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Session10 - Notes Session 10 > > 1 An Overview of...

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Notes - Session 10 >>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> >>>>>> 1) An Overview of International Accounting 2) Chapter 17: Multinational Cost of Capital and Capital Structure 3) Chapter 18: Long-Term Financing >>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> >>>>>> This lecture will review some key concepts from Chapters 17 and 18 and also discuss the topic of international accounting. Our text does not cover the topic of international accounting; however, it is a key area for you to study, especially since the U.S. seems poised to consider changes in out system, including closer adherence to International Accounting Standards Commission (IASC) standards. In order to understand the debate, you need some background in international accounting. First, let me cover some key points of international accounting. Then I will review some key points of the assigned chapter. International Accounting Differences in international accounting standards are not due to whim or caprice. Each company's accounting system has evolved in response to the environment in which it operates. For example, German bankers were historically the major providers of capital to German companies (just as Japanese bankers were to the Japanese company). In Germany, bankers could get their information directly from the company. Financial statements were consequently less important for disclosure purposes in Germany. However, German companies were very concerned with preserving their dignity before the world, and presenting financial results that did not vary wildly from year to year. For example, German companies are allowed to set aside various reserve accounts, often "hidden reserves" that are not reported on their books. These could include accounting reserves for various potential future expenses, such as deferred maintenance, future repairs or exposure to international risks. U.S. companies are not allowed to use reserve accounts, with minor exceptions (reserve for doubtful accounts). In practice, what this means is that German companies can massage their financial statements. In a good year they can move funds into reserve accounts, thus lowering their reported profits, while in a bad year they can move money out of the reserve accounts and increase their reported profits. The net effect is that German companies can show steady profits from year to year. Special reserve accounts are rejected completely by the Securities and Exchange Commission (SEC) which insists that foreign companies disclose these reserves, and
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report in accordance with U.S. standard practices if they wish to list on an exchange in the U.S. Thus Daimler-Benz needed to restate its financial statements in order to list on the New York Stock Exchange. While banks traditionally provided capital in Germany, in contrast, in the United States, the major providers of capital are private investors who, unlike German bankers, do not have direct access to the company's books nor to its chief executives. Consequently, U.S.
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