory 248.0
Other Current Assets 596.0
Investments -
PPE 24,161.0
Intangibles 4,153.0
Other Long Term Assets 422.0

Minority Interest 22.0


Exhibit 4: Swisscom Mobile Financial Statements (2004)
Sales 11,760.0
Investment Income -
Income Taxes (403.0)
Minority Interest (279.0)
Net Income 1,266.0
Cash 2,611.0
Inventory 108.0
Investments -
PPE 5,653.0
Intangibles 976.0
Accounts Payable 843.0

Minority Interest 606.0
Preferred Stock Equity -


Exhibit 5: Vodacom Financial Statements (2004)
Sales 15,789.0
Investment Income
Minority Interest
Net Income 1,881.0
Cash 3,371.0
Inventory 197.0
Investments -
PPE 7,254.0
Intangibles 1,190.0

Minority Interest -


Exhibit 6: SFR Financial Statements (2004)
Sales 23,078.0
Investment Income -
Minority Interest -
Net Income 2,037.0
Cash 225.0
Inventory 445.0
Investments -
PPE 25,664.0

Minority Interest -


Chapter 9
Case 1: BMW (Germany)
BMW is a German-based automobile company with a strong worldwide brand name. Besides
automobiles, BMW manufactures motorcycles and is involved in financial services. In 2003,
BMW disclosed some segment information by both line of business and geographical area as
shown below, some of it on a voluntary basis.
Questions
1. Why do you think BMW would disclose segment information voluntarily when there is no
compulsion to do so?
2. Critically evaluate the meaning and significance of the geographical segments identified by
BMW and the segment information disclosed. How useful is financial statement analysis
based on these segments likely to be?
3. What explanations might there be for BMW’s approach to geographical segment
identification?
4. Discuss some alternative bases for identifying geographical segments. What criteria could
you use to support your choice?
Case 2: Nestlé (Switzerland)
Examine the segment data reported by Nestlé in the company’s 2003 annual report and accounts
as given below. Please answer the following questions based on your study of these disclosures.
Questions
1. What is the primary basis and what is the secondary basis of segment reporting by Nestlé?
2. To what extent has Nestlé complied with IAS 14?
3. To what extent has Nestlé voluntarily disclosed information beyond the requirements of IAS
14?
Chapter 10
Case 1: Coca-Cola (United States)
In its 1999 annual report, Coca-Cola describes the impact of foreign exchange on its operations
as follows:
“Our international operations are subject to certain opportunities and risks, including
currency fluctuations and government actions. We closely monitor our operations in each
country and seek to adopt appropriate strategies that are responsive to changing economic
and political environments and to fluctuations in foreign currencies. We use
approximately 60 functional currencies. Due to our global operations, weaknesses in
some of these currencies are often offset by strengths in others. In 1999, 1998, and 1997,
the weighted-average exchange rates for foreign currencies, and for certain individual
currencies, strengthened (weakened) against the U.S. dollar as follows:
Year Ended 1999 1998 1997

December 31,
All currencies even (9%) (10%)
Australian dollar 3% (16%) (6%)
British pound (2%) 2% 4%
Canadian dollar even (7%) (1%)
French franc (2%) (3%) (12%)
German mark (2%) (3%) (13%)
Japanese yen 15% (6%) (10%)
These percentages do not include the effects of our hedging activities and, therefore, do
not reflect the actual impact of fluctuations in exchange on our operating results. Our
foreign currency management program mitigates over time a portion of the impact of
exchange on net income and earnings per share. The impact of a stronger U.S. dollar
reduced our operating income by approximately 4 percent in 1999 and by approximately
9 percent in 1998.
Exchange gains (losses)-net amounted to $87 million in 1999, ($34) million in 1998 and
($56) million in 1997, and were recorded in other income-net. Exchange gains (losses)-
net includes the remeasurement of certain currencies into functional currencies and the
costs of hedging certain exposures of our balance sheet.”
Questions
1. Which translation methodology or methodologies does Coca-Cola use?

2. Given the methodology it uses, would you expect it to have translation gains or losses in
1997? In 1998? In 1999? Can you find any information in the chapter to help determine its
actual gains or losses in those years? Were your answers consistent with what actually
happened to Coca-Cola during those years?
3. Explain how Coca-Cola could use the translation methodology that it does and still have
exchange gains and losses that show up in income as explained in the last paragraph above.
Case 2: Kamikaze Enterprises (Japan)
Ray Addis, chairman of the board of Ace Inc., a medium-sized airplane manufacturing company,
had called Frank Anderson into his office to talk about an investment made by Ace in Japan five
years ago. Ray was very upset because Ace’s Japanese affiliate, Kamikaze Enterprises, was
owned 40 percent by Ace and 60 percent by the Bansha Group, was not doing well. He expected
Frank, the CFO of Ace, to explain what was going on. Ray had been involved in marketing all
his life, unlike Frank who came up through the finance route.
“How are you doing, Frank?”
“Pretty good, I guess, Ray. I gather from your note that you’re not too pleased with Kamikaze
Enterprises.”
“That’s an understatement. In our last set of statements, I noticed that we picked up a dollar loss
from Kamikaze for the fifth year in a row. I wouldn’t mind it so much, but that loss reduced our
earnings by nearly 40 percent. Why can’t we get that blasted operation in the black? I thought
those Japanese were supposed to be cost-efficient. I feel like we’re tapping money down a rat
hole.”
“I can understand your concern, Ray, but we’ve gotten a healthy yen dividend from Kamikaze
every year since we’ve been in operation. Because the yen keeps strengthening, the dollar
equivalent of that dividend goes up every year.”
“I realize that, Frank, but we report in dollars to our shareholders, and I have to explain those
foreign exchange losses at the next annual meeting. What am I going to do? I understand that the
book value of our investment has been written down to practically nothing because of those
losses. Either that operation becomes profitable or we cut loose. Let me know in three weeks
what our plan of action should be.”
“OK, Ray. I’ll see what I can do.”
“What a circus,” thought Frank as he walked back to his office. “There’s no way I can explain
this situation so that he understands.”
Ace Inc. had entered into the minority joint venture with the Bansha Group to produce small
corporate aircraft in Japan. Ace provided the technical expertise and some equity financing.
However, the Bansha Group provided most of the funds through debt financing with its bank.
The investment was almost 90 percent debt financed.
Kamikaze Enterprises had actually been quite profitable, increasing yen profits by nearly 25
percent a year. Sales were growing at about the same rate. This growth and high profitability
allowed Kamikaze to declare sizable dividends each year. When translated into dollars, however,
the yen profits turned into losses, which reduced Ace’s equity investment in Kamikaze. Frank
had spoken to the managers of Kamikaze, who did not appear to understand the problem or want
to do anything about it. Ace had been offered $50 million for its investment in Kamikaze, which
seemed ironic given that the book value on Ace’s books was close to zero.
Frank’s major concern was that he was afraid the problem stemmed from Ace’s accounting
policies, not their finance strategies. He decided to talk to his controller to find out what the
problem might be and how they could correct it.
Questions
1. Which translation methodology did Ace use to translate Kamikaze’s financial statements into
dollars? Explain how you know that.
2. Assume that Ace uses the other translation methodology allowed by FASB Statement No.52.
How would that change the facts in the case?
3. Which translation methodology do you think Ace should use, and why?
Chapter 11
Case 1: BP
BP is one of the world’s largest petroleum and petrochemical groups. BP has well-established
operations in Europe, the United States, Australia, and parts of Africa and is expanding into other
regions, notably Southeast Asia, America, and the countries of the former Soviet Union.
For some years now, BP has incorporated a replacement cost accounting approach into the
presentation of its group income statement and the results of its individual business and
geographical areas (see below for accounts in 2003).
BP Accounting Policies (Excerpt)
Accounting Convention
The accounts are prepared under the historical cost convention, except as explained under stock
valuation. Accounts prepared on this basis show the profits available to shareholders and are the
most appropriate basis for presentation of the group’s balance sheet. Profit or loss determined
under the historical cost convention includes stock holding gains or losses and, as a consequence,
does not necessarily reflect underlying trading results
Replacement Cost
The results of individual businesses and geographical areas are presented on a replacement cost
basis. Replacement cost operating results exclude stock holding gains or losses and reflect the
average cost of supplies incurred during the year and thus provide insight into underlying trading
results. Stock holding gains or losses represent the difference between the replacement cost of
sales and the historical cost of sales calculated using the first-in first-out method.
Stock Valuation
Stocks, other than stock held for trading purposes, are valued at cost to the group using the first-
in first-out method or at net realizable value, whichever is lower. Stock held for trading purposes
is marked to market and any gains or losses are recognized in the income statement rather than
the statement of total recognized gains and losses. The directors consider that the nature of the
group’s trading activity is such that, in order for the accounts to show a true and fair view of the
state of affairs of the group and the results for the year, it is necessary to depart from the
requirements of Schedule 4 to the Companies Act 1985. Had the treatment in Schedule 4 been
followed, the profit and loss account reserve would have been reduced by $150 million ($209
million) and a revaluation reserve established and increased accordingly.
Questions
1. Why do you think BP would want to introduce replacement information into the presentation
of its results?
2. What is the meaning and significance of the stock holding gains of $16 million identified for
2003 and $1,129 million for 2002?
3. What is the meaning and significance of the stock holdings losses for 1998 of $230 million
for the rest of Europe for 2003?
4. To what extent is BP’s replacement cost information likely to give a better insight into its
underlying trading results and future prospects than historical cost information? Discuss this
question with respect to the results:
a. of the group
b. by business, and
c. by geographical area
5. Do you think BP should extend its replacement cost approach to the balance sheet? If so,
why? If not, why not?
6. Discuss whether more MNEs should be encouraged to follow BP’s lead in disclosing
replacement cost information.
7. What different approaches to measurement could be considered today by MNEs as desirable
alternative or supplements to historical cost?
(See financial information on BP below)

Case 2: Fosters Brewing Group
Fosters Brewing Group, based in Australia, is adopting International Financial Reporting

Standards (IFRS). By June 2006, the company must use the Australian equivalent to IFRS for
external reporting. One of the major changes is related to recognizing internally generated brand
names (see information below).
Note 35 International Financial Reporting Standards (excerpt)

Questions
1. Assuming that $1,700 million of Foster’s intangible assets are internally generated brand
names, how will the statement of financial position look after Fosters implements IFRS?
2. What impact will this revaluation have on Fosters’ financial ratios? Compare the debt-to-
equity and return on equity ratios before and after implementing IFRS.
3. How do you think the revaluation will impact Fosters’ ability to obtain international debt
financing? Equity financing?
Chapter 12
Case 1: P&G and Unilever - Restructuring for Growth
Most people are familiar with brands such as Tide, Crest, Pampers, Dove, Axe, Pringles, and
Hellman’s. These and many household trademarks are produced by two of the largest MNEs in
the world: Procter & Gamble and Unilever. Based in Cincinnati, Ohio, Procter & Gamble
markets approximately 300 brands to consumers in over 140 countries. P&G’s greatest
competitor, Unilever, is a British/Dutch firm with dual headquarters. Despite their dominating
world presences, both companies recently went through large scale restructurings to increase
their market shares.
Organization 2005
In 1999, P&G announced a new restructuring plan named Organization 2005. In his new role as
CEO, Durk Jager saw the need for P&G to create new growth opportunities, and believed
Organization 2005 would be the means of exploiting those opportunities. At the announcement
of the plan, Jager said, “Organization 2005 marks the most dramatic change to P&G’s structure,
work processes and culture in the company’s history…The result will be bigger innovation,
faster speed to market and greater growth.” In simple terms, the plan consisted of the following:
Global Business Units (GBU): P&G moved from four business units based on geographic
regions to seven GBUs based on product lines. This change would drive greater innovation and
speed by centering strategy and profit responsibility globally on brands, rather than geographies.
Most corporate staff moved into the new business units. The remaining staff was refocused on
developing cutting-edge new knowledge and serving corporate needs.
Market Development Organizations (MDO): Eight MDOs were established to tailor global
marketing programs to local markets and develop strategies to build P&G’s entire business based
on superior local consumer and customer knowledge.
Global Business Services (GBS): Support divisions like human resources, accounting, order
management, and information technology were consolidated into a single corporate organization
that would serve the seven GBUs.
Company Culture: P&G redesigned reward systems and training programs to improve result
orientation amongst employees. Executive compensation was changed to be more in line with
business goals to encourage stronger growth.
These changes were made effective on July 1, 1999. P&G anticipated that Organization 2005
would increase long-term annual sales growth to 6–8% and accelerate earnings per share growth
to 13–15% in each of the next five years, through 2004. The plan was expected to cost $1.9
billion. Although the future looked brilliant on paper, the implementation of Organization 2005
didn’t get off to a good start.
Jager put excessive pressure on P&G managers to introduce new products faster, and decided to
sell all products under the same name worldwide. In Germany, for example, its dishwashing soap
changed from Fairy to Dawn. Since Dawn was an unknown brand, sales plummeted. Managers
responded negatively to his confrontational style. Employees were unhappy with the relocations
and new lines of authority created by Organization 2005.
Organization 2005 didn’t produce the expected results—at least not immediately. In 2000, P&G
showed weaker than expected earnings. On March 7, 2000, the announcement of an operating
loss caused the company’s stock price to drop dramatically. By April, Jager accepted
responsibility for the poor performance and resigned. Jager’s successor, Alan G. Lafley, carried
on the restructuring initiatives of Organization 2005, but changed strategies by focusing on
strengthening existing product lines rather than introducing new ones. The new CEO’s efforts
were more successful than his predecessor’s. By 2003, P&G’s sales grew 6%, its biggest
increase since 1996.
Unilever’s Path to Growth
At roughly the same time P&G put into place Organization 2005, Unilever initiated its own plan
called Path to Growth. Unilever’s management felt the same need P&G did to increase growth
by strengthening its market share. Formed from the merger of British detergent maker Lever
Bros. with Margarine Unie of the Netherlands in 1931, Unilver had to resolve the problems of a
company with co-chairmen and dual corporate headquarters in Rotterdam and London.
Traditionally, Unilever operated as a multi-domestic company in order to respond to national
differences in product preferences in its several markets. However, this strategy resulted in very
few economies of scale and little coordination across units, even in the same country.
Competitors like P&G and L’Oreal of France with more centralized organizations were more
able to respond quickly to changes in consumer tastes.
The idea behind the Path to Growth plan was to reduce duplication and focus management
attention on core products. The firm reported: “The cornerstone of the plan is the focus of
product innovation and brand development on a portfolio of around 400 leading brands (from
1600 brands in 1999) which will lead to less fragmentation of resources and bigger hit
innovations. By end 2004 we expect our leading brands to represent 95% of the business
(compared to 75% in 1999). The increase in brand power reflects the contribution from our
acquisitions, the planned acceleration in exit from the non-corporate businesses and the disposal
or 'harvesting' of tail brands.” To accomplish this, Unilever planned get rid of over 100
manufacturing plants to streamline its supply chain.
The Path to Growth took the power away from national managers and put it into the hands of
product managers, who would have responsibility for pushing the products worldwide. Through
the plan, Unilever expected to grow sales by 5-6% annually with operating margins of more than
16%. The estimated cost of the plan was €5 billion.
Country managers used to wide autonomy rejected the move to globalization, and the co-
chairmen of Unilever replaced many senior managers with younger executives more supportive
of the global model resulting from the Path to Growth. By 2003, Unilever’s revenues were about
the same as those of P&G, but with twice the number of employees and about half the profits.
Still, there was much to be happy about. The company reported that operating margins of 15.7%
and free cash flow of €16.4 billion. Unilever had successfully sold 140 businesses such that
leading brands represented 93% of sales by 2003.
Questions
1. What was the new strategy proposed by Organization 2005? How did the new strategy affect
P&G’s organizational structure?
2. Does the new structure match any of the organizational models proposed in the chapter?
Which one? Identify the characteristics of the proposed model that match P&G’s new
structure.
3. In your opinion, what caused Organization 2005 to produce poor results? Would
implementing such a change be easier in a domestic firm than in an MNE such as P&G?
Why?
4. What was the new strategy proposed by Unilever? How did it change its traditional strategy?
5. What are some of the similarities and differences in the problems and suggested solutions of
P&G and Unilever?
Case 2: The Royal Dutch/Shell Scandal
In 1907, Royal Dutch and Shell Transport & Trading Co. combined operations to form the Royal
Dutch/Shell Group. As part of the oil and gas industry, the company’s success depended on
successfully finding reserves. A key industry measure in this area is the “reserve-replacement
ratio,” which is the rate at which a company replaces depleted oil. According to John Browne,
CEO of BP PLC, successful companies must have a ratio greater than 100%.
Until the 1990s, Shell’s exploration and production (E&P) unit was “known as the elite in the
industry.” Characterized by its “geological expertise and conservative image”, the E&P unit led
Shell to very successful oil and gas discoveries, including huge reserves in the North Sea during
the 1970s. However, after the early 1990s, Shell’s reserve-replacement ratio fell well below
100% after spending millions of dollars in unsuccessful drillings.
On January 9, 2004, the company announced it would restate its financial statements to bring
down its oil and gas reserve estimates by 23%. The announcement shocked investors, bringing
down Shell’s stock price by over 9%. British and American investigators began probing into the
causes behind the restatement, eventually leading to a $150 million settlement. Shell created a
committee to investigate the problem and propose a plan to avoid such a disaster from repeating
itself.
Despite the announcement, Shell remained financially strong. However, the scandal left
management, shareholders, and the press wondering what caused Shell to fall from its long
standing position as the industry leader.
Cultural Change
Traditionally, Shell was the industry leader in exploration and production of oil and gas. The
E&P unit was the key to the company’s success. Between 1907 and 1993, young managers were
trained under the “peetvader” (“godfather”) system—senior executives would mentor promising
young executives, assign them to the toughest jobs in remote locations for a few years, and then
bring them to headquarters. The system created seasoned, hardworking, sober executives with
vast experience in exploration, depletion, and other core operations.
In 1993, Cor Herkstroeter was appointed CEO. Under his leadership, Shell began to phase out
the peetvader system. Employees applied for executive positions instead of being hand-picked,
and a performance bonus system was implemented. Older executives familiar with the peetvader
system claim that the changes caused amateurs to be placed in key positions, and motivated short
sightedness over strategic thinking. Herkstroeter’s successors further pushed for change by
encouraging “new age management,” creative thinking, and more aggressiveness.
Outside observers suggested that Shell lost sight of its core E&P operations, causing the reserve-
replacement ratio to fall below 100% after the mid-1990s. In the midst of this oil crisis,
management decided to loosen its reserve booking policy for mature oil fields. Despite several
red flags raised by the company’s internal auditor about improper accounting for reserves,
management didn’t change the policy. In late 2003, an email by the E&P unit chief read: “I am
becoming sick and tired about lying about the extent of our reserves issues and the downward
revisions that need to be done because of far too aggressive/optimistic bookings.”
On January 9, 2004, Shell announced it would restate its financial statements. On August 24,
2004, the SEC reported that Shell had overstated its reserves by 4.47 billion barrels between
1998 and 2002.
The Proposed Solution
Since the 1907 combination of Royal Dutch (RD) and Shell Transport & Trading Co (STT),
Shell operated under a complex dual structure. The assets of the Royal Dutch/Shell Group were
60% owned by RD and 40% by STT. Each company maintained its own board of directors, chief
executives, and headquarters—RD in The Netherlands, and STT in the United Kingdom. This
created a complicated reporting and accountability system. Strategic decisions were made by a
Committee of Managing Directors with members from both parent companies.
The aftermath of the restatement announcement brought a flood of criticism from the press,
shareholders, and management. Shell’s corporate structure and governance relationships came
under fire as one of the causes of the scandal. In response to the criticism, Shell created a
committee to investigate the matter in June 2004. On October 28, 2004, the committee proposed
the following restructuring plan to RD and STT shareholders:
RD and STT wouldould be combined into one company called “Royal Dutch Shell plc”,
headquartered in The Netherlands, but with a strong presence in the United Kingdom.
Royal Dutch Shell would have a single-tiered board of directors, with a non-executive chairman.
The Board will be comprised of fifteen members—ten non-executive directors and five executive
directors.
The Committee of Managing Directors will be dissolved and replaced with an Executive
Committee. The CEO will head the new committee, and all executive directors will report
directly to the CEO.
The CEO will have authority to make strategic decisions and drive cultural change.
Jeroen van der Veer, CEO of RD at the time the proposal was issued, would be the CEO of
Royal Dutch Shell. While supporting the new structure, van der Veer “said he still saw no direct
link between Shell's century-old structure and the scandal. But he said the new model -- a single
chief executive, a single board and a single headquarters -- provides “more clarity, more
simplicity, more efficiency and more accountability” and offers “much more-enabling decision
making.”
After the announcement, Shell’s stock price went up in the London Stock Exchange as well as in
the United States. Analysts and reporters praised the proposal as a positive improvement over the
old structure, claiming it improved decision making and accountability. In some ways, the
change was seen as a means to avoid another scandal. At the time this case was written, the
proposal was still subject to the approval of the shareholders.
Questions
1. In your opinion, what caused the scandal at Shell? What solutions would you propose to
prevent a similar problem from occurring?
2. If you were a Shell shareholder, would you vote for or against the proposed new structure?
Why?
3. Do you agree with Jeroen van der Veer’s statement that there is “no direct link between
Shell's century-old structure and the [accounting] scandal”? Why?
4. The COSO framework of internal controls suggests five key components of a control system:
control environment, risk assessment, control activities, information and communication, and
monitoring. Which of these five components failed in Shell’s accounting scandal? For each
component you identify, explain why it failed.
Chapter 13
Case 1: Nokia’s Foreign Exchange Exposure
In its 4th quarter 2004 earnings announcement, Nokia, the Finnish cell phone giant, reported a
three percent increase in sales to €9.06 billion due to strong demand for new phone models and
sales of network gear. However, Nokia management noted that sales would have been higher if
it hadn’t been for the adverse impact of currency exchange rates.
Nokia is the world’s largest manufacturer of mobile devices and a leader in mobile networks. Its
business is divided into four business groups and two horizontal groups that support the business
groups. The four business groups are mobile phones, multimedia, enterprise solutions, and
networks. The two horizontal groups are customer and market operations and technology
platforms. Nokia was founded in 1967 through the merger of three Finnish companies. In the
early 1980s, Nokia began a big push into telecommunications and consumer electronics markets
through the acquisition of three Swedish companies. After some other acquisitions, it became
the largest Scandinavian information technology company and then expanded its cable business
into Continental Europe. However, it decided to divest its information technology and basic
industry operations in the beginning of the 1990s so that it could focus on telecommunications.
Even though the sale of handsets increased 16 percent in 2004, competition and low prices
actually pushed revenues down by 3 percent and global market share fell 20 percent. The stock
price was pushed down 52 percent by investors between March and August 2004. Nokia’s
management was able to turn around the company by the end of the year, but sales were still flat.
In order to move the company forward, CEO Jorma Ollila is putting a lot of money into R&D.
Nokia generates 63 percent of its revenues and 87 percent of its operating profits from basic cell
phones, a market that isn’t expected to expand significantly in the developed markets. As a
result, Nokia is putting more emphasis into the developing markets of China, India, Brazil, and
Russia and moving into even higher technology areas.
Nokia is the biggest mobile phone manufacturer in the world, and only one percent of its sales
comes from Finland. It makes twice as many handsets as its closest rival, Motorola. Nokia
employs 22,000 workers in Finland and has relationships with some 6,000 Finnish suppliers and
subcontractors. In addition, it has about 51,000 employees worldwide. It had 15 manufacturing
facilities in nine different countries as of December 31, 2004. Only a small percentage of its cell
phone manufacturing takes place in Finland. Manufacturing facilities in the U.S., Mexico, and
Brazil supply the North and South American markets. Plants located in Finland, Germany, the
United Kingdom, and Hungary supply the European market and non-European markets that have
adopted the GSM technology standard. Plants in China and South Korea service Asia. In 2005,
Nokia announced that it was going to set up a manufacturing facility in India.
In 2004, Nokia generated 55 percent of its sales in Europe, the Middle East, and Africa; 25
percent in China and the rest of Asia; and 20 percent in North and South America. However, the
largest market for Nokia in 2004 was the United States, followed by China, the United Kingdom,
Germany, India, and Brazil.
Nokia reports in euros and keeps its financial statements according to IFRS. Its shares are traded
on stock exchanges in Helsinki, Stockholm, Frankfurt, Paris, and New York. Because it lists in
New York it must disclose form 20-F reconciling the financial statement from Finnish
Accounting legislation and IFRS to U.S. GAAP.
In discussing its risk factors, Nokia management noted the following:

“We operate globally and are therefore exposed to foreign exchange risks in the form of
both transaction risks and translation risks. Our policy is to monitor and hedge exchange
rate exposure, and we manage our operations to mitigate, but not eliminate, the impacts
of exchange rate fluctuations. Our sales and results may be materially affected by
exchange rate fluctuations. Similarly, exchange rate fluctuations may also materially
affect the U.S. dollar value of any dividends or other distributions that are paid in euro.”
Talking about the risk in more detail, management noted,

“Nokia’s business and results of operations are from time to time affected by changes in
exchange rates, particularly between the euro and other currencies such as the U.S. dollar,
the Japanese yen, and the U.K. pound sterling… Foreign currency-denominated assets
and liabilities, together with highly probable purchase and sale commitments, give rise to
foreign exchange exposure.”
In most countries where it does business, Nokia has more sales than purchases, with the
exception of Japan where it has more purchases than sales. During 2004, 2003, and 2002, both
the U.S. dollar and the Japanese yen depreciated against the euro. In 2004, the British pound
appreciated against the euro, but in 2003 and 2002, the pound fell against the euro. The
importance of the dollar is significant, because in 2004, more than 50 percent of Nokia’s net
sales were generated in dollars or currencies that closely followed the dollar. In addition, about
50 percent of the components that Nokia uses are sourced in U.S. dollars.
The company is highly centralized in establishing its hedging strategy. In its discussion on risk,
Nokia notes that foreign currency-denominated assets and liabilities as well as expected cash
flows from highly probable purchases and sales give rise to foreign exchange exposures. Due to
a high degree of production and sales outside of the Eurozone, transaction exposures are
managed against the different national currencies. Material transaction hedges are hedged, and
most of the derivatives it uses mature in less than one year.
Questions
1. Identify the different types of foreign exchange exposure Nokia faces.

2. Given the discussion of the movements of the U.S. dollar, Japanese yen, and British pound
against the euro in 2002-2004, what is your guess on how the exchange rates should have
affected the different types of exposure of Nokia?
3. What types of hedging devices do you think Nokia might have used against its different
exposures?
4. Discuss whether or not Nokia’s manufacturing strategy was an effective hedging strategy.
Case 2: RadCo International
RadCo International, a U.S.-based software company, has sold software to a Japanese distributor
for years, but the sales have always been denominated in U.S. dollars so that RadCo didn’t have
to worry about foreign exchange risk. In 2005, however, RadCo’s sales staff finally convinced
RadCo senior management to denominate export sales in Japanese yen. However, the finance
staff noted that now RadCo would be exposed to possible foreign exchange gains and losses, and
the accounting staff had to figure out how to record the transaction.
On January 1, RadCo switched its invoicing to yen. Although sales for the first four months had
already been committed in dollars, the sales staff responsible for Japanese sales estimated that
they would deliver approximately ¥10,000,000 of software to the distributor on May 31. With
that information, the finance staff began discussions with Citibank to determine how it could
deal with the foreign exchange risk. As part of the discussions, the relevant exchange rates
provided by Citibank were as follows:
¥107 the yen/dollar spot rate on January 1

¥110 the forward rate on January 1 quoted for May 31 delivery
¥107 the strike price for a put option for May 31 delivery; the premium on the option is $.0002
per yen.
As the year progressed, Citibank delivered the following relevant exchange rate information to
the finance staff:
¥108 the spot rate on March 31

¥108.5 the forward exchange rate quoted on March 31 for settlement on May 31
¥109.5 the spot rate on May 31
On May 31, RadCo delivers software priced at ¥10,000,000 to the distributor as estimated, and
the distributor wires the cash to RadCo’s account in Citibank. Armed with this information, the
accounting staff now has to make the proper journal entries.
Questions
1. If RadCo decides not to hedge the transaction, what would the journal entries be on January
1, March 31, and May 31?
2. If they hedge the transaction with a forward contract, what would the journal entries be on
January 1, March 31, and May 31? Assume that the discount rate is 6 percent per annum. Be
sure to prepare a table showing nominal values, fair values, and period gains or losses.
3. Compare the net cash receipts from the transaction on May 31 assuming
a. no hedge
b. a forward contract hedge
c. an options hedge
4. What are the pros and cons of each of the three approaches in question 3?
5. Given the financial and accounting complexities of shifting from a dollar to a yen-based
transaction, should top management have allowed the sales staff to invoice in yen?
6. What have you learned about internal coordination when making decisions about which
currency to use to denominate a foreign sale?
Case 1: Niessen Apparel
Juan Valencia was upset. As general manager of the Niessen Apparel Peruvian assembly plant,
he believed that his performance over the past two years was not being evaluated fairly. He had
recently sent a memo to parent company headquarters detailing his complaints and asking for an
immediate response. Charles Niessen, president of the company, asked his son Chuck to review
the matter and report back to him immediately because he did not want to risk losing Valencia
(who had threatened to quit).
Background
Niessen Apparel was a medium-sized U.S. manufacturer of women’s and children’s clothing.
Because of rising domestic production costs, Niessen had investigated the possibilities of sewing
the garments outside the United States, after which they would be shipped back and sold in the
United States. In this manner, Niessen could lower overall production costs and be in a better
position to compete with both domestic and imported products. This could be achieved by
utilizing cheaper labor in a developing country for the most labor-intensive part of the production
process—assembly—and taking advantage of a favorable section of the U.S. tariff code. This
section allowed U.S. companies to export components to a foreign operation, then import the
finished products, paying duty only on the value added outside the United States rather than on
the full value of the product. Thus, a product imported from a Peruvian operation would have a
smaller tariff than one imported from a strictly Peruvian company. This, of course, would give a
U.S. company an advantage over a foreign company not owned by a U.S. corporation. For
example, a product costing $100 imported from Peru might have a tariff of $20 levied against it
(20 percent of its value). However, if the product had $50 worth of U.S. components in its value,
then under the code the U.S. tariff would be $10 (20 percent of the value added outside the
United States). Thus, the full import price would be $110, compared with the $120 import price
of the nonqualifying imports.
The Method of Performance Evaluation
To justify the Peruvian sewing plant, Niessen believed that it should be evaluated as a profit
center. This would allow the operation’s profitability to be compared to the next best alternative
use of funds. Valencia was to be responsible for the profitability of the Peruvian operations and
was to be evaluated and rewarded on that basis. In addition, Niessen believed that the
subsidiary’s performance should be evaluated in terms of U.S. dollars rather than local Peruvian
currency because its value to him and his company was its contribution to U.S. earning power.
Problems with the Operations and Systems
Initially, a transfer pricing system was established on an arm’s-length basis for all intercompany
shipments. This was consistent with the profit center concept in that any other method would
result in artificial profits. However, over the past two years the transfer prices on components
shipped to Peru had been increased, and the transfer prices on finished goods shipped back to the
United States had been decreased. These changes were made to take better advantage of the
special tariff provisions (i.e., to pay less import duty) by increasing the U.S. content and
decreasing the foreign value added to the finished product. This change in strategy was
considered desirable by the U.S. marketing people, who wanted to sell more competitively in the
United States, and by the treasurer, who wanted to save on import duties. In order to avoid
problems with U.S. and Peruvian government agencies, the transfer prices had been adjusted
gradually but steadily each month. Helping to conceal this procedure was the continued decline
of the Peruvian currency relative to the U.S. dollar. This, in itself, increased Peruvian import
(purchasing) costs while lowering U.S. import prices (costs).
Although the effects of the new transfer prices and currency values worked out very well for the
U.S. marketing manager (whose profits increased significantly), just the opposite occurred for
Valencia. The performance evaluation of the subsidiary’s operations deteriorated to the point
where one member of the U.S. staff who was unaware of what had been going on suggested that
Valencia be fired or the Peruvian operation be terminated. In addition, Valencia’s annual salary
bonus had virtually disappeared because it was based largely on his subsidiary’s profit
performance. To make matters worse, slower than anticipated U.S. sales growth had caused a
cutback in shipments to and from Peru, idling much of the Peruvian capacity. And because the
Peruvian subsidiary sold only to the U.S. parent, it could not use its surplus production capacity,
causing its costs to rise further and its profits to decrease further.
Questions
1. What were the strengths and weaknesses of Niessen Apparel’s original method of
performance evaluation?
2. What factors should Niessen consider in deciding whether to change the company’s method
of performance evaluation?
3. Should the old evaluation method be changed for the Peruvian operation? If so, why and
how?
Chapter 14
Case 2: Global Telecom (United States)
Ryan Louw, a summer intern at Global Telecom (GT), is thinking about some of the major
problems that GT is facing in evaluating the performance of foreign operations. One of his
assignments is to identify as many problems as he can and recommend some policy
considerations.
GT is a U.S.-based telecommunications company committed to helping customers solve their

communications and information needs. It came into being with the deregulation of the
telecommunications industry and has risen rapidly to become one of the largest players in the
industry. GT’s major lines of business are computer and network equipment, communications
services (voice, data and video communications services nationally and internationally over
cable, satellite, and mobile systems), and network systems.
In the 1990s, GT expanded rapidly in the U.S. market but has only recently begun to expand
abroad. However, top management believes that the international market has a great deal to
offer. GT’s initial markets were in the United Kingdom and Canada, but it has begun to expand
rapidly into other European countries, Latin America, and Asia, especially China.
GT is primarily a product line organization with a strong focus on finance. To keep up with
major global competitors, GT believes it needs to raise more capital and invest significant funds
in R&D to develop new product lines. It is concerned that its current product line focus may
change significantly as it adds new products and businesses.
GT initially tried to expand overseas with greenfield investments, but it became immediately
obvious that countries jealously guarded their telecommunications sectors. As a result, GT was
forced to enter into a variety of strategic alliances with relatively strong, independent partners. In
addition, GT’s growth in international business forced top management to reorganize the
company and add a new layer of management responsible for markets in Europe, Latin America,
the United States and Canada, and Asia. At this point, foreign revenues are only 20 percent of
total revenues but are expected to grow to 35 percent by the end of the decade.
In order to control costs, GT realized that it needed to improve labor and investment
productivity, so it had selected return on sales (ROS) and return on assets (ROA) as its major
financial targets. It also used other targets for market share, quality, and so on. The target-setting
process is similar to one used by Ford Motor Company:
Identify key trends and critical issues: During this stage, the product groups and geographic area
groups work with top management to determine the key environmental variables that will affect
the firm over the next 5 to 10 years.
Assemble industry and competitive data: Once the issues and strategies are resolved, local
managers prepare five-year business plans. The new matrix structure with product groups and
geographic areas is complicating this process significantly. In addition, the industry is moving
quickly, and possible changes in government regulations make it difficult to know what
businesses GT may be in five years and who its competitors will be.
Agree on competitive targets: Specific targets are set for each SBU with heavy involvement at
the corporate controller level. There is a strong functional linkage between headquarters and
SBU personnel, even at the international level.
Prepare detailed plans to achieve targets: During the fall, after targets are finalized, the
budgeting process takes place for each product group, region, and country. Each reporting unit
prepares detailed profit center budgets, which are expected to result in their assigned ROS and
ROA targets. Top management reviews the budgets and helps to resolve matrix conflicts before
finally signing off on the budget.
Track performance to plan: After budgets are finalized, actual results are compared to the plan
on a monthly basis. Both ROS and ROA targets are set and tracked in dollars according to U.S.
GAAP. A forecast rate is used to set the budget, and actual results are translated into dollars at
the actual exchange rate.
GT’s experience in Mexico in 1994, however, caused it to rethink its approach to performance
evaluation. Top management had projected a year-end exchange rate of 3.2 pesos per dollar, but
the peso devaluation forced the peso down to 5.325 pesos per dollar, with the average for the
year at 3.6 pesos per dollar. That clobbered GT’s results and caused significant unfavorable
variances as a result of foreign exchange. Subsidiary management in Mexico argued that it
shouldn’t even have to be evaluated for dollar results since it had no control over the peso/dollar
exchange rate.
GT was also considering adopting EVA after benchmarking AT&T’s approach to performance
evaluation in the early 1990s. This approach was described by CFO Alex Mandl in AT&T’s
1992 annual report:
“In 1992 we began measuring the performance of each of our units with an important
new management tool called “Economic Value Added”—”EVA” for short. In financial
shorthand, EVA measures returns in excess of the cost of capital. That is how we created
value for you, the owners of our business.
Investors provide us money by purchasing AT&T debt and stock. We use that money to
purchase equipment, to make investments, and for a variety of other needs. Our balance
sheet might be viewed as a status report on the uses we made of that money.
In exchange for the use of their money, investors expect a return on investment.
Bondholders expect interest payments, and shareowners expect dividend payments and a
rising stock price. The return these investors expect depends on market conditions—such
as the levels of interest rates and stock prices—and their views about the riskiness of
investing in AT&T’s future performance.
With our targeted mix of debt and equity financing, our cost of meeting investor
expectations—our ‘cost of capital’—generally ranges between 11 and 14 percent of the
money investors have supplied. The EVA for each of our management units is the dollar
amount by which its after-tax operating profit exceeds its cost of capital.
Shareowners can judge for themselves whether or not AT&T is creating shareowner
value by keeping track of their total return on investment over time. EVA gives our
managers a way to also track the creation of shareowner value in individual AT&T units.
EVA is truly a system of measurement. It supplements traditional accounting measures of

performance, giving us additional insight into our business and helping us to identify the
factors that affect our performance. We have made it the centerpiece of our ‘value-based
planning’ process. And we are linking a portion of our managers’ incentive compensation
to performance against EVA targets for 1993.
In summary, our performance planning, measurement and reward programs are now fully
aligned with the interests of shareowners. And I believe what gets measured gets done.”
The treasury staff noted that GT’s cost of debt in the United States was 5.5 percent and cost of
equity was 15 percent; 35 percent of operations are funded by debt and 65 percent by equity.
Currently, GT does not sell shares on any foreign stock exchanges, although it heard that some
foreign investors had purchased GT stock on the Nasdaq. Also, GT management isn’t sure how
to apply EVA to its foreign operations and wonders if an EVA focus would have helped foresee
anything in Mexico.
GT-Mexico results for 1994 were as follows:
Thousands of Pesos
Total revenues 6,300
Total costs 3,800
Total operating expenses 2,300
Cash taxes paid 80
Total assets 5,300
Cash 2,100
Total liabilities 4,000
Short-term debt 700
Long-term debt 1,000
The Mexican peso was the functional currency for GT-Mexico. Ryan was curious about the
impact of the peso devaluation on GT-Mexico’s EVA relative to what it was in pesos and what it
would have been at the projected rate.
Chapter 15
Case 1: Lucas International—Coordinating an MNE Audit
The following case is based on the audit of a real MNE by one of the large international audit
firms. The names of the firm and its client have been changed to maintain confidentiality. This
case is based on Barret, Cooper, and Jamal, “Globalization and the Coordination of Work in
Multinational Audits”, Accounting, Organizations and Society, 30 (2005):1-24.
Lucas International was a fairly decentralized, multinational manufacturing company operating

in eight countries. For 1997, Lucas reported revenues of approximately U.S. $1750 million.
ABC’s corporate headquarters were Ruritania, a European country. The auditor for Lucas was
DPEK, a large international audit firm with approximately 700 offices worldwide. By the 1997
audit, DPEK had been Lucas’s auditor for several years. The worldwide engagement partner for
the Lucas audit, Jack Knight, based in DPEK’s Ruritania office, was responsible for directing the
work in Ruritania as well as in the international subsidiaries of Lucas. Each country’s
engagement partner reported to Mr. Knight. At the same time, partners of local offices within
each country reported to the country engagement partners.
With revenues of U.S. $600 million, representing 34% of consolidated sales, the North American
division of Lucas was material to the company’s overall performance. Lucas had several
subsidiaries in Canada and the United States. The Canadian engagement partner had worked with
Lucas for several years, had a good relationship with management, and considered the audit as
straightforward and low in risk. On the other hand, the U.S. engagement partner was fairly new
to the Lucas audit, and U.S. operations were reporting a net loss for the year under audit.
Since Lucas was a geographically dispersed MNE, Jack Knight and his staff in Ruritania
couldn’t directly perform the audit work in all significant locations. As the Canadian manager
explained it:
“Our office in Ruritania would coordinate the audit at a worldwide level and they would
issue instructions to all the DPEK offices around the world that will be helping out in the
audit. What we actually do is we issue a report to our office in Ruritania saying what we
have audited and they specify the levels they want us to report, problems and issues and
things. We clear to them and they issue a report on…the worldwide financial statements
of Lucas International.”
The instructions from the Ruritania office were the main coordinating mechanism for the audit
work. One of these instructions involved the overall level of materiality for the audit. For the
year under audit, materiality was set as “items affecting net income of 5% reported profit before
taxes, with a minimum of U.S. $600,000”. As straightforward as this instruction seemed, local
country partners used wide discretion in modifying the materiality level. The Canadian office of
DPEK, for example, increased materiality by nearly four times. Since higher levels of materiality
require lower levels of assurance, the Canadian auditors performed significantly less work than
the instructions from Ruritania suggested. A manager in one of the branch offices of the
Canadian audit commented, “I regard the materiality level as so high on this job that it’s almost a
review job.” Apparently, Jack Knight wasn’t as troubled by the alteration: “I know they are
applying DPEK standards; they are going through quality control processes…So I expect the
quality is there on the assignment.”
The U.S. team, on the other hand, stuck more closely to Ruritania’s low materiality instruction.
This can be explained by the different auditing philosophies between them and their Canadian
colleagues. Since the U.S. environment is more litigious than that of Canada, auditors in the
former country tend to take on less risk by performing more substantive testing. Thus, cultural
and institutional differences cause each team to perform significantly different work.
One of the greatest challenges in managing the Lucas engagement was the geographical distance
between offices, which made communication difficult. As one U.S. manager put it:
“Our] relationship with Ruritania is nonexistent. All they do is send us a package. [The
US partner in charge] talked to [the worldwide engagement partner] a bit at the beginning
of 1996. But they have no contact with me.”
In fact, the distance and difference in operating environments between the Ruritania, Canada,
and U.S. offices made coordination difficult. First, each office viewed their responsibilities quite
differently. Based on the regulatory climate in Ruritania, Jack Knight explained that “we have
got four reporting lines: the shareholders of Lucas, the majority shareholder, the regulatory
authority [in Ruritania], and we have to report to the works councils.” The U.S. and Canadian
partners didn’t share this view of Lucas as an international, consolidated client. “It’s the CFO of
local Lucas plant who we take to the hockey game. He’s my client,” said a member of the
Canadian team. In fact, each local DPEK office independently negotiated the audit fees and work
with management of the Lucas subsidiary. Thus, the lack of face-to-face contact and differences
in incentives between partners in each office accounted for some discord on how to best conduct
the audit and meet the client’s needs.
The nature of Ruritanian governance and reporting requirements were very different from those
in North America. These differences created a few additional misunderstandings. Based on a
firm-wide push for increased revenues, the engagement teams in North America tried to sell
additional advisory services to Lucas’s managers. They were disappointed at the lack of support
from Ruritania in their efforts. What they didn’t know, however, was that the audit committee of
ABC would not permit their auditors to do the type of consulting work that the North American
offices were proposing. This was not communicated to the Canadian and U.S. auditors.
Jack Knight understood the difficulties imposed by lack of face-to-face interaction between those
involved in the Lucas audit. In his own words:
“My dream is to set up a meeting [of all those working on the Lucas audit] at the same
time as the controller’s meeting of ABC, bringing everybody together…I am in favor of
bringing people together because…it is the eye-to-eye contact which is the most
important. That is where you get immersion on top of the message itself.”
Despite the differences between Ruritania and the Canadian and U.S. offices, Jack Knight
respected the partners and auditors from those countries because he saw them as having
legitimate resources and reputable institutions. On the other hand, he had less trust in the work
performed by auditors in developing countries where Lucas operated, such as China and Turkey,
because they lacked the training and experience of North American auditors.
At the end of the yearly audit, Jack Knight was responsible for reviewing the work done in each
subsidiary, compiling the results, and issuing an opinion on the consolidated financial statements
for Lucas.
Questions
1. What are some of the challenges of coordinating a multinational audit?

2. In what ways did the Canadian and U.S. offices view their responsibilities towards Lucas
differently than the Ruritania office? Why did these different perceptions arise?
3. How did institutional, professional, and cultural differences affect the work of auditors in the
three different countries?
4. Suppose you are Jack Knight. The audit work has been completed and now you must review
the work performed in the various subsidiaries of Lucas. What questions would you have
regarding the reliability of the work done the auditors of the various subsidiaries?
5. The auditors in the U.S. and Canada aggressively tried to sell non-audit services to Lucas in
1997. Would these auditors take the same approach in the post-Sarbanes-Oxley environment?
Justify your answer.
Case 2: Xerox Corporation
Chances are you’ve heard of “the document company”. Xerox Corporation is a U.S. MNE based
in Connecticut. Xerox manufactures, sells, and leases document imaging products, services and
supplies in over 130 countries. In 2000, Xerox employed approximately 92,500 people
worldwide.
Xerox was a leading technological innovator for several decades, but by the late 1990s, the
company was confronting intense product and price competition from its overseas rivals. The
investment climate of the 1990s added to pressures on Xerox. Companies that failed to meet
Wall Street’s earnings estimates by even a penny often were punished by significant declines in
stock price. In addition, compensation of Xerox senior management depended significantly on
their ability to meet increasing revenue and earnings targets. Between the first quarter of 1997
and the fourth quarter of 1999, Xerox met analysts’ expectations every quarter. However, the
reported results were fraudulent. In June 2002, Xerox reported restated revenues of $18.8 billion
and a restated net loss of $273 million for the year ended December 31, 2000.
Although Xerox management used many accounting tricks to increase earnings, the bulk of the
fraud was based on improper revenue recognition from it sales-type leases of equipment and
services. When a client purchased equipment from Xerox (e.g. a copy machine), it signed a
contract to pay a fixed monthly fee covering the cost of the equipment, service, and financing.
Under U.S. GAAP, the portion of the lease attributed to the sale of equipment can be recognized
immediately as revenue (Xerox called this portion “the box”). The other portion, attributable to
the sale of ongoing services and financing of the lease, must be recognized throughout the life of
the lease. Between 1997 and 2000, Xerox improperly pulled forward nearly $3.1 billion in
equipment revenue and pre-tax earnings of $717 million by reallocating revenue to “the box” to
accelerate its recognition. This was done in two ways. First, Xerox reduced the discount rate
used to get the value of the equipment—a technique called ROE. By reducing the discount rate,
the present value of the equipment, which can be recognized immediately as revenue, was
increased. Second, revenue was increased by a process called “margin normalization.” Suppose
the U.S. market provided Xerox with the highest gross margin, say 20%. At the end of a
reporting period, Xerox management would take the sales in Brazil, with a margin of less than
20%, and adjust it up to 20% to increase sales and income. These manipulations were directed by
top management, including the CFO of Xerox.
Although accounting for lease revenues requires a significant amount of judgment and is prone
to periodic adjustments to discount rates other inputs, Xerox management made these
adjustments without any rationale other than to meet quarter-end targets. For example, the
typical discount rate to price similar equipment in Brazil was 20%. However, management at
headquarters would adjust the rate down to 6% to increase the value of the equipment, which
could be recognized as revenue in the present period. The motive behind all these accounting
manipulations was simple: to “bridge the gap” between actual performance and analyst
expectations. The chart below shows the difference between EPS by proper standards and what
earnings were by using fraudulent accounting.
Xerox’s auditor during this period was KPMG. KPMG International is one of the largest public
accounting firms in the world, with over 700 offices in 152 countries. KPMG International
employed over 100,000 people in 2002 and had worldwide revenues of $10.7 billion. The firm
was Xerox's auditor for approximately 40 years, through the 2000 audit. KPMG was paid $26
million for auditing Xerox's financial results for fiscal years 1997 through 2000. It was paid $56
million for non-audit services during that period.
While Xerox management was deceiving the public through accounting manipulations, KPMG
apparently had many opportunities to uncover the fraud—yet year after year the auditor issued a
clean opinion on the financial statements. Of particular interest are the many red flags raised by
the auditors of Xerox’s foreign subsidiaries.
For example, KPMG Canada told the managing partner that the ROE model was “not
supportable” and posed an ”unnecessary control risk with regard to accounting records.” In
addition, KPMG's Brazilian affiliate warned that the manipulation of discount rates to value
equipment was using rates that were significantly below the market rates actually realized in
Brazil.
KPMG Brazil warned that this “fine tuning” increased the risk of fraudulent financial reporting
and that the pressure imposed on Xerox Brazil by headquarters to meet revenue and profit goals
increased audit risk. KPMG Brazil also informed the partner that Xerox in Brazil did not
adequately document how accounting estimates were calculated. Similarly, KPMG Tokyo in
1999 objected to the use of the ROE formula by Fuji Xerox because it did “not match the actual
status” of Fuji's business. KPMG U.K. warned in 1998 that that use of a 15% ROE was not
appropriate for Europe. Despite these warning, the engagement partner never required Xerox to
formulate and apply a valid method of estimating its discount rate.
In connection with margin normalization, KPMG U.K. voiced numerous concerns about
implementing margin normalization on Xerox lease accounting in Europe because there was no
objective basis for equalizing margins based on “little hard evidence.” The U.K. office told the
partner that Xerox was “playing ‘follow my leader’—whoever has the highest sales margins
being the leader.” In 1999, KPMG Brazil insisted that there were sufficient stand-alone service
contracts in Brazil to calculate actual margins on service, rather than accept for reporting
purposes margins based on U.S. leases. Xerox officers at headquarters said that the Brazilian
auditors were wrong and that they were not to discuss margin normalization with local Xerox
personnel. By the end of 1999, Xerox had imposed restrictions on KPMG discussions of margin
normalization with local managers in both Brazil and Europe.
When the managing partner finally decided to confront Xerox management about these issues,
the CFO asked KPMG to remove the partner from the Xerox audit team. KPMG complied with
the CFO’s request. It was not until 2001, when the SEC had already begun its investigation of
the irregularities, that the auditor requested Xerox’s audit committee to investigate the
companies accounting practices.
In 2002, after the SEC filed a complaint accusing Xerox management of fraud, the company
settled with the SEC for $10 million, the largest fined imposed to a company up to that date. In
2003, the SEC filed a complaint against KPMG accusing several of the engagement partners of
fraud. As of the writing of this case, the complaint hadn’t been resolved.
(Sources: SEC Complaint 17465 vs. Xerox Corporation, and SEC Complaint 17954 vs. KPMG)
Questions:
1. Explain in your own words the accounting manipulations used by Xerox to accelerate
revenue recognition from its sales-type leases.
2. Although hindsight is 20/20, do you think it was easy for the auditor to detect the fraud?
What are some of the difficulties the auditor may have faced in doing so?
3. Why do you think the engagement partner ignored the repeated issues raised by KPMG’s
foreign affiliates? How does this reflect the difficulty of conducting an MNE audit?
4. Do you think the risks involved in auditing Xerox are unique, or do they apply to all MNE
audits? Justify your answer.
5. Many of the issues involved in the Xerox fraud were related to internal controls. Section 404
now requires the auditor to specifically audit internal controls and issue an opinion on their
effectiveness. Do you think auditing internal controls would have prevented the fraud from
occurring? Why or why not?
Chapter 16
Case 1: Transfer Pricing
Willowmill Clothing, a multinational clothing chain, has operations that span around the world.
The jeans-making process starts in Bermuda, where they spin natural fibers into cloth that is used
to make jeans. They purchase raw material for $3.00 per jean and incur a cost of $7.00 per jean
to spin the cloth. As such, total cost of the spinning process equals $10.00 per jean. The second
phase of the jeans-making process occurs at two manufacturing plants, one in China and one in
Hong Kong. There, they manufacture the jeans for distribution. Generally, 75% of the jeans are
manufactured in China and 25% are manufactured in Hong Kong. The cost incurred to make the
jeans, not including the price paid to purchase the cloth made in Bermuda, is $20.00 at each
location. The jeans are then sent to the distribution center in France, where they sell the jeans to
retailers around the world for $45 per pair of jeans. An additional cost of $5.00 is incurred at the
distribution center.
Willowmill has called you in as a tax consultant to help them minimize its tax burden on the
production of jeans. You are aware of the following tax information about the countries in
which Willowmill operates.
Bermuda No Income Tax

Hong Kong 25% income tax
China 37% income tax
France 30% income tax
Additionally, you researched the clothing industry to determine the standard markup for each
phase of production to ensure that transfer prices are not set at levels which would be not be
considered arm’s length.
Cloth Spinning 15-25%

Manufacturing 5-15%
Distribution 5-10%
In order for Willowmill to set transfer prices to its advantage without committing tax evasion, the
prices need to be set so that the markup at each stage is between the standard values found in the
industry. Additionally, the prices set to and from the two distribution centers need to be
identical. The company must also continue to produce 75% in China and 25% in Hong Kong.
Questions
1. Create a diagram that illustrates Willowmill’s operations around the world. Include the tax
rates in each country and the cost to manufacture the products in each area.
2. Determine the transfer price that should be set at each stage in order to minimize the tax
burden for Willowmill. Remember that at the end, the distribution center needs to be able to
sell the product for $45.00. Round your answers to the nearest cent. Hint: to determine
whether you should minimize or maximize income at the distribution centers, weight the tax
rates by the amount of jeans manufactured there and compare the effective manufacturing tax
rate to the distribution tax rate.
3. Assume Willowmill produces 1,000 pairs of jeans. Calculate the income recognized under
your transfer pricing structure and the overall tax burden. The income recognized should be
the same under any scenario, but the tax burden should differ according to your transfer
pricing structure.
4. Compare your answer to what the income tax would have been if you used a 15% markup at
the cloth spinning stage, a 15% markup at the manufacturing stage, and a 9.1% markup at the
distribution stage. Note the difference between the two tax burdens.
Case 2: Midwest Uniforms
Midwest Uniforms Inc. manufactures and sells cloth and disposable uniforms. The company also
launders and delivers uniforms to hospitals, medical laboratories, and doctors’ offices. The
corporation is organized in the state of Michigan and operates three plants there—one that
manufactures disposable uniforms and related supplies such as caps and masks; one that
manufactures reusable cloth uniforms; and a plant that launders, presses, and delivers clean
uniforms.
The company is owned by the Fulton family. Daniel Fulton, age 60, and his wife, Lauren, age
59, jointly own 40 percent of the corporation’s one vote per share common stock. The Fultons’
son, Michael, owns 20 percent of the common stock, their daughter, Meghan, owns 20 percent of
the stock, and a family trust holds the remaining 20 percent for five grandchildren. Daniel
manages the plant that manufactures disposable uniforms while Michael runs the cloth uniform
plant, and Meghan manages the plant that launders and delivers uniforms.
During the early 1980s, the bulk of the demand for the company’s disposable and cloth uniforms
came from the Midwest. In the late 1980s, the company saw increased demand for its disposable
uniforms from outside the region and outside the United States. In the past few years, the
company has started to supply disposable uniforms to companies in the hazardous waste cleanup
industry. It expects sales of disposable uniforms to hazardous waste companies to triple during
the 1990s. The corporation had $4 million in revenue in 1992, of which $1,500,000 was
attributable to the sale of disposable uniforms.
Midwest Uniforms’ manufacturing plants are working at near capacity. The company has
considered closing its laundering facility and converting it to a manufacturing plant. Many of its
cloth uniform customers have indicated, however, that the company’s ability to launder and
deliver clean uniforms is one of the reasons they purchase uniforms from Midwest. The company
also has considered expanding each of the manufacturing plants, since it has adequate land at
each location. Because the demand for its cloth uniforms is still predominantly from the Midwest
while the demand for the disposable uniforms is becoming worldwide, Daniel Fulton has
suggested that the company consider converting the disposable uniform plant to a cloth uniform
plant and building a new disposable uniform manufacturing facility elsewhere.
Daniel would like the company to build a disposable uniform plant in Puerto Rico. He and his
wife are nearing retirement age and feel that if they located to a warmer climate, they would be
able to work well beyond the age of 65. His estimates indicate that it would be less expensive to
build the plant in Puerto Rico than in the Midwest and that labor costs could be reduced by at
least 25 percent and operating costs could be reduced by at least 20 percent.
The facility in Puerto Rico would operate as a branch of Midwest Uniforms. The raw materials
would be shipped to Puerto Rico from the supplier in the United States and the uniforms, caps,
masks, etc., that are manufactured would be shipped directly from the plant to customers
worldwide. Daniel’s research indicates that taxes are lower in Puerto Rico and that the United
States provides a tax credit for foreign income taxes.
Michael Fulton is concerned about the potential labor unrest in Puerto Rico. He wants the
company to organize a subsidiary in Hungary and call it Global Uniforms Inc. Since Hungary
left communism, it has been forced to deal with terrible pollution problems, as have other
countries in the former eastern bloc. In fact, the pollution problems of these countries are a major
obstacle to joining the European Community (EC) since they must first comply with the
environmental rules of the EC. Michael feels that by locating a plant in eastern Europe, the
corporation will be able to take advantage of the emerging markets in that area and, as a result,
more than triple its sales of disposable uniforms and supplies. His research also indicates that the
corporation could cut labor costs by 30 percent and operating costs by 25 percent by locating in
Hungary.
Michael is particularly interested in sheltering income from taxation so that the grandchildren in
the family will have adequate funds to attend college and graduate school. He believes that
organizing a foreign subsidiary would save the corporation taxes since his research indicates that
a foreign corporation’s U.S. shareholders are not taxed on the corporation’s income until it is
distributed to the shareholders as a dividend. He would like, if possible, to leave all the foreign
earnings in the foreign company until the grandchildren are ready to attend college. He proposes
that 20 percent of the stock of the subsidiary be owned by the family trust and 80 percent by
Midwest Uniforms Inc.
Meghan, on the other hand, would like the corporation to expand the two existing manufacturing
plants and continue to manufacture the disposable products in the United States. She is
concerned that the U.S. taxation of worldwide income would actually result in a higher overall
tax liability for the corporation. She believes that the corporation can increase its exports through
sales offices located in foreign countries.
The current and projected revenue and expenses of Midwest Uniforms are included in Exhibit 1.
The estimates assume that the plants will remain in the United States.
(This case was prepared by Kathleen E. Sinning of Western Michigan University as a basis for
class discussion rather than to illustrate either effective or ineffective handling of a situation. All
rights reserved to the author. Permission to use this case was obtained from the author.)
Tax Considerations of Doing Business in Puerto Rico2
In Puerto Rico, a corporation is considered to be a domestic corporation if it is organized under

the laws of Puerto Rico and a foreign corporation if it is organized under the laws of another
jurisdiction. A corporation is considered to be a resident of Puerto Rico if it is incorporated under
the laws of Puerto Rico or, in the case of a foreign corporation, it if is engaged in a trade or
business in Puerto Rico. A Puerto Rican corporation is taxed on its worldwide income. A
resident foreign corporation is taxed on all Puerto Rican source income and certain foreign
income connected with Puerto Rican operations.
A corporation can use either a calendar or fiscal year in calculating its tax liability. Corporate tax
is imposed at a flat rate of 22 percent. A surtax is imposed on taxable income, after a deduction
of $25,000, at the rates indicated in Exhibit 2. There is no provision in Puerto Rico for filing
consolidated returns. A controlled or affiliated group of corporations is limited to one surtax
exemption that must be allocated among the members of the group.
A branch operating in Puerto Rico is taxed at the same rates as a corporation and is entitled to the
same deductions and credits. Branches of foreign corporations are subject to income tax only on
their Puerto Rican source income and on income effectively connected with a trade or business
within Puerto Rico. In addition, foreign corporations doing business in Puerto Rico are subject to
a branch profits tax (BPT). The BPT is 25 percent (10 percent for hotel, manufacturing, or
shipping operations) and is applied to amounts deemed to be repatriated from the branch in
2
Sources: Price Waterhouse, New York (1991). Corporate Taxes, A Worldwide Summary, and Coopers & Lybrand
(1991). 1991 International Tax Summaries, A Guide for Planning and Decision. New York: Wiley.
Puerto Rico. The deemed dividend will generally be triggered if the branch has earnings and
profits generated in Puerto Rico that are not reinvested in Puerto Rico. The BPT is not applicable
to those corporations deriving at least 80 percent of their gross incomes from Puerto Rican
sources.
To encourage industrialization in Puerto Rico, certain activities (basically manufacturing, export,

maritime freight transportation, and certain service industries) may obtain partial exemption from
income and property taxes and 60 percent exemption from municipal license taxes. The
municipal license taxes are 0.3 percent of gross receipts. The exemption can be obtained for a
period of 10 to 25 years depending on the location of the business within the island. For purposes
of the partial income exemption, Puerto Rico has been classified into four industrial zones. The
periods and rates of exemption are included in Exhibit 3. In addition, the two principal harbors in
Puerto Rico have been classified as foreign trade zones and foreign or domestic goods may be
entered without a formal U.S. customs inspection and without the payment of any duties or
excise taxes.
Tax Considerations of Doing Business in Hungary3
A company is considered a resident of Hungary if it is incorporated in and has its head office in
Hungary. A foreign company cannot trade through a branch in Hungary, but it can open a
representative office, a service office, or a construction site.
Resident corporations are taxed on their worldwide incomes. A business profits tax of 40 percent
is levied on all Hungarian business entities. The tax rate is affected by tax incentives that are
intended to encourage foreign investment in manufacturing corporations. The incentives are in
the form of rebates. The tax rates after the rebates are included in Exhibit 4.
Entities subject to the business profits tax are not subject to other income taxes. Business entities
of foreign ownership, however, are subject to an additional 4.5 percent levy on the business
profits tax base.
A foreign company that trades in Hungary is subject to a corporate tax of 40 percent of the
taxable income. The taxable income of a representative office is deemed to be 90 percent of the
total of 6 percent of Hungarian sales made by its parent company and 90 percent of 5 percent of
sales made outside Hungary if the representative office was involved.
3
Same sources as in note 1
Questions
1. If the corporation builds a plant in Puerto Rico, can it use the foreign tax credit for any
foreign taxes that it pays? Can the credit be used for taxes paid to Hungary?
2. If the corporation decides to build a plant in Puerto Rico, is there any other U.S. tax provision
that it can use in lieu of or in addition to the foreign tax credit?
3. If the corporation organizes a subsidiary in Hungary, will the income of the corporation be
subject to U.S. taxation? If so, when and how? Will the controlled foreign corporation rules
apply to a subsidiary organized in Hungary?
Exhibit 1 Current and project Revenue and Expenses

Plant 1992 1993 1994 1995
Disposable uniforms
Revenues $1,500,000 $2,000,000 $2,750,000 $3,500,000
CGS 400,000 550,000 745,000 945,000
Operating expenses 500,000 666,000 915,750 1,165,500
Cloth uniforms
Revenues 2,000,000 2,500,000 2,750,000 3,000,000
CGS 600,000 750,000 825,000 900,000
Operating expenses 500,000 625,000 688,000 750,000
Laundry
Revenues 500,000 550,000 600,000 650,000
CGS 100,000 110,000 120,000 130,000
Operating expenses 200,000 220,000 240,000 260,000
Exhibit 2 Corporate Surtax Rates in Puerto Rico

Surtax Net Income
Over Not Over Tax on Column 1 Percentage on Excess
$0 $75,000 -- 6
75,000 125,000 $4,500 16
125,000 175,000 12,500 17
175,000 225,000 21,000 18
225,000 275,000 30,000 19
275,000a -- 39,500 20
a
In the case of a corporation whose net income subject to tax exceeds $500,000 for any taxable year, a tax of 5
percent of net income subject to tax in excess of $500,000 is imposed to phase out the benefits of the graduated tax
rates.
Exhibit 3 Periods and Rates of Exemptions from Puerto Rico Taxes
Industrial Zones 1-5 6-10 11-15 16-20 21-25
years years years years years
1. High industrial development 90% 90% None None None
2. Intermediate industrial development 90% 90% 90% None None
3. Low industrial development 90% 90% 90% 90% None
4. Vieques and Culebra 90% 90% 90% 90% 90%
Exhibit 4 Business Profits Tax Rates in Hungary

Type of Entity Rate
Standard rate for corporations 40%
Manufacturing entity owned more than 30% by foreigners
First 5 years 16%
Second 5 years 24%
Manufacturing entity owned more than 30% by foreigners in a priority industry
First 5 years 0
Second 5 years 16%

Case 1: Toyota's Global Expansion

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Case 1: Toyota's Global Expansion

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Chapter 1

Case 1: Toyota’s Global Expansion

Case 1: General Motors and Japanese Convergence vs. Chinese Convergence

Case 1: Reporting Standards vs. Tax Standards

1. What are the advantages of converging the two systems?

Case 1: Small GAAP vs. Large GAAP

Describe the ideal accounting system for Belarus.

1. What values should the country emphasize with its system?

Case 1: Alcatel and Lucent (French/United States)

From 20-F (US GAAP)

Case 1: Infosys Technologies (India)

One of India’s new high-technology companies is Infosys, specializing in software development.

1. Why does Stora Enso provide a Sustainability Report?

Case 1: European Adoption of IFRS

Case 1: Multigroup (Switzerland)

Multigroup, a pharmaceuticals MNE based in Switzerland, decided to prepare consolidated

Operator Country Million of Subscriber Vodafone's

Verizon Wireless 35%

Accounts Payable 5,238.0

Preferred Stock Equity -

Total Liabilities and Stockholder’s Equity 271,159.0

Accounts Payable 4,130.0

Preferred Stock Equity

Total Liabilities and Stockholder’s Equity 165,968.0

Accounts Payable 3,297.0

Preferred Stock Equity

Total Liabilities and Stockholder’s Equity 37,128.0

Accounts Payable 843.0

Preferred Stock Equity -

Total Liabilities and Stockholder’s Equity 13,341.0

Accounts Payable 1,020.0

Preferred Stock Equity

Total Liabilities and Stockholder’s Equity 16,902.0

Accounts Payable 1,390.0

Preferred Stock Equity

Total Liabilities and Stockholder’s Equity 55,488.0

Case 1: BMW (Germany)

Case 1: Coca-Cola (United States)

Year Ended 1999 1998 1997

1. Which translation methodology or methodologies does Coca-Cola use?

“How are you doing, Frank?”

“OK, Ray. I’ll see what I can do.”

BP Accounting Policies (Excerpt)

(See financial information on BP below)

Fosters Brewing Group, based in Australia, is adopting International Financial Reporting

Note 35 International Financial Reporting Standards (excerpt)

Case 1: P&G and Unilever - Restructuring for Growth

Unilever’s Path to Growth

Case 1: Nokia’s Foreign Exchange Exposure

In discussing its risk factors, Nokia management noted the following:

Talking about the risk in more detail, management noted,

1. Identify the different types of foreign exchange exposure Nokia faces.

¥107 the yen/dollar spot rate on January 1

¥108 the spot rate on March 31

The Method of Performance Evaluation

Problems with the Operations and Systems

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GT is a U.S.-based telecommunications company committed to helping customers solve their

EVA is truly a system of measurement. It supplements traditional accounting measures of