IFRS Financial Statement
IFRS
1.Discuss whether IFRSs will provide ‘relevant and reliable information” that meets the needs of all financial statement users in all countries? (15 points)
IFRS stands for the International Financial Reporting Standards, and is a set of rules and guidelines that all companies in the EU must follow. IFRS explains how to properly deal with accounting situations such as Inventory, Borrowing, Acquisitions, Goodwill, and Revenue when writing up the various financial statements. The four basic financial statements are the Balance sheet, Income statement, Statement of retained earnings, and the statement of cash flows. These are used to measure and record financial information about a companies “health” or financial status to the appropriate user. The users of financial statements include internal user; managers, directors, employees, and the owners, and external users; investors, bankers, government, and the public.
The IFRS aim to suite the needs of all users of a companies financial statement users, however considering there are so many different types of users, this seems almost impossible. Every user has a different set of needs and wants, and each different user has a different skill level of interpreting the statements. A banker or investor will obviously have a far greater understanding of the statements than the local IT manager. It is the power of compatibility that makes IFRS a good replacement for the US GAAP, but a good standard setter for accounting all over the world. It provides the world with a transparent, consistent, and comparable insight into the financial status of a company, assisting all the different users make the best possible decisions. Furthermore, since all companies have to present their statements in the same manner every term, it is easy to compare year x of company z with any previous year, or any other company.
On the downside, IFRS is based on a set of general principles, and not specific rules. Therefore they are open to interpretation and possible abuse. This means that different companies can present similar issues in a different way. Furthermore, IFRS is based on “fair value” and is therefore by definition inaccurate. It is impossible to put a fair value on assets such as your workforce and goodwill, and is therefore also impossible to present this value to your stakeholders, unless it is by pure chance. Moreover, IFRS concentrates on how to recognize income and profit of a company, and does very little to acknowledge the fact that presenting this information is just as important. We can say that IFRS is just another standard, as is US GAAP, but why can't the two converge to form a new global accounting standard setter? One globally recognized standard setter would transform the world of accounting into an even more compatible one.
2.Give an example of a recent IFRS, which differs from your local standard. Explain the main differences between the IFRS and your local standard. (15 points)
The switch from Dutch GAAP to IFRS has put some companies in a little bit of trouble, most notoriously, Ahold, with its book keeping scandal a few years ago. Although Dutch GAAP and IFRS are fairly compatible, there are a few differences.
IFRS does not supply small and medium sized businesses with any advantages, while Dutch GAAP favors small to medium sized companies, with separate less strenuous Guidelines Annual Reporting (GAR). Dutch GAAP really differs from IFRS when it comes to share based payments. Dutch GAAP does not define any guidelines for; share based payments to “non-employees,” cash settled transactions, or shares sold at a discount.
While IFRS requires you to review the useful life, residual value, and depreciation method at the issuance of the new balance sheet, Dutch GAAP does not make this mandatory; neither does Dutch GAAP provide any rules on the frequency and timing of revaluations of PPE.
Pensions in Europe
3a.Explain what is meant by a “policy ladder” in the Dutch pension system. (6 points)
The policy ladder was introduced recently in order to ease pension management risks. The ladder policy is a hybrid pension scheme which consists of both the DB and DC schemes. In this policy the indexation rate is used to smoothen out the certain funding risks. The ladder policies includes several advantages; it guarantees fairness, risk is diluted by spreading over the accounts of everyone (including retirees), and is a simple solution to the question of ownership. Looking at figure 1 we can see the effects of a policy ladder more clearly.
3b.Explain what the effect is of a “freeze” of a defined-benefit pension scheme on the replacement rate of the participants and their age. (9 points)
A defined benefit pension scheme differs from a defined contribution pension in many ways. It promises the employee at retirement a fixed amount of money monthly and requires no investment decision making on the part of the employee. Although it is a complex pension plan, it provides stability to the employee and is even adjusted for the costs of living.
A pension freeze occurs when a company decides to block all new accruals to the pension plan of their employees. A pension freeze only affects the current employees and not retirees of the company. This means that employees who are near the age of 65 are seriously disadvantaged by this policy as they see their income level for the pension frozen at the level which they work at currently. This means that if a 55 year old earns 50,000$ a year sees his pension frozen at this level (instead of maybe 60,000$ which he might earn at 65) and has little time to start building up his own retirement fund. However the company is required to offer their employees another plan such as an employer sponsored 401(k) plan, but these defined contribution plans come bundle with high investment risks (for the employee) and make it hard for those who start at later ages to create funds.
A pension freeze is not a huge deal if you just started out working for a company at a young age; you still have the option to build funds in another pension scheme such a 401(k). However the increased risk and the idea of un-guaranteed pension is not something every employee would welcome.
4a.Which accounting standard should be used by Dutch pension funds? (6 points)
As explained in question 1, IFRS is a highly regarded accounting standard which is based on fair valuation and emphasizes transparency, compatibility, and consistency. This is of course very important to keep track of your pension and is therefore a much clearer system than Dutch GAAP. This is why IFRS was adopted in the Netherlands some years ago and is still the standard setter not only in the Netherlands, but in the European Union. IFRS helps keep track of ones pension value through its consistency and avoids situations where fresh retirees find out their pension is not so healthy after all.
4b.Did Dutch companies that switched from defined-benefit to collective defined contribution schemes compensate the participants for the risk transfer? (9 marks)
As discussed in 4a, the switch from DB to DC can leave the employee at a grave disadvantage and therefore must be compensated. The way they do this is to absorb the shock of the switch by spreading it out over many years. They also assist the employee in the first period when adjusting to the changes of having to invest your own pension funds.
International marketing
5.What is your favorite company acting on the global market place? Describe its strategy to international marketing. (10 points)
I can't say I have ONE favorite company, although if I would have to choose one, I would say Grolsch. Grolsch is one of the oldest Dutch companies in the world, and has been around since 1615, a time when Dutch brewing techniques were highly revered. Grolsch makes high quality pilsner and does a fine job marketing it.
Grolsch uses its roots (Dutch origin) as a source of a core competency. They therefore insist all their beer be brewed in the Netherlands holding their name high, signaling the fact that there is indeed the finest. To bolster this fact, Grolsch still distributes in lager in “gurdel” bottles (beugel fles) to highlight the authenticity of their beer, and simplifying the process of opening the bottle. Grolsch came up with a genius plan only last year which has solidified its position as second largest beer brewer (behind Heineken) in the Netherlands by introducing a new “green bottle” which is modern yet authentic. Grolsch is the first big brewer in the Netherlands to break the brown bottle agreement and has seen its sales sky rocket since the replacement. Not only have Grolsch changed the bottle, they even gave the crate a facelift adding rubber grips to smoothen the process of carrying one home.
6.What are benefits and conditions related to this approach? (10 points)
Grolsch advertises its flavor, quality, and heritage to people of all drinking ages. However, since the introduction of the new “green bottle” they have moved to targeting a younger group. With the modern new look, they have shifted their target market to the young consumers, students, and starters. This is obviously a very good move considering that the younger the consumers are, the longer they might stay loyal to Grolsch.
Grolsch uses its origin (The Netherlands) as a source of pride, Dutch beer brewers are known world wide. There is nothing in the foreseeable future that can take this away from Grolsch. Sure, they have been taken over by SABmiller, but the beer stays the same; same Dutch breweries, and the same Dutch heritage. The Dutch image is only shared by fellow country beer Heineken, and no other brand can take this away from Grolsch.
7.There exists a "compromise approach" to international marketing. Describe it. (10 points)
The compromise approach referred to can also be known as Glocalization. This is the combination of globalization and localization, and is a term used to describe when a company uses a standard set of specifics for a global market, but adjusts a minor detail for global appeal. A perfect example is a shampoo used in The Netherlands, marketed by a blond woman, whereas the same shampoo is used in Asia, but marketed by an Asian lady. The expression “Think global act local” is derived from this. The essence behind glocalisation is that the details will be specialized in details, and used globally, while certain aspects are localized to the different markets world wide. This is the process of standardization and saves a lot of costs.
8.Describe the marketing mix this firm developed in your home country. (10 points)
The marketing mix is the use of the four P's; price, place, product and promotion. Grolsch has adjusted these to fit its image as a quality product.
Price: Grolsch has priced its beer in the upper end of the scale, just behind Heineken. It is not overly expensive, but you pay a premium for this high quality beverage.
Place: Grolsch is sold in just about any supermarket in the Netherlands, and is also served in many restaurant, bars, and cafes.
Product: Grolsch sticks to its Dutch image, insisting on brewing it in its native country, backing the great taste with the fact that is brewed in a country with a long history of beer breweries.
Promotion: Grolsch has gotten rid of its old brown bottle, which is used by almost all brewers in the Netherlands (for recycling purposes), and replaced it with a new sleek modern bottle. On the other end, Grolsch still serves its authentic beer in authentic “gurdel bottles” (beugel fles) for the authentic experience.
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