(2c) Accounting for securities investments are different for US GAAP and foreign

Question

(2c) Accounting for securities investments are different for US GAAP and foreign GAAPs. This difference can create advantages or disadvantages for companies based on where they are located. It is important to understand the differences and the economic affect they can have on investments.

Please respond to all of the following prompts:

The takeover battle for Gerber Products Co. included bids by a number of U.S. companies, including Quaker Oats (now part of PepsiCo), which entered a bid of $35 per share. Swiss drug giant Sandoz Ltd. won the battle quickly, however, by raising the ante to $53 per share. Some investment bankers claimed that the favorable accounting treatment for acquisitions practiced in Switzerland gave Sandoz the advantage it needed to outbid Quaker Oats.

Accounting differences also seem to discourage certain large foreign companies from raising capital on the U.S. stock exchanges. For example, Nestle, a Swiss food giant, says it is not willing to redo its financial statements to conform to U.S. GAAP (a requirement of the U.S. stock exchanges). Some offer that the main reason is that its earnings would look much lower.

Accounting differences across countries have elicited complaints from U.S. businesses that certain foreign countries allow liberal accounting methods that provide unfair trade advantages for their local companies and capital markets.

Is it ethical for the government or stand-setting body in a particular country to set accounting standards that are designed to provide international economic advantages enjoyed solely by the companies and capital markets in that country?

Explanation / Answer

Different countries in the world setup accounting body to regulate the accounting practices in their country. This policies are formulated to provide the local company a advantage and are formulated by taking in to consideration the socio economical situation of the country. This situations may be different in different country. Some of the accounting stadandard followed in the world are US GAAP (Generally Accepted Accounting Principles), EU GAAP, IAS (Indian Acconting Standards, mainly followed at Indian Subcontinent).

With the increasing globalisation, multinational companies faced a very peculier situation. As to which standard to follow to consolidate its local and world business, as requirement of every standards are different and to continue doing business in that perticular country, MNC companies have to comply with the requirements of that country.

Examples given in the question are the examples of this situation where company having base at one country need to to follow the legislation of other company. To overcome this all accounting bodies in the world agreed to formulate one accounting principle so that companies doing business in other countries do not face difficulty in reporting and investors and share holders of other company can read and understand the Balance sheet and other financials of the company. This internalnational standard is called as IFRS (International Financial Reporting Standard). Though this standard is still in its inception stage and not yet implemented fully all over the world.

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