1. International Accounting and Financial Reporting Summer 2007 William F. O’Brien, MBA, CPA

2. Session VII-A Changing Prices

3. INTERNATIONAL ACCOUNTING & FINANCIAL REPORTING-2007 9-3 Impact of Inflation n Avoid assets; hold liabilities n Old costs matched with new revenues leads to sense of false income while value of cash dwindles

4. INTERNATIONAL ACCOUNTING & FINANCIAL REPORTING-2007 9-4 General and Specific Price Increases n General price level increases (GPI) n Based on market basket of goods & services n Specific price level increases (SPI) n Relates to a particular item

5. INTERNATIONAL ACCOUNTING & FINANCIAL REPORTING-2007 9-5 Tight Money Policy n Monetary policy influence both inflation and economic growth

6. INTERNATIONAL ACCOUNTING & FINANCIAL REPORTING-2007 9-6 Constant Money Restatement (Current Purchase Power Accounting) n Balance sheet n I/D items as monetary or nonmonetary n Extend monetary items at their face amount n Adjust nonmonetary items for changes in purchasing power n Roll-forward prior year balances n Income statement n Adjust items based date of occurrence n Compute depreciation based on adjusted historical cost n Adjust other items based upon weighted average n Compute cost of goods sold based on adj. Inventory items n Calculate purchasing power gain or loss

7. INTERNATIONAL ACCOUNTING & FINANCIAL REPORTING-2007 9-7 IASB and Inflation n IAS 15: Price level accounting disclosures n IAS 29: Hyperinflation report n Requirement for IAS countries n Hyperinflation exists when 3-year cumulative inflation exceeds 100 percent n Restatement for GPI changes in primary financial statements n Hotly debated issue without firm resolution n Note the number of countries that have added PLA standards and then withdraw them (US, UK, Asia etc.)

8. Session VII-B Managing FX Exposure

9. INTERNATIONAL ACCOUNTING & FINANCIAL REPORTING-2007 9-9 Foreign Risk Exposure n Financial n Transaction n Conversion n Translation n Remeasurement n Operational n Economic n Political n Monetary

10. INTERNATIONAL ACCOUNTING & FINANCIAL REPORTING-2007 9-10 FX Risk Exposure n CA > CL = positive exposure n CA < CL = negative exposure n Positive exposure & appreciation yields gain n Negative exposure & depreciation yields gain n FX risk includes both translations and transactions

11. INTERNATIONAL ACCOUNTING & FINANCIAL REPORTING-2007 9-11 Hedging Strategies n FX forward contract: most common n Currency swap n FX currency future n Options n Puts n Calls

12. INTERNATIONAL ACCOUNTING & FINANCIAL REPORTING-2007 9-12 Why Companies Do Nothing n Failure to understand the issue n Belief that exposure cannot be measured n Belief that the hedging of transactions is sufficient n Ignorance of economic risk n Belief that firm is rewarded for risk n Accounting hedges are made

13. INTERNATIONAL ACCOUNTING & FINANCIAL REPORTING-2007 9-13 Financial Strategies n Derivatives n FX contracts and options etc. n Debt

14. INTERNATIONAL ACCOUNTING & FINANCIAL REPORTING-2007 9-14 Operating Strategies n Consider location of operations n Use the portfolio approach n Use flexible planning n Use pricing and promotional strategies

15. INTERNATIONAL ACCOUNTING & FINANCIAL REPORTING-2007 9-15 Generic Risk Mgt. Strategies n Define and measure exposure n Implement a reporting system n Assign responsibility for action n Formalize strategies for hedging n Including Board of Directors approval

16. INTERNATIONAL ACCOUNTING & FINANCIAL REPORTING-2007 9-16 Key Text Examples n FX hedging using derivatives-p. 362 n DaimlerChrysler’s Risk Mgt. Disclosure-p. 370