Assume you have been hired as a consultant to Philan Manufacturing Company located at 1 Main St., Worcester, MA 01560. Currently, Philan only operates in the United States. In your discussions with Anne Phillips, the CEO of the company, you learn that Philan is currently evaluating two initiatives that would turn it into a “global” company: (1) setting up a sales office in France and (2) acquiring an interest in a manufacturing company in China. Ms. Phillips has asked your advice about the potential positives and negatives of expanding globally.
Also, in reviewing the financial statements for the potential acquisition target in China, Ms. Phillips noticed that they were prepared using International Financial Reporting Standards (IFRS). Ms. Phillips, who is not an accountant, asks you if IFRS is the same thing as United States Generally Accepted Accounting Principles (US GAAP). She says, “My controller says that we have to follow certain rules (US GAAP) when we put together our financial statements. I assume that since English is a common language used around the world, the same thing applies to accounting, and that US GAAP is followed by companies in other countries such as France and China.”
Write a letter to Ms. Phillips addressing all of the following:
1. What are the complications, complexities, and challenges of operating a global business? In other words, what issues will Ms. Phillips have to consider that she didn’t have to consider when operating domestically? Identify at least two complications or complexities and explain why they are complications or complexities. Also, discuss how they might affect the financial results of Philan (e.g., potential effect on revenues, expenses, assets, liabilities, etc.).
2. Is Ms. Phillips’ assumption about US GAAP being used world-wide correct?
3. What are International Financial Reporting Standards? Who determines these standards? What is the process for standards being passed and becoming part of IFRS?
4. Identify one area where the accounting rules are different between US GAAP and IFRS and provide details on how the accounting differs.
5. Discuss the current progress toward “convergence” of accounting standards worldwide. What progress has already been made in the US toward convergence? (Be specific – find actual milestones) Discuss the desirability and the problems of achieving convergence, as well as on the consequences of not achieving it. Based on the SEC’s actions and statements, what is expected to happen in the future related to convergence in the US?
For helpful information, you may want to visit www.iasb.org, or visit the websites of The Big Four firms, or read articles in the business press.