The Portable MBA in Finance and Accounting, 3rd Edition

(Greg DeLong) #1
Global Finance 355

against expropriatory conduct (as defined in the policy) by the government of
Ecuador.^2

Some of the important issues implicit in the Fashionhouse scenario out-
lined above are identified below and are discussed and illustrated in the bal-
ance of this chapter:



  1. Fashionhouse incurs a foreign-currency obligation when it begins to ac-
    quire furniture from its Danish suppliers. A decrease in the value of the
    dollar between purchase and payment date increases the dollars required
    to discharge the Danish krone obligation and results in a foreign-currency
    transaction loss.
    Financial repor ting issue: How are the foreign-currency obligations
    initially recorded and subsequently accounted for in the Fashionhouse
    books, which are maintained in U.S. dollars?
    Management issue:What methods are available to avoid the currency
    risk associated with purchasing goods abroad and also being invoiced
    in the foreign currency, and should they be employed?

  2. The purchase of one of its Danish suppliers requires that this firm hence-
    forth be consolidated into the financial statements of Fashionhouse and
    its U.S. operations.
    Financial repor ting issues:(a) How are the Danish statements con-
    verted from the krone in order to consolidate them with the U.S. dol-
    lar statements of Fashionhouse? (b) What differences in accounting
    practices, if any, exist between Denmark and the United States and
    what must be done about such differences?
    Management issues: (a) Is there currency risk associated with the Dan-
    ish subsidiary comparable to that described previously with the for-
    eign purchase transactions? Are there methods available to avoid the
    currency risk associated with ownership of a foreign subsidiary and
    should they be employed? (b) How will the financial aspects of the
    management of the Danish subsidiary be evaluated in view of (1) the
    availability of two different sets of financial statements, those ex-
    pressed in krone and those in U.S. dollars, and (2) the fact that most of
    its sales are to Fashionhouse, its U.S. parent?

  3. Fashionhouse relocates its manufacturing to a high-inf lation and low-
    labor cost country.
    Financial repor ting issues:How will inf lation affect the local-country
    financial statements and their usefulness in evaluating the perfor-
    mance of the company and its management?
    Management issues:(a) Are their special risks associated with locating
    in a highly inf lationary country and how can they be managed?
    (b) What are the restrictions on U.S. business practices related to deal-
    ing with business and governmental entities in other countries?

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