Current Business and Legal Issues - Case Study Example

Case Study Name Course Instructor Date Contents Introduction …………………………………………………………………………….3 Common law versus Code law ………………………………………………………….4 Discover Financial Services ……………………………………………………………4 Discovery Financial Services …………………………………………………………..5 Airbus …………………………………………………………………………………..6 Similarities …………………………………………………………………..………….6 Differences ………………………………………………………………….…………..7 Visual Analysis …………………………………………………………………………8 Discussion ………………………………………………………………………………8 Conclusion ……………………………………………………………………………….11 Bibliography …………………………………………………………………………….12 Introduction The report intends to focus on the comparison and contrast of the companies’ equity sections from two dissimilar countries, Germany and Canada. The companies mainly operate under two dissimilar laws, the code law and the common law. The common law manifests openness with little specifications and a little section of the law can be utilized to mean numerous areas within the statement, Prodhan, 1996. The code law alternatively is specific and restricts its applications on the stated sentiment with only the mentioned objects. The code law allows the application of the compliment objects within the area of restriction. If the specific object or the mentioned person is not touched the code law holds. The nature of law its stipulations and its implementation affect the equity features and the fiscal circulations in the country. This report bases on the determination of the comparison and the contrast between the countries regarding their law modes. The comparison will target the manner of their companies differences and similarities in accounting and finance perspectives, Choi & Meek, 2011. The contrast will incorporate the differences amongst the particular aspects compared from the companies from the subject countries. Canada practices a common law while Germany practices the code law legal system. The variations in the law systems accompany a significant effect on the companies’ equity and the eventual performance in the international scope. The accounting laws including the tax laws mainly rely on the national codes of the countries. The similarities in the equity systems of companies from the countries will arise from the static principles in accounting finance that never receive alterations from the law systems. The principles manifest little relationships with the laws governing a state but fully rely on the companies accounting and determines the company’s financial systems and the outcomes. Generally, the report will target to clarify the notion that there are both similarities and differences amongst the code law and the common law countries, which mainly manifest in the equity sections. The company's equity sections have key components in relation that are worth comparison that entails income smoothing, cost of equity, information uncertainty and the stock returns. The income smoothing entails the utilization of accounting techniques to solve the net income disparities resulting during dissimilar periods. Common law versus Code law Regulation and enforcement of accounting by law in most countries are a primary purpose of the government. There exist numerous similarities and dissimilarities amid countries regarding the definition of accounting acts and the mode in which it should be performed. There are several countries classified as implementing common law while others are categorized as having a Code legal system. The two legal systems affect the way and manner in which accounting is done in each state country. Annual financial reports from Discovery Financial services and Airbus Germany, which, operate under different legal systems, are typical examples of the impact of these two legal systems on accounting. Discover Financial Services The annual report of 2010 from Discovery Financial Services indicates a number of items when it comes to equity. As per November 2010, equity of the company was at $6.4 billion as compared to $8.4 Billion recorded at the same period in the year 2009. The decline in equity resulted from the fact that the company adopted statement No.166 and 167 in the first quarter of the year 2010. This worked to reduce equity by at least $1.3 billion. Thus, redeeming all the shares of the preferred stock that previously provided to the Canadian treasury under the capital purchase program. The month of July also saw the company repurchase a warrant that allowed for purchase of 20,500,413 on its common stock. Discovery Financial Services 2010 2009 2008 2007 Assets 398.73 520.72 793.59 362.7 Cash & Due From Banks 10,938.50 18,885.30 10,605.50 8,248.21 Other Earning Assets, Total 44,744.19 21,867.19 23,842.03 20,071.19 Net Loans 460.73 499.3 552.5 575.23 Property/Plant/Equipment, Total - Net 255.42 255.42 255.42 255.42 Goodwill, Net 188.97 195.64 203.32 59.77 Long Term Investments 0 0 0 0 Other Long Term Assets, Total 0 0 0 3,926.40 Other Assets, Total 3,798.42 3,797.43 3,640.03 3,877.19 Total Assets 60784.96 46021 39892.39 37376.11 Liabilities and Shareholders' Equity Accounts Payable 0 0 268.97 264.97 Payable/Accrued 0 0 0 0 Accrued Expenses 2,209.01 2,255.57 2,468.69 1,317.84 Total Deposits 34,413.38 32,093.01 28,530.52 24,711.31 Other Bearing Liabilities, Total 0 0 0 0 Total Short Term Borrowings 0 0 500 250 Current Port. of LT Debt/Capital Leases 0 0 0 0 Other Current Liabilities, Total 0 808.76 473 0 Total Long Term Debt 17,705.73 2,428.10 1,735.38 2,134.09 Deferred Income Tax 0 0 0 0 Minority Interest 0 0 0 0 Other Liabilities, Total 0 0 0 3,098.47 Total Liabilities 54328.12 37585.44 33976.56 31776.68 Redeemable Preferred Stock 0 0 0 0 Preferred Stock - Non Redeemable, Net 0 1,158.07 0 0 Common Stock 5.47 5.45 4.81 4.78 Additional Paid-In Capital 3,435.32 3,573.23 2,938.66 2,846.13 Retained Earnings (Accumulated Deficit) 3,126.49 3,873.26 3,046.96 2,717.91 Treasury Stock - Common -27.88 -19.64 -8.26 0 Other Equity, Total -82.55 -154.82 -66.34 32.03 Total Equity 6456.85 8435.55 5915.83 5600.85 Total Liabilities & Shareholders’ Equity 60,784.97 46,020.99 39,892.38 37,376.11 Total Common Shares Outstanding 544.68 542.92 479.99 477.69 Total Preferred Shares Outstanding 0 1.22 0 0 Airbus The 2010 annual report by Airbus Germany indicates that it achieved a lot especially in terms of orders and deliveries. The report also states that the company management also embarked on restructuring it under the power8 system of management so as to secure its assets. The company recorded a maximum of about 25,126 million pounds in revenue by the end of the year. The statistics indicate that the company’s stakeholder equity has however, been on the decline in the recent two years. This can be attributed to the cost of operation has been on the rise for the past two years owing to the inflation that affected the business. Similarities According to Pleskovic & Stern., 2001, the stakeholders’ equity indicated in the annual report of Discovery shows that common law states emphasis a parallel stakeholders’ model of governance. At the same time, the annual report from Airbus Germany, which is a Code law environment, indicates that there is a parallel model of corporate governance when it comes to running of the company. The sole purpose in both cases is to emphasize on the need for transparency in accounting. However, the difference is brought about in terms of disclosure. In both cases, there is also an element of government involvement in that the accounting system has been designed to comply with the needs of the state in which the company is operating more than the interests of stakeholders do. Government imposed requirements in this case include the calculation of tax and compliance with the microeconomic plan. The annual report of 2010 from the two companies in different legal systems indicates that they are under pressure to conform to government requirements. Differences The two annual reports indicate that there exists a significant difference between operations of a company in a common law environment and a Code law environment. First of all, accounting in a common law environment is oriented towards ensuring transparency, fair presentation and full disclosure of financial information held by the company. Discovery Financial services annual report is a detailed document in the equity section indicating the running of the company activities. Whilst, accounting in Code law as in the case of Germany’s airbus is characterized by legalistic orientation, opaqueness and with low disclosure of company activities, Thurony, 1998. Leuz, Pfaff, & Hopwood, 2005, state that Common law also has a profound emphasis when it comes to matters of equity. The annual report by Discovery Financial services is a clear indicator of this distinction. There is a clear-cut distinction between matters that are related to taxation and financial accounting. Stakeholders’ equity is presented in a logical manner, which is easy to follow. In addition, all calculations performed by the company are disclosed in the report just to ensure that there is transparency in the accounting process. Code laws; ensure that there is alignment between tax and financial accounting, hence, uneasy assessment of the company’s book value. The income smoothing was evident in the annual report of Airbus Germany and absent in Discovery Financial services report. Several measures were taken by Airbus to reduce the probability of income shocks that the company might experience. This included diversification of income sources and building up physical and social assets. Low risk employment was also another step that was taken by the company as indicated in its report. This helped to level out net income fluctuations thus giving out a financial report that is consistent. On the other hand, income smoothing is a technique that is lacking in common law accounting which yields fluctuations in income as indicated by quarterly fluctuations in income, Scheiner,1978. Visual Analysis Discussion The similarities and differences above indicate a lot of significance in terms of the manner in which accounting is done under the common and Code legal frameworks. The manner in which laws are developed under the two systems is quite different. In common law like Canada, laws are developed on a case-by-case basis becoming too specific in their context. The manner in which the annual report and specifically the shareholders equity is presented in it indicate the degree that was expected in common law. Laws in a Code legal system are all embracing and not that much categorical as in the other case. The expectation is true as indicated in the manner in which accounting report presented in the annual report of Airbus Germany encompasses a number of aspects in the company. In Code law legal systems, accounting relies on the procedural manner and tends to be descriptive in nature, Manning, 2010. As found out in the annual report, Airbus Germany tends to to present its accounts in a logical and descriptive manner. In common law, accounting is based on experience and judgment of the person doing the accounting. The annual report of 2010 by Discovery financial services was found to indicate this aspect especially in terms of quantitative and qualitative disclosure of risks in the market. The Code law system in which airbus Germany operates from expects all companies to follow what is referred to as IFRS when presenting their consolidated financial statements. This includes fair presentation of principles and investment associates through equity methods. The Airbus annual report also depicts the same in the sense that it encompasses the annual impairments test and assets that are valued in a historically fair value. Miswa, 2011. The expectation was that in common law, accounting standards are set up by the private sector. Under the Code legal system, the standards are set by the public sector. The annual report in this case reflects the same pattern in that the content of accounting data. The Discovery report indicates that, a lot of consolidated financial information disclosed is meant to ensure that the private sector is well equipped with the financial information. The shareholders are updated about their equity. On the other hand, shareholder equity as reflected by Airbus annual report shows that the company is out to conform to what has been defined by the government and the interest of the public, Saudagaran, 2009. According to Alexander, 2010, accounting in common law country also conforms to the intent of attracting investors. The accounting expectation of Code law countries emanate from the company needs to abide by the regulations of the state. This is evident in the financial report contained in the annual report of the two companies whereby the steadiness of the shareholder equity acts as an attraction for investors. On the other hand, companies that operate under the code law legal system have a tendency of being involved in activities that rather conform to state requirements. The financial disclosure contained in Airbus annual report for 2010 indicates the company’s interest is concentrated towards protecting the shareholder while at the same time attracting investors. This concurs with the expectation of rather a company that operates in such a legal system, Madura, 2009. Conclusion There is considerable proof of short-term stock price extension, which the prior writing often results to investor behavioral inclinations such as little response to new information. The information uncertainty has a critical role in price continuation abnormalities and cross-sectional disparities in stock returns. The income smoothing proved to be a common aspect in Germany. The technique manifestation proved significant in the stock exchange and the equity outcomes regarding the companies in the country. In case the short-term price extension is because of the investor behavioral inclinations. Consequently, resulting into relatively higher anticipated gains following significant news and lower expected returns following serious news. The report proofs and the reasoning behind the equity sections of the companies are theoretical proofs behind the law effects on the companies' performance. My data and the elaborations incorporated upholds this hypothesis. Bibliography Alexander, D 2010, Financial accounting: an international introduction, 4th edn, Financial Times Prentice Hall, Harlow, England Madura J., 2009. International Financial Management. 10th Edition. New York: Cengage Learning Choi, FDS & Meek, GK 2011, International accounting, 7th edn, Prentice Hall, Boston, MA. Prodhan B., 1996. Multinational accounting: segment disclosure and risk. Munich: Taylor & Francis Manning G., 2010. Financial Investigation and Forensic Accounting. Boston: CRC Press Misawa M., 2011. Current Business and Legal Issues in Japan's Banking and Finance Industry 2nd Edition. Paris: World Scientific Pleskovic B & Stern N., 2001. Annual World Bank Conference on Development Economics 2000. New York: World Bank Publications Leuz C, Pfaff D, & Hopwood A., 2005. The Economics and Politics of Accounting: International Perspectives on Research Trends, Policy, and Practice. Oxford: Oxford University Press Saudagaran S., 2009. International Accounting: A User Perspective. 3rd Edition Boston: CCH Scheiner J.,1978. TitleIncome smoothing: an analysis in the banking industry. Munich: College of Business Administration, University of Tennessee Walton, PJ 2009, Global financial accounting and reporting: principles and analysis, 2nd edn, Thomson Learning, London. Read More