Chapter 1

Case 1: Toyota’s Global Expansion

In November 2004, Hiroshi Okuda, Chairman of Toyota Motor Corp. of Japan, announced that the company was going to build another factory in North America, raising the number of factories producing parts or assembling cars and trucks in North America to 14. As of May 2004, Toyota manufactured parts and assembled cars in 51 overseas manufacturing companies in 26 countries/locations. In 1980, the company had only 11 production facilities in 9 countries, so it was essentially servicing the world market through exports from Japan. Since 1980, however, the company has committed more energy and resources into foreign production.

Toyota, the second largest auto manufacturer in the world, is moving aggressively to overtake leader General Motors in terms of volume. In 2004-2005, GM sold 7.4 million vehicles worldwide, and the company expects to increase sales to 8.5 million vehicles by 2006. Even though Toyota’s major manufacturing base is in Japan, with 12 plants located closely together around ToyotaCity in AichiPrefecture, it is expanding its manufacturing capabilities to every corner of the world, including Russia. However, it is clear that Toyota is betting more on production in countries outside of Japan. Although Toyota hopes to produce 3.8 million vehicles in Japan by 2006, it plans on doubling its foreign output to 6million vehicles sometime in the future. It currently produces more vehicles in Japan than it does in its overseas plants, and it exports more of its domestic production than is sold inside of Japan.

Toyota is known for its commitment to low cost, high quality, and just-in-time inventory, which implies that it must be close to its main suppliers. A major reason for the company’s success in Japan is its close proximity to key suppliers, such as Nippon Denso, which allows it to schedule the delivery of parts as soon as they are needed in the assembly operations.

One of Toyota’s major advantages is its strong cash position. Its cash and short-term investments totaled $30 billion in 2004, even though GM’s cash and short-term investments at the end of the 3rd quarter 2004 were nearly double that at $58.623 billion, down slightly from the same quarter a year earlier. However, Toyota’s strong earnings and cash positions are in contrast to GM, which is constrained by weak credit ratings, rising health-care and pension costs, and losses in its automotive division. Toyota expects to use its strong financial position to expand operations worldwide and increase its commitment to R&D, especially in safety, automation, and environmentallyfriendly vehicles, such as the Prius, one of its hybrid cars.

In spite of its strong commitment to future growth, Toyota has some challenges. Its net profits in the second quarter of 2004 dropped from ¥301.9 billion a year earlier to ¥297.4 billion. Toyota reports its financial information in yen, although it reports earnings according to U.S.generally accepted accounting principles due to its active presence on global capital markets and the universal acceptability of U.S. GAAP.

Operating in global markets is a challenge for Toyota. Since it is a Japanese company that reports financial information in Japanese yen, it is subject to exchange rate fluctuations. In particular, the yen has been strong relative to the U.S. dollar, so earnings of its U.S. operations have fallen in yen terms in recent years when translated from dollars back to yen. In addition to the strong yen, Toyota and other companies operating in the U.S. market have struggled with high gasoline prices and high competition, which have cut into profit margins. Toyota has also suffered with high raw materials costs, both inside Japan and in its other operations worldwide. It is important for the company to do well in North America, because it accounts for about two-thirds of the Japanese car industry’s profits on an operating level. Given Japan’s rapidly aging population and the sluggish economy, Toyota and other Japanese car manufacturers will have to do well in the United States to survive.

Toyota services U.S. markets through significant exports from Japan as well as assembly inside North America. Because Canada, the United States, and Mexico are members of the North American Free Trade Agreement, parts and final vehicles can be moved from one country to the other duty-free, as long as the North American content is at least 62.5% of total cost. It has plans to assemble the Tacoma in Mexico; it assembles the Corolla, Matrix, and RX33 in Canada; and it assembles the Corolla, Tacoma, Avalon, Camry, Solera, Tundra, Sequoia, and Sienna in the United States. It is firmly committed to manufacturing cars and trucks in developing countries, especially Thailand, and it is making a big push to assemble in China. It also has plans to expand in South America, probably in Brazil where it already produces the Corolla, and it plans to expand into Russia, which would then join Poland and the Czech Republic as former members of the Soviet Union that have production facilities.

Another factor influencing Toyota’s growth abroad is the opening of the European Union. In 1999, the EU countries finally opened the doors to Asian car makers, and their market share rose from 14.8% to 17.4% at the expense of Ford, GM, Volkswagen, and other European manufacturers. Due to high wages in Europe, which have reached $40.68 per hour for average wages including health-care costs, Asian auto makers are increasingly establishing assembly operations in Eastern Europe, where wages are significantly lower. In Poland, for example, wages are only $8.63 per hour. Thus it appears that Toyota’s strategy of making vehicles in Poland, the Czech Republic, and Russia makes sense. If the sluggish European market can recover, Toyota may have a bright future there.

Questions

  1. Why do you think Toyota is expanding so aggressively outside of Japan instead of focusing more on manufacturing in Japan and exporting to other countries?
  2. What are the risks it faces in expanding its overseas manufacturing?
  3. Where do you think Toyota should put its next plant in North America, and what factors should it consider in making that decision?
  4. What are some of the major accounting issues that Toyota faces as it expands its global reach?

What are the pros and cons to Toyota of issuing its financial statements according to U.S. GAAP?

Case 2: Ahold and the Challenges of Going Global

On September 4, 2003, Anders Moberg was appointed CEO of the Dutch company Royal Ahold. With experience as CEO of IKEA, the Swedish furniture giant, Moberg was seen as the right man for the right job. One of the main points of his first speech as chief executive was the following:

Ahold’s reputation is the most precious asset we have... We know that we have a lot to do to restore your confidence in us. Our highest priority now is to rebuild the value of our company. We will do everything in our power to create a company of which you can once again be proud.

Why was Moberg talking about rebuilding value and reputation? What past events led to the need for such a statement?

Background

Royal Ahold, based in The Netherlands, is a holding company with subsidiaries and joint ventures mainly in the food services industry. Founded in 1887 as a small local store, the company was listed in the Amsterdam Stock Exchange by 1948. Between 1977 and 1989, Ahold expanded into the U.S. by acquiring several supermarkets. The 1990s were a period of very rapid expansion, with large acquisitions and partnerships in the U.S., Europe, and Latin America. In each of those regions, Ahold owned some of the most well-known retail food stores, like Stop N’ Shop in the U.S and Disco in South America. By 2003, 71% of Ahold’s revenues came from the U.S., with a large portion of the remainder coming from other foreign operations.

In the year 2000, Ahold purchased U.S. Foodservice (USF), a distributor based in Maryland. That acquisition would prove to be the source of the problems Moberg referred to in his first speech.

The Fraud

On February 24, 2003 Ahold announced that its 2002 earnings would be significantly lower than anticipated, and that it would restate its financial statements for 2001 and 2000. The announcement was triggered by Deloitte & Touche’s unwillingness to sign Ahold’s 2002 financial statements due to the discovery of overstated earnings by USF. Following the announcement, authorities began an investigation which led to the discovery of $829 million in fraudulently overstated net income between 2000 and 2002.

The fraud consisted mainly of two aspects: “(1) overstatements of vendor allowance income at USF and (2) the deconsolidation of five current or former joint ventures.” The bulk of the fraud occurred at USF, where several top executives purposely accelerated or inflated $700 million in “promotional allowance” revenue, which came from rebates received from vendors in exchange for a commitment to purchase an agreed-upon amount of goods. The contracts of the involved executives at USF tied their year-end bonus to meeting certain earnings targets imposed by Ahold, the parent company.

The second major part of the Ahold fraud was related to “current or former joint ventures.” When the USF fraud was discovered, Ahold cooperated fully with authorities and began an internal investigation to “clean up the mess.” The investigation revealed that five joint ventures had been inappropriately consolidated in financial statements of Royal Ahold with the full knowledge of top management. After this discovery, the CEO, CFO, and two board members were dismissed or resigned.

When news of the investigation became public, “Ahold’s stock price plummeted from approximately $10.69 per share to $4.16 per share.” Faced with the enormous task of picking up the pieces after such a scandal, Ahold’s board brought in Anders Moberg as the new CEO.

The Consequences

After his speech on September 4, 2003, Moberg and his team got to work and developed a program named “Road to Recovery”. The program focuses on four key areas: (1) re-engineering thefood retail business; (2) recovering the value of U.S. Foodservice; (3) reinforcing accountability, controls and corporate governance; and (4) restoringfinancial health. Some of the most dramatic measures include aggressively reducing the level of debt through divestments, improving operational performance, generating cash flow by improving working capital management and scrutinizing capital expenditures, and reducing costs.

Ahold’s divestments have dramatically changed the face of the company—all operations in South America (including Brazil, Paraguay, Chile, Argentina, and Uruguay), Spain, Poland, Malaysia, and Indonesia were or will be divested. In addition, major stores in the southeastern United States will be divested.

Major changes have also been implemented in the finance department and in corporate governance practices. Even the company’s headquarters have changed locations.

For the third quarter of 2004, Ahold reported a net loss of €166million and was still trying to clean up its image and operating results. As Moberg promised upon his inductionas CEO, much has been done to restore the value of Ahold. Only time will tell if the Dutch giant will recover from the blow received from one of its subsidiaries.

Questions

  1. Most of Ahold’s revenues come from foreign markets, especially the United States. What major challenges does this operating characteristic represent?
  2. Based on the experience of Ahold with USF, what important considerations should firms make when purchasing existing companies in foreign markets?
  3. As an alternative to fully purchasing an existing food distributor such as USF, Ahold could have started a brand new distributor (this is called a “greenfield investment”). What are the advantages and disadvantages of such an approach?
  4. Ahold has significantly reduced its international presence by divesting many of its foreign operations. Besides extreme cases like the Ahold fraud, what other circumstances may call for the divestment of foreign operations?

Chapter 2

Case1: General Motors and Japanese Convergence vs. Chinese Convergence

General Motors Corp. is the world’s largest automaker and has led the auto industry worldwide in sales since 1938. GM employs over 324,000 people worldwide, with manufacturing operations in 32 countries and sales operations in 200 countries.

GM operates its own facilities worldwide, but it also has global partners in Italy, Japan, South Korea, Germany, France, and China. In Japan, its global partners are Fuji Heavy Industries Ltd., Isuzu Motors Ltd. and Suzuki Motor Corporation. In China, it has a vehicle manufacturing venture with Shanghai Automotive Industry Corp.

A major challenge that GM faces in both Japan and China is that both have financial reporting and measurement practices that differ from both U.S. GAAP and IFRS issued by the IASB. Assume you have just been hired by GM as an intern, and your first assignment is to research the convergence of China’s financial reporting standards with U.S. or IAS GAAP since 1999. Compare China’s historical path of convergence with Japan’s over the same period of time. What societal values and economic goals have caused the two Asian countries to develop different financial reporting standards? What societal values and economic goals have caused the two Asian countries to develop similar financial reporting standards?

Suggested websites:

Case 2: Inductive and Deductive Methods Relating Reporting Standards to Cultural Values

Use the inductive or deductive method to correlate Sweden’s history with its financial reporting standards.

Suggested websites:

Chapter 3

Case1: Reporting Standards vs. Tax Standards

The Anglo-American countries tend to have substantial differences between their reporting standards and their tax standards. Yet, little has been done to reconcile these differences because tax law and reporting law have different objectives. However, having two sets of rules requires that companies keep two sets of books, which is both time-consuming and costly.

Cardon Company, located in the United States, is frustrated with the costs of maintaining two sets of books. After some research, top management noticed that some other countries, such as Japan and Germany, have tax law and reporting standards that closely correlate with each other. Cardon Company does not understand why the United States does not try to adopt a similar system. Does the company have a valid argument? In discussing this question, consider the following questions:

Questions

  1. What are the advantages of converging the two systems?
  2. What are the disadvantages?
  3. What difficulties are likely to arise if such a shift were to take place?
  4. Should the Anglo-American countries adopt a similar system?

Case 2: EU Conversion

Spain’s accounting system has historically been heavily tax-oriented. With the EU’s adoption of IFRS, however, itwill be required to have a reporting system substantially different from itstax system.

La Rodonda Company is trying to anticipate some of the problems itmight face with the conversion to IFRS.

Questions

  1. How might itsgoals of accounting change with the adoption of IFRS?
  2. What should itdo to aid the transition?
  3. What problems is it likely to encounter and how can itmitigate them?

Chapter 4

Case 1: Small GAAP vs. Large GAAP

With countries around the world adopting IFRS, many argue that the IASB should tailor itsstandards to meet the needs of small enterprises. One view is that the board should create standards for SMEs, specifically those that do not have public accountability. Others, however, believe that full IFRS are suitable for all entities. The board also needs to determine which entities the IASB SME standards should be intended for. One view is that public accountability should be the distinguishing factor. Full IFRS, rather than SME IFRS, should be required for companies that are public. Others believe the IASB should set forth characteristics of SMEs and let individual countries determine whether the companies qualify as an SME. Another possibility would be to use a size test to determine the enterprise’s classification.

Questions

  1. Should the IASB develop a separate set of standards for SMEs or are existing IFRS suitable for all companies?
  2. If the IASB does create separate standards, how should the board distinguish between small companies and large companies? Discuss the pros and cons of each method described.

Case 2: Developing Countries

Belarus attained its independence in 1991 after being a constituent republic of the USSR (now Russia) for 70 years. However, in 1995, the government reinstated “market socialism” and issued controls over prices and currency exchange rates. Italso gave the state the right to control private enterprises. Accounting standards have been of little concern in the past. However, with a struggling economy, it is becoming increasingly important that Belarus develop accounting practices that will instill confidence in the country’s companies. Many hope that Belarus will follow its western predecessors and embrace a free-market economy.

Describe the ideal accounting system for Belarus.

Questions

  1. What values should the country emphasize with its system?
  2. What needs to happen in order for the system to succeed?

Chapter 5