International Financial Reporting Standards - Assignment Example

1. Ulker Biskuvi is the most prominent subsidiary of Yildiz Holdings, the largest consumer products manufacturers in Turkey. The company is involved with manufacturing of biscuits, wafers and crackers and is a leader in the biscuit market with a market share of 60%. The company has an established position in the local market and according to the AC Nielsen 2006 Brand Survey, Ulker is the best known food brand in Turkey and the second most recognized brand name in the country on the whole (AK securities, 2007). Apart from manufacturing facilities in , the company exports its products to more than 100 countries around the globe and these imports account roughly for 15% of the company‘s revenue. The company is in excellent financial health and has been experiencing steady growth since the last 3 years, which is a great attraction for any investor. Even though the current per capita consumption of biscuits in Turkey at 4-5 kg per year is lesser than the consumption in other European countries at 7-15 kg, the market suggests a considerable potential for sustainable growth (JP Morgan, 2008). Biscuits, wafers and crackers are still considered a luxury item in Turkey, with most of the population residing in rural areas still preferring local bakery items over mass produced baked goods. However, this is mainly due to the fact that these low-income regions are more price sensitive to such commodities, however rapid growth is expected in this regard as the coming years see a reduction in economic imbalances in the country (Global securities, 2007). The company experienced a sales volume growth of 9% in the year 2008 and 2009 consecutively, and reported a total gross sales growth of 13.6% and 14% respectively in the year 2008 and 2008. The 5 year Gross margin average for the company is 21.90%, which is lesser than the gross margin averages of most international and national competitors, but the organization has a policy which does not concentrate on increasing prices and margins in tough economic circumstances and instead concentrates on trying to increase in volume growth, a feat it has been very successful at. Ulker Biskuvi’s growth in the Turkish market is directly linked with the country’s GDP and per capita income growth. Although Turkey had been experiencing a rapid GDP rise since 2001, the year 2007 and specially 2008 were difficult as the GDP growth was merely 4.5% and 3.8% respectively, a decided low when compared to the GDP growth of 8.4% in the year 2005. Due to this, these years presented a slower growth for the company. The company’s ROE also dropped down to 2.21 in 2008, which was very low as compared to the ROE recorded in 2007 which was 18.52. However it picked up again as the national per capita income rose once more in the following year and was recorded at 11.22 at the end of 2009. Apart from prospective growth, the company also has an attractive Price earning ratio average of 17.25 recorded over the last five years which is greater than that of it’s direct competitor, Eti Biskuvi, with a 30 % share in the market. Although the company’s share price has fallen from a 2006 high of 6.5 Turkish Lira per share to 3.55, it is steadily increasing from the downward plummet it received in the year 2007 and 2008 and is once again climbing steadily upwards.Over all, the company is in sound financial health and what is most appealing is that it has a great potential for long term growth, both locally, due to the increase in Turkey’s per capita income, and internationally due to Ulker Biskuvi’s new manufacturing facilities set up in Pakistan and Egypt, as well as the international takeovers that the company has a history of engaging in. Investment in Ulker Biskuvi is an excellent opportunity and I would definitely invest in the organization , as the organization is currently the strongest biscuit manufacturer in the country, with a massive reputation, a unique distribution network and a diverse portfolio of products: a remarkable 1,500 Stock keeping units, manufactured under 50 different brand names, something which is hard to compete with in the current Turkish market scenario. 2..What is globalization important to international reporting and how will globalization affect financial reporting and MNCs? As businesses around the world are going global, organizations are feeling a rising need to adopt a unified set of accounting standards which entail the same principles worldwide. Since globalization involves economic and financial integration, MNC’s are finding it crucial to employ financial reporting standards that incorporate a level transparency so that sustainable growth can be encouraged. Oxelheim (1996), points out that MNC’S who incorporate a standardized practice which allows transparency in financial reporting are faced with “reduced political risks, a lower premium as a part of cost of capital, higher investment and an increased economic growth”. By regulating the way a globalized firm takes part in financial information disclosures, it can effectively increase its effectiveness by ensuring the availability of information which is necessary for managers and investors to handle economic fluctuations that are part and parcel of operating in a global business environment. 3. Critically examine the reason for MNE’s listing on foreign stock exchanges . What issues does this pose for both regulatory authorities and host governments? One of the biggest reason that company’s opt for listing in foreign exchanges is the reduced cost of capital associated with this activity. Since global investors who would otherwise be restricted by international investment barriers are able to engage in investment activities with such MNE’s easily, it increases any such organization’s global visibility by attracting investor’s attention. (Roosenboom and van Dijk, 2009) . By having their stock listed in foreign stock exchanges, company’s also benefit because it allows firms to increase their brand visibility, attract growth and maintain an image of greater integrity and ethical standing by engaging in increasingly transparent and accurate financial information disclosures which strengthen the firm’s relations with the investor’s and local authorities. Question 4) Financial accounting differs internationally why? According to Jindřichovská (n.d), a very big reason that financial accounting standards differ world over is that “different users with different purposes require different information about the same item”. hence it would be safe to say that government, investors and regulating authorities in different parts of the world require and are able to understand information of a varying degree of complexity and depth. Other reasons include cultural differences among nations such as differences in attitudes such as uniformity vs. flexibility and secrecy vs. transparency, which account for a major difference in the way financial accounting is carried out in different parts of the world. Question 5) Why harmonize international financial reporting and what is the effect of harmonization on MNCs? According to Miller & Narayanan (2006), a standardized financial reporting methodology ensures that all regulators, auditors analysts and management teams know that they have a single set of standard rules to implement and practice in regard to the disclosure of financial information. The researchers note that harmonizing international financial reporting allows the people in charge on preparing strategies that focus on “making that single set of standards work in the intended manner” . It also allows firms to facilitate investment appraisals as well as mergers and acquisitions as a familiarized set of practices helps people adjust with and understand the organization’s working and finances much more easily. 6. who are the users of international reports and what are their needs? Financial reporting is aimed at a number of authorities among whom the most important are investors, regulators, governments and pressure groups. A company’s financial reports have a number of uses all depending on the particular needs of the person or authority using them. For an investor, a financial report is a tool which enlightens about the company’s growth prospects and its financial standing, where as for a regulatory authority, the same report is a means through which organizations are verified for compliance with the regulatory authority’s rules and regulations. 7. Explain how international differences in the ownership and financing of companies could lead to differences in financial reporting According to Nobes and Parker (1998), the “difference in providers of finance (creditors/insiders) versus (equity/owners) is the key cause for international differences in financial reporting’. Another deciding factor that shapes financial reporting standards is the legal system of a firm’s operating setting. According to Jindřichovská (n.d), in countries where the common law is followed, accounting regulations are handled by specific firms in the private sector and company laws are not detailed and highly regulated. On the other hand, the author notes that in countries where the code law system is followed , the financial accounting standards are extremely rigid as the accounting regulation codes are in the hands of the government. Hence, the way firms engage in financial reporting is highly dependent on the mentioned variables and is varied across geographical locations. 8. What are possible drivers of financial reports? In the larger sense, financial reporting is essentially a form of communication which allows firms to communicate their financial standings with their stakeholders. Initially, financial reporting had the singular aim of providing it’s owners with means to manage the organizations finances in an effective manner. However with the passage of time, as businesses started becoming progressively more complex due to expansion, firms started to seek capital investment from outside sources. Due to this reason, firms started incorporating financial information into reports which showed them in a favorable light so as to attract investor’s attention. In the modern times, another major driver of financial reporting is ethical evaluations and corporate governance processes and regulations that firms are subjected to by authorities. 9. How will international financial reporting change in the next 10 years? The increasing amount of bridged distances in the business world will play a major role in re-shaping the way firms practice their financial reporting. Globalization has given rise to the Multinational Firm, and due to the environment in which these firms operate, there is a greater need of transparency in their financial reporting procedures. There will also be a need for greater incorporation of sustainability reporting in the financial reporting of the coming years as rising awareness in this regard will put added pressure on firms to incorporate social and sustainability issues regarding their business practices into their financial reporting. The increasing unpredictability in the global business environment will also require firm’s to put more effort into authentically providing risk reporting parameters for their stakeholders. 10. According to Dunmore, the concept of a singularly standardized set of accounting practices imposed by the IASB, has many complications which make it highly impractical. In my opinion, the concept of standardized international financial reporting standards (IFRS’s) is almost impossible as well as impractical because the same set of practices can never be taken up by organization which vary in size, structures and operations. Since a financial report is not just catering a single profiled audience, and is aimed at different people and authorities, as per the reporting organizations situation, therefore it is going to be almost impossible to set out a reporting methodology that will be a perfect ‘fit’ for every organization. According to a report published by the European Banking Federation in 2009, the initial indications of the FASB’s approach towards the creation of standardized reporting procedures is not indicative of any reduction in complexity, and does not seem to be able to improve transparency. The federation also notes that these practices will not be suitable and acceptable to most users of financial statements. Ramanna & sletten (2009), also note that adoption of IFR’s is attractive to countries and organizations only if their trading partners are practicing the same and it can be almost detrimental to those countries who have a poor governance system. Hence in my opinion, standardization in this regard is a difficult task that will raise many more complexities rather than ’simplifying’ the financial reporting procedure. References Abidin, G. 2007, ‘Ulker Biskuvi Market Outperformer’, AK Securities. Ayaz, G. 2008, ‘CEEMEA Equity Research: Ulker Biskuvi’, JPMorgan. Churchwell, C. 2006, Financial Reporting Goes Global. Retrieved May 22, 2010, from http://hbswk.hbs.edu/item/5177.html European Banking Federation 2009, EBF preliminary views on the IASB ED IAS 39 “Financial Instruments: Classification and Measurement”. Retrieved May 22, 2010, from http://www.efrag.org/files/EFRAG%20public%20letters/IAS%2039%20Replacement/Classification%20and%20Measurement/CL%2007%20EBFPreliminaryViewsIASBEDIAS39-FinancialInstruments-ClassificationMeasurement-5thDraft260809-final.pdf Jindrichovska, I. n.d., International Differences in Accounting: The Birth of an Accounting Harmonization Process?. Retrieved May 22, 2010, from http://www.svses.cz/skola/akce/konf/ucto04/texty/jindrichovska.pdf Nobes, W. and Parker, R. 1998. Comparative International Accounting. 5th ed, Prentice Hall, London Oxelheim, L. 2008, ‘Globalization, transparency and Economic Growth: The Vulnerability of Chinese Firms to Macroeconomic Shocks’, Working Paper no. 268 Research Institute of Industrial Economics. Pamir, K. 2007, ‘Equity Research: Ulker Biskuvi’, Global Securities. Ramanna, K & Sletten, 2009, ‘Why do countries adopt International Financial Reporting Standards?’, Working Paper no. 09-102. Retrieved May 22, 2010, from http://www.hbs.edu/research/pdf/09-102.pdf Roosenboom, P. & Dijk 2009, ‘The Market Reaction to Cross-Listings: Does the Destination Market Matter?’, Journal of Banking and Finance, vol 33, pp. 1898-1908. Retrieved May 22, 2010, from http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1047261 Read More