SUMMARY
SUMMARY ■ The MNE must cope with differing rates of inflation, changes in exchange
rates, currency controls, customs, levels of sophistication, and local reporting requirements in performing its finance and accounting functions.
■ Some of the major factors that influence the development of accounting objectives, standards, and practices are the nature of the enterprise, the enterprise's users of information, governmental users and regulators, other external users (such as creditors), local environmental characteristics, international influences, academic influences, and the accounting profession.
■ There are important differences in worldwide accounting standards and practices. However, groups such as the EC and the International Accounting Standards Committee (IASC) are attempting to harmonize accounting practices and upgrade the accounting profession.
■ In translating transactions denominated in foreign currency, all accounts are recorded initially at the exchange rate in effect at the time of the transaction. At each subsequent balance-sheet date, recorded dollar balances representing cash and amounts owed by or to the enterprise that are denominated in a foreign currency are adjusted to reflect the current rate.
■ The translation of financial statements involves measuring and expressing in the parent currency and in conformity with parent country GAAP the assets, liabilities, revenues, and expenses that are measured or denominated in foreign currency.
■ According to FASB Statement No. 52, the financial statements of most foreign firms are translated into dollars by using the current rate translation method. According to that method, all balance-sheet accounts except stockholders" equity are translated into dollars at the current exchange rate in effect on the balance-sheet date. All income statement accounts are translated at the average exchange rate in effect during the period.
■ Foreign-exchange gains and losses arising from foreign currency transactions are taken to the income statement during the period in which they occur. Gains and losses arising from translating financial statements by the current rate method are taken to a separate component of stockholders' equity. Those arising from translating according to the temporal method are taken dkectiy to the income statement.
■ International tax planning has a strong impact on the choice of location in the initial investment decision, the legal form of the new enterprise, the method of financing, and the method of setting transfer prices.
■ The Foreign Sales Corporation (FSC) is a company incorporated in a foreign country or a U.S. possession (except Puerto Rico). If it engages in substantial export services for its parent company, some of its income will be considered exempt from U.S. corporate income tax.
■ Deferral means that income earned by a subsidiary incorporated outside of the home country is taxed only when it is remitted to the parent as a dividend, not when it is earned.
■ A controlled foreign corporation must declare its subpart F income as taxable to the parent in the year it is earned, whether or not it is remitted as a dividend.
■ The tax credit allows a parent corporation to reduce its tax liability by the direct amount paid to foreign governments on dividends declared by its subsidiary to the parent as well as by the amount of the corporate income tax paid by the subsidiary to the foreign government.
■ Policies in other countries vary as to what is taxable income, how honest taxpayers are in filing returns, and how taxes are assessed. The United States taxes each separate unit (the classical approach), whereas most other industrial countries use an integrated system in which double taxation of dividends is minimized or eliminated.
■ The purpose of most tax treaties is to prevent international double taxation or to provide remedies when it occurs.
From 1886, when Atlanta pharmacist J. S. Pem-berton mixed up his first batch of Coca-Cola, to 1989, when Cuban Robert C. Goizueta presided over the company as chairman and chief executive officer, Coca-Cola's worldwide revenues increased from $50 to $8,966 billion. Coke's rapid worldwide expansion has resulted in over 65 beverage trademarks worldwide and sales in 155 countries. From Fig. 19.7 we can see that Coke's international revenues in 1987 were 55 percent of total revenues. Coca-Cola's international presence has resulted in a number of interesting challenges and opportunities. In 1986 its operations were divided into three different product categories: soft drinks, entertainment, and foods.
In 1989 the soft-drinks division comprised about 18 percent of total revenues and foods comprised about 18 percent of revenues. Coca-Cola sold its entire equity interest in Columbia Pictures in November 1989. Its soft-drink business is particularly strong internationally, capturing over 40 percent of the soft-drink market in the 155 countries where it is operating and a significantly higher percentage of the market in its major markets. Coca-Cola management feels that international markets are virtually untapped and are clearly the growth area of the future.
In 1989 Coca-Cola increased its soft-drink sales to more than 48 percent of the global market. A major strength of Coca-Cola is the European Community, which accounts for 24 percent of Coke's total international gallon sales. However, Coke also has a strong presence in Latin America and Asia.
Specific information was provided in the An-
nual Report on changes in the value of the German mark, the Japanese yen, the British pound, and the Australian dollar. In 1988 other income (a category in the income statement) was reduced by $ 13 million due to transactions and translation losses, and in 1989 other income was increased by $20 million by transactions and translation gains.
In 1989 nearly 96 percent of operating income came from the sale of soft-drink concentrates and syrups. International sales accounted for nearly 80 percent of Coke's soft-drink operating income. International soft-drink operating income grew 13 percent in 1989, despite the effects of a U.S. dollar that strengthened approximately 6 percent against key foreign hard currencies during the year.
Coca-Cola's other major product group is not quite as international as the beverage category, but it is increasingly moving into international markets. Coke's food division is increasing its international sales, especially in Canada.
As noted earlier, Coca-Cola operates in 155 different countries; it used 40 different functional currencies to translate its financial statements from foreign currencies into U.S. dollars. The dollar is the functional currency of operations in hyperinflationary economies, such as Brazil and Mexico. Exchange effects on foreign currency transactions and translation of balance-sheet accounts in hyperinflationary countries are included in "other income" in the consolidated income statement.
In one place in its Annual Report, Coca-Cola's management noted that it had $212 million worth of 53A percent debt in Japanese yen, over half of which is designated as a hedge against its net investment in Japan. The 1986 Annual Report classified this as a Euroyen debt (Eurocurrency debt denominated in Japanese yen), but there was no such distinction in the 1989 Annual Report. In another place in the same report, it states that in general the company does not hedge its net investments in foreign operations. However, it sometimes enters into hedges to protect cash flows in foreign currencies.
An Accounting Procedures Manual In
the mid-1980s Coke management saw that its international operations were increasing significantly and that the nature of its business had changed since its last accounting manual had been written. It needed a comprehensive, easy-to-reference accounting manual to help maintain strong financial controls over operations. Management felt that a better accounting manual would help the firm acquire reliable information about units all over the world in order to help local subsidiaries operate at peak efficiency and generate corporatewide reports consistently.
A team consisting of a project manager and three senior accountants worked for eight months to develop an entirely new accounting manual. A universal chart of accounts was set up so that each account in the balance sheet and income statement would be consistent around the world. Based on the chart of accounts, definitions of each account were written and policies and procedures governing the use of each account and the flow of information into the financial statements were developed. A separate section was written describing how to translate financial statements from local currencies into U.S. dollars. Drafts of the report were given to audit, legal, and tax managers for their comments, and other field accounting managers were asked for their input before a final draft was completed.
Questions
1. Explain how the changing value of the dollar has affected sales and earnings of Coca-Cola.
2. Describe how Coca-Cola translates its financial statements into U.S. dollars. How do you think transactions and translation gains and losses are recognized in the financial statements?
rates, currency controls, customs, levels of sophistication, and local reporting requirements in performing its finance and accounting functions.
■ Some of the major factors that influence the development of accounting objectives, standards, and practices are the nature of the enterprise, the enterprise's users of information, governmental users and regulators, other external users (such as creditors), local environmental characteristics, international influences, academic influences, and the accounting profession.
■ There are important differences in worldwide accounting standards and practices. However, groups such as the EC and the International Accounting Standards Committee (IASC) are attempting to harmonize accounting practices and upgrade the accounting profession.
■ In translating transactions denominated in foreign currency, all accounts are recorded initially at the exchange rate in effect at the time of the transaction. At each subsequent balance-sheet date, recorded dollar balances representing cash and amounts owed by or to the enterprise that are denominated in a foreign currency are adjusted to reflect the current rate.
■ The translation of financial statements involves measuring and expressing in the parent currency and in conformity with parent country GAAP the assets, liabilities, revenues, and expenses that are measured or denominated in foreign currency.
■ According to FASB Statement No. 52, the financial statements of most foreign firms are translated into dollars by using the current rate translation method. According to that method, all balance-sheet accounts except stockholders" equity are translated into dollars at the current exchange rate in effect on the balance-sheet date. All income statement accounts are translated at the average exchange rate in effect during the period.
■ Foreign-exchange gains and losses arising from foreign currency transactions are taken to the income statement during the period in which they occur. Gains and losses arising from translating financial statements by the current rate method are taken to a separate component of stockholders' equity. Those arising from translating according to the temporal method are taken dkectiy to the income statement.
■ International tax planning has a strong impact on the choice of location in the initial investment decision, the legal form of the new enterprise, the method of financing, and the method of setting transfer prices.
■ The Foreign Sales Corporation (FSC) is a company incorporated in a foreign country or a U.S. possession (except Puerto Rico). If it engages in substantial export services for its parent company, some of its income will be considered exempt from U.S. corporate income tax.
■ Deferral means that income earned by a subsidiary incorporated outside of the home country is taxed only when it is remitted to the parent as a dividend, not when it is earned.
■ A controlled foreign corporation must declare its subpart F income as taxable to the parent in the year it is earned, whether or not it is remitted as a dividend.
■ The tax credit allows a parent corporation to reduce its tax liability by the direct amount paid to foreign governments on dividends declared by its subsidiary to the parent as well as by the amount of the corporate income tax paid by the subsidiary to the foreign government.
■ Policies in other countries vary as to what is taxable income, how honest taxpayers are in filing returns, and how taxes are assessed. The United States taxes each separate unit (the classical approach), whereas most other industrial countries use an integrated system in which double taxation of dividends is minimized or eliminated.
■ The purpose of most tax treaties is to prevent international double taxation or to provide remedies when it occurs.
From 1886, when Atlanta pharmacist J. S. Pem-berton mixed up his first batch of Coca-Cola, to 1989, when Cuban Robert C. Goizueta presided over the company as chairman and chief executive officer, Coca-Cola's worldwide revenues increased from $50 to $8,966 billion. Coke's rapid worldwide expansion has resulted in over 65 beverage trademarks worldwide and sales in 155 countries. From Fig. 19.7 we can see that Coke's international revenues in 1987 were 55 percent of total revenues. Coca-Cola's international presence has resulted in a number of interesting challenges and opportunities. In 1986 its operations were divided into three different product categories: soft drinks, entertainment, and foods.
In 1989 the soft-drinks division comprised about 18 percent of total revenues and foods comprised about 18 percent of revenues. Coca-Cola sold its entire equity interest in Columbia Pictures in November 1989. Its soft-drink business is particularly strong internationally, capturing over 40 percent of the soft-drink market in the 155 countries where it is operating and a significantly higher percentage of the market in its major markets. Coca-Cola management feels that international markets are virtually untapped and are clearly the growth area of the future.
In 1989 Coca-Cola increased its soft-drink sales to more than 48 percent of the global market. A major strength of Coca-Cola is the European Community, which accounts for 24 percent of Coke's total international gallon sales. However, Coke also has a strong presence in Latin America and Asia.
Specific information was provided in the An-
nual Report on changes in the value of the German mark, the Japanese yen, the British pound, and the Australian dollar. In 1988 other income (a category in the income statement) was reduced by $ 13 million due to transactions and translation losses, and in 1989 other income was increased by $20 million by transactions and translation gains.
In 1989 nearly 96 percent of operating income came from the sale of soft-drink concentrates and syrups. International sales accounted for nearly 80 percent of Coke's soft-drink operating income. International soft-drink operating income grew 13 percent in 1989, despite the effects of a U.S. dollar that strengthened approximately 6 percent against key foreign hard currencies during the year.
Coca-Cola's other major product group is not quite as international as the beverage category, but it is increasingly moving into international markets. Coke's food division is increasing its international sales, especially in Canada.
As noted earlier, Coca-Cola operates in 155 different countries; it used 40 different functional currencies to translate its financial statements from foreign currencies into U.S. dollars. The dollar is the functional currency of operations in hyperinflationary economies, such as Brazil and Mexico. Exchange effects on foreign currency transactions and translation of balance-sheet accounts in hyperinflationary countries are included in "other income" in the consolidated income statement.
In one place in its Annual Report, Coca-Cola's management noted that it had $212 million worth of 53A percent debt in Japanese yen, over half of which is designated as a hedge against its net investment in Japan. The 1986 Annual Report classified this as a Euroyen debt (Eurocurrency debt denominated in Japanese yen), but there was no such distinction in the 1989 Annual Report. In another place in the same report, it states that in general the company does not hedge its net investments in foreign operations. However, it sometimes enters into hedges to protect cash flows in foreign currencies.
An Accounting Procedures Manual In
the mid-1980s Coke management saw that its international operations were increasing significantly and that the nature of its business had changed since its last accounting manual had been written. It needed a comprehensive, easy-to-reference accounting manual to help maintain strong financial controls over operations. Management felt that a better accounting manual would help the firm acquire reliable information about units all over the world in order to help local subsidiaries operate at peak efficiency and generate corporatewide reports consistently.
A team consisting of a project manager and three senior accountants worked for eight months to develop an entirely new accounting manual. A universal chart of accounts was set up so that each account in the balance sheet and income statement would be consistent around the world. Based on the chart of accounts, definitions of each account were written and policies and procedures governing the use of each account and the flow of information into the financial statements were developed. A separate section was written describing how to translate financial statements from local currencies into U.S. dollars. Drafts of the report were given to audit, legal, and tax managers for their comments, and other field accounting managers were asked for their input before a final draft was completed.
Questions
1. Explain how the changing value of the dollar has affected sales and earnings of Coca-Cola.
2. Describe how Coca-Cola translates its financial statements into U.S. dollars. How do you think transactions and translation gains and losses are recognized in the financial statements?
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