Global Business profitability and lose making

ACC 680

Robert Shulzinsky

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Southern New Hampshire University

Global Business

  • Accounting is a basis that is used to evaluate the profitability and lose making of a company. It is also a tool that is used for the purpose of taxing. It is from the basis of taxation that the accounting process may not be the same.
  • It is from the fact that various countries do exists as sovereigns and they are able to come up with their tax law, hence the accounting principles and cycles may change or rather may be formulated so as to fit within the laws of the specific country.
  • In this era of Globalization where there are various business setting up various chains around the world, there have played some sought of influence in ensuring that the accounting regulations and process in a specific country are harmonized.
  • There are various environmental issues that play a crucial on accounting practices. Some of this include:

Globalization has been an ever growing factor and therefore there are serious issues that govern the accounting systems of a particular country. The factors are based on culture of a particular society.

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Cont’d

  • Tax law
  • Political system
  • history
  • Values
  • it is from this factors above that bring about the issue about diversity in the accounting practices this is because not all countries are industrialized the same. The various tax laws play a crucial role in the creation of diversity within the accounting practices.
  • This is because the accounting practices are set so as to be conform with the tax law. This is to make it easier for the tax man to look at the accounting books and be able to establish if the business has been able to file their taxes effectively.
  • Every country therefore sets an accounting practice that is within a specific formula that it will be easy to interpret and understand. For the purpose of this assignment we shall focus on Tanzania.

The environmental issues that may have an impact on the diversity will be tax law. This is set by the state since it is where it generates money that it will use to run its affairs. The law will therefore be set so as to enable the state to collect sufficient revenues. The political system plays a crucial role since it is what dictates how the polices of country are going to be formulated. The economic history of a country will determine the method of accounting that is going to be used. For instances countries that were colonized by the Britain’s will tend to use the same concept being used in Britain

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Cont’d

  • The culture of Tanzania has created an impact on the financial accounting standards. This is because the economy is an emerging economy in East Africa. The culture of the country has affected the accounting system this is because the members of the society consider one another as brothers.
  • This therefore bring about difficulty in the accounting practice this I because the country believes in the Ujama system which is socialism in English.
  • This has influenced the accounting practice because it may turn out to be difficult to distinguish properties of a individual because no person can claim ownership to other assets since it is believed that it belongs to the society. This has, therefore, affected the accounting standards of the country. This is because they are not standard and that they are subject to change easily.
  • This is based on the principle of Hofstede’s dimension of culture, which sates that the culture of a society: this involves values, behaviors and how the society is structured is dependent on the society. This therefore implies that the culture of a society has the ability to shape and determine the values of the society.
  • This will therefore have an impact on the existing factors such as the financial accounting standards. This principles explains better about Tanzania.

Hofstede’s major research was traditionally meant to be used in cross-cultural psychology it has however been drawn upon by researchers and consultants in many fields such as international business and communication. The theory has been applied in several fields as a model for research, mainly in cross-cultural psychology, cross-cultural communication and international management.

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Potential issues on business

  • Tanzania is a socialist country and therefore it has strict laws that regulate the business arena some of the potential issues are:
  • The tax laws are very strict on foreign companies, this is considered as a measure of protecting local companies. This has proven to be an issue because most companies may end up not being able to be sustained in the market easily.
  • Since the company is based on socialism values the competition laws tend to be strict and, therefore, the business may not be able to compete effectively since the government will be regulating the affairs of the company. The values of socialism has contributed to a lazy society.
  • The nature of the people of Tanzania has a potential problem to any business, this is because they believe a business is not supposed to make profit at the detriment of a citizen. This therefore may act as a barrier for the company to expand because certain people may not want this, this is due to their historical belief that the society should benefit from a particular business rather than the owner.

Accounting Standards (Difference between IFRS and GAAP)

  • Inventory costs

IFRS does not allow the accounting method of inventory where the last in, first out method is used, whereas the GAAP can either use the First in, first out or even the Last In, first out method, this is done so as to carry out an estimation of the inventory.

  • Intangibles

Intangible assets that have been acquired through GAAP are recognized through a fair value, whereas, the IFRS only recognizes assets that have future economic value and has a measured reliability.

  • Write downs

the provisions of writing down an inventory under the GAAP, I that if an inventory has been written down, then under no circumstance can it be reversed while the IFRS provides that an inventory which had been written down can be reversed I future, this will only occur when laid down criteria have been achieved.

The IFRS is considered to be principle based accounting standard whereas on the other hand GAAP is considered to be rule-based

IFRS is able to effectively represent the economic factors of a transaction compared to GAAP.

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Cont’d

  • The most appropriate mode of reporting system that the company will adopt will be the IFRS. This is because the company is going to be international and therefore it will require a principle based mode of reporting.
  • IFRS will be beneficial to the company because when conducting an assessment of the accounting treatment it will be more focused on facts pattern which is done thoroughly. This will therefore ensure that the company is able to have a comprehensive reporting system that is In touch with reality rather than assumptions.
  • Since the company has an international operating base, it will be important for it to use the IFRS so that it can have an international understanding with other businesses.
  • IFRS will be an important tool or rather type of reporting system that will be important to the business, this is because it makes assumptions that are necessary for any business some of this assumptions include going concern and accrual concept.

On definition of an asset the IFRS looks at it as a resource from which economic benefit will arise from in future to the company. This therefore odes not under look the value of an asset but rather it future benefit that will be realized by the company. This therefore, makes this framework important since it sees the business as a tool of generating income through the existing assets that the business possesses.

With regards to disclosure, the GAAP provides that companies should disclose the information that pertains to their accounting choices and expenses in footnotes. Whereas under IFRS it is not clear on how the disclosure should be made.

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Disclosure

  • this is the process or the act of releasing important information that are related to a company, this is done with an aim of influencing the mind of the investor. Since this is a requirement for every company to be able to release both bad and good information to the public.
  • with regards to the best form of disclosure that the company will be using is the use of footnotes. This will helps everyone to see all the information that is important to public and investors so that they can be able to make a decision out of it.
  • Since the company will be listed in various stock exchange, it will be important to have all the information that is relevant to the investors so that they can use it to either invest in the company or not

Disclosure is also important because it will also the company to assess itself. It will also provide an assessment to be used by finical intuitions when the company is looking for finances to expand its businesses.

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Cont’d

  • The security exchange commission realized that there was need to combine the GAAP and IFRs this was due to the continued economical meltdown that was witnessed in the united states. the need of converging this two financial reporting system has therefore brought about challenges when it comes to diversity of the field of accounting in the world.
  • Impact on Investors- there will be a reduced cost for a company which is entering a foreign market. This is because the companies will be operating under the same rules and therefore the markets will be able to compete globally.
  • Impact on accounting standards- the process that will be involved will rather be long and complicated .
  • Impact on professionals the convergence will bring about change to the existing standards and this will force the professionals to learn the international required standards, since consistency is key they will have to ensure that they have all the necessary keys that will enable them to improve their accuracy.
  • The role IASB is to issue permit that allows the use of IFRS, it was formed by strong economies and therefore it has mandate over its members. It was reorganized in 2003 where it acquired the new name and thus it has been operating independently since then.
  • This will impact my company in the sense that it will be compete effectively since there is a standard financial reporting system. Therefore the market will be operating effectively in the society.

the standards convergence of the U.S. GAAP together with the IFRS largely affects corporate management, investors, stock markets, accounting professionals and accounting standards setters. This therefore has the impact of affecting the international standards of accounting. It will be hard to formulate a reporting methodology that will able to work effectively for the convergence this sis because one I based on rules whereas the other one is based on principles.

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Global Market

  • The potential issue that will arise when making financial statements in Tanzania will e the variation of the accounting polices. This is because the business has the leverage in accounting of how it will treat certain items like foreign exchange transactions, valuation of stock etc.
  • Another issue will be the interpretation of the results, the industry average is commonly used in financial ratios, it may however be hard to make judgement if such ratio s bad or good.
  • The company would rather use financial statement analysis that will be easy to understand. The factors in deciding how the company will be treating certain items will be based on the general practice. This will be done with a purpose of coming up with comparative standard form which the document can be compared with other companies financial statement.

International financial statement Analysis will provide a more updated detail, which will be very crucial in the assessment of a company’s performance and its position financially. This will be regardless of the of the country in which the company is based. It therefore provides international investors with insight of the financial position f a company and acts as guide which can be used by investors.

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International Business Practice:

  • The heightened currency unpredictability, and the changes in the exchange rates will have an impact on the companies operations and the level of profits. This is determined with the exchange rates. This mostly affects multinationals and the company being international it is likely to be affected with the exchange rates.
  • The company is likely to face the following types of risk that can be associated with currency unpredictability.
  • Transaction exposure- this occurs when the exchange rate changes and the company needs to make or receive payments in foreign currency.
  • Translation exposure- this will occur when to a company that has a consolidated financial statement. It is therefore mostly associated with a company that has foreign subsidiaries.
  • Economic exposure-this fluctuation of currency s concerned with the flow of the currency of a company in future. The exchange rate can therefore affect the competiveness of a company.

It is therefore important to note that the economic exposure focuses on changes in exchange rates which are unpredictable and therefore it may be impossible to predict. This is because the company makes its budget on certain exchange rates assumptions, this therefore represents the expected exchange rate that the company will be working with

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Recommendation of the risks

  • Operational strategies
  • 1. Sourcing flexibility- the company should have an alternative source of factors of production, this will help when the exchange rate makes the factors of production from one region.
  • 2. Diversification of finance- the company should be able t have access to several nation’s capital markets. This will give the company flexibility in raising capital in markets that have the cheapest costs.
  • Currency risk-sharing agreement- this is an agreement that is entered between the parties from which they agree to share the fluctuations of the currency.

It is therefore important for the business owners to carry out an economic awareness this will help them to mitigate the risks associated with economic exposure

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Reference

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