Mock exam 1 Flashcards
According to your textbook companies had other options to attract foreign investments before the global financial reporting. Describe the options and what you think would be the best option to do so.
- Do nothing
- Provide translations in another language
- Provide translations in the language as well as the currency of the country from which investment as sought
- Provide partial restatements
- Prepare secondary financial statements
Lufthansa prepares the financial statements in the English language and not in the German language. Elaborate, in accordance with the textbook, on why the company prepares the financial statements in the English language, what the benefits are of doing so and/or the downsides.
By using the English language Lufthansa increases the audience which are able to read the financial statements. Part of the audience are the investors which enables them more easily to get / understand the information provided to them in making a decision to invest or not (3 points). A downside for a company is that the local market (in this case Germany) is less serviced by the English language. (2 points)
From page 133 in the pdf version you find the consolidated financial statements of the Lufthansa Group. Elaborate on why the company needs to prepare consolidated financial statements.
Consolidated accounts provide more information (3 points) about the performance of the group in total (3 points). It does not matter whether or not a subsidiary performed the activities of the parent company. If the parent company would only mention the shareholding and results we do not know how the results are reached (2 points). This provides better information to the shareholders and other users (2 points).
Page 233 in the pdf version shows the shareholding in subsidiary LSG Sky Chefs TAAG Angola S.A., Luanda, Angola where the shareholding and voting rights are 40%. The subsidiary is fully consolidated in the financial statements. Elaborate, by your textbook, on why the company had to consolidate the subsidiary in full. In your answer use and elaborate on the term control.
IFRS 10 describes the term control as; Control means that a parent is exposed, or has rights, to variable returns through its power over the subsidiary (3 points). As such there are three elements to consider the parent company has:
* The power over the investee (subsidiary)
* Exposure, or rights, to variable returns from its involvement with the investee
* The ability to use its power over the investee to affect the amount of the investors’ return. (3 points)
The footnote to the investment states that Lufthansa manages the company (management) and therefore can influence its power to affect the amount of return (4 points)
Page 2 in the pdf version states several KEY figures such as available seat-kilometers and passenger load factor. These KEY figures are not pre-described by IFRS or US GAAP. Elaborate, by your textbook, on why Lufthansa may want to report these key figures, and what the benefits and downsides are for you as an investor.
These KEY figures are so-called non-gaap measures (2 points) If companies use these figures they present the financial situation of the company without using any ‘officially recognized’ GAAP, but rather with the use of their own internally created measures (page 804). The benefit may be providing more information to the reader, showing relevant information and providing an insight into how the management of the company controls the organization. Downsides are internally generated and may disguise certain information. (3 points)
Tangible fixed assets may be depreciated using the component method. Explain what this method is by your textbook and what you think about using this method. Use in your answer the term true and fair view.
In the component method, you allocate money to different parts of the tangible fixed assets with different depreciation periods. Each part will be depreciated separately to ensure when replacement of the part is needed the items are fully depreciated. The replacement is then allowed to be capitalized (5 points). Using the component method is better for the true and fair view as each part is valued/depreciated in accordance with the lifetime of the part. As such the component method provides a better view. (5 points) The downside of this method it takes more calculations and therefore more errors, allocation of value and lifetime.
IFRS is adopted in 94% of the countries worldwide. Your textbook states that the adoption has been increased by the IMF. Please explain how they did this and why this organization supported the use of IFRS.
The IMF made reporting in accordance with IFRS obligatory (3 points). As such more and more countries became aware of the standard and also implemented in their own jurisdiction. The more awareness creates more knowledge and then the benefit of being able to attract foreign investments benefited the use of IFRS. (2 points) (page 54 and 55 of the text book)
On page 174 in the pdf version table T097 CASH OUTFLOW FOR LEASES the following text is stated: Lease expense from short-term and low-value leases and variable lease payments not included in the measurement of lease liabilities. It seems that certain leases are not included in the lease liabilities. Can you elaborate on this, in accordance with your textbook, and how this would be possible to do so?
short-term leases (less than 12 months) should not be part of this amount and directly expensed. So it should be leases which would classify as leases. The only option the company has is that the amount is so not significant that it would not lead to a different decision by the investor. (5 points)
Would it be possible to have one set of standards worldwide? In other words, do you think that US GAAP and IFRS could be converged into one standard? Elaborate and support your answer.
there is no right or wrong answer to this question. Items that should be mentioned are:
* IFRS and US GAAP are working closely on new standards (leases, revenue recognition, etc.) (5 points)
* The IASB and the IASC know each other
* Standards are already linked so much that new developments should be linked as well
One standard could be easy for investors but given the cultural differences between IFRS and US GAAP one standard would not be the best option (5 points)
During the lectures, it is mentioned that IFRS is principle-based and US GAAP is more rule-based. Can you explain these terms and elaborate on the benefits and downsides of each of them?
Principle-based is about the results that need to be reached not the way how you get there. Rule-based is following the different rules and steps (comply or die). For accounting the principle-based method could result in the fact that you are evaluating certain items not by the law as the principle is not harmed. (5 points)
In your textbook it is stated that: Some people may believe that (international) financial reporting regulation is not necessary or even desirable. Do you agree or disagree with this statement and why do you do so?
Arguments for agreement would be that the market will decide and dictate what companies need to report. If a company wants to have finance for their operations they need to listen and provide the information an investor need. Arguments for disagree would be that if we leave room for interpretation companies will get creative in what and how to report their financial figures. (5 points per answer with a decent argument)
Page 163 in the pdf version states the reconciliation between the nominal tax rate (calculated as 25%) and the effective tax rate (calculated as 22%). Elaborate, in accordance with your textbook, on why differences between the nominal tax rate and the effective tax rate can occur.
The reasons stated below are examples and not all of them have to be mentioned by the student:
* Financial statements are based on economic accounting and not tax accounting
* Tax accounting can differ from economic accounting
* Temporary differences (e.g. depreciation)
* Differences in tax rates in different countries
* Cash (tax) versus accrual (accounting) based (3 points)
Companies want to pay taxes as late as possible and use the money to invest in order to have gains. A dollar today is worth more than a dollar tomorrow and in most cases, it is all about a timing difference. In the long run a company has to pay taxes. (2 points)
Page 6 in the pdf version states: Responsibility will continue to be the foundation of all business activity in the Lufthansa Group. Here, we aspire to lead the airline industry with our high standards. We are expanding our environmental commitment. For instance, we support the industrial production and use of alternative, sustainable fuels and the expansion of intermodal traffic. This statement is further explained on page 19 in the pdf version. Apparently, Lufthansa will work together with Deutsche Bahn, Austrian Railways and various bus operators to transport people from A to B. This seems to offset the number of travellers with Lufthansa. Why would they participate in this kind of activity as it would lower the revenue and profit of the company? Use in your answer the different stakeholders and the development of sustainability.
A company has to take into consideration the different needs of the different stakeholders and the public in general. Given the climate challenges companies need to find so-called greener options for the activities they do. For the airline industry, there seems to be a wish to abandon short (intercity) flights and as such Lufthansa needs to find other companies to work with to be able to provide customers these services. (4 points) It is a fundamental difference in thinking and being a leader in this example enhanced the public’s opinion about the company. Lower revenues may be offset by increased revenues as others want to fly with you on other (more profitable) flights.(2 points) The term sustainability is being introduced as a term to which certain activities can be addressed. There is no fixed threshold when a company is more sustainable and that is difficult for management of the company. (2 points)
Note that not only customers / the public ask for more sustainable activities. In the last couple of years, investors/shareholders have these demands. The more sustainable the more chance there is that a company will survive in the long term. (2 points)
According to your textbook corporations should take CSR reporting seriously. Identify and elaborate on at least four reasons why you need to do so.
- The public asks for it
- Competitors are doing it
- CSR is rethinking your strategy
- CSR should be part of your company DNA to ensure that it works
Five points for identification and reasoning.
Identify and elaborate on at least three examples where the choice of accounting methods, and accounting estimates of even real transactions could significantly affect the analysis and interpretation of the financial statements. Comment on how these choices affect the financial statements.
If you read the real life illustrations in chapter 30, you will find a number of examples as for example:
* operational leasing vs. ownership or financial leasing will influence the debt structure of the company
* fair value vs. historical cost valuation with depreciation will have an impact on the amounts reported as assets
* differences in the amounts of impairment recorded, affect this years’ profit but also future profits
5 points when 3 examples provided.
