Investment 4 Future

Resolving Ethical Dilemmas of Taylor Johnson

2014-07-24T17:23:00.001+10:00

INTRODUCTION

During the course of employment, an employee may not avoid from facing an ethical problem. These problems often arise when an employee is ethically required to take an action that may conflict with one’s self-interests or undue influence by others. In fact, in Taylor Johnson’s case, where there is an ethical dilemma arising as it is required Taylor whether to act morally and ethically against his manager or to advocate for his job security. Therefore, the report will outline 6 steps in ethical conducts to assist Taylor in resolving the ethical dilemma by pursuing an optimal solution that is in compliance with the Code of Ethics for Professional Accountants (APES 110).

DISCUSSION

Step 1: Obtain the relevant facts.

· Taylor Johnson is a new employee of Australian Whitegoods (AW), and he is responsible to prepare and reconcile monthly management accounts

· AW is owned by World Whitegoods Limited (WW)

· AW has made good profits for the past 3 years; however, it has dropped in profit margin for the last 6 months

· AW’s net margin is below the WW’s benchmark. Rumours of selling/closing bad subsidiaries, like AW

· Taylor’s reports are reviewed by Geraldine; then Taylor sends the reports to WW with the attachment of Geraldine’s comments

· AW’s manager, Geraldine instructed Taylor to:

Ø Recognise $1m sales in July for June

Ø Extend depreciation of conveyor belt from 10 to 15 years, to reduce depreciation charge

· WW has set accounting policies, Taylor cannot make adjustments without informing WW

· If Taylor did not follow Geraldine’s instruction, he would be fired.

Step 2: Identify ethical issues from the facts.

Taylor has been instructed by his manager – Geraldine, to make two unreasonable adjustments regarding of the conveyor belts’ depreciations, and future sales in July. If he did not follow the instructions, he would lose his new job. What should Taylor do to solve this ethical dilemma?

If Taylor follows Geraldine’s instruction, he will breach the code of ethical conducts, such as APES 110-110 Integrity, 110-120 Objectives and 110-150 Professional behaviour.

Integrity: Members must be straightforward and honest, and practise fair dealings in their professional relationships. In Taylor’s case, he believes that it is reasonable to inform WW before making any adjustments, which are not compliable with the WW’s accounting policies. Therefore, if Taylor follows Geraldine’s instruction to bring forward the revenue from July to June, and reduce the depreciation rate of the conveyor belt, without informing the WW; he will fail to comply with the APES 110-110.

Objectivity: All members have an obligation of not to compromise their professional or business judgment due to bias, conflict of interest or the undue influence of others. Taylor has been threatened by Geraldine regarding of his job security, and forced to follow Geraldine’s instruction. If Taylor adheres to Geraldine, he will secure the job as a result. Nevertheless, it is a violation of the objectivity of the code of ethical conducts (APES 110-120) as Taylor is making a profession judgment because of the undue influence of Geraldine.

Professional Behaviour: Members are required to be compliant with relevant laws and regulations and avoid any actions or omissions that may bring discredit to the profession. This comprises actions or omissions which a reasonable and informed third party, having knowledge of all relevant information, would conclude negatively affect the good reputation of the profession. In this scenario, if Taylor agreed to make the required adjustments of the conveyor belts’ depreciation and the unearned revenue without informing the WW, he would lose creditability in his profession and even ruin his professional career if the WW revealed the adjustments. Therefore, Taylor will fail to comply with the APES110-150 Professional Behaviour, if he agrees on Geraldine’s favour.

Step 3: Determine who is affected by the outcome of the dilemma.

Taylor Johnson:

· Adjustments made: This will breach the code of ethics, but secure his job for a short-term until the problems are revealed eventually. Then, he will lose creditability in his profession, and even his job.

· Adjustments not made: He may lose the job, but he has ethically and morally acted as a profession in compliance with the code of ethics.

Geraldine:

Geraldine would face a risk of losing his position as a manager in AW as if the matter was revealed by the WW. As a consequence, this will ruin his career development.

Australian Whitegoods Pty Limited:

AW would continue its operation if the WW did not find the adjustments. Nevertheless, the WW would eventually find out the unreasonable adjustments, and it would sell off or close down the under-performing subsidiary – AW. Even if the adjustments are not made, the AW also has to face a risk of being closed down or sold off as it has performed badly for the last 6 months

World Whitegoods Limited:

· Adjustments made: if the matters were revealed, this would negatively impact on WW’s image as WW did not have a good internal control to monitor its subsidiaries’ performance.

· Adjustments not made: the WW is able to review the AW’s actual performance. AW’s losses may decrease the total profit margin of the WW, and its overall performance.

50 full time employees and casual salespersons:

· Adjustments made: AW will still show its positive profit margin, however, it is likely that the WW will unveil the problem, and evaluate the AW’s performance below the WW’s benchmark for its subsidiaries. As the result, AW will be put in a risk of being closed down or sold off, and all 50 full-time staff, and some other casual employees will be laid off as a consequence.

· Adjustment not made: WW will discover the problem by reviewing AW’s financial reports. As a result, WW may lay off all the employees of AW, or all the staff could secure their jobs if AW was sold off.

Step 4 & 5: Identify the alternatives available and likely consequences of each alternative.

· Just follow Geraldine’s instruction:

Taylor: He has breached the APES 110 -110,120, 150, as he did not act fairly towards his professions, and has been influenced by Geraldine; and as mentioned in step 2, he would also breach the objectivity of the code of ethics. Additionally, the misstatements may be discovered subsequently and Taylor may lose creditability in his professional relationships.

Geraldine: He would be punished by WW’s management as if the adjustments were revealed.

Australian Whitegoods Pty Limited & 50 full-time staff, and some casual: WW may sell off or close AW down, which would result in all the staff losing their jobs.

· Refuse to make the adjustments:

If Taylor refuses Geraldine’s instruction, he will lose his current job. However, he has acted ethically and morally in accordance with the code of professional ethics.

· Quit the job himself and send a resignation letter to ASIC

If Taylor quits, he will likely miss out some potentially valuable experiences in public accounting firms. Nonetheless, he does not breach the code of professional ethics.

· Inform the WW’s management about Geraldine’s instruction:
Taylor: The WW’s top management will appreciate for Taylor’s attempt to act ethically, or they would think Taylor has bypassed Geraldine’s authority , and informed them without having discussed with Geraldine.

Geraldine: He might be blamed for his professional behaviours.

· Advice G not to make the adjustments, but prepare a formal report to the WW, stating that AW has lost in its profit margin due to heaps of online competitions, not management’s faulty, and propose the best strategy to deal with the company’s difficulty.

If Geraldine agrees, Taylor will not breach the APES 110 of Integrity, Objectivity, and Professional Behaviour. The AW will not be closed down or sold off. G would not be blamed for the AW’s unprofitable operation.

If Geraldine does not agree, there will be a conflict between Taylor and G. The AW’s performance will be revealed by WW, and AW will likely be sold off or closed down.

· Follow G’s instruction but inform WW secretly:

Taylor will be seen as acting ethically in his professional manners, as well as not trying to pass over his manager’s authority. As a result, Taylor will stabilise his position while he still complies with the code of ethics.

Geraldine: WW will blame Geraldine for not to follow the company’s accounting policies.

· Ask for some ethical advices from a professor:

Taylor will gain some relevant knowledge from the professor, and then he can find some other alternatives to solve the dilemma.

Step 6: Decide the appropriate action.

The decisions are completely upon to Taylor, which he personally thinks they are the best course of actions he could take.

One of the best solutions he could take is to inform the WW’s management about Geraldine’s instruction. By doing so, Taylor is still in alignment with the code of ethics, and he may maintain his job. However, if Taylor could persuade Geraldine not to make the adjustments, and report the WW about what has happened to the AW for the last 6 months, Taylor would still comply with the code of ethics for professional accountants. This could also rescue the AW from being closed down/sold off, and Geraldine’s position is secured as if the company’s recovering strategy is passed. On the contrary, if Geraldine still forces Taylor to make the unethical changes without informing the WW, Taylor should quit his job and send a resignation letter to ASIC detailing the real reasons of resignation.

Last but not least, Taylor can seek helps from an independent business consulting firm or dial the Institute of Ethics’ hotline. Both of these assist in directing him to make an appropriate decision, which can maintain his integrity, objectivity, professional behaviour. Hence, it does not give rise to violation of APES110.

CONCLUSION

The six-step framework has been used to indentify ethical dilemmas and suggest the best alternatives to solve these dilemmas. In this specific case, Taylor had to find the way to solve his ethical dilemma when he was forced by his manager – Geraldine, to make two adjustments which could result in false and misleading statements. By using the six-step framework, this report has come up with the best possible solutions. That is to report the manager, or advice the manager by suggesting the best strategy to save the AW, or seek further advices from an independent source. Although ethical dilemmas always exist in any courses of employment, following the code of ethics is a must regardless of any consequences may arise.

Case study of United Kingdom’s financial reporting standards

2011-07-05T12:49:00.001+10:00

Click here to download the file

Five characteristics of the development factors that would predict low levels of transparency and disclosure in the financial statements of German listed companies

2011-07-04T12:34:00.000+10:00

1. Traditionally bank credit plays a major role in corporate finance.

2. German accounting is heavily influenced by tax law.

In Germany, tax law has a strong influence on accounting and financial reporting. The reason for this link between taxation and financial reporting is historical. When corporate income taxation was introduced in Germany in 1874, the requirement for annual accounting had already been codified in the Commercial Code in 1862. It was convenient to link corporate income taxation to existing financial statements.

3. German accounting rules allow companies to smooth income over time by using hidden reserves.

4. There are two main external factors that have influenced financial reporting in Germany in recent years. They are, EU Directives and the forces of globalization. The 1985 Accounting Act implemented the Fourth, Seventh, and Eighth Directives and transformed them into German Commercial Law.

Although the EU’s Fourth Directive requires companies to present a true and fair view in their financial statements, it appears that extensive note disclosures are seen as a way of achieving this without changing the tax-based, income smoothing approach to financial reporting – i.e. Germany still only allows one set of reports.

5. The EU’s decision to adopt IFRS from January 1 2005, was in recognition of the global trends in financial reporting. Even before the EU’s decision, large German companies like Daimler-Chrysler that had their shares listed on foreign stock exchanges were already using internally acceptable accounting standards.

Since January 2005, all German listed companies are required to use IFRS in preparing their consolidated financial statements. However, German accounting practices differ from IFRS in some important respects.

German accounting law contains no specific rules in some areas. Examples include the translation of foreign currency financial statements of foreign subsidiaries, disclosures of fair values of financial assets and liabilities, and earnings per share.

Advantages and disadvantages of internal versus external corporate governance mechanisms

2011-07-03T13:46:00.000+10:00

Internal corporate governance mechanisms are established to insure the proper actions of management. Because providers of capital do not control the daily operations of the business, so they set up corporate governance mechanisms to insure that management acts in the best interest of the owners. This mechanism is controlled directly by the owners of the firm. It can be applied to monitor corporate risks and assurance corporate controls

Examples for internal corporate governance mechanisms include the following: 1. Set up a board of directors which are normally composed of members of management and outside members who do not participate in daily operations of the firm to represent the interest of owners (typically shareholders). The board hires, controls and fires management and determines management’s compensation. 2. It could have voluntary codes of conduct. 3. Internal auditing should be conducted. 4. Voluntarily provide internal information on firm’s operations.

Advantages of internal corporate governance mechanism include: 1 allow directors such as Woolworth who can both won major awards for their excellent governance practices, to differentiate themselves from their competitors. 2. The voluntary, internal and additional governance controls can make sure that their stakeholders such as customers, employees and investors are well protected and looked after.

Disadvantage: 1. additional cost could be generated. 2. Some countries tend to be secrecy; they are unwilling to disclose more information such as china. So cultural influence should be noted. Thirdly, “bad” companies will simply not adopt any internal governance requirements on their directors – requiring only the external ones be complied with and nothing more – even if some internal mechanisms are adopted by these companies, remember, given they are voluntary, they can be removed at any time.

External governance mechanisms are not directly controlled by the current owners of the firm. Example can include 1. independent auditors. 2. Legal system which highlights directors duties and obligation and ensure the company comply with the accounting standards. 3. To comply with stock exchange list rules. 4. External taker-over market.

Advantages: they are imposed on all listed companies and a not subject to control by directors in terms of whether they will comply or not.

Disadvantage: although these mandatory rules do not allow companies to differentiate themselves in the market – i.e. all listed companies must comply with CG rules, thus no one company can claim to their shareholders/ the market that they are better at governance than any other company- not in terms of strictly external mechanisms.

Have US corporations lobbied against the US adoption of international financial reporting standards?

2011-07-01T18:20:00.000+10:00

I think the US corporations have lobbied against the US adoption of international financial reporting standards. The key issue to understand is the reason why corporations want to become involved in lobbying of the accounting standard process. The answer lies in the fact that the accounting standards set out mandatory rules for recording business transactions – e.g. they control when sales revenues can be recognised/ recorded as a sale in the accounts of the corporation.

If the standard rules are too restrictive or difficult to comply with, then corporation may be required to delay the recognition of some sales to a later financial reporting period – this delay would meant that the current overall profits of the corporation would fall.

Another example is the valuation of assets . The US accounting standard developed by the FASB, required banks to record their asset values at their market value. The back directors were very unhappy at this rule within the standard as they argued that they should be able to value their assets at Directors’ valuation –i.e. that the Directors should have total control of the asset values not the market. Again Directors were concerned here because low asset values could prevent investors from buying shares in the company and could also prevent banks from lending money.

Thus, it’s important to remember the connection between the rules in accounting standards and their impact then on the final accounting numbers – sales and asset values – in the financial reports for the listed companies.

Will the IASB and the FASB eventually merge, or will they remain separate accounting standard-setting bodies?

2011-07-01T00:37:00.002+10:00

We doubt that the IASB and FASB will merge in the future. First of all, various points discussed in the chapter mean that it is unlikely that the IASB will disappear and the FASB will become the global standard setter. It also seems unlikely that the FASB will go away. It is difficult to believe that the United States will cede its authority over accounting standard setting to a multinational group. Even if the FASB felt that a merger was advantageous, would politicians or even the SEC allow international interests to supersede domestic ones?

Another issue is principles- versus rules-based standards. Generally speaking, IFRS are principles-based while U.S. GAAP are rules-based. While it is true that IFRS are getting more rules-based and U.S. GAAP are (supposed to be) getting more principles-based, the litigiousness of the U.S. environment probably means that the United States will need additional implementation guidance even if IASB and FASB standards are converged.

Financial resources are another consideration. Operating expenses for the IASC Foundation in 2005 were approximately €12 million (or approximately $15.6 million). Operating expenses of the Financial Accounting Foundation in 2005 were approximately $31 million. These numbers suggest that the FASB has a budget twice as large as the IASB. Whether the IASB can match the resources of the FASB is unclear.

Taken together, we argue that the IASB and FASB will remain separate accounting standard setting bodies in the future.

The key rationales that support and against the development and widespread application of International Financial Reporting Standards

2011-06-28T20:33:00.000+10:00

Evidence of support for IFRS

A growing body of evidence indicates that the goal of international convergence of accounting, disclosure and auditing has been widely accepted.

All dimensions of accounting are becoming converged worldwide.

Increasing numbers of highly credible organizations strongly support the goals of the IASB.

National differences in the underlying factors that lead to variation in accounting, disclosure, and auditing practices are narrowing as capital and product markets become more international.

International standards will improve the comparability of international financial information.

Time and money will be saved on international consolidations, the components of which now are subject to different national laws and practices.

There may be a tendency for accounting standards throughout the world to be raised to the highest possible level.

Widespread application of IFRS might also result in:

Improved managerial decision making within multinational enterprises.

Improved allocations of corporate investment money worldwide.

Better international understandability of financial statements. Cost reductions in accounting information processing and financial disclosure costs for multinational enterprises.

Greater international credibility for published financial statements.

Some countries disallow IFRS for domestic firms but allow foreign companies to use them.

U.S. and Japan, for example will allow foreign countries listing on their respective exchanges to file financials prepared in accordance with IFRS without reconciliation to U.S. or Japanese GAAP.

International Convergence Issues

The complicated nature of standards such as financial instruments and fair value accounting

The tax-driven nature of the national accounting regime

Disagreement with significant IFRS, such as financial statements and fair value accounting

Insufficient guidance on first time application of IFRS

Limited capital markets = little benefit

Investor satisfaction with national accounting standards

IFRS difficulties in language translation

Significant differences in standards currently exist.

The political cost of eliminating differences.

Overcoming “Nationalism” and traditions.

Perhaps it will not provide significant benefits.

It will cause “standards overload” from some firms.

It diverse standards for diverse places is acceptable.

Distinguish between the terms “harmonisation” and “convergence” as they apply to accounting standards

2011-06-27T02:02:00.000+10:00

Just start with thinking about the fact that prior to the introduction of IFRS, most nations had their own national accounting standards.
The ideal position to move to from this point - where there would be no differences at all in the accounting standards in place in every country - is FULL CONVERSION - in this case each nation totally removes its old, national standards and adopts only IFR standards - and nothing else. This is the accounting standard setters ideal as every company's performance could be very fairly compared as they would all be using exactly the same rules (or very close to this) for the recording and reporting of their key business transactions.
However, the reality is, as we saw during the semester with the EU, there have been a lot of concessions made to powerful countries - such as Germany and Japan and China - which allows them to only "harmonise". Under this guideline, nations simply and gradually change/modify one standard at a time until they have all their old, relevant accounting standards aligned or consistent with any matching IFRS - e.g. there is an international standard on segments - IFRS 8 as we have seen - each nation that is "harmonising" only will modify their existing segment reporting standard to be as closely aligned with the IFRS 8 std. as possible - but differences will and do occur as we have seen as a result of legal rules etc. that operate within each nation.
Once all the national accounting standards are aligned with matching IFR standards - then, for the business transactions covered by the IFR standard, there is a form of convergence - i.e. all the nations should be adopting the same or very similar, global rules for that business transaction.
However, this convergence process is flawed in that nations such as the US retain a range of their existing national standards - which listed companies have to comply with as well as the IFRS - i.e. THEY HAVE NOT FULLY CONVERTED TO COMPLYING ONLY WITH IFRS - this is very confusing to the market - as US company reports are complying with over 300 accounting standards related to a wide range of business transactions while Australian companies by comparison ONLY HAVE the IFRS in place and nothing else.
Where there is doubt and "opaque" practices, mismanagement and fraud can occur and the investment risk in those countries increases as a result.
Thus: Harmonisation is the slow process of modifying existing national accounting standards to be more aligned, one by one, with any matching IFRS - it leads to inconsistent accounting rules across countries as the alignment is not perfect.

Five characteristics of development factors that help to predict low levels of transparency and disclosure in the financial statements of German listed companies

2011-06-25T23:27:00.001+10:00

1. Traditionally bank credit plays a major role in corporate finance

2. German accounting and financial reporting are heavily influenced by tax law

The reason for this link between taxation and financial reporting is historical. When corporate income taxation was introduced in Germany in 1874, the requirement for annual accounting had already ben codified in the Commercial Code in 1862. It was convenient to link corporate income taxation to existing financial statements.

3. German rules allow companies to smooth income over time by using hidden reserves.

4. EU directives and the forces of globalization have influenced in German financial reporting. The 1985 Accounting Act implemented the Fourth, Seventh, & Eight Directives and transformed them into German Commercial Law. Although the EU’s Directive requires companies prepare a “true and fair view” in their financial statements, it appears extensive note disclosures are seen as a way of achieving without changing the tax-based, income smoothing approach to financial statements.

5. Since the EU decided to adopt IFRS in January 1 2005, all German listed companies are required to use IFRS in preparing their consolidated financial statements. However, German accounting practices differ from IFRS in some important respects. For instance, German accounting law contains no specific rules in some areas, such as the translation of foreign currency financial statements of foreign subsidiaries, disclosures of fair values of financial assets and liabilities, and earnings per share.

What is ROI, RI, and EVA ?

2011-06-21T14:06:00.000+10:00

ROI (Return-on-investment):

To calculate ROI, simply get profit divided by total assets of the firm

ROI = profit / assets

Disadvantages of ROI: Actions that increase divisional ROI can make the corporation worse off & conversely. ROI gave the illusion of insight and control when managers were taking actions that increased ROI but decreased the long-run value of their business units. These perverse incentives happen whenever performance is measured by a percentage or a ratio.

RI (Residual Income):

RI is calculated as net investment base multiply by risk-adjusted, then deducted by ner income before tax

To simplify:

RI= Net income (before tax) – ( net investment base x cost of capital (risk-adjusted ))

The RI measure will always increase when we add investments earning above the cost of capital or eliminate investments earning below the cost of capital.

Thus, this evaluation method can eliminate the ROI perverse incentives, and more closely align manager’s incentives with the value of the firm

Econimic Value Added (EVA)

EVA is a specific form of RI (developed by Stern Stewart) with adjustments made to the inputs (i.e. Accounting numbers, e.g. earnings and assets; Investments in intangible assets, e.g. R&D, advertising, training; Leased assets; Changes in general and specific price levels; Depreciation methods.

And adjustments with purpose of correcting distortions introduced by generally accepted accounting principles (GAAP)

EVA more closely aligns with economic income. However, cares need to be taken that ensure any adjustments made to GAAP are warranted, otherwise it would lead to manipulation.

Market participants may apply a different set of adjustments. EVA and residual income contain little news beyond earnings. Under EVA, there is little incentive for managers to seek out the top level (high yield) investments as long as their investments are just above the company’s cost of capital. Although EVA doesn’t create incentives to over or under-investment per se, it may create the perverse incentive to heavily invest in mediocre investments rather than seeking out high performing investments. Investing in too many mediocre projects, rather than high performing projects not only affects risk, but may affect liquidity. Thus, EVA should be used only as one indicator among many.

The performance evaluation systems

2011-06-21T14:04:00.001+10:00

The performance evaluation system is one the three legs of organisation architectures (i.e 3 legs of stools). To be successful in the competitive environment, the first thing that every firm need to consider is whether their 3 legs of stools are in balance.

To measure the performance of the firm, firstly, you need to classify the firm’s divisions into 5 centres (i.e. Cost Centre, Expense Centre, Profit Centre, Revenue Centre, and Investment Centre)

For now, we just focus on Cost Centre, Profit Centre, & Investment Centre.

Cost centre:

Task: Produce some output

Decision rights: Input mix (labour, materials, and outside services) used to produce the output

Evaluation: Efficiency in applying these inputs to produce output (i.e. use budgeted cost vs output.) Note: Quality must be easily observable and must be monitored

Profit Centre:

Task: Run a specified part of the business profitably.

Decision rights: Input mix, selling prices, marketing techniques, but nothing on the cost side

Evaluation: Profit (i.e use actual versus budget).

Investment Centre:

(this centre is quite similar to profit centre, but it has a power over the expenditures of the company):

Task: Run a specified part of the business, earning an adequate return on investment

Decision rights: Similar to profit centres but with additional decision rights for capital expenditures.

Evaluation: Using ROI, RI, & EVA

What is Market Sentiment

2011-06-17T14:54:00.001+10:00

In technical analysis, sentiment comes in only two flavours — bullish (the price is going up) or bearish (the price is going down). At any moment in time, a bullish crowd can take a price upward, or a bearish crowd can take it downward. When the balance of sentiment shifts from bullish to bearish (or vice versa), a pivot point emerges. A pivot point is the point (or a region) where an up move ends and a down move begins (or the other way around). At the pivot point, the crowd itself realizes that it has gone to an extreme, and it reacts by heading in the opposite direction. As far back as the early 1900s, traders observed that if they were patient and waited for a pivot point to develop, they could trade at the right psychological time — just as the crowd is beginning a new move. When the crowd is reaching an emotional extreme, the crowd is usually moving in the wrong direction. A reversal point is impending. You should do the opposite of what the crowd is doing, or at least get ready to.

How to start trading

2011-06-17T00:11:00.001+10:00

If you don’t already know trading basics, you need to get a few things under your belt to get the most out of this blog — things like what a securities exchange is, exchange hours, what trades in after hours, what brokers do (and don’t do), trading conventions like “bid and offer” and order types, how to read a brokerage statement, and oh yes, what securities you plan to trade. After that, all you really need is a newspaper that publishes securities prices, a sheet of graph paper, and a pencil. Fortunes have been made with nothing more than that. But these days, a computer, an Internet connection, and at least one piece of software that allows you to collect data and draw charts are also standard issue. You can also do charting directly on technical analysis Web sites without buying software. Don’t skimp on tools to put in your technical analysis tool belt. Buy the data, books, magazines, and software you need. Pay for lessons. Get a trading coach. You wouldn’t try to make a cordon bleu dinner on a camp stove with three eggs and a basil leaf, so don’t try to make money in the market by using inadequate tools. Your first task when you’re ready to take your technical knowledge out for a trial run is to earn back the seed capital you put into the business, the business of technical trading.

What is Technical Analysis ?

2011-06-16T03:25:00.001+10:00

Technical analysis is the study of how securities behave and how to exploit that information to make money while avoiding losses. The technical style of trading is opportunistic. Your immediate goal is to forecast the price of the security over some future time horizon in order to buy an sell the security to make a cash profit. The emphasis in technical analysis is to make profits from trading, not to consider owning a security as some kind of savings vehicle. Therefore, technical analysis dictates a more active trading style than you may be used to.

Home Loan Analysis

2011-06-12T19:47:00.000+10:00

Home loans are one sort of mortgage which is similar with credit union. There is a large market which offers numerous produce of home loans to Australian homes existing in every corner of Australia. This report summarises a pair of datasets regarding RBA cash rate and 198 standard variable home loan products’ detail information.
Due to the collapse of the Bretton Woods System and American extremely loose monetary policy and oil dollars rolling into the third world countries in late 1970’s and early 1980’s, the cash rate had a large reduction. After 1990’s Asian Financial Crisis, the cash rate fell down and never rises again. Then the first part of the report includes the chart of RBA cash rate historical change data through 1976 to 2010 and the analysis of this chart which highlights the main trend and feature of cash rate change.
Another part of report shows five different factors that impact the variable rate to which factors (if any) most influence the variable rate of these 198 kinds of home loans products. There are over five tables and charts being used to summarise five relevant factors that are institution type, redraw, portability, offset, total upfront fee and yearly service fee respectively. This report illuminates the key features and analysis paragraphs for each factor. It can be seen that institution type influenced the variable rate most and other factors had tiny impacts on the variable rate.
In conclusion, this report talks about the historical data of cash rate from Reserve Bank of Australia and the data of different home loans products in current market. Furthermore, this report analyses these two datasets in terms of the variation of historical cash rate as well as the influences from the different factors of the home loan products. From all the findings we find that the institution type influenced the variable rate most. However, other factors had tiny impacts on the variable rate. The advice for consumer is that they should pay attention to the institution type when they choose home loan service in the future as it impacts variable rates the most.

In Australia, there are different types of home loans products currently available in the market that provided by banks and other organizations. Interest rate is one of the major determining factors in many borrowers’ decision. Two types of interest rates - variable rates and fixed rates are based on different financial market indicators. According to Gambacorta(2008), variable rate refers to an interest rate that fluctuate over time based on the changes of an underlying interest rate index. Moreover, variable rates can be influenced by kinds of factors such as institution types, total upfront fees and yearly service fees. This report will focus on analyzing two sets of data which are interest rate data and historical data respectively.

2.0 Outliers
Outlier is an observation that lies an excessive distance from other data which lies outside the overall pattern of a distribution. However, sometimes it is difficult to realize what factors caused this situation. Therefore, it is important to identify the outlier due to it is possible to affect the accuracy and cause the systematic errors if people cannot handle it properly.
Z score formula is adopted to identify potential outlier. When the Z score is above 3.0 or below -3, it is considered to be an outlier. It has been calculated that from the data that has been provided, the Z score is within the range of -3 and 3 (see appendix 1). As a result, the outlier will not remain in the data of this report.

3.0 Historical analysis on cash rate tendency

Cash rate is the interest rate paid by bank which affected by transactions between the central bank and other financial institutions. Figure one illustrates the variation in the percentage of cash rate from May 1976 to March 2010. As can be seen in this line graph, there was a significant increase in cash rate during the first six years and it reached a peak at 20.77% in August 1982. However, an obvious decline was seen in cash rate since September 1983 and the percentage dropped to 4.76% which was the lowest point within nearly eight years. Moreover, the cash rate fluctuated a lot over the next six years and it reached a peak again in November 1989 at 18.18. Whereas, from this year onwards, the growth of cash rate was suddenly replaced by a sharply downward trend. This is probably because RBA tried to decrease the negative effects which were brought by savings and loan crisis in the early 1990s to Australia. It is interesting that after September 1991, although the cash rate still changed with some ups and downs, it tended to be stable and maintain below 10%. Besides, from May to September 2009, the percentage of cash rate keeps remaining at 3% which is the lowest data over the 15 years. It shows that the world economy seems to be growing again and Australian economy is recovering as well after the global financial crisis which started from 2008.

4.0 Current market

The global financial crisis had resulted in the economic downturn since 2008. In Australia, in order to decline the negative effects brought by this severe crisis, the main financial institutions decreased the percentage of home loan interest rates at that time. However, at the beginning of 2010, RBA improve the interest rates which means homeowners have to pay more on their mortgages. Meanwhile, there are some major banks include ANZ, the Commonwealth Bank also followed the RBA, lifting their interest rates by a few points. On the other hand, it shows the world’s economy is growing while the economy in Australia is recovering as well. In this section of the report will focus on the home loan variable rate and what factors influence it.

4.1 Distribution of variable rate

The distribution of variable rate will be discussed in the paragraph below. This histogram demonstrates the changes of variable rate in relation to the different types of institutions. According to the data that has been provided, the institutions are tending to the interest rate of 5.75 to 7 percent which located in the third, fourth and fifth highest group of rate in the graph. In addition, only four institutions have the lowest rate and two have the highest rate. Therefore, it can be concluded that most institution may located in the interest rate group that is not too high or too low. This can be also revealed in the Table1 that the mean and the median is within the range of 5.75% to 7%. The reason for this circumstance is that if the rate is too low, institutions may be not able to earn profit and if the rate is too high, customers may not choose them.

sum	1268.57
mean	6.41
max	7.26
mini	5.67
median	6.38

4.2 Bivariate relationships

4.2.1 Relationship between variable rate and institutions types

This paragraph will analyze the different institution types in relation to variable rate. Accordingly, most bank institutions concentrate on the rate between 5.75 and 7.25 percent. A vast majority of banks is located in the group of 7 to 7.25 percent which is the second largest group. Furthermore, there is no apparent relationship in terms of the types of financial institutions. Therefore, the types of financial institutions may not influence the variation of interest rates predominantly.

4.2.2 Relationship between variable rate and redraw facility

Figures 4 represents the relationship between interest rates and redraw facility. As can be told from the chart, when variable rate is intermediate between 5.5% and 6%, all financial institutions allow customers to redraw their extra funds. However, there are some mortgage lenders reject borrowers’ requests of redrawing money when interest rate fluctuates between 6% and 7%. If borrowers’ money is tight, they can access the funds later when interest rate is above 7%. The redraw facility gives borrowers an incentive to make extra loan repayments, because it helps them repay the debt and saves money on interest which is one of the most significant advantages of this home loan feature.

4.2.3 Relationship between variable rate and loan portability

The bar chart above shows information about variable rate and loan portability. It can be observed that this relationship is similar to variable rate and redraw facility. Around 23% financial institutions do not permit borrowers to move a mortgage from one property to another when the interest rate varies from 5. 75% to 7%. But when the interest rate is over or below that range which was just talked about, almost all lenders agree that borrowers can transfer the outstanding balance of the existing mortgage loan at the same rate. This may because the interest rates are higher than the traditional loans to some extent, so borrowers need to have perfect credit.

4.2.4 Relationship between variable rate and offset facility

This bar chart illustrates whether the financial institutions have offset facility in relation to the variation of interest rate or not. It can be shown from figure 6 that the percentage of institutions to offer offset facility seems to be distributed similarly. That means the amounts of institutions in different groups are distributed equally. Offset facility can not only decline the unpaid balance of customers’ home loan but also accelerate the speed of paying home loans. The reason why some financial institutions refuse to offer offset for customers might be the risk of paying back the loans.

4.2.5 Relationship between variable rate and total upfront fee

Figure 7 gives a description about the association of variable rate and total upfront fees. Based on this data, the scatter diagram shows a strong positive relationship. It means that the more total upfront fees are required, the more variable rate will be allocated. Hence, the total upfront fee plays an important role in the variation of interest rate. In addition, this figure also most points concentrate between 6 and 7 percent of variable rate. In the next section of the report the relation between one year service fee and variable rate will be examined.

4.2.6 Relationship between variable rate and yearly service fee

With respect to Figure8, the yearly service fee and the variable rate are displayed. Figure8 indicates a weak negative relationship of the yearly service fee and variable rate. The correlation is calculated to be -0.097 which means the tendency of linear regression goes down slightly. Subsequently, decreasing of yearly service fee may give rise to the increase of variable rate.

5.0 Conclusion

In conclusion, the variable rate of home loan is an important factor in relation to diverse home loan products in the current market. It has been proved that the Z score of the values is between -3 and 3 which indicates that the data can be treated as an outlier. The historical data illustrates that the cash rate changes frequently for the reason of financial crisis. Moreover, in consideration of the factors including institution type, redraw facility, mortgage portability, offset facility, total upfront fee and yearly service fee, it has been discovered that total upfront fee and yearly service fee may impact the variation of interest rate.

Loan Repayments

2011-06-12T13:47:00.000+10:00

Jack and Jill take out an investment loan to purchase a rental property
worth $980,000. They have a deposit of $100,000. The loan is to be repaid in equal monthly instalments over a term of 10 years

SOLUTION
You have purchased a rental property worth $980,000 by using an investment loan with the interest of 7.29% pa nominal with interest added monthly. Then, you will repay in equal monthly instalments over a term of 10 years. Your first deposit is $100,000. Therefore, this report will address problems regarding of your investment loan for the rental property.

a) Monthly repayments
The monthly repayments are $10,349.56
Supporting calculation:
Amount borrowed is 980,000 – 100,000 = 880,000 Interest rate is 7.29% per year, which implies .0729/12 or .6075% or .006075 per month The term is 10 years, which gives 10 x 12 or 120 repayments. Repayments = 880,000/PVIFA(120, .006075) = 10,349.56

b) Interest claimed for tax purpose

By getting the total interest of each 12 months period, we have the interest in very year over 10 years. And the interest you need to claim each year for tax purpose is shown in the figure 1. The chart has demonstrated that the interest decreases years after years. It can be explained that the principle payments are reduced after one payment has been made each year.

c) If you decide to pay out the loan immediately before making the 50th payment, you will need to pay the amount of $599,043.02. It has been calculated as below.

Balance owing after the 50th payments:

PV = C x PVIFA(r,n)

= 10,349.56×[1 – (1 + .006075)^(-70) ]/.006075

= 588,693.47

Balance owing just before the 50th payment:

PV = 588,693.47 + 10,349.56

= 599,043.02

d)At the end of year three of the loan, a gift of $100,000 is put against the loan to do either option 1 or 2:
1.Keep the same term and reduce monthly payments
2.Keep the same monthly payments and reduce the term

Data analysis:

Principle payment after year 3: 679,334.86

After year 3, there are still 84 payments to go.

Principle payments after put 100,000 against the debts: 679,334.86 - 100,000 = 579,334.86

For option 1: The new repayment will be: $8,826.07 by using the formula PV = C x PVIFA(n,r)

Supporting calculation:

PV = C x PVIFA(n,r)

= C x {[1-(1+r)-n]/r}

Therefore: C = PV/PVIFA(n,r)

= PV/{[1-(1+r)-n]/r}

= 579,334.86/{[1-(1+ .006075)-84]}/ .006075

= 8,826.07

For option 2: According to the repayment schedule (table 2), after adding $100,000 to the payments, 15 months are reduced. There are only 105 payments remaining, and you only have to pay $6,422.96 instead of $10,349.56 in the last payment (105th payment).

As it is shown in figure 2, if you choose option 1, your monthly repayment will be $8,826.07. In other words, you will save the amount of $1,523.48 per month over 84 months remaining. However, if you prefer option 2, you will finish off the loan term quicker than option 1 by 15 months, thus no interest charged for 15 months. Two options have their own benefits; hence the best option would depend on debtors’ budgets for the months.

Markets & International Trade

2011-06-12T02:03:00.000+10:00

Along with the globalisation of the world economy, governments around the world have used variety of policy instruments to intervene in international trade which protects domestic jobs, industries, and national security. According to Gans, King and Mankiw (1999, 178), tariff is the oldest and simplest instrument of trade policy. It is also a form of tax that imposes on imported goods in order to increase the price of goods and generate the government’s revenue. One of the major purposes of tariff is to protect and enhance the domestic producers from international producers (Frijters, Dulleck and Torgler 2010, 300). In Australia, tariff has been added in every imported car and component. This has taken away billion of dollar from consumers and taxpayers. Therefore, this essay will explain how tariff impact on the car industry as well as who lose and benefit in the situation. It will also examine who lose and benefit if the tariff was abolished.

The impact of tariff is shown below: In figure 1, it shows that before tariff there was a world price for the market. It is presumed that the world price is lower than equilibrium price. Hence there were imports for this market which is from Q⁵₁ to Q^D₁(Gans, King and Mankiw1999, 300).

Figure 1. A market without tariff

Figure 2. After tariff

When the tariff imposed, it causes the price increasing as shown in figure 2 (price with tariff). This is because the importers have to pay the world price plus the tax on the goods. This action decreases the volume of imports. However, the domestic producers can now sell their goods at the same prices the importers sell. As a result, the domestic supplier increases from Q⁵₁to Q⁵₂. Domestic customer has to pay a higher price, therefore, the amount of customer decreases from Q^D₁ to Q^D_2.The total quantity traded has reduced (Gans, King and Mankiw1999, 300).

Figure 3. Social welfare allocation after tariff

After the tariff, the market reallocated. The initial customer surplus was A, B, C, D, E, and F. After the imposition of the tariff, the new customer surplus is A and B. As for producer surplus, it had only G and the area C has been added after the tariff. Area E donated to the government revenue. However, the total quantity traded has reduced which reflected by the deadweight loss D and F (Gans, King and Mankiw1999, 300).

In Australian car industry, the tariff contributes to the increasing car price; reduce the quantity of imported cars available in order to boost the domestic car producers. The tariff has not only brought many benefit to domestic manufacturers, and the Australian Government, but also brought many drawbacks to consumers and importers. First of all, the domestic producers can sell car at higher price than the world price as the tariff has increased the price of imported cars. Therefore, they can control the price and quality of productions. According to Katharine (2008), the tariff has helped Holden (an Australian car manufacturer) become the bestselling car company in Australia. Secondly, the government has generated huge revenue from tariff, it was about $17 billion in 2000 (Tim 2000). On the other hand, consumers and importers have to buy and sell at very high costs comparing to the world prices. This has limited the demand on imported cars, and therefore the imported cars availability. Consequently, domestic manufacturers and the Australian Government gain benefit from tariff when consumers and importers have to suffer from the disadvantages.

In another case, if the tariff was abolished, the positions would completely change as the government, domestic producers would lose and consumers and importers would gain the benefit. This would also reduce domestic manufacturing producers’ ability to compete with international producers and they may lose their position in the market (Vanessa 2006). This would make the international producers gain the market share intensively, and may dominate the whole national market although customers may have many benefits regarding of the decreasing in car price.

As this essay has showed, the tariff has been used to protect national industry, particularly car industry. It has enhanced domestic car industry compete with international industry within nation. Moreover, the Australian Government has generated billions of dollars from this policy. However, consumers and importers have faced the increasing price made by tariff. Although tariff can protect the domestic industries, domestic firms should improve their technique in economic perspectives in order to improve the industry and the nation as a whole.

Reference list

Gans, J.S. S.P. King and N. G. Mankiw. 1999. Principles of microeconomics. Sydney: Harcourt Publishers.

Frijters, P. U. Dulleck and B. Torgler. 2010. Introductory Economics for Decision Makers. Australia: South Melbourne.

Katharine, M. C. 2008. Car industry tariff to stay. Age. June 7.

TIM, C. E. 2000. Zero tariff rate to cost government $17 billion: report. Age. August 1.

VANESSA, B. 2006. Resource boom is beating domestic producers. Age. November 23

Environmental Economics and Taxation

2011-06-11T23:52:00.000+10:00

QUESTION:

Preserving the environment is high on the agenda for both governments and society. Governments around the world are using a variety of instruments to change environmentally harmful

1. Identify a current or proposed Australian tax that has aspects of an environmental tax. Explain your choice.

2. Explain how environmental taxes can correct for externalities.

3. Discuss whether the environmental tax you identified in (i) is a fair tax.

ANSWER:

As environmental issues are considerable nowadays, governments among nations are implementing variety of instruments to protect and improve the environment. In particular, Australian Government has many interventions to prevent environmental negative behaviour; those include market based instrument, command and control policies, and tax system. However, this essay will only focus on carbon tax which is known as an Australian environmental tax as well as how it correct for externalities. It will also examine whether the tax is fair or not.

Most of environmental problems including air pollution are caused by environmental externality. According to Frijters, Dulleck and Torgler (2008, 234) environmental externalities is a source of market failure which often arises in environmental issues because it is very difficult to exclude individuals from using environmental resources or from polluting a common resource. To correct this externality and limit environmental deterioration, D’Ascenzo (2003) states that tax system could reduce different types of environmental expenditure by providing an incentive to undertaken that expenditure. For instance, Australian Government has used a carbon tax to maintain the level of carbon dioxide emissions in nation (Cornwell 2006, 65). Humphreys (2007, 2) explains that carbon tax involves manipulating the price and quantity of carbon released into in the atmosphere from human activity as it sets a fixed price of carbon and allows the quantity emitted to fluctuate. The carbon tax has helped to reduce emissions of 20% of 1988 levels by 2005 (Cornwell, and Creedy ). Cornwell and Creedy (2006) explains that the carbon tax can reduce carbon dioxide emissions because the carbon tax would increase the price of fossil fuels and thus consumer prices, both directly for fuels and indirectly for manufactured goods. These price changes would reduce the levels of final demands, and therefore fossil fuel use and aggregate carbon dioxide emissions.

Also, the following graph can explain how the tax can correct for externalities thoughtfully.

Tax

Assuming that there is a polluter A; in figure 1, MC_p is the private marginal cost curve for polluter A; MC_s is the social marginal cost curve made by polluter A; and D is the social demand curve.

If there is no outside control, the polluter A will produce the product with quantity Q_m to gain maximum profit, which is an “efficient quantity” only for the polluter A rather than the whole society. If put the social cost into polluter A, it will effective for the whole society. Therefore, the quality of polluter A should be in the intersection between social cost and social demand which means firm A should produce the products with Q*. To change polluter A’s producing quantity from Q_m to Q*, it is effective that add an extra cost which is tax into the private marginal cost of polluter A. From the figure 1, a new marginal cost curve appeared which are MC_p, and the vertical distance between A and P* will be the externality tax.

Carbon tax is a fair tax as it brings many benefits to the environment and society….states that with a $30 per tonne carbon tax could be used to replace the current fuel taxes with little or no economic cost. This has an effective reduction of 75% in the fuel levy, which would lead to a reduction in petrol prices by about 30 cents per litre, and help to offset recent high petrol prices (Humphreys 2007, 6). In addition, the carbon tax can encourage technology transfers and reduce the tension between environment protection and poverty alleviation (Shinji, and Jin 2009). Furthermore, with a $30 per tonne carbon tax, the government could lift the income-tax-free threshold to $15,000 (Humphreys 2007, 6). As a result, the carbon tax could improve the environment, technology, and people’s living standard.

As this essay has showed, a carbon tax was introduced to protect the environment from damage as it can reduce carbon dioxide emissions. It also contributes to the government tax revenues and improves people’s living standard by reducing income tax and replacing fuel taxes. Moreover, the carbon tax has improved the technology and created better perspectives between environment protection and poverty mitigation. Therefore, the carbon tax is an effective method used to prevent environmental harmful behaviours as well as increase people’s living standard within environmental aspect.

Fiscal & Monetary Economics

2011-06-11T21:26:00.000+10:00

QUESTION:

In response to the recent global financial crisis the Australian government and the Reserve Bank of Australia made various interventions designed to avoid/bring Australia out of a recession. Identify the theory that supports such interventions and using the concepts of fiscal and monetary policy evaluate the success of these interventions.

ANSWER:

Recently, the Australian government and the Reserve Bank of Australia (RBA) made variety of expansionary fiscal and monetary policies to cope with the recession and bring the economy out of the recession. The government has invested $42 billion for Economic Stimulus Plan (Commonwealth of Australia 2009). Meanwhile, the RBA lowered the interest rate to increase spending (AAP General News Wire 2008 ). The theories of fiscal and monetary policies show that these interventions were appropriate and successful. Therefore, this essay will examine theories of fiscal and monetary policies that support these interventions as well as evaluate their success.

In the crisis, the government spent its budgets to recover the economy, which is known as expansionary fiscal policy. In Keynesian theory, recession is a wave of pessimism about the future and, the state has more expenditure to stimulate demand and overcome initial pessimism (Frijters, Dulleck, and Torgler 2008, 145). The theory supports the government responses to the recession by giving away $42 billion for Economic Stimulus Plan including targeted cash payments of $20.9 billion from December 2008 to February 2009, and $22 billion National Building (Treasury, 2009). As a result of these interventions, Australian consumer confidence increased by 12.7% in June 2009 (Swain 2009, 10). It also can create more work opportunities. While the global economy remains weak, these figures emphasises the appropriateness of the fiscal policy response of Australian Government.

Besides the expansionary fiscal policy, the Reserve Bank Australia (RBA) reduced the interest rate as its expansionary policy. As the RBA has a lot of money, it can set the interest rate itself, and commercial banks will align the interest rate according to the RBA (Frijters, Dulleck, and Torgler 2008, 147). Therefore, it reduced the interest rate from 7.00% to 3.50% between 2008 and 2009 (Reserve Bank of Australia 2010) in order to increase the borrowing and spending, and prevents people from saving money, thus the economic activity can increase and aggregate demand is stimulated. As a result, the real GDP growth increased 3.6% in 2008-2009 (Australian Government 2010), this can show that these interventions had an effective impact on the Australian economy.

As this essay has showed, fiscal and monetary policies were implemented in order to bring Australia out of the recession. These interventions have been successful in recovering the Australian. In addition, fiscal and monetary policies theories also support these interventions. However, the effect of these interventions will have in a short term run, so in a long term, their exact nature will matter to a large extent.

Reference List

AAP General News Wire. 2008. Fed: More rate cuts needed to boost economic activity – AiGroup. Sydney. http://gateway.library.qut.edu.au/login?url=http:// proquest.umi.com.ezp01.library.qut.edu.au/pqdweb?did=1545826411&sid=2& Fmt=3&clientId=14394&RQT=309&VName=PQD

Australian Government. 2010. Australian Fact Sheet. http://www.dfat.gov.au/geo/fs/aust.pdf

Commonwealth of Australia. 2009. National building. http://www.economicstimulusplan.gov.au/community_infrastructure/pages/default.aspx

Frijters, P., U. Dulleck, and B. Torgler. 2008. Introductory Economics for Decision Makers. South Melbourne: Cengage Learning.

Swain, R. 2009. Rba Economics Competition 2009. Sydney: The University of Sydney. http://www.rba.gov.au/econ-compet/2009/pdf/second-prize.pdf

Treasury. 2009. Budget 2009-2010. http://www.budget.gov.au/200910/content/overview/html/overview_key_initiatives.htm

Strategic Management Case Study

2011-06-11T13:50:00.000+10:00

AYB 321 STRATEGIC MANAGEMENT ACCOUNTING

Case Study on Svenska Handelsbanken: Budgeting, Beyond Budgeting and Organisational Architecture

1. Introduction: SH’s Approach

In 1970s, Svenska Handelsbanken (SH) eliminated budgets and has also changed completely its organizational strategies since then. SH has adopted beyond budget system because the traditional budgeting process is seen to be an unproductive negotiation process, artificial and almost unresponsive with the market and business reality. Therefore, they would rather manage the business according to what really happens than rely on a fictitious budget. Besides that, SH has also changed product marketing concept to customer driven marketing concept, focusing on providing high quality service and maximising customer profitability. In order to achieve this approach, SH has decentralised decision rights to lower managers, thus local knowledge of branch offices can be used efficiently.

2. How SH Achieves the Five Purposes of Budgeting

Although Svenska Handelsbanken has abandoned the traditional budgeting system, it still acquire the five purposes of this type of forecast system including planning, facilitating communication and coordination, allocating resources, controlling profits and operations, and evaluating performance and providing incentives.

2.1. Planning

Svenska Handelsbanken has delegated planning to branch managers, and required these managers to set an operational plan. Customer targets, products offered, prices and individual responsibilities are considered in these plans during discussions between the branch manager and staff. Costs to implementing these plans cannot exceed 40 percent of income, which every employee must contribute to. As the branch managers have an advantage of their local knowledge, and closer relationship with their customers, they can effectively design products, and prices that their target customers are willing to consume.

Along with this implementation, the financial department prepares a rolling cash forecast quarterly which provides an early signal to the trend of cash flows (i.e. increasing or decreasing in value), thus supports investment plan, and liquidity requirements plan.

2.2. Facilitating Communication and Coordination

Minimisation of interference is considered crucial. A policy was established to eliminate head office directives or reports. In case of a poor decision was being made, the expectation was that senior managers would only send an e-mail or make a brief phone call to inquire about the issue. The final decision ultimately remained with the local manager.

Service agreements regarding price, type, amount and level of a particular service are created between a planning committee headed by the CFO and representatives of the sellers (support services) together.

Finally, the managing director spends some time with branches to hear about their views on the local markets, customers, or other issues. Assumptions in their operation plans might also be challenged during this time.

2.3. Allocating Resources

Using beyond budgeting, business unit managers are not restricted to their expenses as long as those expenses satisfy that unit operation’s relevancy. In relation, the bank does not allocate capital to unit managers, whereas unit managers are charged with capital costs. Then, SH measures revenues and expenses assigning to the unit manager’s operations by using cost-to-income ratio. In addition, being understanding the local situation best, the local branch managers are devolved to manage their own financial, and human resources. By doing so, SH can allocate resources effectively, and top-managements can monitor how accurate these managers allocate resources, thus possible actions will be taken place if necessary.

2.4. Controlling Profit and Operations

There are a number of measures the bank use to assess their competitive situation. These measures include return on equity, cost-to-income ratio, profit per employee, and total profitability. Managers are judged by these ratios. If a branch was underperforming, the regional controller would be made aware and have to address the enquiries about the situation with head office management.

At head office level, transaction volumes, productivity measures, customer acquisitions, defections, and the level of customer discounts being granted by branches are also monitored. Written reports from all parts of the organisation are provided to the management group regarding the previous month’s performance on a monthly basis

2.5. Evaluating Performance and Providing Incentives

The bank uses the handicap system to evaluate performance and provide incentives.

At the regional level, regions are compared to each other using return on equity (ROE), cost to income, profit per employee and total profit metrics. Each year, the best region is awarded a trophy cup. Each branch manager is held accountable for KPIs and they share lessons learnt with other branches to improve regional standing

In regards to evaluating performance of employees, 85-90 percent of employees at SH are paid straight salaries based on market considerations and their individual performance. A few employees in investment banking are eligible for bonuses in order to be comparable to competitor firms.

3. How SH’s Organisational Architecture Supports their Approach

3.1. Decision Rights

Assigning decision rights is one of an important element of organization architecture and a process of placing decision rights is implemented through a firm’s centralization or decentralization. In the case of SH’s organisation, the firm’s performance is improved by decentralising decision making. It provides the lower level manager more power in making decisions. In SH, all the marketing activities at the local branch are in charged by the local branch manager while the account managers are responsible for the business relationship with customers. Moreover, there are no sales targets imposed on the branch office network, thus branch managers can make decision over the products that meet customers’ needs.

By giving the branch manager more authority in making decision, it can reduce the cost of transferring information and promote quicker response to changing market conditions because local branch managers generally have more detailed and up-to-date information about their local conditions than top managers. Also, it will encourage employees buy-in as a result of being delegated greater responsibility. Consequently, it helps the firm to achieve its approach as to provide quality services for customers and customer profitability.

3.2. Performance Evaluation

Performance evaluation is a necessary and beneficial process, which provides annual feedback to staff members about job effectiveness and career guidance. The success of SH’s approach is also supported by the effective use of performance evaluation. In SH, they evaluate the performance of the profit centers in the bank in relative terms which is one of the best ways to reduce the risk of employee’s evaluation being affected by factors outside their control.

What's more, they employ internal and external benchmarking in their performance evaluation process to compare actual with actual without budget figures. With internal benchmarking, the cost-to-income ratio is the key to measure the performance of the branch offices among themselves. The performance of the branch manager is also considered through the performance of the branch office. In the central part of the organization such as the staff department of legal services, external benchmarking is playing an important role in evaluating the performance. They compare with the external lawyers to see if units are able to cover their costs by internally charging at or lower than the equivalent market price for their services. As a result, SH’s management approach is achieved by this successful performance evaluation system.

3.3. Rewards

Compensation is one of the most important parts of reward systems within a business organisational structure. It benefits individuals, thus business’ owners are responsible to decide which compensation package can attract and retain their employees at the lowest cost possible.

Svenska Handelsbanken manages their rewards system by creating profit-sharing system in 1973. Within this system, when SH’s after-tax return on shareholders’ equity is higher than the average for the Nordic banks, one third of the shares will be allocated to their employees equally. The employees can receive disbursement at age sixty.

Individual performance achievements are also a vital aspect in the SH’s reward systems. If a manager outperforms the other managers, they will be successful in SH as they can be entrusted with the management of a larger branch office or expected to be a head of the region.

By doing these strategies, SH can motivate their employees to work better, particularly local branch managers will exert themselves to perform well.

3.4. Balance of the three legs with each other and with Corp Culture

In a decentralised organisation, to enhance value of employees’ decisions, there should be a control system that provides incentives for employees. It is important to develop rewards and performance evaluation systems in which compensating employees according to their performance outcomes.

Decentralised organisation is also a part of SH’s corporate culture. This is when account managers have control over the total business relationship with their customers, all marketing activities, and designing products. Svenska Handelsbanken decentralises decision rights to their employees by granting local branch managers these controls. Importantly, SH manages rewards and performance evaluation systems by profit-sharing systems, internal and external benchmarking. Profit-sharing systems can improve manager’s performance capacity while internal and external bench marking can evaluate manager’s performance and monitor their actions. As a result, SH has balanced the three elements of their organisational architecture and its corporate culture.

4. Conclusion

Although Svenska Handelsbanken has abandoned the traditional budgeting and implemented the beyond budgeting, they can still successfully achieve the five purposes of the traditional budgeting such as Planning, facilitating communication and coordination, allocating resources, controlling profits and operation, and performance evaluation and providing incentives. Along with this achievement, SH has also managed their organisational architectures to support their management approach by decentralising decision rights to local branch managers, using external and internal benchmarking, and implementing reward systems (i.e. profit sharing systems). As a result, this approach has made the company outperform their peer banks throughout Europe.

Bibliography

Brickley, J. A., Smith, C. W., & Zimmerman, J. L. (2009). Managerial economics and organizational architecture. Boston: McGraw-Hill Irwin.

Francke, L. (2003, February 24). Interview with Lennart Francke: Managing without budgets at Svenska Handelsbanken. (J. Daum, Interviewer)

Handelsbanken. (2010). Annual Report 2010. Retrieved May 2, 2011, from http://www.handelsbanken.se/shb/inet/icentsv.nsf/vlookuppics/investor_relations_en_hb_10_eng_ar/$file/hb10eng_medfoto.pdf

Lindsay, R. M., & Libby, T. (2010). Svenska handelsbanken: Controlling a radically decentralized organization without budgets. American Accounting Association , 625-640.

Svenska handelsbanken's outlook revised to stable: [1] (1998). PR Newswire Association LLC. Retrieved from http://search.proquest.com/docview/447276229 ?accountid= 13380

Svenska Handelsbanken: Moody's affirms all ratings of svenska handelsbanken (2007). Normans Media Ltd. Retrieved from http://search.proquest.com/docview/444635098?accountid=13380

Svenska Handelsbanken AB earnings conference call - final (2008). Voxant, Inc. Retrieved from http://search.proquest.com/docview/466189894?accountid=13380

Relevancy of Hostede cultural dimensions and Gray's accounting values

2011-06-11T13:38:00.000+10:00

Due to globalisation, IFRS have been adopted widely. However, under some circumstance, the convergence of IFRS has not been successful. Some major factors such as development factors and cultural factors have strong impacts on a country’s accounting principles and practices; and they contribute to.....Therefore, this report will examine the IFRS convergence and the impacts of development factors and cultural characteristics, particularly Hofstede and Gray’s models. To do this analysis, we have conducted a financial analysis about three different companies which are Tesco (UK), Metro (Germany), and Seven&i Holdings (Japan) in order to test the relevancy of both models. The opacity index has also been used to test the relevancy of these models.

During this analysis, we have found that IFRS has been fully adopted in the United Kingdom, partly in Germany, and has not been fairly accepted in Japan. This has led to some limitation to compare the three companies’ annual reports. Due to these hindrances, there is a sign of existence of hosted and Gray’s model in this modern world.

Furthermore, a few major forces, for examples International Accounting Standards (IAS) at national levels, and International Accounting Standards Board (IASB) at international levels have harmonised countries’ accounting principles and practices.

United State has strongly involved in this harmonization as they engage lobbying against the IFRS convergence. This has made it difficult to the IFRS convergence, thus both Hofstede and Gray’s models become more important in 2011.

This report is prepared to test the relevance of Hostede and Gray’s models by digging through several steps. First of all, comparing different development factors of United Kingdom, Germany, and Japan are analysed. This will involve the examination of current factors and opacity index. Then, cultural characteristics and accounting values will be taken into consideration as well as an analysis of financial statements of Tesco (UK), Metro Group (Germany), and Seven&i Holdings (Japan); following by the confirmation of Hostede and Gray’s models and recommendations.

2.1.1 Development factors

United Kingdom, Germany, and Japan’s accounting principles and practices have been influenced by some major development factors such as legal systems, source of finance, and taxations, political and economic ties, etc. In United Kingdom, capital market mainly provides funding for business, and main form of organisations are limited liability companies. The UK’s accounting is an independent regulation, used to provide information for efficient functioning of the capital market. The principle-based approach is taken place within the system rather than rules-based approach. For Germany, tax law, EU directives, and globalization have strong impacts on German financial reporting. In Japan, bank credit and cross-corporate ownership are the main sources of finance and corporate earnings are the main source of funding for business. Conglomerates (known as Keiretsu) control over the economy and government regulate stock exchanges

2.1.2 Current information

Furthermore, in April 2010, the Iceland volcano cloud has slightly impacted on United Kingdom’s economy in airline industry, export and import sectors for a while. The Germany’s economy is influenced by an allegation of soccer match-fixing, and senior politicians are allegedly affirmed that they are being paid by large companies. This has led to lower tax revenues and higher state spending. Japanese earthquake has a major impact on the country’s economy activities. Many large firms (i.e. Honda, Toyota, and Nissan) have suspended their total production and issues of power shortages are being significant due to the shutdown of reactors.

2.1.3 Opacity index

Opacity index is determined by conducting surveys from chief financial officers, equity analysts, bankers, and accounting consultants in different countries around the world. To estimate it, the analysis based on corruption, legal system, economic policy, accounting and reporting standards, and the regulatory regime have been conducted[3]. As UK, Germany, and Japan have O-factors scores of 18, 17, and 25, this leads to the following consequences for Tesco (UK), Metro (Germany), and Aeon (Japan):

Firstly, it could cause foreign direct investment decreasing, thus slower GDP growth. Secondly, companies (i.e. Aeon) are likely limited to access capital which is related to bank loans, and deposits. In addition, Aeon is operating in a less liquid, and efficient financial market, thus income would be reduced

2.2 Perspectives of Hofstede and Gray’s models
2.2.1 Culture Characteristics

Culture is a complex thing which inspires knowledge, art, morals, custom, heroes, rituals, laws, religions, taboos and any other capabilities and habits acquired by members of society. It has different characteristics in different countries. This is one of the reasons that encourage Hostede to analyse and create five dimensions of national cultures such as power distance, uncertainty avoidance, masculinity, individualism, and long-term orientation[5]. However, Hostede’s model have strengths and weaknesses

Using these dimensions, we may identify the way of how cross-cultural people behave and habitats. In United Kingdom, respects are showed between employees and managers, and people are taught to be independent and willing to take risks. People from Germany do not have strong distance between poverty and wealthy. Somehow they focus on individual achievement, and have ambitions of going beyond the nation. In contrast, Japanese society has a strict social structure where there is strong distance between managers and staff, men and women. People tend to follow societal structures and code of conducts.

2.2.2 Accounting Values

More than Hostede (1980) did, Gray (1988) developed his theories through the general experience of international accounting regimes. This is a result of the creation of the four accounting values including professionalism (versus statutory control), uniformity (versus flexibility), conservatism (versus optimism), and secrecy (versus transparency)[7]. These accounting values have strong influence on accounting practices, thus it can be used to explain the difference of accounting systems worldwide. However, debates for its usefulness are still going concerned.

United Kingdom is a professionalism, flexibility, transparency, and optimistic country where there are private-self regulations, transparent fair and true view concepts. Accounting practices are flexible and accounting measurements are approached by optimistic views. As Germany is individualism country where people tend to care about themselves and their own families, it has affects to Germany’s accounting professions and work ethics. In contrast, Japanese people prefer to live in a restricted culture and legal systems.

2.3 Limitations for comparing the performance of TESCO(UK), METRO(GERMANY), and SEVEN&I HOLDING(JAPAN)

Tesco (UK) and Metro Group (Germany) have prepared the financial statements in accordance with the International Accounting Standards (IFRS). In contrast, Seven&i Holdings (Japan) are still preparing the financial statements using Japanese accounting principles generally accepted (GAAP). In addition, there are some other barriers that have impeded the comparison of the three financial reporting practices such as currency, audits differences, timeliness, goodwill, and disclosure differences[8]. As moving into second step of financial statement analysis, another hindrance has come into light, that is the current ratio may not be used to compare the performance between Tesco (UK), and Metro (Germany). This is because the “asset held for sale” line item is classified as current liability in Metro, whereas non-current liability in Tesco[9]. In the prospective analysis, it is given that Tesco has prospectively approached substantial returns; however there is no sign of independent supported evidence. Additionally, Seven&i Holdings has expected an increase in revenue, but the operating income are decreasing due to applying new accounting standards[10].

However, these hindrances can be overcome by using coping mechanism. That is using currency translators to convert all the currency to a common one, undertaking the three companies visitations, asking for second auditor for opinion, and so on[11].

As all the necessary analysis have been taken, it is found that Hofstede and Gray’s models still have strong influence on worldwide accounting principle and practices. These models also play a key part in gathering an accurate FSA as they can tell how problems are incurred, some solutions can be carried out.

2.4 Evaluation and Recommendation

Tesco (UK) and Metro Group (Germany) fully disclose their information in a concept of true and fair view presentation, Seven&i Holdings however have limited disclosure. This is because Tesco and Metro Group’s financial statements are prepared in accordance with IFRS, but Seven&i Holdings’ are not. These firms are using different accounting standards and principles as they are impacted by development factors (i.e. legal systems, source of financing, tax system), cultural factors defined by Hofstede and Gray. Japan still keeps their existing GAAP, Germany partially adopt IFRS, and UK fully adopts IFRS; these substantial variations have supported the Hostede and Gray’s model in term of its relevancy in 2011.

To understand and to be more reliable in the market place, the following recommendations should be suggested to Mr. Peter Hines (CEO of DPT Holdings Ltd):

· As Tesco (UK), and Metro (Germany) are more transparent in the disclosures than Japan, it is recommended that UK and Germany are better places to invest.

· Japan has very high opacity index, this could indicate that there is hidden risks behind company’s “actual” performance; thus we should implement all the necessary analysis before investing in Seven&i Holdings.

· Development should find the ways to solve all the barriers cause by the different development factors, cultural factors.

International Accounting Standards (IAS) and International Accounting Standards Board (IASB) are major forces that drive the movement towards international harmonisation at both a national and international level. Moreover, U.S governments and Swiss companies have been lobbying against the IFRS[12].

3. CONCLUSION

Hostede and Gray’s models have been tested by analysing financial statements between three different countries including Tesco, Metro, and Seven&i Holdings from different countries around the world. Somehow, it seemed to be obsolete; however, as the result of the analysis, these models become even more important. It is also expected to be more significant factors if the political lobbying is still in place.

APPENDIX 1: Development factors of United Kingdom, Germany, and Japan

Section A: Development factors

Development Factors
United Kingdom	Germany	Japan
- The capital market provides the main source of funding for companies - The limited liability company is the main form of business organization. - UK’s accounting purpose: providing information for the efficient functioning of the capital market. - Accounting in the U.K. grew as an independent discipline, responding to business needs. - The first professional accounting body in modern times was established in the U.K. in 1853 - There are six professional bodies in UK, coordinated by the Consultative Committee of Accountancy Bodies (CCAB). - The U.K. accounting profession has favoured a principles-based approach rather than a rules-based approach to standard setting.	- Tax law has a strong influence on accounting and financial reporting - This is because when corporate income taxation was introduced in Germany in 1874, the requirement for annual accounting had already been codified in the Commercial Code in 1862. It was convenient to link corporate income taxation to existing financial statements. - There are two main external factors that have influenced financial reporting in Germany in recent years. They are, EU Directives and the forces of globalization. The 1985 Accounting Act implemented the Fourth, Seventh, and Eighth Directives and transformed them into German Commercial Law. - The EU’s decision to adopt IFRS from January 1 2005, was in recognition of the global trends in financial reporting. Even before the EU’s decision, large German companies like Daimler-Chrysler that had their shares listed on foreign stock exchanges were already using internally acceptable accounting standards.	- The economy is dominated by a few conglomerates known as Keiretsu. - The main sources of finance for business are bank credit and cross-corporate ownership, rather than outside equity finance. - Corporate earnings are regarded as the source of funds that can be distributed (but only distributed to shareholders, after payments to banks and government who are the priority under the Japanese legal system), and not as a measure of corporate performance. - Stock exchanges in Japan are government regulated rather than self-regulated. The stock exchange law is administered by the Ministry of Finance.

Section B: Current information of United Kingdom, Germany, and Japan

B1. United Kingdom

Iceland volcano cloud: the economic impact Tuesday, 20 April 2010

The cloud of volcanic ash drifting across Europe is continuing to make much of the continent a no-fly zone this week. International trade relies more heavily on road, rail and sea freight than it does on air freight. For example, just 1% of the UK's trade, by volume, is carried by air but the disruption has caused real problems for those trading perishable goods, including food and flowers, which depend on air freight. Food exports from Africa and the Caribbean are among those hit, with reports of Kenyan farmers being forced to dump stocks of fresh food and flowers destined for European consumers. According to a report in Kenya's Daily Nation newspaper, the Kenyan economy is losing $3.8m a day as a result of flight cancellations to Europe. That scale of losses is expected to be repeated in agriculture-based economies across Africa and South America. Supermarkets' supplies of some fresh produce could soon be affected, though no problems have yet been reported by UK retailers. Meanwhile, carmaker Nissan has also announced a one-day suspension of production of three of its models in Japan because it has been unable to import parts from the Irish Republic. It is still unclear how long that disruption will last, but the longer flights are grounded, the greater the impact will be on businesses and the wider economy. Businesses are also expected to lose money through cancelled meetings, stranded staff, and delays to air mail. Productivity in the UK is expected to suffer due to workers being unable to return to work, according to the Centre for Economic and Business Research (CEBR). Meanwhile, major courier companies FedEx, DHL and TNT have reported delays and disruption to their services.

B2. Germany

The German Problem With Corruption

Großansicht des Bildes mit der Bildunterschrift: The Parliament dome is transparent, but that's about itA widening match-fixing scandal and revelation of politicians' corporate salaries have sullied Germany's once clean image. Experts say the country has been slow to tackle corruption and are calling for tougher laws. There was a time when Germany was known as a country stubbornly resistant to corruption, where even the mere whiff of scandal or sleaze would spell the end of a public or political career. Bildunterschrift: Großansicht des Bildes mit der Bildunterschrift: German referee Robert Hoyzer at the center of a match-fixing scandalNot anymore. In recent months, the country has been rocked by allegations of soccer match-fixing and revelations of high-ranking politicians making money on the side by being on the payrolls of large companies. The events have further tainted Germany's once squeaky-clean reputation, which was already dealt a blow in 1999 when a financing scandal involving the conservative Christian Democratic Party came to light. Now, experts say that Germany's problem with corruption may be worse than previously thought. "The perception that Germany has no corruption problem has absolutely nothing to do with reality, but rather with the fact that a maximum of five percent of all corruption cases come to light," said Uwe Dolata, press spokesman for the trade union representing Germany's criminal police (BDK). The Berlin-based arm of Transparency International, a corruption watchdog, defines corruption as "the misuse of public or private economic power for private use." According to economists, corruption in Germany results in lower tax revenues and higher state spending, amounting to losses of some €200 billion ($259 billion) yearly.

B3. Japan

'Considerable' economic impact from Japan quake Mar 13, 2011

Japan's government expects the economic impact of Friday's huge 8.9-magnitude quake and the devastating tsunami that followed to be "considerable". Chief cabinet secretary Yukio Edano says the government will hold a meeting to assess economic damage from the disaster which laid waste to parts of the north-eastern coast and triggered a nuclear emergency. "The quake is expected to have considerable impact on a wide range of our country's economic activities," he said. Analysts say it will take weeks to get a firm idea of the extent of the damage inflicted on the nation and its economy, as the destruction wrought by the biggest quake on record to strike Japan continues to emerge. The government says at least 1,000 people are believed to have lost their lives, but the police chief in badly-hit Miyagi Prefecture says the death toll there alone is certain to exceed 10,000. The quake and tsunami have damaged or closed down key ports. Some airports shut in the immediate aftermath have since reopened, but transport infrastructure has been crippled along parts of the north-east. Many top Japanese firms say they are suspending operations. Automakers Toyota, Nissan and Honda have announced the total suspension of production in Japan until at least Monday. Sony has also shut plants. Mitsubishi says it will halt production at all three of its domestic plants on Monday and Tuesday. Suzuki motors also says it will suspend all domestic plant operations on Monday. The immediate prospects for Japan's atomic power industry are a key concern following a radioactive leak and an explosion at the ageing Fukushima No. 1 atomic plant located 250 kilometres north-east of Tokyo. Japan's nuclear industry provides around a third of the nation's power needs, and the shutdown of reactors may lead to a shortfall in electricity supply that will make power outages necessary, the government has warned. The east of the country is likely to face substantial power shortages due to Friday's massive quake, economy, trade and industry minister Banri Kaieda says.

In total, 11 of Japan's roughly 50 nuclear reactors shut down following the earthquake, an action taken automatically because they were located in affected areas.

The Bank of Japan (BoJ) says it will do its "utmost" to provide market liquidity and ensure the stability of financial markets. The BoJ has also announced that the two-day policy board meeting previously scheduled for Monday and Tuesday will now be cut short and conclude on Monday, seen as a sign it may quickly implement extraordinary measures.

APPENDIX 2: OPACITY INDEX

A. What is opacity index and how is it calculated?

PricewaterhouseCoopers' Opacity Index report -- developed from surveys of chief financial officers, equity analysts, bankers, and the firm's consultants in each country -- presents an estimate of the adverse effects of opacity on the cost and availability of capital.

The report offers a composite opacity-factor (O-Factor) ranking for each country based on the lack of transparency in five areas that affect capital markets: corruption, legal system, government macroeconomic and fiscal policy, accounting standards and practice, and regulatory regime. The O-Factor is based on a scale of zero to 150, with the lower numbers indicating a greater degree of transparency.

According to the report, factors that contribute to a country's opacity include: corruption in government bureaucracy that allows bribery or favouritism; unclear, conflicting, or incomplete laws governing contracts or property rights; economic policies -- fiscal, monetary, and tax related--that are vague or change unpredictably; weak, inconsistent, or unenforced accounting standards; and unclear, inconsistent, or irregularly applied business regulations. The report considers the impact of opacity from two perspectives: as a form of hidden tax and as a risk premium when countries borrow through sovereign bond issuances in international or domestic capital markets. The countries included in the index were chosen to be representative geographically and also to provide measurements for a sample of countries taken from the World Bank's economic tier -- upper income, upper middle income, lower middle income, and lower income.

B. Opacity Index score of United Kingdom, Germany, and Japan

Country	2009					2009 opacity score (O-factor)	2008 Opacity score (O-factor)	2009 country rank	2007-2008 country rank
Country	C	L	E	A	R	2009 opacity score (O-factor)	2008 Opacity score (O-factor)	2009 country rank	2007-2008 country rank
United Kingdom	24	9	35	11	10	18	17	10 (↓)	9
Germany	16	12	31	10	18	17	17	9 (-)	9
Japan	36	20	31	21	17	25	25	18 (↓)	16

Table 1: Opacity Index for United Kingdom, Germany, and Japan

Note: C = Corruption; L = Legal System; E = Economic policy; A = Accounting and reporting standards; R = the Regulatory regime.

C. Consequences for Tesco (UK), Metro (Germany), Aeon (Japan)

Higher costs associated with high levels of opacity function as a drag on the economies of the countries that score poorly on the Index. Slower GDP growth is correlated with higher opacity levels, as are other factors, including a reduced ability to attract foreign direct investment (FDI).

High opacity decreases the ability of entrepreneurs, institution to access capital, since access to capital is critical for entrepreneurship to operate, a changes in policies to improve opacity result in higher level of entrepreneurship.

Furthermore, it also highly associated with banked deposit, which is a different source of funding for entrepreneurs.

High Opacity also negatively affects the trading of equity market; the result could be wider bid-offer spread and therefore less liquid and less efficient financial market. Also, it can mask underlying fundamentals of investment, which cause investment in an opaque country less attractive.

Opacity Index impacts on Income

Income To test these relationships, we looked for consistent differences between the average Opacity Index and individual scores among the four World Bank income groups. (See “Average Scores by World Bank Income Group,” p. 42.) We found that, as income decreases, opacity increases for each factor except accounting. The accounting exception is probably when the countries studied are broken down into the four World Bank income groups, group opacity for each component increases as group income decreases. The sole exception is accounting, because most lower-income countries adopt international accounting standards, possibly to counter high opacity in other components.

· Opacity is not only a deterrent to economic development; it also decreases the ability of entrepreneurs to access capital

· Opacity also increases the ranges of possible projected cash flows from risky projects, resulting in lower expected present values. This decreasing of expected discounted returns may ultimately result in the rejection of some projects that have strong potential but appear, because of opaque conditions, to be poor investments.

· Opacity can affect economic development indirectly by deterring foreign direct investment. Since FDI is an amalgamation of stable investment funds, advanced technology, efficient managerial skills and easier access to the world market, it has a positive impact on economic growth and development

Opacity also has a negative and significant impact on FDI as a percentage of GDP.

(See “Opacity Vs. Foreign Direct Investment.”) In the majority of cases, most foreign direct investments go to countries with relatively transparent financial and economic systems. In the case of China, which has high levels of opacity and high levels of economic development, the simple lure of China’s “bigness” has tended to make it the recipient of greater levels of FDI than would otherwise be warranted

APPENDIX 3: Hofstede’s five cultural dimensions

Power Distance Index (PDI): that is the extent to which the less powerful members of organizations and institutions (like the family) accept and expect that power is distributed unequally. This represents inequality (more versus less), but defined from below, not from above. It suggests that a society's level of inequality is endorsed by the followers as much as by the leaders. Power and inequality, of course, are extremely fundamental facts of any society and anybody with some international experience will be aware that 'all societies are unequal, but some are more unequal than others.

Individualism (IDV) on the one side versus its opposite, collectivism, that is the degree to which individuals are inter-grated into groups. On the individualist side we find societies in which the ties between individuals are loose: everyone is expected to look after him/herself and his/her immediate family. On the collectivist side, we find societies in which people from birth onwards are integrated into strong, cohesive in-groups, often extended families (with uncles, aunts and grandparents) which continue protecting them in exchange for unquestioning loyalty. The word 'collectivism' in this sense has no political meaning: it refers to the group, not to the state. Again, the issue addressed by this dimension is an extremely fundamental one, regarding all societies in the world.

Masculinity (MAS) versus its opposite, femininity refers to the distribution of roles between the genders which is another fundamental issue for any society to which a range of solutions are found. The IBM studies revealed that (a) women's values differ less among societies than men's values; (b) men's values from one country to another contain a dimension from very assertive and competitive and maximally different from women's values on the one side, to modest and caring and similar to women's values on the other. The assertive pole has been called 'masculine' and the modest, caring pole 'feminine'. The women in feminine countries have the same modest, caring values as the men; in the masculine countries they are somewhat assertive and competitive, but not as much as the men, so that these countries show a gap between men's values and women's values.

Uncertainty Avoidance Index (UAI) deals with a society's tolerance for uncertainty and ambiguity; it ultimately refers to man's search for Truth. It indicates to what extent a culture programs its members to feel either uncomfortable or comfortable in unstructured situations. Unstructured situations are novel, unknown, surprising, and different from usual. Uncertainty avoiding cultures try to minimize the possibility of such situations by strict laws and rules, safety and security measures, and on the philosophical and religious level by a belief in absolute Truth; 'there can only be one Truth and we have it'. People in uncertainty avoiding countries are also more emotional, and motivated by inner nervous energy. The opposite type, uncertainty accepting cultures, are more tolerant of opinions different from what they are used to; they try to have as few rules as possible, and on the philosophical and religious level they are relativist and allow many currents to flow side by side. People within these cultures are more phlegmatic and contemplative, and not expected by their environment to express emotions.

Long-Term Orientation (LTO) versus short-term orientation: this fifth dimension was found in a study among students in 23 countries around the world, using a questionnaire designed by Chinese scholars It can be said to deal with Virtue regardless of Truth. Values associated with Long Term Orientation are thrift and perseverance; values associated with Short Term Orientation are respect for tradition, fulfilling social obligations, and protecting one's 'face'. Both the positively and the negatively rated values of this dimension are found in the teachings of Confucius, the most influential Chinese philosopher who lived around 500 B.C.; however, the dimension also applies to countries without a Confucian heritage.

Section A: United Kingdom

Figure 3: United Kingdom's five cultural dimensions

Power Distance: The UK's score in this dimension is 35. This indicates that rank, status and inequalities between people are reasonably low. On a macro level this manifests in a number of ways, such as legislation protecting ethnic minorities. On a micro level this is witnessed in the office where the relationship between superiors and subordinates is relatively casual and incorporates little ceremony.

Individualism: The UK scores 89 for Individualism. This is high and therefore points to that fact that British culture values and promotes individuality. On a macro level we see that the nuclear family is the more predominant form of basic social structure. On a micro level, in the business environment the individual may be more concerned with themselves rather than the team.

Uncertainty Avoidance: For this dimension the UK scores 35 which is quite low. This means British culture is relatively open to taking risks and dealing with change. On a macro level this can be seen in the constant revision of laws and government structures. On a micro level, conflict or disagreement in the workplace, even with superiors, is considered healthy.

Masculinity: The UK scores 66 which indicates that it is somewhere in the middle. This may reflect the fact that British society and culture aims for equality between the sexes, yet a certain amount of gender bias still exists underneath the surface.

Section B: Germany

Figure 4: Germany's five cultural dimensions

Power Distance 35: Germany has a 35 on the cultural scale of Hofstede’s analysis. Compared to Arab countries where the power distance is very high (80) and Austria where it very low (11), Germany is somewhat in the middle. Germany does not have a large gap between the wealthy and the poor, but have a strong belief in equality for each citizen. Germans have the opportunity to rise in society.

Individualism (67): Germany can be considered as individualistic with a relatively high score (67) on the scale of Hofstede compared to a country like Guatemala where they have strong collectivism (6 on the scale).

In Germany people stress on personal achievements and individual rights. Germans expect from each other to fulfill their own needs. Group work is important, but everybody has the right of his own opinion and is expected to reflect those. In an individual country like Germany people tend to have more loose relationships than countries where there is collectivism where people have large extended families

Uncertainty Avoidance Strong :(65): The structured system used was more preferable for German people before the Second World War. However, it had been changed after merging of East and West Germany.

In German, the political style and culture had been influenced by USA because of the frontline status in the Cold war. For at least two generation, German people had been absorbed the USA life style. These make their culture structure to have less regulation control (Tomalin, 2003). Furthermore, the movement of European Union impacts the German culture. For example, German regulators implemented the EU Directive to German law system. This has created the flexibility to German culture because some of these laws were adopted from UK and USA regulations that provide more freedom (the_German_Federal_Foreign_Office, 2009).

Masculinity :(66): In Germany, Role between genders is not different. Also, German people emphasize the visible achievement as equal to caring for the environment and personal relationships.

In Germany, as in other modern societies, there has been tremendous progress with regard to the equal rights for women stipulated in the Basic Law. As such, with regard to education girls have not only drawn level with, but have indeed now overtaken boys (the_German_Federal_Foreign_Office, 2009). Furthermore, the rights of woman workers are protected by legislations. For example, workers who become pregnant will be treated fairly (Tomalin, 2003).

Section C: Japan

Power Distance :(52): The Japanese culture is generally well-known for its hierarchical nature, and resembles what is expected by academics among Asian cultures, particularly in relation to power distance (Yamamura et al., 2003). Society’s inclination toward Hierarchical structure is best demonstrated through professional ranks, grade in school, or age (Hagen & Choe, 1998, p. 591). With regards to the workplace, Yamamura (et al.) characterizes power distance in Japanese organizations as follows:

“In the work place, high power distance reveals itself in the form of centralized decision structures and [a] concentration of authority. The ideal boss is a well-meaning autocrat or paternalistic leader”(Yamamura et al., 2003, p. 5)

The origins of this attitude towards management have been established over many years, and known as Oyabun-Kohai. This system separates employees as senior (Oyabun), who is responsible for and provides advice to employees under his charge; and Junior (Kohai) or general employees. This system results in the creation of relationships where new workers will rely on the senior or supervisors to instruct and evaluate their performance (Alston & Takei, 2005).

Individualism :(46): Japanese society has strong traditional belief in religions which are Shinto and Buddhism (85% of population) (Choi & Meek, 2008; O'Regan, 2003). Even though the Religion does not have much impact on the daily life, Japanese people favor religious rituals at ceremonies involving births, weddings and funerals; and may visit a shrine or temple on New Year and participates at local festivals (japan-guide.com, 2009; Mapsofworld.com, 2009). Close relationships between individuals are forged and maintained during these festivities.

Japanese people are likely to rely on group’s opinion rather than to use individual mentality (Intelligence_Bridges, n.d.). For example, when shopping, the opinion of friends and colleagues will significantly influence their purchasing decisions. In a situation where a decision on travel is being made, they are likely to choose the travel packages offered by travel agencies rather than making individual decision (Intelligence_Bridges, n.d.). The strength and coverage of their language is high, with Japanese being the language spoken by all members of society, and only a few who can speak a secondary language (Lycos_Inc, 2009; O'Regan, 2003). The influence of opinion of the group in the decision process, and the uniqueness of their language saturation amongst society, results in the strengthening of interrelationships with each other.

Attendance by students to senior high school is not compulsory, yet is recorded at over 90% in Japan (Japan_Guide, 2001). Japanese children today attend schools that are very much similar to those schools of the Western countries. However, traditional interrelationships are maintained in Japanese schools during group activities. During the summer vacation, high school students will join major class trips (Shugaku-ryoko), and stay in a Japanese-style Inn. Girls are accommodated in one room and the boys in another. The time spent together in shared accommodation builds societal interrelationships. Further relating to education, there is a great expectation in Japan that parents will provide daily assistance with homework compared to the United States (White, 1987). The education system is a prevailing method used by most societies to teach young people traditional national values, a technique that has a demonstrated use in Japan.

Additionally, without similar debate system in Western countries, school culture from primary school to undergraduate university emphasizes teachers to provide lecture from a platform and students taking notes. Students are evaluated solely by exam results, which test memorization of the lecture materials (Intelligence_Bridges, n.d.). This system will not encourage Japanese students to be creative and free on their opinion.

Uncertainty Avoidance (92): According to Hofstede cited in Yeh (1988, p. 153), the reason for high Uncertainty Avoidance in Japan is that “ ancestor worship in Japan can be seen as a form of religious coping with uncertainty”. These actions are deemed to represent the Japanese people preferring strong uncertainty avoidance; exhibiting a high tolerance on strict regulations and controls, and preferring to follow the societal structures and code of conduct (Vitell, Nwachukwu, & Barnes, 1993). Furthermore, many regulations later had become the customs and code of conduct and the penalties for breach of these customs could become severe in Japan because these customs are centered on ostracism (Hagen & Choe, 1998, P. 591).

Masculinity :(95): A standout aspect of high power distance in Japanese culture is the right between women and men (Japan_Institute_of_Workers'_Evolution, 2007). Most of men would reject any woman who used vocabulary of power to give males orders (Alston & Takei, 2005, p. 24) This is also related to the Japanese hierarchical nature. In additional aspect of the Masculinity society characteristics in Japan is that there are high levels of competitiveness for material successes or business achievement rather than environment conservation (Vitell et al., 1993; Yeh, 1988). This is because once the country has been grown, it will require more resources to maintain the economy progress (Auty, 2001). Thus, Japanese government and corporation both require the successes of the economy instead of remedy to recover environment resources that have been used up.

APPENDIX 3: Hofstede model’s strengths and weaknesses.

Strengths:

There are some strengths of this model. Hofstede’s framework is the most widely used national cultural framework in psychology, sociology, marketing and management. He created five dimensions, assigned indexes on each to all nations, and linked the dimensions with demographic, geographic, economic, and political aspects of a society, a feature that is unmatched by other frameworks. It is the most comprehensive and robust in terms of the number of national cultures samples. Moreover, the framework is useful in formulating hypotheses for comparative cross-cultural studies. Consequently, Hofstede’s operationalization of cultures (1984) is the norm used in international marketing studies.

Weaknesses:

On the other hand, it has some weaknesses as well. The averages of a country do not relate to the individuals of that country. One must be aware that not all individuals or even regions with subcultures fit into the mould. The data has been collected through questionnaires, which have their own limitations. And all the respondents had worked in the single company. Hence, the results of the data may not be accurate. The data has become old at the present and it is not up-to-date (1967-1973). The culture of a country can change over time, by internal or external influences.

APPENDIX 4: Gray’s accounting values

Professionalism versus statutory control

Gray (1988, p. 8) defined professionalism as a preference for the exercise of individual professional judgment and the maintenance of professional self-regulation, as opposed to compliance with prescriptive legal requirements and statutory control. As identified by Gray, professionalism may be identified at two levels: the level of the individual making professional judgments and the statutory level, possibly concerning self-governing, professional, regulatory institutions. Professionalism is considered a core dimension of accounting values because accountants are required to make professional judgments regarding valuation and various aspects of disclosure in financial information. Such judgments are made by accountants to a lesser or greater extent in different parts of the world, depending on various factors including legal and statutory requirements and prevalent professional practice (Belkaoui, 1990 and Belkaoui, 1995). At an organisational level, the development of accounting bodies in various parts of the world reflects differing degrees of self-regulation with professional bodies in the United States and United Kingdom possessing a larger degree of autonomy and self-regulation than those in continental Europe and developing countries. Writers such as Gray and Coenenberg (1984), Holzer (1984), Nobes and Parker (1995), and Taylor and Turley (1986) support the above arguments for professionalism, and there is little disagreement that this is a significant concept in accounting.

Uniformity versus flexibility

Gray (1988, p. 8) defined uniformity as a preference for the enforcement of similar accounting practices between companies and for the consistent use of such practices over time, as opposed to flexibility in accordance with the perceived circumstances of individual companies. This dimension thus consists of at least two components: intertemporal consistency in accounting practices and uniformity in the application of accounting policies and rules across companies. There has been a wide variation in the application of accounting principles across firms and between countries. In France, for instance, where, traditionally, there has been a concern with facilitating national planning, a uniform accounting plan has been followed. This is in contrast to practices in the United Kingdom and the United States, where there is a perceived need for flexibility in adopting and following accounting policies. Writers such as Arpan and Radebaugh (1985), Choi and Mueller (1984), Holzer (1984), and Nobes and Parker (1995) have provided arguments in support of treating uniformity as a central notion underlying accounting practice.

Conservatism versus optimism

Gray (1988, p. 8) defined conservatism as a preference for a cautious approach to measurement, to cope with the uncertainty of future events as opposed to a more optimistic, laissez-faire, risk-taking approach. Conservatism here fundamentally means prudence or the use of caution and implies that accountants who are conservative should anticipate losses but not gains. It is considered by many as one of the most fundamental accounting concepts, even being “the most ancient and probably the most pervasive principle in accounting valuation” (Sterling, 1967, p. 110). Conservatism is usually thought to contrast widely in different parts of the world, ranging from a strongly conservative approach in Continental Europe to much less conservative attitudes among accountants in the United Kingdom and the United States. Gray suggested that such differences are reinforced by the relative development of capital markets, the differing pressures of users' interests, and the influence of tax laws on accountants in the countries concerned. In addition to Arpan, J.S. and Radebaugh, L.H., 1985. International accounting and multinational enterprises. , Wiley, New York.Arpan and Radebaugh (1985), Beeny, 1975 and Beeny, 1976, Choi and Mueller (1984), Gray (1980), Nobes (1992), and Sterling (1967) have noted the importance of the concept of conservatism in the practice of accounting.

Secrecy versus transparency

Gray defined secrecy as a preference for a cautious approach to disclosure, considering it a fundamental accounting attribute that stems from the influence of management on the quantity of information disclosed to outsiders. Jaggi (1975) had also previously attributed this dimension to management because firms often disclose minimal information in financial statements. Some research has claimed that secrecy varies considerably among countries, especially between continental Europe and the United States (Arpan & Radebaugh, 1985; Barrett, 1976 and Choi & Mueller, 1984). These differences may also be reinforced by the differential development of capital markets and the nature of share ownership, which provide incentives for disclosure (Watts, 1977).

Gray (1988) was presented as being “the first step” towards a theory of cultural relevance, but with much empirical work to follow. It is appropriate to operationalize Gray's accounting values as empirical constructs if the usefulness of the hypotheses stated earlier are to be assessed objectively. To facilitate this objective, the following subsection reviews some research that has attempted to extend, apply, and critique the Hofstede–Gray framework that developed from Gray's thesis.

Section A: United Kingdom

Professionalism versus statutory control

Professionalism

· With long accounting history, UK establishes private-self regulation and concept of true and fair view which requires professional judgment. UK’s accounting standards are set up by private-self regulation and UK emphasize the important of true and fair view concept.

· UK’s culture values and promotes individuality indicating relatively high score in individualism. In addition, power distance and uncertainty avoidance are quite low which put UK in Professionalism’s accounting value

Uniformity versus flexibility

Flexibility

With the low power distance and low uncertain avoidance, it indicates the flexibility of accounting practice . This is because of few regulations. With few regulations and less restricted law, the business investors in UK are more flexible in making their business decision. Also it is found that UK have low power distance and uncertainty avoidance, which allow more risky transaction involve in capital market

Conservatism versus optimism

Optimism

· The factor which makes UK to have less conservative attitude is the legal system. Also, an emphasis on individual achievement is likely to foster a less conservative approach to accounting measurement.

· Legal system has huge impact on UK being optimism. Thus high masculinity and low uncertainty avoidance keeps them away from being a conservative country.

Secrecy versus transparency

Transparent (High)

· In weak uncertain avoidance society, the material information is likely to disclose more than strong uncertain avoidance society. Also, in the countries with high individualism, the capital market play important role. Thus, voluntary disclosure will be performed to persuade investors.

· The information and material related to financial statement are likely to be disclose more easier compare to other country that have low individualism, and high certainty avoidance. For UK, they has score relatively high individualism and low uncertainty avoidance, which lean them toward high transparency

Section B: Germany

Professionalism versus statutory control

Professionalism

· In German culture, People have high individualism which respects others on academic and professional titles, and a strong work ethic. Doing what need to be done in the right way is an important part of German psyche.

· People tend to look after themselves and their family only which indicate a high individualism. Thus, Germany society is decentralized with relatively flatter organisation structures. They also have low uncertainty avoidance as they feel the needs for their security, rules and details code of conduct are essential.

· Germans workers are known for being loyal to their companies and wish to comply with their legal duty to respect company confidentiality indicating a small power distance

Uniformity versus flexibility

Uniform/ Flexibility (low)

· With high individualism, middle power distance and high uncertainty avoidance German accounting system is on Low level Uniform of Flexibility culture. They may require having certain regulations but it still requires accountants to use their professional judgment.

· Germany has a high individualism, medium power distance and relatively high uncertainty avoidance which would put Germany on medium-low level of uniform/flexibility culture.

Conservatism versus optimism

Conservatism

· Although German has high individualism and low power distance, the uncertainty avoidant German culture, together tax regime drive individual companies and profession toward a conservative set of financial statements.

· In Germany, it is required for all the business corporation to follow a standard set of rules to prepare their annual financial report, thus their accounting standard are based on Code law indicating high uncertainty avoidance which drive them toward conservatism even though they have high score on individualism and power distance

Secrecy versus transparency

Secrecy (Medium-Low)

· The information discontinuity / low disclosure can occur with uncertainty avoidant culture in which it results in substantial fluctuations in risk premium

· Germany has high individualism, power distance and masculinity. However high uncertainty avoidance can lead to limited information disclosure

Section C: Japan

Professionalism versus statutory control

Statutory control

· Due to strong governmental interference, large distance of social hierarchy and strong culture ‘taboos’, it clearly predicts that Japanese culture is on statutory control.

· As the business in Japan are controlled closely by government bodies, as well as other factors such as low individualism, high power distance and high uncertain avoidance clearly indicate that Japanese is more Statutory Control.

Uniformity versus flexibility

Uniform (strong)

· Japanese people prefer clear culture and legal restrictions in order to illustrate their duty and social position. This results in less flexibility of accounting practice and strong written accounting rule.

· Japanese prefer to follow rules and strict standard and less likely to take a lot of risk in doing their business. The culture of Japan is uniformed and oppose to flexibilities.

Conservatism versus optimism

Conservatism

· Japan accounting value is highly affected by low individualism and high power distance. Therefore, Japanese accounting system is based on prudent and conservative concepts which requires in its accounting standards.

· Low individualism and high power distance played a key role in Japanese’s culture which heavily affect the accounting system set of rules, considered being conservative.

Secrecy versus transparency

Secrecy

· With high collectivism and power distance, people tend to preserve material information to their groups. With high uncertain avoidance, Japanese people only disclose required information

· Businesses in Japan are not open in disclosing their financial information, only required information is disclosed. Thus, people tend to keep the material information to themselves and not sharing it with others.

APPENDIX 5: Gray’s accounting values’ strengths and weaknesses.

Strengths

There are some strengths of this model. Drawing upon Hofstede's (1980) framework, Gray incorporated accounting to it by depicting how accounting practices might influence and reinforce societal values. Gray's theory presents societal values at the level of the accounting subculture. Cultural or societal values at the national level permeate through to occupational subcultures, including the accounting profession, with varying degrees of integration. The value systems of accountants are derived from societal values, with specific reference to work-related values. Accounting values, in turn, influence accounting practices, including the reporting and disclosure of information. Thus, depending on the varying degrees of external and ecological forces shaping societal values, different accounting systems develop, reflect, and reinforce these values. Gray proposed that this framework might be used to explain international differences in accounting practices. Gray also suggests that there should be a close match between cultural areas and patterns of accounting systems. Hence, each culture should develop its own accounting systems to serve its own distinct requirements and is the basis upon which Gray rests his theory of cultural relevance to accounting.

Weaknesses

But this model also has some limitations. The questionnaire items were developed based on theoretical, rather than the empirical, considerations. There was the difficulty of clearly identifying the constructs of interest with particular questionnaire item statements. It is assumed that the questionnaire responses were truthful and meaningful, and that reported attitudes, perceptions, beliefs, and values have significance for the respondents in terms of social action. The reliability of the responses can be gauged some extent from the consistency of the responses to particular questionnaire items

APPENDIX 8: Prospective Analysis

Tesco (UK)

An improving global economy and recent investments in acquisitions and new selling space making a greater contribution going forward, returns will improve significantly – starting this year. However, there are no independent evidences that have supported this prospect.

MetroGroup (Germany)

MetroGroup has come up with the following prospects:

· The Eastern European cash & carry segment is expected to continue to grow in the next two years, but at starkly varying speeds

· They expect the strong growth trend of the cash & carry segment in Asia to continue unchanged for the next two years.

· The growth dynamic in the cash & carry segment will remain higher than in the modern food retail business

KPMG has confirmed that the Group management report is consistent with the consolidated financial statements and as a whole provides a suitable view of the Group’s position and suitably presents the opportunity and risks of future development.

Seven&i Holdings (Japan)

In the fiscal year ending February 28, 2011, they are forecasting revenues from operations of ¥5,200.0 billion, up 1.7%; operating income of ¥240.0 billion, an increase of 5.9%; and net income of ¥100.0 billion, up 122.8%.

However, from the current fiscal year, the Company has applied the “Accounting Standard for Measurement of Inventories” (ASBJ Statement No. 9, on July 5, 2006), and inventories are now stated mainly at cost determined by the retail method with book value written down to the net realizable value. Due to this change, valuation loss on beginning inventories included in other expenses was ¥1,323 million. As a result of this change, the impact of operating income decreased by ¥320 million, income before income taxes and minority interests for the period decreased by ¥1,644 million.

APPENDIX 09: Harmonisation and political lobbying

Harmonisation

International Level

When the AISG was expanded to the formulation of international accounting standards and gained the assurance of world wide acceptance of the standards, this was the starting point for the International Accounting Standards Committee (IASC), at a meeting in London in June 1973. The IASC was characterized as a “major step towards the harmonization of international accounting practice”. It is responsible for issuing standards, known as International Financial Reporting Standards (IFRS).

National level

In 2000, the IASC modified its constitution and constituted the International Accounting Standards Board (IASB), which had assumed the responsibility for setting standards. Many countries without domestic standards have adopted the International Accounting Standards (IAS). In addition, many countries allow the use of IAS in cross-border filing of financial information with stock exchange listing and regulatory boards.

Harmonisation of accounting standard could prove dangerous to the companies, as the standards could cut profits and inject volatility into the balance sheets of the companies. Therefore the companies must educate their investors about the effects of harmonization, on their reported profits and liabilities. Also, the harmonization of accounting standards would change the complexion and quality of financial information in unpredictable ways. Therefore, it is vital that the companies understand the extent of the impact and ensure that the stakeholders also understand it.

Political lobbying:

Concert campaigns of action against a proposal, where the lobbyists make overt or convert threats to seek intervention to overturn a proposed standard or to compromise the standard-setter’s reputation, independence, powers or even its existence.

The "political" pressures may emerge in very different degrees and strength of feeling across the eight countries whose standard setters are to act in liaison with the IASB. Such pressures could impede the effort to achieve convergence at a high level of quality

A major Swiss company, later revealed to be Novartis, had written to Sir David Tweedie, chairman of the IASB, that it will consider switching from IFRSs to U.S. GAAP if the IASB does not change its standard that requires the amortization of goodwill over 20 years.

One researcher has found that the chief financial officers (CFOs) of a number of major Swiss companies are attracted to U.S. GAAP because preparers in the U.S. are well organized and constitute a powerful lobby-a source of comfort to CFOs[13]

Beginning in the late 1930s, the SEC looked to the public accounting profession and, since 1973, to the independent FASB as the authoritative source of most of what constitutes U.S. GAAP. Once the FASB issues a Standard, except in rare instances when the SEC regards the Standard as an unacceptable norm, the SEC requires all publicly traded companies to adopt it forthwith. If such companies fail to do so, or if they implement the Standard in a way that is unacceptable to the SEC's accounting staff, then the SEC requires them to revise and reissue their defective financial statements. Otherwise, these companies are rebuked by the SEC, which would immediately issue an order to stop the trading of their securities in the U.S. securities market[14]

BIBLIOGRAPHY

Chanchani, S. and Willett, R. (2004). An empirical assessment of Gray's accounting value constructs. The International Journal of Accounting 39(2): 125-154.

Choi, F., Frost, C. A., & Meek, G. K. (2002). International accounting . Upper Saddle River: NJ : Prentice Hall.

Doupnik, T. S., & Perera, M. H. (2009). International accounting . Boston: McGraw-Hill Irwin.

Hofstede, G. (2009). Geert Hofstede Cultural Dimessions Resources. Retrieved May 9, 2011, from Geert-Hofstede: http://www.geert-hofstede.com/geert_hofstede_resources.shtml

Kurtzman, J., & Yago, G. (2009, April). 2009 Opacity Index: Measuring Global Risks. Santa Monica, CA.

Kurtzman, J., Yago, G., & Phumiwasana, T. (2004). The global costs of opacity Massachusetts Institute of Technology. Retrieved from http://search.proquest.com/docview/224964200?accountid=13380

Metro Group. (2010). Metro Group: Annual Report 2010. Düsseldorf, Germany.

Seven & i Holdings. (2010). A New Approach to meet changing customer needs. Tokyo, Japan.

Tesco PLC. (2010). Annual Report and Financial Statements 2010. Cheshunt, Hertfordshire, United Kingdom.

Zeff, S. (2002). "Political" lobbying on proposed standards: A challenge to the IASB. Accounting Horizons, 16(1), 43-54. Retrieved from http://search.proquest.com/docview/208921531?accountid=13380

E-Tax Advice letter

2011-06-11T13:29:00.000+10:00

19 May 2011

Mr Scott Tracey
47 Preston Avenue

FIG TREE POCKET QLD 4068

Dear Mr Tracey,

RE: TAX ADVICE RELATING TO LAND SUB-DIVISION AND SALE

The purpose of this letter is to advise you as to whether or not certain events carried out at your land at Clayfield have any associated tax implications with regards to Capital Gains Tax (CGT) legislation as well considering any associated Income Tax implications.

Firstly with regard to the subdivision of land in August 2007 constituting a CGT event there are a few different considerations that must be made before a definitive answer can be given. Normally a primary residence is exempt from CGT according to section 118-110 of the Income Tax Assessment Act 1997 (ITAA). This rule specifically applies when the taxpayer is an individual and the dwelling itself was the taxpayer’s main residence for the entire tax year. The subdivision of the land into two equal parts (0.8 hectares each) does not constitute a CGT event in itself. This is because according to section 118-120 of the ITAA (1997) the main residence exemption for a taxpayers primary dwelling can also extend to adjacent land as long as it is close or near the dwelling, is used for private/domestic purposes, the land does not exceed 2 hectares and that the land and dwelling must be sold under the same contract.

However with regard to the sale of Block B in July 2009, there will be CGT implications associated with the sale as a result of it being sold exclusively without the sale of Block A attached to it, as previously mentioned there will be no CGT exemption relating to this sale. Therefore the tax calculations for this sale are as follows. Firstly the cost base of the asset must be established, this comprises of mainly five elements that relate to the costs associated with acquiring the CGT asset which are detailed in section 110-25 ITAA (1997).

Sale Price Cost of the land	$275,000 $150000
50% of the $12000 stamp duty and legal fees on the purchase	$6000

Cost of connecting water and drainage	$2,000
Legal fees on sale	$3,000
Total Gross Capital Gain	$161,000 $114,000

By subtracting the cost base from the sale price gives a preliminary capital tax gain of $114,000. Considering that the asset has been held for more than 12 months and was acquired after September 1999 the discount method can be used to offset the amount of taxable capital gains income. Therefore the amount of $114,000 would be reduced by 50% to a total capital tax gain of $57000. This amount would of course need to be added onto any other gain or loss accrued relating to another CGT assets for the applicable tax year.

Finally with regard to whether or not the sale of Block A in May of 2010, constitutes a CGT event the answer is no. This is because the asset is exempt according to section 118-120 of the ITAA (1997). The rule specifically mentions that because it is a primary residence it therefore does not carry any CGT implications. With regard to income tax implications there would be no associated implications due to this transaction.

Therefore to summarise, the subdivision of land in 2007 does not in itself constitute a CGT event which of course carries no tax implications. However the sale of Block B in 2009 does have tax implications and a figure of $57000 will need to be included in your tax return under the appropriate CGT section. Finally the Sale of Block A does not have any tax implications as previously mentioned above.

Yours sincerely,

William Dodd
Consultant