Research Korner: International Finance

International Finance

OBJECTIVES As a person with knowledge of international finance, the author has always brought up to his superiors the viability of strategy formation regarding the analysis of this topic and at times fails to understand the reasons or logic behind certain strategic implementations imposed on it. By delving into this project paper, the author intends to have better insights into how the euro was thought up, formulated and then imparted down into the European continent. The author hopes to have an in-depth understanding as to how the introduction of the euro enabled European countries to compete effectively and profitably in this era of internationalization where competition is extremely intense. In order to reinforce the learning objectives, two key focal issues were focused upon i.e. innovation and diversity. Innovation was discussed with regard to the introduction of euro where it was renowned for its developmental capabilities to constantly innovate. Diversity came under strategic thinking and formation as the author considered the diverse culture, political climate, economic surroundings, social environment, technological settings, government policies and legal systems in order to better understand the issues being discussed.     EXECUTIVE BRIEF This essay utilized the euro as the model currency to review its present impacts and how it dealt with critical situations. From the analysis, key trends in the introduction of the euro were then identified, how it worked and its effectiveness in dealing with critical situations was ascertained. The paper then moved on to assess the euro with regard to its suitability to critical situations, during which the internal capabilities of the euro in relation to the strategy being followed by most European countries was determined also. An overall analysis of the performance and effectiveness of the euro was also conducted to assess and compare the capabilities of this currency with those of others. Gaps in the capabilities of the euro were then identified. Finally, several choices of strategies to strengthen the euro as effective means in critical situations were recommended and evaluated in terms of appropriateness to the issues reviewed, feasibility in carrying out the options and acceptability within the key stakeholders and decision makers. Several key implementation issues related to managing strategic change were also addressed as well.           INTRODUCTION The euro is the official currency of the European Union member nations. It was introduced in 1999 in order to contribute to the efficient and effective implementation of the policies and tasks necessary to satisfy the European citizens, workers and government officials. The introduction of the euro focused on the careful management of the processes involved in the production and distribution of products and services within the Eurozone (2002). More often than not, countries outside the Eurozone don't really have the capabilities to compete against the strength of the euro. Instead, these countries engage in activities that various schools of management typically associate with trading with the strength of the euro. These activities include the manufacturing of products, product development, production and distribution. However, the euro deals with all operations done within member countries of the European Union. Activities such as the management of purchases, the control of inventories, logistics and evaluations are often the introduction of the euro. A great deal of emphasis lies on the efficiency and effectiveness of processes. Therefore, the introduction of the euro includes the analysis and management of internal processes.             The Euro and its Objectives   The euro’s introduction has four main objectives: A)   Remain one of the top currencies in the world. Being one of the top currencies enables the euro and the Eurozone countries to command the respect and confidence of other nations. Thus, the Eurozone countries are able to expand their operations through the continued strengthening of the euro. B)   For the European Union countries to gain more profit than other non-member nations. The euro currency that is being used in the trading process used all over the world is able to meet high quality standards. As a result, the European Union member nations which use the euro are able to earn more profit as against other non-member nations ( 2000). C)   Build the best currency portfolio, with the euro as the international currency of flagship; and D)   Maintaining its independence. Being an independent currency allows the euro to continue its tradition of excellence in both its ability to purchase products and services by setting new trends and standards. In order to achieve these objectives, the European Union implements a strategy of selling a combination of local brands and international brands, but maintaining the euro as the flagship currency. The European Union also aims for broader positions as well as either the top or secondary positions in any market. Any of these positions would be enough for European Union member nations to deliver a high level in terms of production, marketing and distribution using the euro. Moreover, these positions create a platform from which the European Union member nations can sell or trade their premium and other specialty products. With a continued focus on the structures of the costs, the above mentioned objectives should undoubtedly be reached. The Euro and its Impact on the US Dollar After the introduction of the euro, its exchange rate against the U.S. dollar was not very impressive at all. At the onset of 1999, the euro’s exchange rate against the U.S. dollar was at US$1.18, and even went to the lowest exchange rate of $0.8228 the following year. The year 2001 brought some optimism for European Union member nations because the exchange rate rose to a respectable $0.96 (1994). On the contrary, it was the US dollar that suffered a huge decline that year as the U.S. trade deficits increased tremendously. Modern economists and experts hypothesize that a significant decline in the value of the US dollar and a significant increase in the value of the euro would eventually result to a significant gain in U.S. exports and a significant loss in U.S. imports, as the US exports becomes less costly and the US imports becomes more expensive. Therefore, a significant decrease in the value of the US dollar makes foreign investment in the U.S. a lot less expensive. In the year 2001, in an effort to contend with the growing strength of the Euro, the US based its pricing strategies on several key trends that continuously shaped the global marketplace. One particular trend was labeled as “premium-tization” (1981). This phenomenon caused the polarization of different markets. This then triggered the consumers to demand and pay much higher prices for perceived quality. However, discounting in prices was also simultaneously taking place, therefore squeezing out the middle range. More often than not, the US business sector underwent internationalization which led to a tighter squeeze for shelf space. This in turn left the US as a winner. It is for this reason why the US valued the “premise sector” so much because this allowed consumers to try their products and services at low risk and price. In terms of growth rate, the US dollar had a disproportionate share of growth at an estimated 4-5% per year since 2001, as against the 2-3% overall growth rate for the euro. These rates come up as a result of both the rise in GDP among developing markets and consumer demands for higher value propositions, which is obviously dominated by international brands. Therefore, the US has to increase its portfolio and operate globally to become competitive against the euro. The euro practically operates on a relatively fragmented market, with the top four Eurozone nations accounting for 22% of global growth five years ago and only about 28% today.     RECOMMENDATIONS The euro has been able to remain one of the world's leading currencies since its introduction in 1999 primarily because of the execution of the European Union’s strategies to perfection. Add to the mix the euro’s mark of dedication to high quality of service and the formula for success is at hand. However, I am not totally convinced that the strategies that the European Union implements currently would be as effective as before. For one, consolidation and globalization are taking place across most countries and their currencies, and the euro is not excluded. The European Union has implemented various strategies to fully adapt for the need of the euro to become competitive globally.  I suggest that the European Union should implement a more sober approach to maintain consumer loyalty with their member nations. There is nothing wrong with building new loyalties with the other global consumers. But there are instances, for example, in the Netherlands, where the local market is often neglected. As a result, local consumers will tend to develop a bad impression about the European Union and its roles. While it is good to make moves to strengthen the euro, it is even better to keep and maintain the older and more established markets within the member nations. This way, the European Union will remain unscathed amidst the advent of consolidation and globalization. CONCLUSION The results of the analysis carried out on the introduction of the euro indicated very significant effects, even amidst the threats of unrest. Therefore, we could conclude that the value of the euro could still be expected to increase faster than average. The review of the euro’s capabilities and objectives revealed very little inconsistencies regarding the European Union’s strategies in strengthening it. This is coherent with its traditional inside-out approach. However, the need to reconcile both the inside-out and outside-in approaches becomes imperative now for the member nations of the European Union. The analysis of the euro’s impacts on the US dollar revealed certain gaps, most of which are biased towards the US environment. However, these gaps paved the way towards determining a number of recommended strategic options to secure the competitiveness of both currencies. Also, the European Union has to find a balance between adherence to internal forces within their member nations and to the changing forces of the environment in order to implement such strategic options.

International Finance

OBJECTIVES As a person with knowledge of international finance, the author has always brought up to his superiors the viability of stra...

INTERNATIONAL FINANCIAL REPORTING STANDARDS ( IFRS )

International Financial Reporting Standards     This essay takes a look on the issues raised regarding the implementation of the International Financial Reporting Standards. It discusses the benefits associated with the adoption of such standards as well as its implications on companies in different countries. Introduction   International consistency in accounting and auditing standards has become the demand of the global financial markets. With this, several countries have started adopting the International Financial Reporting Standards while others base their local standards on the IFRS. In Europe, public enterprises have already been required to prepare financial statements under the IFRS. On the other hand, reconciliation on the U.S General Accepted Accounting Principles (GAAP) is already being facilitated. The trend towards these international standards is evidently growing and is expected to result in greater comparability and disclosure of information. The transition though encompasses not just the changing of accounting procedures. Companies will have to undergo extensive change and risk management to facilitate adoption. Also there remains to be issues concerning the complexities of the IFRS requirements in terms of measurement and accounting as well as the amount of information to be disclosed. Such areas of concern are yet to be fully resolved as continuous efforts are being made to improve the conflicts and contradictions. Ultimately, the IFRS will be beneficial only after a consensus is achieved on how to apply such standards. Also, there are arguments that the IFRS is specifically suited to developed economies. As such, its implementation may be inappropriate to developing countries. Unless these critical issues are resolved, the objectives of the IFRS towards a single accounting standard may be far from reach. The transition and conversion to IFRS entails tremendous amount of changes to be undertaken. The adoption must eventually be able to bridge the gap between the IFRS and companies’ perception as to what is relevant to its circumstances. Standardizing International Financial Reporting Primarily, financial reporting is aimed at providing information to the existing and the potential partners of an enterprise as well as to the public. Well founded decisions are supported by the information resulting from the management’s stewardship. The framework of financial reporting standards mentions the concept of useful decision making. These kinds of frameworks are used in countries where there is noncodified law on financial reporting. With this, the standard setters are provided with important guidelines.  Paragraph 12 of the International Financial Reporting standards state that “The objective of a financial statement is to provide information about the financial position, performance and changes in financial position of an enterprise that is useful to a wide range of users in making economic decisions.”  Moreover, the Statement of Financial Accounting Concepts says that financial reporting function primarily to provide useful information to those who make economic decisions regarding business enterprise and investments to these enterprises (, 2004, ) The International Financial Reporting Standards (IFRS) refers to a set of standards in the area of accounting. This body of financial reporting standards is developed by the International Accounting Standards Board (IASB). To date, major nations are adopting these standards to a certain extent.             A trend towards the use of the International Financial Reporting Standards (IFRS) is emerging in the global financial markets.  Historically, such standards are used on voluntary basis. Today, there have been a growing number of jurisdictions requiring the use of IFRS among companies for local reporting as well as listing purposes. In Europe alone, public listed companies are required by the European Commission quartered within the European Union to prepare financial statements that are in accordance with the IFRS. Such requirement affects about 7,000 enterprises. The evolution has affected the nature and the scope of national standard-setters which include that of the U.S Financial Accounting Standards Board (FASB) (, 2005)             The primary focus of the International Accounting Standard Board is the convergence of accounting standards worldwide. In order to achieve this, the IASB will designate official liaisons to national standard-setters. As such they are responsible for close contact with their respective national standard setters. Agenda coordination and the assurance that IASB and national bodies are working for convergence are part of their responsibility. Among the countries with formal liaison are Australia (including New Zealand), Canada, France, Germany, Japan, the United Kingdom and the United States (, 2005) Impact on the U.S GAAP Implementation Significant consistency in accounting recognition and measurement and the greater disclosure of information regarding financial statements are among the benefits of the IFRS implementation. However, there is still a long way before reasonable consistency can be achieved under the IFRS. Primarily, this is caused by the fact that there remains to be no substantial body of custom and practice or an accepted way by which IFRS shall be applied. A number of years of implementation by representatives of cross section businesses in different countries and industries are needed to attain a consensus on how IFRS can be applied. Until that is achieved, divergent practices and the limited comparability remain unavoidable Undoubtedly, the current IFRS reporting platform is far from being perfect. The IASB announced that there will be no new international standards to be effective until the year 2009. Ongoing improvements are aimed at the elimination of deficiencies within the current standards and to facilitate global convergence and ultimately, to remove the onerous requirement of the reconciliation with the US GAAP. It is expected that five new or revised standards will be implemented by the year 2009(, 2006).             Continued discussions are being made in the UK with regard to the future direction of corporate reporting and as to what type of convergence with the IFRS should be made. Among the many benefits of a common financial reporting language are greater transparency, consistency and comparability with entities. The adaptation of IFRS by companies is aimed to provide a competitive advantage in terms of quality, clarity and the credibility of disclosures (, 2006).             The IFRS conversion is a huge challenge which has been dictated by the International Law in a relatively short time scale. In the UK finance community, almost all of the companies are able to achieve it on schedule indicating their expertise and professionalism. It is projected that around 100 countries will permit and require the use of IFRS by the year 2007(, 2006). In this sense, it will become the most widely used accounting standard in the world. The challenge remains on the part of the investors to engage in the debate and to influence future developments Implementing IFRS requires the companies to an extensive change as well as risk management process. The conversion process would entail time, cost, effort and expertise to be able to be able to meet deadlines. Larger listed groups found it vital to use effective and timely communication with investors and analysts. The conversion to IFRS is not just changing a set of accounting principles with another. It involves a number of different financial accounting and disclosure requirements that may result to differences in the financial report. With it, the company executives are provided with the opportunity to challenge the way the company is evaluated by investors, stakeholders and competitors. Since the IFRS will affect every decision of the company, it is necessary that the management is able to foresee changes in terms of market perception.             Primarily, there is concern about the preparedness of companies regarding the changes which IFRS will require. In February 2004, an Accountancy Age Survey revealed that only 34% of financial Directors are confident that their employees are ready for the IFRS implementation. In addition to this, a concern over the lack of attention on the implications of the IFRS to companies accounting systems is expressed by providers of software and accounting systems (‘’, 2004).             One of the key issues that need to be addressed by companies is to educate the employees who are responsible for the preparation and use of financial statements. It is only in 2004 that international standards are introduced onto the syllabi by the professional bodies. Professional training firms need to be considered by the companies to provide training. Since the use of IFRS is expected to impact the transactions processes and the way they are given value, businesses should ensure the understanding of the impacts by the analyst and investors. Lastly, an accounting system that is capable of collecting, processing and reporting the information under the IFRS format is required of for the transition (‘’, 2004) Critical Issues on IFRS Implementation Generally, the IFRS is recognized by companies to bring more economic substance. The criticisms related to its implementation are the complexity of the new standard as well as the amount of work required to correctly implement the standards. IFRS financial statements pose greater complexities as compared to those which are based on national accounting standards. Such complexities arise from the extensive measurement rules and the greater number of disclosures required in IFRS than those of the national accounting standards. The disclosure requirements of the of the IFRS approximately doubled those of the UK GAAP and the Australian GAAP and four times to that of the French GAAP. The more complex accounting standards are interpreted and applied properly by a small number of technical experts. These experts are mostly employed by accounting firms and regulators rather than those which prepares and uses such financial statements (‘’, 2007). The increasing number of complexities in terms of accounting measurements and disclosure requirements of the IFRS poses a danger to companies. This is because the preparation of the financial reports may only lead to a sheer volume of data rather than the communication of the performance and financial performance of the company. Moreover, the numbers of required disclosures are not assessed based on their significance to the company’s particular circumstances.             Clearly, the implementation of these standards will require extensive judgment as to the selection and the application of the accounting treatments. In turn, consistency and comparability is restricted. Inconsistencies and conflicts within individual standards and between different standards are likely to arise as a result of the non coherent and integrated set of principles. Areas of known difficulty are yet to be addressed and the industry related accounting guidance on the IFRS shows to be very little. The selection and application of the appropriate accounting policies remain greatly dependent on the judgment of the management. This in turn becomes a limiting factor as to the degree of comparability to be achieved. Hence, the low level of familiarity and industry practices undermine the very objective of the IFRS (‘’, 2007) The challenge of this principle based approach is the consistency in application and the transparent judgments towards the application of the standards. Participants must agree that the accounting made under the international standards conform to the spirit of the standards. Varying interpretation can cause tensions and even threaten the consistency of the application. Thus, the consistency within the conceptual parameters of the international standards must be ensured by the companies. The movement to a principle based approach entails the difficulty to accommodate greater acceptance of judgment. In order for such standards to work, rigorous interpretations and effective application must be ensured (, 2005). Since the IFRS are principle based standards, they focus on the understanding of the economics which underlie transactions or events. They can be applied to differing environments and thus require a high degree of professional judgment (, 2005) As such, interpretations of similar issues may vary from company to company and perhaps from country to country. The aim of the single accounting standard is to enable comparability. Hence, the differences in the interpretations will have to be limited. The country adopting IFRS is required to fall in line with the international interpretations of the standard. In this sense, local interpretations must be in line with the interpretations of the rest of the world. The use of non-IFRS measures in the result announcements of companies reflects the gap between the IFRS and what the company perceives as essential in communicating the information to the market. The usefulness of information is dependent on individual decision contexts. Apparently, standard-setters of financial reporting are incapable of knowing in advance which information is useful for the company. Both in the national and international levels, the data that is decided to be recorded and the way by which it will be disclosed in accounting statements are based on what the society, groups or interests of individuals consider to be significant to the needs of the users. This only suggests that the differing interest can not easily be transformed to a unified interest that will satisfy all the demands and interest of different groups. Recent arguments on the adaptation of IFRS suggest that its standards are designed specifically for developed capital markets which may not be applicable to those developing economies. There is a school of thought suggesting that the standardization of the world accounting standards is not practicable considering the different socio-political and economic environment  as the issue of standard setting is a subject of local politics(, n.d). Moreover, the standards and principles that are appropriate in the western developed countries may be inappropriate or may inflict undue hardships to those developing countries Also, the IFRS may be seen as a blocking mechanism in which the developing countries that adopt its standards may be prevented from evolving their own standards which is significant in the social, political and the economic environment. Hence, perpetual tendency is likely to be caused by the adoption to the emerging economies. The nature of the socio-economic, political and cultural environment of developing countries require their economies to apply appropriate accounting standards based on their economic problems than merely adopting the standards of advanced economies (, n.d) Conclusion   The objective of having a single accounting standard worldwide is clearly manifested by the IFRS efforts. Indeed, such standards will foster benefits to the global financial market as it introduces a new trend in the area of financial reporting. However, it is also important not to disregard the possible implications of such standardization. Companies who are converting to IFRS are faced with the challenge of changing not only their accounting procedures but the understanding of the real impact of IFRS on their accounting system. Moreover, companies are confronted with the lack of general accepted ways of applying these standards. The IFRS implementation is at its early years and only through continued implementation can a consensus be laid on how to effectively apply it. And as far as adoption is concerned, international standards must be appropriate to the economic problems of the countries worldwide to be truly beneficial. References   Books   Journal     Internet Sources

INTERNATIONAL FINANCIAL REPORTING STANDARDS ( IFRS )

International Financial Reporting Standards This essay takes a look on the issues raised regarding the implementation of the Inte...

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