Running head: UNIT VIII – Essay

MBA 6601

Nguyen Duy Hung

CSU

Jul 2018
UNIT VIII – Essay

Part 1

Balance of payment (BOP) is a record of international transactions between residents of

one country and the rest of the world. International transactions include exchanges of goods,

services or assets. “Residents” means businesses, individuals and government agencies,

including citizens temporarily living abroad but excluding local subsidiaries of foreign

corporations.

BOP is tracked using double-entry accounting. It means that every transactions enter the

BOP twice a credit and a debit. Credit transactions result in receipt of payment from foreigners.

Debit transactions involve to payments to foreigners. Each credit transaction has a balancing

debit transaction, and vice versa, so the overall balance of payments is always in balance.

The balance of payments is composed of a capital account and a current account — though a

narrower definition breaks down the capital account into a financial account and a capital

account.

The current account is a country's trade balance plus net income and direct payments. It

also measures international transfers of capital. The exports of goods and services, investment

income and transfers exceed imports and outflows means current account surplus, while a current

account deficit means imports of goods and services, and outflows are greater than exports and

inflows. In US, The Bureau of Economic Analysis divides the current account into four

components: trade, net income, direct transfers of capital, and asset income.

The capital account, in international economics, is the part of the balance of payments

which records all transactions made between entities in one country with entities in the rest of the

world. These transactions consist of imports and exports of goods, services and capital, as well as

transfer payments such as foreign aid and remittances.

UNIT VIII – Essay

Official settlement account is a type of account used in balance of payments accounting

to keep track of central banks' reserve asset transactions with one other. The official settlement

account keeps track of transactions involving gold, foreign exchange reserves, bank deposits

and special drawing rights (SDRs). Essentially, this account keeps track of transactions related to

international assets that are transferred among nations to settle either a balance of payment

deficit or surplus.

First transaction - The U.S resident buy Mercedes Benz C230: Since Mercedes Benz is a

German company and Mercedes Benz C230 is not produced in U.S, when the transaction

happens the good will be imported to U.S. This is the import good and will be recorded as a debit

to the U.S current account chart (CA). BOP is tracked using double-entry hence the same amount

will be record as credit in to Financial Account chart.

Second transaction - U.S resident purchases a Chevrolet Impala: Since Chevrolet Impala

is a product of GM which is an American company hence the transaction is not between a

American and foreigner party so that this will not be recorded to U.S BOP.

Third transaction - A foreigner purchases GE Dryer: When transaction happens, this is an

export good from U.S since GE is a US company. The transaction will be recorded as a credit

into Current Account chart and a debit with the same amount will be recorded into Financial

Account for receiving cash and financial assets.

Forth transaction - A U.S resident purchases U.K stock: This is formed as U.S investment

into U.K hence a debit will be recorded to Capital Account chart and a credit will be recorded to

Finance Account chart to make the balance of BOP as per double entry discipline.
UNIT VIII – Essay

Fifth transaction - A U.S resident borrows funds from a British broker to purchase stocks.

This is formed as loans to domestic by acquiring domestic asset. The Finance Account chart will

be input as credit for this transaction and this would be Official Settlement Balance.

Part 2

GAAP In Various Countries

Hennes & Mauritz AB (H&M) is a Swedish multinational clothing-retail company

known for its fast-fashion clothing for men, women, teenagers and children. It was started as a

store wear of single woman in Sweden in 1947. H&M and its associated companies operate in 61

countries with over 4,000 stores and as of 2015 employed around 132,000 people. It is the

second-largest global clothing retailer, just behind Spain-based Inditex. H&M does not own any

factories, its strategy is outsource to independent suppliers. It is listed in Stockholm Stock

Exchange and Nasdaq Stockholm. H&M had followed Swedish GAAP till 2006 before moving

to International Financial Reporting Standards (IFRS).

Inditex, the biggest fashion group in the world, operates over 7,200 stores in 93 markets

worldwide. The company's flagship store is Zara, but it also owns the chains Zara

Home, Massimo Dutti, Bershka, Oysho, Pull and Bear, Stradivarius and Uterqüe. The majority

of its stores are corporate-owned, while franchises are mainly conceded in countries where

corporate properties cannot be foreign-owned. Inditex is a Spanish company and Spain is a

member of European Union hence Inditex also follow IFRS.

The Gap, Inc. is an American worldwide clothing and accessories retailer. It was founded

in 1969. The company operates five primary divisions: Gap, Banana Republic, Old Navy,

Intermix, Weddington Way, and Athleta. Gap Inc. is the largest specialty retailer in the United
UNIT VIII – Essay

States, and is 3rd in total international locations, behind Inditex and H&M. Gap is different from

H&M and Inditex, it is a U.S company hence it is applying U.S GAAP for its finance system.

In conclusion, different companies are using different accounting system. It depends on

either their strategy or home country and regional they are belong to. If the investor want to

compare the financial results of H&M, Gap, Indetex they should know clearly about the

difference of GAAP, Non-GAAP and IFRS in the present of their finance statements. Investors

forced to choose a side as the two diverge should consider the specific exclusions in adjusted

figures, and personal economic outlook is also important. H&M and GAP are using the same

accounting system GAAP hence the investors will not be difficult when they do the comparison,

especially the finance statement of H&M is preparing in English this is much more easier for

investor when they do the evaluation for the period before 2006. For the time from 2006 to now,

H&M moved to IFRS so the investor will get easier when they do the comparison between H&M

and Inditex.

U.S GAAP vs IFRS

Since GAAP is using by GAP is rules-based while IFRS is using by H&R and Inditex is

principle- based hence GAAP and IFRS would have difference. The difference between these

two approaches is on the methodology to assess an accounting treatment. Under U.S. GAAP, the

research is more focused on the literature whereas under IFRS, the review of the facts pattern is

more thorough. There are a lot of factors which are showing the difference between U.S GAAP

and IFRS; however, five items are mainly show the difference.

Consolidation: IFRS favors a control model whereas U.S. GAAP prefers a risks-and-

rewards model.
UNIT VIII – Essay

Statement of Income: Under IFRS, extraordinary items are not segregated in the income

statement, while, under US GAAP, they are shown below the net income.

Inventory: Under IFRS, LIFO (a historical method of recording the value of inventory, a

firm records the last units purchased as the first units sold) cannot be used while under U.S.

GAAP, companies have the choice between LIFO and FIFO (is a common method for recording

the value of inventory).

Earning-per-Share: Under IFRS, the earning-per-share calculation does not average the

individual interim period calculations, whereas under U.S. GAAP the computation averages the

individual interim period incremental shares.

Development costs: these costs can be capitalized under IFRS if certain criteria are met,

while it is considered as “expenses” under U.S. GAAP.

Type of IFRS and H&M Report

Normally, a company switch to IRFS from GAAP because of international financial

reporting standards makes it easier to compare, it is internationally understood, and it helps

multinational businesses to stay up-to-date and competitive in the globalization of markets. For

the case of H&M, it was asked to adopt IFRS in 2005 which is the preparation after Sweden

become the member of EU. This was the big change from the practice in previous years when it

reported in line with Swedish GAAP. The report show the mixture of Anglo and American

accounting. And in its 2015 annual report, H&M disclose follow IFRS standard because it is

looking for the standard accounting professional which show higher level of auditing practices.

Beside that it also need to change the practice to fulfil the requirements from some foreign

countries where H&M is operating. H&M also need to satisfy the requirement of its stakeholders

in both domestic and international such as employees, management, investors…

UNIT VIII – Essay

CFO of H&M and Type of Exposure

CFO of H&M would be paid attention by many type of exposure when H&M’s finance report

are prepare according to IFRS such as economic or operation, translation, transaction.

Economic or exposure is the risk that a company's cash flow, foreign investments,

and earnings may suffer as a result of fluctuating foreign currency exchange rates. When there is

a price change of material of H&M in the market, this will impact to the cash flow of company

thereby hurting the operations.

Beside that H&M also expose to translation exposure this mean that the risk that H&M’s

equities, assets, liabilities or income will change in value as a result of exchange rate changes.

When the braches of H&M are using different currency from headquarter in this case are the

foreigner currency and Swedish Kronor. This exposure is also known as accounting disposure.

Another type of exposure that CFO of H&M may face is transaction exposure.

Transaction exposure is the level of risk companies involved in international trade face,

specifically, the risk that currency exchange rates will change after company has already entered

into financial obligations. A high level of exposure to fluctuating exchange rates can lead to

major losses for H&M. H&M is using U.S Dollar for the transaction, however; if there any

change of exchange rate between Euro, Swedish kronor and U.S Dollar before they do the

transaction will risk to H&M.

Operational Hedging Strategies to Offset the Exposure

The goal operational hedge is to reduce the volatility of a firm’s present and future cash

flows. To meet this objective, the firm can use financial hedges such as interest rate, foreign-

exchange, and commodity derivatives (e.g., futures, options, swaps, etc.) to reduce the volatility

of its cash flows. Alternatively, the firm can use operational hedges, which stem from the
UNIT VIII – Essay

operating and investment activities of the firm, to reduce cash flow uncertainty. The firm can

hedge by finance contract such as forward contract, option contract, borrowing or investing in

local market or operation techniques like geographic diversification to spread the risk. Another

strategy used to hedge foreign exchange exposure is through the use of borrowing or investing in

foreign currencies. The company can borrow or invest in foreign currencies as a means of

offsetting foreign exchange exposure. Borrowing in a foreign currency is done to offset a long

position. Investing in a foreign currency is done to offset a short position. Long position means

global firm expecting to receive foreign currency in the future. It will take out a loan the foreign

currency equal to the amount of the long position, convert the foreign currency loan amount into

its home currency at the spot exchange rate and eventually use the long position to pay off the

foreign currency denominated loan. Global firm needs to pay out foreign currency in the future is

known as short position by borrowing in its home currency, converting the home currency loan

into the foreign currency at the spot rate, investing in a foreign currency denominated asset, and

using the proceeds from the maturing financial asset to pay off the short position.
UNIT VIII – Essay

References

BOP definition. Retrieved from https://investinganswers.com/financial-

dictionary/economics/balance-payments-bop-2116

Daniels, D. J. (2015). International Business, Environments & Operation. Pearson.

https://www.thebalance.com/current-account-definition-and-4-components-3306265

Differences of U.S GAAP and IRFS. Retrieved from

https://www.ifrs.com/overview/General/differences.html

Operational hedging strategies and competitive exposure to exchange rates (2014).

Retrieved from https://apps.olin.wustl.edu/workingpapers/pdf/2014-08-004.pdf