What are the Autorit des Marchs Financiers - Coursework Example

What are the Autorité des Marchés Financiers? a) What is the Autorité des Marchés Financiers? Explain why it was established in 2003 and describe its role in the development of financial reporting in France Autorité des Marchés Financiers is a regulatory body set up by the French State. It is an independent body which protects investors and deposits and ensures that fair trading takes place. It is also a regulator of investment markets and is a maintains a general listing of all businesses in France. It is the existence of this statutory body which ensures that all investors receive necessary information about their investments. Its formation in 2003 was a result of the merger between Commission des opérations de bourse (COB), the Conseil des marchés financiers (CMF) and the Conseil de discipline de la gestion financière (CDGF).[EAD10] This formation was necessary as the French financial system was not clearly organized prior to its formation. Intense market competition investor concerns demanded that a single French body regulate French financial affairs. The presence of three different bodies resulted in decreased efficiency and therefore a single body was formed with a merger enough power was given to it to properly regulate the affairs. It was also necessary as French companies were known to be the weakest regarding the protection of investors and their rights. Currently all French public companies are listed with Autorité des Marchés Financiers. The body ensures that all these companies fulfill proper disclosure requirements and the information is properly disseminated. Thus the company is the backbone of all financial reporting in France. Since the body is imparted with proper authority by the State it has the right to impose penalties if a company is considered a defaulter of its regulations. Thus orderly maintainence of financial statements and there transition to the International Financial Reporting Standards (IFRS) is assured. (a) b) The European Union’s Fourth Directive allows four income statement formats. Explain the structure of LVMH’s income statements on page 110, and on page 182, in terms of the options allowed under the Fourth Directive and IAS 1. The income statement on page 110 is in one of the formats under the Fourth directive. It is in form of a list where the presentation format entails that expenses are deducted from the income to show how the result in form of profits is formed. The income statement on page 182 also follows the same format where a list format but instead of calculating all revenue and all expenses, revenues and expenses are calculated according to different functions and the net profit from each activity is calculated and added to provide the result. It presents profit and loss according to business functions thus follows the second format of the Fourth directive. [Sil] The Fourth directive allows the presentation of exceptional income which cannot be presented in any other formats. This can be seen under the heading Total exceptional income on page 182. The IAS 1 allows presentation of comprehensive income in two formats. The first being a single statement of comprehensive income and the second being separate income statements for profit and loss and another for comprehensive income. LVMH Moet Hennessy Louis Vuitton SA follows the second format when it presents two separate statements, one for income and one for gain and loss. The IAS 1 requires companies to present a balance sheet, an income statement, changes in equity and a cash flow statement. The Fourth Directive requires companies to present balance sheet, profit and loss account and notes to the accounts. The LVMH's financial statements fulfill both these requirements. c) The ‘Equity’ component of LVMH’s balance sheet on page 181 includes legal reserve (see also Article 28 on page 230). What are legal reserves? Is this practice allowed in the UK Legal reserves are the minimum fixed amount of money that public companies (in this context) should set aside as very safe assets to keep as security. This money cannot be used to pay depositors. In France it is a business requirement to set aside 5% of annual profits till they equal 10% of the capital[Doi10]. In UK no such practice is mandatory. Though it is a common worldwide practice for financial institutions such as banks to have legal reserves but the law regarding public companies varies. This practice is not allowed in the UK as UK prioritizes creditor rights and creditors have to be paid first before putting any money in the reserves. d) Discuss the similarities and differences between LVMH’s accounting policies and US GAAP in 1)Foreign currency transactions. Under the GAAP changes in fair value over maovements in exchange rates are reflected in equity and recycled to the income statement.[IFR07] In the LVMH financial statements they are recorded under foreign exchange gains and losses or subsequent hedges. In the LVMH financial statements Euro and the functional currency are exchanged at the exchange rates prevailing at the transaction dates. 2)Goodwill Under the GAAP fair value of goodwill is determined based on a hypothetical purchase price allocation and the carrying amount records a total impairment loss regarding the difference. In the LVMH financial statements it is not amortized but is subject to annual impairment and the expenses are recognized in Other operating income and expenses 3)Property, plant and equipment Under GAAP property, plant and equipment are written at historical cost and all revaluations are prohibited. In the LVMH financial statements, property, plant and equipment are also stated at acquisition cost (pg 185) or at contribution value but this value excludes acquisition expenses. e) Identify and list the main lines of business and geographical areas in the segmental data within LVMH’s financial statements Main lines of business LVMH has multiple lines of business and each line is further divided into different smaller segments. The first main line of business is "Wines and spirits" which is segmented into Champagne and wines, Cognac and spirits and Wines and spirits distribution. The second line of business is Fashion and Leather goods which includes multiple brands such as Louis Vuitton Malletier, Donna Karan and Givenchy. The third line of business includes Perfumes and cosmetics. It again includes multiple brands such as Givenchy, Christian Dior, Benefit Cosmetics and Make up forever. The fourth line of business is Watches and jewellery which includes famous brands like DeBeers and TAG Heuer. The fifth and the last line is selective retailing which includes travel retail like DFS and selective retail like Sephora. Geographical areas LVMH's activities mainly span three continents namely Asia, North America and Europe but its network can be broken down into six different networks. They are France, Europe excluding France, United States, Japan, Asia excluding Japan and other markets. f) It is stated on page 75 that LMVH is a signatory to the United Nations Global Compact. What is the Global Compact? The Global compact is the world's largest initiative to promote sustainable and socially responsible attitudes in organizations worldwide. It has ten basic principles regarding human rights, anticorruption, environment and labour and companies who have signed the Global contract are bound by its regulations. Some of the ten principles include that companies should promote human rights and not complicit in human right abuses. Companies should also uphold freedom of association, abolish child labor and eliminate forced labor and discrimination. They should promote environmental responsibility and develop environment friendly practices. Lastly companies should work against corruption in all its forms.[The102] g) List 10 types of social responsibility and environmental disclosures provided in LVMH’s annual report. Different types of social responsibility and environmental disclosures are mentioned in the statements. The first is the maintenance of health and safety of employees while the second pertains to the environment 1) Occupational medical services 2) Protective equipment 3) Compliance and posting of warnings, fire prevention training and noise prevention 4) Work groups to reduce stress 5) Modules to prevent social harassment 6) Social and cultural activities 7) Equal opportunity employment 8) Compliance with international regulations 9) Water consumption 10) Raw material consumption 11) Energy consumption requirements 12) Soil use 13) Green house gas emissions 14) Discharges to water 15) Waste production 16) L imitation of damage to ecosystem balance, natural habitats, animal and plant species 17) Consumer safety h) Are your findings in (e), (f), and (g) in line with Gray’s notion of secrecy and Hofstede’s concept of masculinity/feminity? Explain your answer. Grays notion of secrecy relates the cultural dimensions with accounting practices in countries. It states that countries high on uncertainty avoidance will high on the accounting values of secrecy. Thus he relates Accounting values to Hofstede's cultural dimensions. In France, regardless of the countries cultural dimensions and accounting values, accountants have to implement detailed legal requirements. According to Hofstedes's cultural dimensions France is strongly Conservative and highly feministic thus has a high uncertainty avoidance value. This in line with Grays notion of secrecy implies that the Financial disclosures in France will be highly secretive. These different standards result in differences in Financial statements in different countries though they are prepared under the same standards. It should be noted that all public limited companies are obligated to fulfill proper disclosure requirements under law and that is the reason for the detailed reports about LVMH. Even then in comparison to other countries these reports are less detailed and do not provide exact numerical figures in places where they could have been provided. In the business types and geographical segments sections no details about other markets such as their location is provided. Similarly revenues from business are again succinct just fulfilling legal obligations. A more masculine approach and less secretive culture with less secrecy would have provided in its financial statements more numbers and details. More qualitative and quantitative data about following the Global pact could have been provided and a separate corporate responsibility report can be published the way Unilever and Hershey's Corporation do. Nevertheless the company is not very secretive despite cultural inclinations as it is bound by law to provide investors with necessary details and so LVMH only provides what is required not going overboard. Gray's notions of secrecy can be seen very well implied in this context. This is notion of secrecy is further reinforced by the fact that consolidated financial statements are presented i)Explain the major environmental factors that might have influenced LVMH’s financial reporting practices in (b), (c), and (d) above. There can be numerous factors affecting LVMH's accounting practices. The first and the foremost is France's legal requirements and law. The Autorité des Marchés Financiers which regulates all public companies disclosure requirements demands that the Fourth and the Seventh directive of EU be followed. The French State also demands that legal reserves be maintained. The European style of presentation is followed as directed by LVMH's location. The balance sheet is made for the fiscal year ending December as compared to June in certain countries. Since the French market faces intense competition internationally and is invested in by global investors, it adopts a more international practice in financial statement presentation. Though the disclosures are less open but transparency is regulated by law. Other environmental factors which affect the financial statements is the global changes in approach towards corporate responsibility. Firms ranking high in social responsibility are more popular and considered environment friendly, thus all companies competing in the international market are expected to contribute to the environment and record and publish their activities in order to gain share holders trust. In a greatly volatile market which is still suffering from the after affects of recession, it is absolutely necessary that a company provides full financial details to its customers, potential investors and current shareholders. Only if a company is perceived as transparent and practicing fair dealing will it attract more capital. The major environmental factor which contributes to the presentation of LVMH's financial statements is its internationalization. [Yua] of the business and attempts to penetrate international markets. Other are legal factors which are controlled by law. Another is the risk averse investors and the fourth a more concerned and environment savvy customer. References EAD10: , (EADs global website), Sil: , (Taulea), Doi10: , (Doing business in France), IFR07: , (IFRSs and US GAAP), The102: , (The ten principles), Yua: , (Yuan Ding), Read More