INTERNATIONAL

ACCOUNTING
ASSIGNMENT
Submitted To:

10
Acknowledgement

I would like to pay my sincere thanks to, University of Delhi, South Campus for
endowing me with the precious insights needed for working out this Project. He
has been very instrumental in communicating the core of this project study and
thus without his direction, the very inception of this work would not have been
possible.

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Q1. Whether a country’s capital market is debt –oriented or equity
oriented has a significant impact on the financial reporting that
develops in the country, both at the cosmetic and at the substantive
level. Choose a equity oriented country and a debt oriented country,
and obtain two corporate annual reports from each. Comment on the
similarities and the differences of the reports

National differences in disclosure are driven largely by differences in corporate

government and finance. In US, UK and other Anglo-American countries, equity
markets have provided most corporate financing and have become developed. In
these markets, ownership tends to be spread among many shareholders, and
investor protection is emphasised. Institutional investors play a growing role in
these countries, demanding financial returns and increased shareholder value.
Public disclosure is highly developed in response to companies accountability to
the public.

In many other countries i.e. France, Germany, Japan and emerging market
countries shareholding remains highly concentrated and Banks traditionally have
been main source of corporate financing. Structures are in place to protect
incumbent management. Banks and other insiders provide discipline. These
banks, insiders and others are closely informed about the company’s financial
position and its activities. Public disclosures is less developed in these markets
and large differences in the amount of information given to large shareholders
and creditors vis-a-vis the public may be permitted.

As investors around the world demand more detailed and timely information,
voluntary disclosures levels are increasing in both highly developed and
emerging market countries.

Equity Oriented - US ( Companies : Intel Corporation, McAfee Inc.)

Debt Oriented – Ireland ( Companies : 1. Glanbia plc, 2. Greencore Group plc )

Equity Oriented Debt Oriented

Focus Focus on profitability, future Focus on creditor protection,
cash flows, risk. direct access to information,
conservative measurements.

Components of Two years of consolidated Similar, except three years

Financial balance sheets, income required for SEC registrants for
Statements statements, cash flow all statements except balance
statements, changes in equity sheet.
and accounting and notes.

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Balance Sheet Does not prescribe a particular
format. A current/non current
presentation of assets and
liabilities is used, unless a
liquidity presentation provides
more relevant and reliable
information. Certain minimum
items are presented on the
face of the balance sheet.
Entities may present either a
classified or non -classified
balance sheet. Items on the
face of the balance sheet are
generally presented in
decreasing order of liquidity.
SEC registrants should follow
SEC regulations.

Income Does not prescribe a standard Present as either a single step

Statement format, although expenditure or multiple step format.
is presented in one or two Expenditures are present by
formats ( function or nature ). function. SEC registrants
Certain minimum items are should follow SEC regulations.
presented o the face of the
income statement.

Exceptional Does not use the term but Similar, but individual
items requires separate disclosures significant items are presented
of items that are of such size, on the face of the income
incidence or nature that their statement and disclosed in the
separate disclosures is items.
necessary to explain the
performance of the entity.

Extraordinary Prohibited Defined a being both

items infrequent and unusual, and
are rare. Negative goodwill is
presented as an extraordinary
item.

Cash Flow Standard headings, but limited Similar,but more specific

Statements- guidance on contents. Use guidance for items included in
formats and direct or indirect method each category. Direct or
method indirect method used.

Changes in Comparatives and prior year Similar

accounting are restated against opening
policy retained earnings, unless
specifically exempted.

Correction in Comparatives are restated and Similar

errors , if the error occurred before
the earliest prior period
presented, the opening
balances of assets, liabilities
and equity for the earliest prior
period presented are restated.

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Changes in Reported in income statement Similar
accounting in the current period and
estimates future, if applicable.

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Q2. The proximity or distance between accounting regulations and
accounting practice often depends on the level of enforcement. Select
two countries and discuss the level of enforcement of financial
reporting regulations in each country. Identify the agencies and
organisations in place that are responsible for enforcing the financial
reporting requirements. How do they compare to one another?

SPAIN

General Enforcement Framework in Spain

The timber framework of Spanish enforcement is composed for these following

institutions, which are in charge of issue and establishment mandatory audit and
accounting standards and oversight companies, auditors and audit firms.

a)Creation and establishment of high accounting and auditing standards

Accounting standards are written in a General Accounting Book (El Plan

General Contable de 1990- PGC). The 1990 PGC is completed with
adaptations for specifics sectors and standards about specifics problems
as assessment standards, which are approved through Ministerial Orders.
Moreover, from 1997 the ICAC issue resolutions with goal of explaining
and amplifying concrete aspects which are undeveloped in the 1990 PGC;
all these accounting regulations are compulsory.

There are three specific oversight institutions, the DGSFP, BE and CNMV
as well as the ICAC oversighting institutions and issuing accounting
standards which are compulsory within its specific supervision area.

The AECA issue accounting Standards, which in spite of not being

compulsory, they are useful for accounting professional to elaborate
financial statements, in so doing they are considered as generally
accepted accounting principles in Spain. The AECA’s recommendations
influenced the creation of PGC and its posterior modifications. (Canibano
et al. 2005)

Audit Technical Rulings in Spain are issued by the ICAC and they are
published in the ICAC Bulleting, but the corporations which represent
auditors and audit firms participate in the elaboration process.

b) Oversight of companies, auditors and audit firms

There is a formal control in Spain with the aim to increase the information
transparency and back the oversight work of accounting standards, which
consists of the obligation of depositing the accounts of every Spanish company
in the Mercantile Register. These accounts have to contain financial statements,
which will be audited in case of being demanded by law1.
If the company does not deposit theirs accounts in the Mercantile Register it will
be penalized, the next year, with the closure of the registry, which in spite of not
being a monetary sanction is especially effective, because the company isn’t
allow to registry any mercantile action such as inscription of new statutes,
members of a council, economic transactions and so on, thereby strongly
limiting the company activity. Furthermore the ICAC, as stated by law, could
penalise the company with a monetary sanction of up to 50 million pesetas.

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(Jefatura del Estado Espanol 1996)
b.1) Oversight of auditors and audit firms

The ICAC is the most important institutions in Spain, which is in charge of

securing the correct behaviour of the accounting and auditing profession. The
ICAC, a governmental institution, was set up under the Audit law, 1988 with two
main roles: 1) the accounting regulation and 2) the regulation, control and
discipline of the audit profession. (ICAC 1990)

The first role has been explained previously, that’s why this section will deal the
ICAC’s role in relation with the audit profession.

The mechanisms of enforcement used by the ICAC to oversight and control the
auditors and audit firms are principally reactive, and consist of: a) technical
controls which are completed promptly to oversight specific audit work in
defence of public interest, b) keeping and managing the Audit Official Registry
(Registro Oficial de Auditores de Cuentas- ROAC) and c) monitoring, overseeing
and keeping the guaranty incorporate by the recognised auditors. (Jefatura del
Estado Espanol 1988a)

From the Financial law, 2002, a proactive revision mechanism has been
incorporated; thereby the ICAC is accomplishing quality controls, where the
audit work on listed companies will be supervised at least each six years.
Furthermore the corporations which represent auditors continue realizing quality
controls and they must send theirs results to the ICAC each ended year.

Moreover, from the Financial law, 2002, with the aim to assist in their oversight
role of the ICAC, the audit firms and auditors must be communicate to the ICAC,
the hours and fee invoice to the client, differing between audit works and other
services.

Under the Financial law, 2002, an Auditing Fee per auditing reports has been set
up to achieve this proactive activity of oversight. Before this fee the ICAC was
financed mainly with the general state budgets.

If the ICAC detect wrong auditing services, it may impose disciplinary action,
which ranges from a fine to the expulsion from the ROAC and the disablement as
an auditor. From the Financial law, 2002, the sanctions are imposed only to the
responsible auditors, and will be published in the ICAC Bulleting when the
sanctions are either very strong or strong.

The ICAC investigate cases which affect public interest thought technical
controls. Theses cases, which might be a liable to ICAC’s disciplinary action, are
selected thanks to quality controls achieved by either corporations which
represent auditors or the ICAC and denouncements of any member of the society
(CNMV or other Institutions)(Gonzalo Angulo, 2002). Before the Financial Law,
2002, it was enough a denouncement realised by a part legality interest to the
ICAC investigate a case, but with the new law this has been suppress.

The audit profession, besides being oversight by an institutional control, is Self-

regulated by three corporations which represent auditors which compound the
ROAC. The corporations which represent auditors are: the (Registro de
Economistas Auditores- REA), the (Registro General de Auditores- REGA) and the
(Instituto de Auditores-Censores Jurados de Cuentas de España- IACJCE).

The REA and REGA are expert bodies which depend, repectivaly, of the following

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corporations the “Consejo General de Economistas” and the “Consejo de
Titulados Mercantiles y Empresariales”. The IACJCE is an independent
corporation, which is found upon to the Economy and Taxes Minister, and it is
the only Spanish corporation with representation in international audit bodies, as
a member of the IASB.

Every auditors and audit firms must be registered in one of these three
corporations, which are recognised under the Audit Law, 1988 as Statutory
recognised professional audit corporations. Their responsibilities, besides the
continued formation2 of their members are:

a) Elaboration of audit principles, standards and technical procedures

which only have validity when they are published by the ICAC.

b) Convocation of unified Examination Access Test to the ROAC. Since the

Financial Law, 2002 this test is unified under the ICAC’s supervision.

c) Quality Control of the audit activity of their members. These oversight

activities may be assisted in sanctions. The ICAC must be informed of procedures
utilised and results found and must taken disciplinary actions if necessary. Since
the Financial Law, 2002, the results must be sent at the end of each year.

The big four audit firm are registered in different corporations which represent
auditors. Deloitte and Ernst & Young are registered in the REA, and KPMG and
Price Waterhouse Coopers in the IACJCE. Likewise all of them are under the
oversight of the ICAC, because they are registered in the ROAC.

b.2) Oversight of companies:

In spite of the fact that the ICAC is the most significant institution to secures the
compliance with the accounting standards in Spain, there are four specifics
oversight institutions to definite areas: 1) The Directorate-General of Insurances
and Mutual
Fund Industry (Dirección General de Seguros y Fondos de Pensiones- DGSFP),
which oversights and monitors insurance companies 2) The Bank of Spain (El
Banco de España- BE), which oversights and monitors banks and financial
institutions, and 3) The National Securities and Exchange Comission (Comisión
Nacional del Mercado de Valores- CNMV), which oversights and monitors the
capital market and the companies with capital market activities 4) The State
Auditing Agency (Intervención General de la Administración del Estado- IGAE) It
is the body which oversights and monitors public sector entities. Besides
preparing their financial statement under the 1990 PGC, they also do it under
1994 PGC for public sector entities.

This paper analyzes enforcement to secure the compliance with accounting

standards to listed companies and in so doing the DGSFP, BE and IGAE will not
be explained.

The CNMV is an independent body funded by the Government with the

Securities Market Law, 1988 that has been revised by the Laws 37/1998 and
44/2002. Its main goal is securing the correct capital market functioning and
protects the investor rights whereby this body is authorised to oversight the
Spanish capital markets and the activities of both the individual and/or the legal
entity, who take part in them and so.

The CNMV’s roles are oversighting and monitoring the stock market activities
such as insurance of securities, takeover bids, trading in futures and options and

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so on; also regulating and oversighting and monitoring investment firms such as
listed companies, mutual funds, stockbroker companies and so on. Within this
last CNMV’s function is to guarantee the compliance of listed companies’
financial information with the accounting standards.

Regarding securing the compliance of listed companies’ financial information

with the accounting standards, the CNMV must ensure that the information is
send complete. This information must be audited and contains individual and
consolidated financial statements and management report. If this financial
information is not sent or is incomplete, the CNMV demand it from the company
which will be penalized.

The types of sanctions ranges from a fine to the suspension the company’s
securities, if the company does not sent the information.

With the aim to protect the investor rights this information is disclose, for this,
the CNMV possess its own registry. In addition there are public registries for
other kind of listed companies’ information such as prospectuses, sanctions,
relevant information and takeover bids.

Moreover the CNMV may review this financial information, which is selected
principally, thought qualified audit opinions (CNMV 2004b). Furthermore the
CNMV could initiate an investigation either for own initiative or when relevant
data is presented by any member of the society to department of investor
rights, others oversight institutions, press comments and so on.

In particular, the CNMV does not usually analyze the whole of the financial
statements, only the problems referred in qualified audit opinions. For the
correct revision of the qualified audit opinions, the CNMV may require additional
information from the company about why they have decided to present their
financial statements with a qualified audit opinion and how they are going to
solve those problems referred to by the auditors. Moreover the amplification of
information contained in the memory may be demanded. This required additional
information may be found in the web page of the CNMV.

On the other hand, it is compulsory that auditors send a special audit report for
each qualified audit report of listed companies. Theses “Special audit reports”
are published in one of the CNMV official registries and inform us if the company
has or has not solved the problems referred to by the auditors at the close of the
first six month period of the next exercise.

From 2000 the CNMV have published a report where the study of the audit
qualifications is explain. This report contents a general summary of audit
qualifications of listed companies and its general features of the audit
qualifications, but does not explain whether the company has been sanctioned
by accounting irregularities or whether it has restated its information by CNMV
demand or voluntary action.

In addiction from the Financial Law, 2002, is compulsory that a report on its
oversight functions is published, within it a small part describes the actions and
procedures achieved to secure the compliance of listed companies’ financial
information with the accounting standards.

In spite of the fact that the sanctions imposed by the CNMV, are predominantly
related with infractions related with fraudulent stock market operation such as
accomplishment of disallowed activities, manipulation of prices, using of
privileged information and so on. The non compliance of investment firms’
financial information with the accounting standards could be penalised. In 2003
1 in 23 very strong sanctions and 2 in 29 strong sanctions, were imposed for
accounting irregularities and in 2004, 0 in 25 very strong sanctions and 1 in 23

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strong sanctions were imposed. (CNMV 2004a)

The sanctions may be imposed to any physic and juridical person who had
unfulfilled law. There are sanctions very strong, strong and light. The sanctions
range from monetary sanctions and/or the disqualification of directors to the
suspension the company’s securities (Jefatura del Estado Espanol 1988b)

From the Financial Law, 2002, the very strong and strong sanctions must be
published in the Official State Bulletin and furthermore the CNMV publish them
within one of its own registries which is found on its own web page. Strong
infractions completed before 2002 might not be published. The light sanctions
are never published. (Jefatura del Estado Espanol, 2002).

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Austria

Enforcement of Financial reporting regulations in Austria

In Austria, the enforcement of financial reporting regulations is shared by the

executive board, the supervisory board, auditors, tax authorities and the
courts.Financial statements are prepared by the executive board (Vorstand),
which is comprised of the executive management of the company. They are then
audited by a statutory auditor and subsequently approved by the supervisory
board (Aufsichtsrat), whose duty is to oversee the executive board.19 It is the
responsibility of the statutory auditor to ensure that accounting regulations have
been complied with. Licensed by the legislator, they act as an impartial and
independent control mechanism. However, due to growing concerns about
auditor independence and audit standards, the regulation and enforcement of
auditing are currently undergoing a significant change, both as far as the scope
and purpose of the audit and the role of the auditor and the audit opinion are
concerned. Its aim is to make Austrian audit standards internationally
comparable, thus fostering the further integration of capital markets. This is part
of the general European harmonisation process of financial reporting, especially
the European Union’s Financial Reporting Strategy.

Austria lacks an official enforcement agency such as the Financial Reporting

Review Panel (FRRP) in the UK, whose sole purpose is the enforcement of
financial reporting requirements. Sir David Tweedie, the Chairman of the
Accounting Standards Board (ASB), explains the establishment of the FRRP as a
direct result of economic and commercial conditions, namely “the abuses of
accounting rules that occurred in the 1980s” in the UK. Other countries, in
including Austria, which did not experience the same problems, thus have not
felt the need to “set in place the same regulatory protections as the UK”
(McBarnet and Whelan, 1999, pp. 250–251). Another reason might be that
Austria has a creditor-orientated accounting system in which the verification of
inside information to outside parties does not have the same importance as in a
shareholder-orientated system.

The following sections focus on the role of the courts and the tax authorities in
the regulation and enforcement process by means of providing an analysis of the
type and extent of their involvement.

The Role of the Courts in the Regulation and Enforcement of Financial

Reporting

THE INTERRELATIONSHIP BETWEEN FINANCIAL AND FISCAL REPORTING

As mentioned previously, courts act as regulatory agents by means of

interpreting the financial reporting regulations of the Commercial Code (§§189–
283) in the course of judicial rulings. The following section examines their role in
the regulation and enforcement process of accounting regulations in more detail

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by means of analyzing court rulings and interpretations. Due to the
interrelationship between financial and fiscal reporting in Austria, the sections of
the Austrian Income Tax Law, which are interrelated with financial reporting
(§§4–14), also have to be included in the analysis.20 The inclusion of the latter is
important since it causes the Administrative Court (Verwaltungsgerichtshof) to
be involved in the interpretation of financial and fiscal reporting regulations. This
is a direct result of the particular structure of both German and Austrian Income
Tax Law, which is interrelated with the Commercial Code on three different levels
(Beisse, 1980, p. 637):

(1) Income Tax Law contains financial reporting regulations which are being
transformed into fiscal reporting regulations. This leads to the influence of
financial on fiscal reporting.

(2) It further includes fiscal reporting regulations which are congruent with
financial reporting regulations.21 This entails another influence of financial on
fiscal reporting.

(3) It also contains autonomous, separate fiscal reporting regulations, which

differ from financial reporting regulations. Since they have precedence over the
corresponding financial reporting regulations,22 this can result in the influence of
fiscal reporting on financial reporting.

Due to this particular structure of Income Tax Law, interpretations and rulings of
the Administrative Court concerning both financial (1 and 2) and fiscal (3)
reporting regulations impact on the interpretation and advancement of financial
reporting regulations. Beisse (1980, p. 645) describes the nature of the
involvement of the Administrative Court in the regulation and enforcement of
financial reporting regulations in the German context:23

. . . due to the specific structure of our [German] accounting regulations the

Federal Tax Court [Bundesfinanzhof] carries the main burden of interpreting and
advancing financial reporting regulations. Hence, the relevance of financial
accounting to fiscal accounting determined by the Maßgeblichkeitsprinzip has
proven to be a double-edged sword. On the one hand it causes a strong influence
of commercial law onto tax law. On the other hand it implies a corresponding
extensive relevance of fiscal judicial interpretations and rulings on financial
accounting. . . . this legal situation leads to an ongoing high court judicial
interpretations and rulings in this important area of commercial law by means of
fiscal trials. (my translation)

However, it should be noted that this relationship between financial and fiscal
accounting is limited to individual accounts (HGB, §§189–243), which are the sole
basis for tax calculation.

Conclusion

In Austria, regulation takes place through the law, the courts, and the academic
and professional community. These regulatory instruments are interrelated, with
the law having an impact on both legal interpretations and academic and

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practical research, and research influencing the judicial interpretations and
rulings. The involvement of courts in the regulation and enforcement of
accounting regulations has been found to occur infrequently and mainly as a by-
product of company litigation issues.What is more, almost fifty percent of court
cases are not concerned with the enforcement of accounting regulations, but
with the enforcement of filing regulations. The Administrative Court, in its role as
the highest court of appeal in tax matters, emerges as by far the most active
enforcement agent in Austria. Thus, the majority of enforcement activity takes
place indirectly through the enforcement of fiscal requirements. This is due to
the strong economic incentives of both parties involved. These results might be
attributed to Austria’s creditor-orientated accounting system in which the
verification of inside information to outside parties does not have the same
importance as in a shareholder-orientated system.

Q3. Obtain the annual reports of three companies (from the same
industry) that prepare their financial statements using international
accounting standards (IASs). Compare the disclosures, accounting
policies and practices, and informational content between the three
companies. In your opinion, are they truly comparable? Based on this
comparison, are IASs an effective global standard?

BAHRAIN TOURISM COMPANY B.S.C

Basis of preparation:

1. Prepared in accordance with International Financial Reporting Standards

(IFRS) and the provisions of the Companies Law, Cap. 113 and the
requirements of the Bahrain Commercial Company Law 2001.

2. The financial statements have been drawn up from the accounting records
of the Company under the historical cost convention, except for certain
available for sale investments which are stated at fair value.

3. The Company classifies its expenses using the nature of expense method.

Hotel revenue

1. Income from hotel operations is recognised when services are rendered

and when facilities are provided to customers .

Receivables

1. Receivables are recorded at cost, being the fair value of services rendered

and facilities provided; less provision for impairment .

Inventory

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 1. Inventory is valued at lower of cost and net realisable values with due
allowance being made for damaged and deteriorated items. Cost is
determined on a weighted average basis and includes expenditure
incurred in acquiring inventories and bringing them to their existing
location and condition. Net realisable value is the estimated selling price
in the ordinary course of business, estimated selling expenses.

Foreign currency translation

(a) Transactions and balances

Monetary assets and liabilities are translated into Bahraini Dinars at year
end exchange rates. Transactions in foreign currencies during the year are
converted at the rate ruling at that time. Foreign exchange gains and
losses are recognized in the income statement. Translation differences for
non-monetary items, such as equities classified as available-for-sale
investments, are included in a fair value reserve in equity.

Property, plant and equipment

Property and equipment held for operational purposes are carried at cost
less accumulated depreciation and any impairment losses. The cost of the
properties and equipments includes the cost of bringing them to their
present location and condition. Direct costs are capitalized until
properties and equipments are ready for use. Capital work-in-progress
comprises the cost of properties and equipments that are not yet ready for
their intended use on the reporting date. The cost of additions and major
improvements are capitalised.

Depreciation

Land is not depreciated. Depreciation is charged to the income statement

on a straight-line basis over the estimated useful lives of each part of an
item of property and equipment as follows:

Hotel and conference centre buildings

40 years

Hotel and conference centre furnishings and equipment 2 - 10

years

The assets’ residual values and useful lives are reviewed, and adjusted if
appropriate, at each reporting date. When an item of property and
equipment is sold or discarded, the respective cost and accumulated
depreciation relating thereto are eliminated from the statement of
financial position, the resulting gain or loss being recognized in the income
statement.

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 Impairment of Assets.

An impairment loss is recognised for the amount by which the carrying

amount of the asset exceeds its recoverable amount. The recoverable
amount is the higher of an asset’s net selling price and value in use.

Related Party Transactions

Transactions with entities controlled by directors, or over which they exert

significant influence, are conducted on a normal commercial basis. There
were capital expenditure payments for hotel projects made to director-
controlled entities where the directors were interested. During the year,
the Company has rented the office of one of its divisions to its associate
company.

Segmental Reporting

The Company has three distinct operating segments, Hotel, Investments

and Travel, which are the Company’s strategic business units. The
strategic business units offer different products and services, and are
managed separately because they require different strategies for
management and resource allocation within the Company.

The following summary describes the operations in each of the Company’s

operating reportable segments:

• Hotel: Provision of hotel facilities and other services to individual and

corporate customers;

• Investments: This segment is focused on investing the surplus funds of

the Company in investments in equity shares, mutual funds, and
associates and monitoring the performance of the portfolio on a timely
basis. The investments are not traded, but held as available for sale
securities.

National Hotels Company B.S.C.

Basis of preparation:

1. Prepared in accordance with International Financial Reporting Standards

(IFRS) and the provisions of the Companies Law, Cap. 113 and the
requirements of the Bahrain Commercial Company Law 2001.

2. The financial statements have been drawn up from the accounting records
of the Company under the historical cost convention, except for certain
available for sale investments which are stated at fair value. The Company
classifies its expenses

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Receivables

1. Trade receivables are stated at original invoice amount less a provision for
any uncollectible amounts. An estimate for doubtful debts is made when
collection of the full amount is no longer probable. Bad debts are written
off when there is no possibility of recovery.Net realisable value is based on
estimated selling price less any further costs expected to be incurred on
completion and disposal.

Inventories

Inventories of food and beverage are stated at the lower of cost and net
realisable value. Inventories of maintenance stores are stated at cost less
provision for obsolescence. Costs are those expenses incurred in bringing
inventories to their present location and condition and are determined on
a first-in-first-out basis.

Property, plant and equipment

1. Property, plant and equipment, except land, is recorded at cost less

accumulated depreciation and any impairment in value. Land is carried at
revalued amounts. Land and capital work-in-progress are not depreciated.

2. Revaluation of land is normally carried out every three years. On

the subsequent sale or retirement of revalued land, the additional
revaluation surplus is transferred to retained earnings.

Depreciation

- Buildings 25 to 40 years

- Improvements to buildings 5 to 10 years

- Furniture, fixtures and equipment 5 to 7 years

- Plant and machinery 4 to 20 years

The carrying values of property, plant and equipment are reviewed for
impairment when events or changes in circumstances indicate the
carrying value may not be recoverable.

Impairment of Assets

An assessment is made at each statement of financial position date to

determine whether there is objective evidence that a specific financial
asset may be impaired. If such evidence exists, any impairment loss is

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 recognised in the statement of income. Impairment is determined as
follows:

a) For assets carried at fair value, impairment is the difference between

cost and fair value, less any impairment loss previously recognised in
the statement of income.

b) For assets carried at cost, impairment is the difference between

carrying value and the present value of future cash flows discounted at
the current market rate of return for a similar financial asset.

Foreign currency translation

(a) Transactions and balances

Transactions in foreign currencies are recorded at the functional

currency rate of exchange prevailing at the date of the transaction.
Monetary assets and liabilities denominated in foreign currencies are
retranslated at the functional currency spot rate of exchange ruling at
the statement of financial position date. All differences are taken to the
statement of income. Non-monetary items that are measured in terms
of historical cost in a foreign currency are translated using the
exchange rates as at the dates of the initial transactions. Non-monetary
items measured at fair value in a foreign currency are translated using
the exchange rates at the date when the fair value is determined.
Translation gains or losses on non-monetary available for sale
investments carried at fair value are included in equity as part of the
fair value adjustment on available-for-sale investments. Translation
gains or losses on non-monetary trading investments carried at fair
value are included in the statement of income as part of the net change
in the value of managed portfolios.

Related Party Transactions

Related parties represent the associated company, major shareholders,

directors and key management personnel of the Company, the operator
of the hotel and entities controlled, jointly controlled or significantly
influenced by such parties.

Segmental Reporting

The Company’s operating businesses are organised into the following

segments:

Hotel business and corporate - Room rental, food and beverage

sales, conference and events, and head
office expenses.

Investments - Income from investments including

associate and term deposits.

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 Segment assets include all operating assets used by a segment and
consist primarily of property, plant and equipment, inventories,
available for sale investments, managed portfolios and accounts
receivable. Whilst the majority of the assets can be directly attributed to
individual business segments, the carrying amounts of certain assets
used jointly by two segments is allocated to segments on a reasonable
basis.

IFA Hotels & Resorts

Basis of preparation

1. The consolidated financial statements of the group have been prepared in

accordance with International Financial Reporting Standards.

2. The consolidated financial statements are prepared under the historical

cost convention except for the measurement at fair value of investments
at fair value through statement of income, available for sale investments
and investment properties.

Basis of consolidation

1. The consolidated financial statements incorporate the financial

statements of the parent company for the year ended 30 June 2009, and
the financial statements of its subsidiaries prepared to that date, or to a
date not earlier than three months of the parent company’s year end
using consistent accounting policies.

Revenue recognition

1. Revenues Revenue is recognised to the extent that it is probable that

the economic benefits will flow to the group and the revenue can be
reliably measured. The following specific recognition criteria must also be
met before revenue is recognised:

(a) Revenue from hotel operations and other related services

Revenue from hotel operations and related services is recognised when

services are rendered.

(b) Revenue from sale of properties

18 | P a g e
 Revenue on sale of condominiums is recognised on the basis of
percentage completion using the certificate provided by the independent
lead consultants of the respective projects

Impairment of Assets

An assessment is made at each balance sheet date to determine whether

there is objective evidence that a specific financial asset or a group of
financial assets may be impaired. If such evidence exists, any
impairment loss is recognised in the consolidated statement of income.
Impairment is determined as follows:

a) For assets carried at fair value, impairment is the difference between

cost and fair value;

b) For assets carried at cost, impairment is the difference between

carrying value and the present value of future cash flows discounted
at the current market rate of return for a similar financial asset; and

c) For assets carried at amortised cost, impairment is the difference

between carrying amount and the present value of future cash flows
discounted at the original effective interest rate.

Reversal of impairment losses recognised in prior years is recorded when

there is an indication that the impairment losses recognised for the
financial asset no longer exist or have decreased and the decrease can
be related objectively to an event occurring after the impairment was
recognised

Property, plant and equipment

1. Property, plant and equipment, are stated at cost less accumulated

depreciation and impairment losses.

Depreciation

Depreciation is calculated to write-off the cost less the estimated

residual value of property, plant and equipment on a straight-line basis
over their estimated useful lives as follows:

Buildings 50 years

Plant and Equipment 5-7 years

Motor vehicles 4-5 years

Furniture and fixtures and equipment 5-7 years

Yacht 10 years

Lease hold property is depreciated over the period of the lease. No

depreciation is provided on freehold land.

19 | P a g e
Tax

Deferred taxation is provided in respect of all temporary differences.

Deferred tax assets are recognised in respect of unutilised tax losses
when it is probable that the loss will be used against future profits.

Foreign currency translation

(a) Transactions and balances

Transactions in foreign currencies are initially recorded in the

functional currency rate of exchange ruling at the date of the
transaction. Monetary assets and liabilities denominated in foreign
currencies are retranslated at the functional currency rate of exchange
ruling at the balance sheet date. All differences are taken to “foreign
exchange gain/loss” in the consolidated statement of income. Non-
monetary items that are measured in terms of historical cost in a
foreign currency are translated using the exchange rates as at the
dates of the initial transactions. Non-monetary items measured at fair
value in a foreign currency are translated using the exchange rates at
the date when the fair value was determined

Segmental Reporting

The group operates in four main geographical segments: Kuwait, Asia

and other Middle Eastern countries, Africa, United Kingdom (UK) and
Europe.

Related Party Transactions

Related parties represent the ultimate parent company, associates,

joint ventures, directors and key management personnel of the group,
and other related parties such as subsidiaries of the ultimate parent
company (fellow subsidiaries), major shareholders and companies in
which directors and key management personnel of the group are
principal owners or over which they are able to exercise significant
influence or joint control.

Are they truly comparable?

Since the companies follow IFRS, the core principles remaining consistent, the
reports are the comparable in the basic theme. The methods of disclosures, the
type of reporting procedure and the tools and methods used are true to the
once promulgated by IFRS.

However, there are differences in various areas because of Company Law of the
jurisdiction, the tax law practices in particular countries and also the segment

20 | P a g e
 and geography the companies operate. Also the type of operation methodology
followed by companies leaves a distinct flavour to the reports prepared.

IAS an effective global standard?

The IAS because of several similarities makes the reports comparable and
consistent across various jurisdictions. Leaving aside political and social factors,
the analysis of report leads to better result in lesser effort. Therefore, the step
towards adoption of IAS by countries is a useful step which would boast
efficiency and ease the analysis and comparability of the reports.

Q4. Log onto the website of an accounting organisation of your choice

and describe some of the steps this organisation has taken to promote
international harmonisation, including any cooperative activities with
other organisations and countries

Singapore-Harmonisation

In Singapore, the Institutes of Certified Public Accountants of Singapore (ICPAS)

issued a Statement of Recommended Accounting Practices, which regulates
matters of disclosure in 1977. This statement provides guidance to companies
for complying with the disclosure requirements found in the Singapore
Companies Act 1967. Singapore Companies Act governs all Singapore business
corporations and branches of foreign companies In 1977, ICPAS set the rules of
accounting and reporting in Singapore.

Standards are issued as Statements of Accounting Standards (SASs) and

Statements of Recommended Accounting Practices (RAPs). In 1994, ICPAS
indicated that it was necessary to comply with these standards for financial
statements to provide a true and fair view, in accordance with the
Singapore Companies Act. While compliance with the standards is expected, the
SASs are not legally binding and are not intended as a rigid, comprehensive set
of rules. However, professional judgement should be exercised in their
application

The Actors
In Singapore, the private sector body, ICPAS, has been at the forefront of
standard setting activities. Beside ICPAS, many other organization participate
directly or indirectly in accounting standard setting, such as the Registrar of
Companies and Business, the Monetary Authority of Singapore, the Public
Accountant Board, the Stock Exchange of Singapore, and the Singapore
Federation of Chambers of Commerce and Industry.

Institute of Certified Public Accountants of Singapore (ICPAS)

The ICPAS is the national organization of the accounting profession in Singapore.
This is the only official accounting body in Singapore and responsible for all
professional matters of the accounting profession. It was formed in June 1963 as
the Singapore Society of Accountants under the Accountants Act. The Society
was reconstituted and renamed the ICPAS on 11 February 1989, under the

21 | P a g e
Accountants Act 1987. The ICPAS promulgates the accounting standards and
auditing standards in Singapore

The ICPAS' network of members span the globe and its international outlook and
connections are reflected in its membership of regional and international
professional organizations such as the AFA, IASB and IFAC.

Registrar of Companies and Business

The principal task of Singapore’s company registrar is to maintain records of
domestic companies, as stipulated by company laws. Registrar of Companies
and Business in Singapore ensures that companies comply with specific
disclosure requirement found in company laws. In Singapore, exclusively
designated company registrars handle company administration

Monetary Authority of Singapore (MAS)

MAS, as the statutory regulator, has the authority to regulate all elements of
monetary, banking and financial aspects of Singapore. It was formed in 1971 by
the parliament of Singapore. The MAS monitors compliance with the laws and
regulations that govern the integrity of the markets, seeks enforcement of the
laws and proposes amendments in order to keep them relevant in a changing
market environment.
MAS' mission is to promote sustained and non-inflationary growth of the
economy, as well as foster a sound and progressive financial services sector.
Several MAS’ objectives as follows:
• To conduct monetary policy and to manage the official foreign reserves
and the issuance of government securities
• To supervise the banking, insurance, securities and futures industries, and
develop strategies in partnership with the private sector to promote
Singapore as an international financial centre
• To build a cohesive and integrated organization of excellence.

Public Accountant Board (PAB)

PAB is the regulatory body of the accountancy profession in Singapore. It was
formed in 1989, following the restructuring of the Singapore Society of
Accountants. The 10-member Board is responsible for the registration and
discipline of practising members in Singapore. It acts as a watchdog body by
checking irregularities in the professional conduct and practices of ICPAS
practising members. PAB is the government body that licenses practising
accountants. Law and professional self-regulation regulate the accountancy
sectors in Singapore. Regulations are
found in the Accountants Act, whilst the rules are found in PAB rules 1989 and
the ICPAS Rules 1989, respectively.

Stock Exchange of Singapore (SES)

SES was formed on 1st of December 1999 by the merger of two well established
and respected financial institutions, SES and the Singapore International
Monetary Exchange Limited (SIMEX). In 2000, SES became a public-listed
company. The broadened shareholder base better positions SES to
seize the opportunities of the future, and to enjoy the flexibility available to any
listed company in terms of capital structure, corporate finance, mergers and
acquisitions .
SES is the first fully electronic and floorless exchange in Asia and is the first
demutualised, integrated securities and derivatives exchange in Asia Pacific. The
SES supports Singaporean and global companies to rise capital, and for investors

22 | P a g e
to transact and clear financial products. The SES owns and operates the only
integrated securities exchange and derivatives exchange in Singapore and their
related clearinghouses. Its exchanges have a presence and prominence that
extends beyond the borders of Singapore.

Singapore Federation of Chambers of Commerce and Industry

The Singapore Federation of Chambers of Commerce and Industry is a private
sector body that acts as the national peak body representing the private sector
in Singapore. It provides comments regarding proposed financial accounting
regulations.
The principal functions of this body is to promote and protect the interests of
member organization by:
• Acting as the national peak body representing the private sector in
Singapore and serving as its spokesman to ASEAN private and public
sector organizations.
• Representing Singapore in the affairs of regional and international
business organizations such as: ASEAN Chambers of Commerce and
Industry, Confederation of Asia-Pacific Chambers of Commerce and
Industry and International Chamber of Commerce

The Actors and the Process of Standard-setting

SES plays a key role in preserving fair and transparent markets. Therefore, they
are responsible for the listing rules for companies that raise capital and have
their shares traded on the exchange, and for ensuring that conditions exist for
orderly trading of listed securities. When it comes to financial reporting, the SES
participates in regulating financial reporting practices and promulgates
listing requirements for companies seeking to have their securities traded in the
exchange issues its own Listing Manual and Disclosure Policy Guidelines
containing requirements beyond those
specified by the Companies Act. On the other hand, stock exchange
administrators monitor whether listed companies comply with continuing
reporting requirements after such companies have been qualified to list their
securities in the exchange.

In Singapore, the government influences financial reporting and support of

professional accounting initiatives. This influence and support occurs directly
thorough legislation and indirectly, thorough audit requirements. The 1990
amendments to the Ninth Schedule of the Singapore Companies Act have
directly incorporated most of the accounting standards and recommended
accounting practices issued by ICPAS. Government agencies, such as the
Registrar of Companies and Businesses and MAS, require companies to be
audited by a licensed CPA.

As the securities agency, the MAS monitors whether companies prepare financial
reports in accordance with securities market regulations. The MAS, based on its
mandate under the Banking Act and the Securities Industry Act, has specified
disclosure requirements for financial institutions and companies issuing their
own securities to the public. The MAS also requires companies to
be audited by a licensed CPA The role of other private sector groups in
accounting standard setting and preparation of financial statements and user
groups, appears minimal . However, these groups influence standard setting
activities in Singapore. These groups mainly influence the consultative process
adopted by ICPAS. This process is designed, in part, to accommodate the
concerns of the business community. For this reason, drafts are often sent to the

23 | P a g e
national chamber of commerce and industry groups, and then this body gives
comments. The other way by which a preparer of financial statements could
influence standard setting outcomes indirectly is through explanation made by
public accountants who, in view of their association with their clients, are aware
of the likely impact of new accounting standards on companies.

Due Process
ICPAS is governed by a Council comprised of eight elected practicing members,
eight elected non-practicing members (e.g. commerce, industry, education), and
three members nominated by the Singapore Government and appointed by the
Minister for Finance. The Council may appoint members of the Institute to be a
co-opted member of the Council but no more than two coopted
members can hold office in the Council at any one time .The particular
committee of the professional body takes charge of preparing proposed
accounting standards.
This committee generally is comprised of representatives from public practice,
government, commerce and industry, and education, all of whom must be
members of the professional accounting body.

The ICPAS’ Accounting Standards Committee examines the current IAS to

determine its relevance to Singapore. If deemed suitable, the Committee
distributes the IAS for comment to various government and private sector
organizations, including the Stock Exchange of Singapore, the Association of
Banks of Singapore, and the Chamber of Commerce. The Committee, using the
comments received as well as various legal and regulatory considerations, make
modifications to IAS. The revised standard is sent to the Institute’s Council for
approval. Once it is approved, it is promulgated as a Singapore accounting or
auditing standard.

Singapore Accounting Standards

The colonial history of Singapore dictates that its accounting system was also
under British influence. After independence, and the emergence and
development of IAS, Singapore also turned to the IASB as its major source of
accounting standards. Singapore started adopting IASs as national standards in
1977, two years after the first IAS rolled off the press. As an independent country
severing its links with the UK, Singapore found the IASs a politically correct
substitute for the informal influence of UK accounting standards.

All IAS standards are examined for their propriety of adoption in the Singapore
context, and most had been adopted by the end of 1995. Some IAS standards
have been amended to be more relevant in the Singapore context, but the
amendments generally are not significant and the essence of each IAS statement
has been retained. In Singapore, IASs are heavily adopted, but with minor
modifications in some cases, as Statements of Accounting Standards. Although
Singapore is a country that adopts IASs as national standards, SASs are not
limited to IASs. There is no IAS on earnings per share yet, but there has been an
SAS on this since 1983. More recently, with the introduction of the goods and
services tax (GST) in Singapore, an SAS on accounting for GST was added. Both
of these SASs are based on UK standards.

Accounting Standards are applicable to financial statements of reporting entities

(not just companies) that are intended to give a true and fair view of state of
affairs at the balance sheet date. However, the ICPAS is continuing its policy of
harmonizing SAS with IAS. This effort is in line with the AFA’s policy encouraging

24 | P a g e
the members to adopt IAS. Accounting standards in Singapore include all of the
professional releases issued by the ICPAS. All members of ICPAS, whether in
preparing or auditing financial statements, are required to observe these
accounting standards. Some of the professional releases include SAS, Provisional
Statements of Accounting Standards, and Statements of Recommended
Accounting Practice.

Although the Accountants Act regulates the accountancy profession in

Singapore, technical standards (accounting and auditing) are not directly
regulated. There is no requirement in the Companies Act for companies' financial
statements to be prepared in accordance with SASs. The Companies Act
requirements pertain to the form and content of the balance sheet and the
profit and loss account deal with disclosures, but not presentation or
measurement issues. The raison d'etre of SAS rests on the statutory requirement
that the accounts give a `true and fair view'. The role of SASs in Singapore is the
same as that of accounting standards in the UK before the Dearing reforms
introduced the Accounting Standards Board and before the UK Companies Act
of 1985.

The ICPAS is continuing its policy of harmonizing SAS with IAS. The ICPAS has
announced their plan to simultaneously issue exposure drafts and standards with
the IASB and to make the standards effective in the quarter following adoption.
The ICPAS has issued five new accounting standards, which became effective on
the 1st of April, 2001.

In late 2000, the Disclosure and Accounting Standards Committee (DASC) of the
ICPAS was formed to propose changes to the Singapore Companies Act. This
committee announced its recommendation that Singapore adopt the IAS and US
standards as the only acceptable accounting standards in Singapore. If this were
done, Singapore accounting standards would be eliminated. The table
below shows the SAS number that comply with IAS:

SAS Title and related IAS Number Effective for periods

beginning on or after
1 Presentation of Financial Statements (IAS January 1, 2000
1)
6 Earnings per share (IAS 33) December 31, 1999
8 Net profit or loss for the period, October 1, 2000
fundamental errors and changes in
accounting policy (IAS 8)
10 Events occurring after the balance sheet April 1, 2001
date (IAS 10)
12 Income Taxes (IAS 12) January 1, 2000
15 Leases (IAS 17) April 1, 2001
17 Employee Benefits October 1, 2000
22 Business Combinations (IAS 22) January 1, 2000
23 Segment Reporting (IAS 14) October 1, 2000
31 Provisions, contingent liabilities and October 1, 2000
contingent asset (IAS 37)
32 Financial Instruments: Disclosure and October 1 , 2000
Presentation (IAS 32)
33 Financial Instruments: Recognition and April 1, 2001
Measurement (IAS 39)

25 | P a g e
34 Intangible Assets (IAS 38) October 1, 2000
35 Discontinuing Operations (IAS 35) October 1, 2000
36 Impairment of assets (IAS 36 October 1, 2000
37 Information reflecting the effect of April 1, 2001
changing prices (IAS 15)
38 Financial Reporting in hyperinflationary April 1, 2001
economies (IAS 29)

26 | P a g e
Q5. As multinational companies continue to expand globally managing
the risk related to fluctuating currency exchange rates has become a
strategic challenge usually resulting in use of financial derivatives.
Obtain the annual report of a company and describe the different types
of derivative financial instruments the company utilizes.

Arcelor Mittal

Foreign currency sensitivity

The following table details the Company’s sensitivity as it relates to derivative

financial instruments to a 10% strengthening and a 10% weakening in the U.S.
dollar against the other currencies to which the Company is exposed. The
sensitivity analysis does not include non-derivative foreign currency-
denominated monetary items. A positive number indicates an increase in profit
or loss and other equity where a negative number indicates a decrease in profit
or loss and other equity.

Foreign exchange and Interest rate risk

Interest rate risk

The Company enters into derivative financial instruments to manage its

exposure to fluctuations in interest rates, exchange rates and the price of raw
materials, energy and emission rights allowances arising from operating,
financing and investment activities.

The Company utilizes certain instruments to manage interest rate risks. Interest
rate instruments allow the Company to borrow long-term at fixed or variable
rates, and to swap the rate of this debt either at inception or during the lifetime
of the loan. The Company and its counter-party exchange, at predefined
intervals, the difference between the agreed fixed rate and the variable rate,
calculated on the basis of the notional amount of the swap. Similarly, swaps may
be used for the exchange of variable rates against other variable rates.

Interest rate derivatives used by the Company to manage changes in the value
of fixed rate loans qualify as fair value hedges.

Exchange rate risk

The Company is exposed to changes in values arising from foreign exchange rate
fluctuations generated by its operating activities. Because of a substantial
portion of ArcelorMittal’s assets, liabilities, sales and earnings are denominated
in currencies other than the U.S. dollar (its reporting currency), ArcelorMittal has
an exposure to fluctuations in the values of these currencies relative to the U.S.

27 | P a g e
dollar. These currency fluctuations, especially the fluctuation of the value of the
U.S. dollar relative to the euro, the Canadian dollar, Brazilian real and South
African rand, as well as fluctuations in the other countries currencies in which
ArcelorMittal has significant operations and/or sales, could have a material
impact on its results of operations.

ArcelorMittal faces transaction risk, where its businesses generate sales in one
currency but incur costs relating to that revenue in a different currency. For
example, arcelorMittal’s non-U.S. subsidiaries may purchase raw materials,
including iron ore and coking coal, in U.S. dollars, but may sell finished steel
products in other currencies. Consequently, an appreciation of the U.S. dollar will
increase the cost of raw materials; thereby impacting negatively on the
Company’s operating margins.

Following its Treasury and Financial Risk Management Policy, the Company
hedges its net exposure to exchange rates through forwards, options and swaps.
ArcelorMittal faces translation risk, which arises when ArcelorMittal translates the
statement of operations of its subsidiaries, its corporate net debt and other items
denominated in currencies other than the U.S. dollars, for inclusion in the
ArcelorMittal Consolidated Financial Statements.

The Company also uses the derivative instruments, described above, at the
corporate level to hedge debt recorded in foreign currency other than the
functional currency or the balance sheet risk incurred on certain monetary assets
denominated in a foreign currency other than the functional currency.

Derivative financial instruments

The Company enters into derivativefinancial instruments principally to manage

its exposure to fluctuation in interest rates, exchange rates, prices of raw
materials, energy and emission rights allowances. Derivative financial
instruments are classified as current assets or liabilities based on their maturity
dates and are accounted for at trade date. Embedded derivatives are separated
from the host contract and accounted for separately if required by IAS 39,
“Financial Instruments: Recognition and Measurement”. The Company measures
all derivative financial instruments based on fair values derived from market
prices of the instruments or from option pricing models, as appropriate. Gains or
losses arising from changes in fair value of derivatives are recognized in the
statement of operations, except for derivatives that are highly effective and
qualify for cash flow or net investment hedge accounting.

Changes in the fair value of a derivative that is highly effective and that is
designated and qualifies as a fair value hedge, along with the gain or loss on the
hedged asset, liability, or unrecognized firm commitment of the hedged item
that is attributable to the hedged risk, are recorded in the statement of
operations.

Changes in the fair value of a derivative that is highly effective and that is
designated and qualifies as a cash flow hedge are recorded in equity. Amounts

28 | P a g e
deferred in equity are recorded in the statement of operations in the periods
when the hedged item is recognized in the statement of operations and within
the same line item.

The Company formally assesses, both at the hedge’s inception and on an

ongoing basis, whether the derivatives that are used in hedging transactions are
highly effective in offsetting changes in fair values or cash flows of hedged
items. When a hedging instrument is sold, terminated, expires or is exercised the
cumulated unrealized gain or loss on the hedging instrument is maintained in
equity until the forecasted transaction occurs. If the hedged transaction is no
longer probable, the cumulative unrealized gain or loss, which had been
recognized in equity, is reported immediately in the statement of operations.

Foreign currency differences arising on the retranslation of a financial liability

designated as a hedge of a net investment in a foreign operation are recognized
directly as a separate component of equity, to the extent that the hedge is
effective. To the extent that the hedge is ineffective, such differences are
recognized in the statement of operations.

Available for sale financial assets classified as Level 1 refer to listed securities
quoted in active markets. The total fair value is either the price of the most
recent trade at the time of the market close or the official close price as defined
by the exchange on which the asset is most actively traded on the last trading
day of the period, multiplied by the number of units held without consideration of
transaction costs.

Derivative financial assets and liabilities classified as Level 2 refer to instruments

to hedge fluctuations in interest rates, foreign exchange rates, raw materials
(base metal), freight, energy and emission rights. The total fair value is based on
the price a dealer would pay or receive for the security or similar securities,
adjusted for any terms specific to that asset or liability. Market inputs are
obtained from well established and recognized vendors of market data and the
fair value is calculated using standard industry models based on significant
observable market inputs such as foreign exchange rates, commodity prices,
swap rates and interest rates.

Derivative financial liabilities classified as level 3 refer to the conversion option

in the €1.25 billion convertible bonds (see note 14). The fair value is derived
through the use of a binominal model.

The following table summarizes the reconciliation of the fair value of the
conversion option classified as Level 3 with respect to the €1.25 billion

29 | P a g e
convertible bonds and the 800 convertible senior notes for the year ended
December 31, 2009 respectively until the waiver of the cash settlement option:

Portfolio of Derivatives

The Company manages the counter-party risk associated with its instruments by
centralizing its commitments and by applying procedures which specify, for each
type of transaction and underlying, risk limits and/or the characteristics of the
counter-party. The Company does not generally grant to or require from its
counter-parties guarantees over the risks incurred. Allowing for exceptions, the
Company’s counter-parties are part of its financial partners and the related
market transactions are governed by framework agreements (mainly of the
International Swaps and Derivatives Association agreements which allow netting
in case of counter-party default).

The portfolio associated with derivative financial instruments as of December 31,

2009 is as follows:

30 | P a g e
Q6. The revolution in information technology has seen the convergence
of a large number of high-tech and internet companies. Choose a high-
tech company from each of three different countries and compare their
accounting policy for research and development costs.

Company Name: Intel

Country: USA
Research and Development Costs

They amortize acquisition-related in-process research and development over the

estimated useful life once the research and development efforts are completed. In the
quarter following the period in which identified intangible assets become fully amortized,
the fully amortized balances are removed from the gross asset and accumulated
amortization amounts. In addition, acquired in-process research and development is
capitalized as an intangible asset.

Company Name: Telenor

Country: Norway
Research and Development Costs

Development expenditures that meet the criteria for recognition, i.e. that it is
probable that the expected future economic benefits that are attributable to the
asset will flow to the entity and the cost can be measured reliably, are
capitalised. The assets are amortised over their expected useful life once the
asset is available for use. Costs incurred during the research stage of a project,
as well as maintenance and training costs are expensed as incurred.

Company Name: SAP AG

Country: Germany
Research and Development Costs
Research and development includes the costs incurred by activities related to the
development of software solutions (new products, updates and enhancements) including
resource and hardware costs for the development systems. Development activities
involve the application of research
findings or other knowledge to a plan or design of new or substantially improved
software products before the start of commercial use. Development expenditures are
capitalized only if all of the following criteria are met: The development cost can be
measured reliably. The product is technically and commercially feasible. Future economic
benefits are probable.

31 | P a g e
32 | P a g e
Q7. Choose a company that issues both a domestic financial statement
using its own GAAP and one in which it uses a foreign GAAP or IAS/IFRS.
Are there significant differences in the bottom line, policies and
practices, formats etc.? Do the two sets of financial statements lead
you to different conclusions about the operating performance of the
company? Support your answers.
Indian GAAP
ICICI Bank
Operating Rs. 8925 crores
Profit
Net profit Rs. 3758 crores
EPS Rs. 36.14
Financial Statements
Components 2 years consolidated
Balance Sheet, Income
Statement, Cash Flow
statement, changes in
equity, accounting
policies and notes
Balance Sheet Entities may provide
either a classified or non-
classified balance sheet.
Items on the face of the
balance sheet are
generally presented in
decreasing order of
liquidity
SEC registrants should
follow SEC regulations
Income Present as either a single
Statement step or a multi step
format
Expenditures are
presented by function
SEC registrants should
follow SEC regulations
Exceptional Requires separate
33 | P a g e
US GAAP
Rs. 10410 crores
Rs. 4843.41 crores
Rs. 41.93
Single entity parent
company 2 years Balance
Sheet, Income Statement,
Cash Flow statement,
changes in equity,
accounting policies and
notes
Public companies are
additionally required to
prepare consolidated
financial statements along
with standalone financial
statements
Accounting standards do
not prescribe a particular
format; certain items
must be presented of the
face of the balance Sheet
Formats are prescribed by
the Companies Act and
other industry regulations
like banking, insurance
etc
Does not prescribe a
standard format, but
certain income and
expenditure items are
disclosed in accordance
with the accounting
standards and the
Companies Act
Industry specific formats
are prescribed by the
Industry regulations
Similar to US GAAP
(Significant items) disclosure or items that
are of such size, incidence
or nature that their
separate disclosure is
necessary to explain the
performance of the entity
Cash flow Standards headings, use Similar to US GAAP
statement- of both direct and indirect
format and method permitted
method
Changes in Comparatives and prior Restatement is not
accounting policy year are restated against required. The effect of
opening retained change is included in the
earnings, unless current year’s income
specifically exempted statement. This impact of
changes is disclosed.
Consolidated Financial Statements
Subsidiary A subsidiary held-for-sale If the entity is acquired
even at the time of and held for resale or if it
acquisition, will be operates in severe long-
consolidated until sold term restrictions which
impair its ability to
transfer funds to the
parent
Associates In consolidated financials, In consolidated financials,
equity method is used. equity method is used.
Share of post-tax results Share of post-tax results
is shown. is shown.
In standalone financials, In standalone financials,
at cost or equity method shown at cost less
is used impairment
Accounting No adjustment to Similar to US GAAP
policies of accounting policies is
associates required if the associate
follows an acceptable
alternative US GAAP
treatment
Joint ventures Equity method required In consolidated financials:
except in specific proportional consolidation
circumstances is used.
In standalone financials, In standalone financials:
at cost or equity method at cost less impairment
is used
Revenue & Expense Recognition
Revenue Based on several criteria, Similar to US GAAP
Recognition which require the
recognition of revenue
when risks and rewards
and controls have been
transferred and the
revenue can be measured
reliably
There is extensive

34 | P a g e
 detailed guidance for
specific types of
transactions that may
lead to differences in
practice
Depreciation Allocated on a systematic
basis to each accounting
period over the useful life
of the asset
Interest Expense Recognised on an accrual
basis using the effective
interest method
Assets
Acquired Capitalised if recognition
Intangible Assets criteria are met,
amortised over useful life
Revaluations are not
permitted
Internally Both R&D costs expensed
generated as incurred
intangible assets
Property, Plant Historical Cost is used,
and Equipment revaluations are not
permitted
Inventories Carried at lower of cost or
net realisable value
LIFO is permitted
Reversal of write downs is
prohibited
Financial Assets Held-to-maturity loans or
receivables are carried at
amortized cost or fair
value
Gains/ losses on fair value
through profit or loss
classification is
recognised on income
statement
Gains and losses on
available-for-sale
instruments are
recognised in equity
Liabilities
Deferred income Full provision method is
taxes used driven by balance
sheet temporary
differences
35 | P a g e
Similar to US GAAP, where
useful life is shorter as
envisaged under the
Companies’ Act , the
depreciation is computed
by applying a higher rate
Recognised on an accrual
basis, practice varies with
respect to recognition of
discounts and premiums
Similar to US GAAP
Research costs expensed
as incurred
Development costs
capitalised and amortised
only when specific criteria
are met
Historical cost is used,
revaluations are
permitted
Carried at lower of cost or
net realizable value
LIFO prohibited
Long term investments,
loans and receivables are
carried at cost less
impairment
Current assets carried at
lower of cost and fair
value
Any reduction in the
carrying amount or the
reversal of such reduction
is credited to income
statement
Full provision method is
used driven by timing
differences
Deferred tax asset is
 Deferred tax assets are recognised if realisation is
recognised if recovery is virtually certain or
probable reasonably certain as
applicable for entities with
and without tax carry
forward losses
respectively
Equity
Purchase of own Shown as deduction from Purchase is permitted in
shares Equity limited circumstances
subject to the provisions
under the Companies Act
On purchase such shares
are required to be
cancelled i.e, they cannot
be kept at treasury stock
Dividends Presented as a deduction Presented as an
in the statement of appropriation to the
changes in the income statement.
shareholder’s equity in Dividends are accounted
the period when in the year when
authorised by proposed
shareholders. Dividends
are accounted in the year
when declared
Other accounting concerns
Functional “Currency of primary Functional currency is not
currency economic environment in defined and its
which entity operates” determination is also not
If indicators are mixed, required
judgement is used by It is assumed that an
giving priority to the entity normally uses the
currency that mainly currency of the country in
influences sales prices which it is domiciled in
and currency that mainly recording its transactions
influences direct costs of
providing the goods and
services before
considering other factors

Q8. The risks of investing in Emerging Capital Markets (ECM’s) are not
only associated with structural, political and economic problems, but
also with international problems stemming from the difficulty of
obtaining adequate, reliable and timely information useful for
evaluating investment opportunities in these markets. Research
two/three ECM’s and determine the timeliness and availability of
financial reporting for each. Do publicly listed companies release
quarterly or semi-annual financial statements? Is actual practice

36 | P a g e
different from required practice? Briefly summarize your findings for
each.

Transparency is a very important component of financial reporting. Companies

must disclose anything that might influence the investment decision of an
informed investor. One aspect of transparency is timeliness. Timeliness of
financial reporting is one of the attributes of good corporate governance
identified by the OECD and World Bank. Shareholders and other stakeholders
need information while it is still fresh and the more time that passes between
year-end and disclosure, the more stale the information becomes and the less
value it has. A research by McGee in 2007 reveals that companies in transition
economies issue their financial statements far later than do companies in the
more developed market economies.

In a brief research of few companies in the emerging economies, I fund that most
companies prepare their semi annual and quarterly financial statements, though
with a lagged effect. Further, these statememnts are prepared to meet the
informational needs of investors and other stakeholders rather than to fulfill any
regulatory obligation.

Emerging Capital Markets Quarterly Financial Semi- annual Financial

Statements Statements

Brazil Yes Yes

India Yes Yes
China Yes (scarce) Yes
South Africa No No

India

Companies prepare reports on an annual, quarterly and semi- annual basis.

These reports are easily available for most publically traded companies.

Brazil

Not all Brazillian companies prepare quarterly and semi- annual reports. Most
publically traded Brazilian companies release an annual report and a
sustainability development report.

China

Chinese companies take significantly longer to issue their financial statements

than do non-Chinese companies. Thus, Chinese financial statements are less
timely than the financial statements of non-Chinese companies in developed
market economies. Since timeliness is an attribute of good corporate governance
(OECD, 1998), it is also reasonable to conclude that the corporate governance in
Chinese companies is not yet on the same level with that of companies in OECD
countries, at least not as far as the timeliness of financial reporting is concerned.

It is likely that the situation will improve. Chinese companies will likely take less
time to issue their financial statements and annual reports in the years to come.

37 | P a g e
There are several reasons for this prediction. For one, the Chinese government is
aware of corporate governance principles as advocated by the OECD, World
Bank, IMF and others. Secondly, Chinese companies are also aware of corporate
governance principles, although they are not always easy to adopt and
implement. But this situation will change over time.

Another influential factor is the communication that takes place between

Chinese company management and foreign investors. If foreign investors put
pressure on Chinese companies to issue their financial statements in a timely
manner, there is a tendency for them to do so. The Big-4 audit firms will also
help to make the goal of timely financial reporting a reality. Thus, it is probably
only a matter of time before Chinese companies will issue their financial reports
in as timely a manner as non-Chinese companies. However, that point has not
yet been reached.

South Africa

In my research, I did not find any South African firm which undertakes quarterly
and semi annual reporting.

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Q9. One factor that can affect investor confidence in financial reporting
is the timeliness of annual reports. Choose an ECM and obtain three
local annual reports all with the same fiscal year end. Critically examine
the auditor’s reports of three companies. When was the audit report
issued (i.e. how long after the year-end date)? Is this period shorter or
longer compared to companies listed in your home country? Explain.

China
Company Auditors Opinion Fiscal Date of Time lag
year end issue
of
auditor
’s
report
st
China Ernst & “In our opinion, the 31 26 April 4 months
Railway Young financial statements give Decembe 2010
Construction a true and fair view of the r
Corporation state of affairs of the
Limited Group and of the
Company as at 31
December 2009 and of
the Group’s profit and
cash flows for the year
then ended in accordance
with IFRSs and have been
properly prepared in
accordance with the
disclosure requirements
of the Hong Kong
Companies Ordinance.”
China KPMG “In our opinion, the 31st 18th 2.5
Petroleum & Huazhen consolidated financial Decembe March months
Chemical statements give a true r 2010
Corporation and fair view of the state
of the affairs of the
Company and of the
group as at 31 December
2009 and of the group’s
profit and cash flows for
the year then ended in
accordance with
International Financial
Reporting Standards and
Hong Kong Financial
Reporting Standards and
have been properly
prepared in accordance
with the Hong Kong
Companies Ordinance.”
Novatek Ernst & “In our opinion, the 31st 26th 1 months
Microelectro Young consolidated financial Decembe January

39 | P a g e
nics corp statements give a true r
and fair view of the state
of affairs of the Company
and of the Group as at 31
December 2009 and of
the Group’s profit and
cash flows for the year
then ended in accordance
with International
Financial Reporting
Standards as issued by
the International
Accounting Standards
Board and the disclosure
requirements of the Hong
Kong
Companies Ordinance.”

India
TATA motors DELOITTE “in our opinion and to the 31st 27th 2 months
HASKINS best of our information March May
& SELLS and according to the 2010
explanations given to us,
they said accounts give
the information required
by the Companies Act,
1956 in the manner so
required and give a true
and fair view in
conformity with the
accounting principles
generally accepted in
India:
(i) in the case of the
Balance Sheet, of the
state of affairs of the
Company as at March 31,
2010;
(ii) in the case of the
Profit and Loss Account,
of the profit of the
Company for the year
ended on that date;
(iii) in the case of the
Cash Flow Statement, of
the cash flows of the
Company for the year
ended on that date.”
Reliance DELOITTE “In our opinion and to the 31st April 1 month
Industries HASKINS best of our information March 23rd

40 | P a g e
Limited & SELLS and according to the 2010
explanations given to us,
the said accounts read
together with the
Significant Accounting
Policies and notes thereon
give the information
required by the
Companies Act, 1956, in
the manner so required
and give a true and fair
view in conformity with
the accounting principles
generally accepted in
India:
(i) in the case of the
Balance Sheet, of the
state of affairs of the
Company as at March 31,
2010;
(ii) in the case of the
Profit and Loss Account,
of the profit for the year
ended on that date;
(iii) in the case of the
Cash Flow Statement, of
the cash flows for the
year ended on that date.”

According to the annual reports of Indian companies (Tata Motors, Reliance

Industries), the average time lag of taken by companies to report their financial
statements is 1.5 months. This is the average time lag between the date of fiscal
year ending and the date of issue of auditor’s report.

Compared to the Indian perspective, companies of China report their financial

statements in a less timely manner.

Q10. As companies continue to grow globally, the importance of global

risk assessment and management has motivated MNC’s to adopt a
broad range of risk management tools and strategies. Obtain two MNC
annual reports and describe each company’s foreign exchange risk
management programs, policies and hedging activities. Based on the
information provided, do the programs in place appear adequate?
Support your answer.

Arcelor Mittal

41 | P a g e
Foreign currency sensitivity

The following table details the Company’s sensitivity as it relates to derivative

financial instruments to a 10% strengthening and a 10% weakening in the U.S.
dollar against the other currencies to which the Company is exposed. The
sensitivity analysis does not include non-derivative foreign currency-
denominated monetary items. A positive number indicates an increase in profit
or loss and other equity where a negative number indicates a decrease in profit
or loss and other equity.

Foreign exchange and Interest rate risk

Interest rate risk

The Company enters into derivative financial instruments to manage its

exposure to fluctuations in interest rates, exchange rates and the price of raw
materials, energy and emission rights allowances arising from operating,
financing and investment activities.

The Company utilizes certain instruments to manage interest rate risks. Interest
rate instruments allow the Company to borrow long-term at fixed or variable
rates, and to swap the rate of this debt either at inception or during the lifetime
of the loan. The Company and its counter-party exchange, at predefined
intervals, the difference between the agreed fixed rate and the variable rate,
calculated on the basis of the notional amount of the swap. Similarly, swaps may
be used for the exchange of variable rates against other variable rates.

Interest rate derivatives used by the Company to manage changes in the value
of fixed rate loans qualify as fair value hedges.

Exchange rate risk

The Company is exposed to changes in values arising from foreign exchange rate
fluctuations generated by its operating activities. Because of a substantial
portion of ArcelorMittal’s assets, liabilities, sales and earnings are denominated
in currencies other than the U.S. dollar (its reporting currency), ArcelorMittal has
an exposure to fluctuations in the values of these currencies relative to the U.S.
dollar. These currency fluctuations, especially the fluctuation of the value of the
U.S. dollar relative to the euro, the Canadian dollar, Brazilian real and South
African rand, as well as fluctuations in the other countries currencies in which
ArcelorMittal has significant operations and/or sales, could have a material
impact on its results of operations.

ArcelorMittal faces transaction risk, where its businesses generate sales in one
currency but incur costs relating to that revenue in a different currency. For
example, arcelorMittal’s non-U.S. subsidiaries may purchase raw materials,

42 | P a g e
including iron ore and coking coal, in U.S. dollars, but may sell finished steel
products in other currencies. Consequently, an appreciation of the U.S. dollar will
increase the cost of raw materials; thereby impacting negatively on the
Company’s operating margins.

Following its Treasury and Financial Risk Management Policy, the Company
hedges its net exposure to exchange rates through forwards, options and swaps.
ArcelorMittal faces translation risk, which arises when ArcelorMittal translates the
statement of operations of its subsidiaries, its corporate net debt and other items
denominated in currencies other than the U.S. dollars, for inclusion in the
ArcelorMittal Consolidated Financial Statements.

The Company also uses the derivative instruments, described above, at the
corporate level to hedge debt recorded in foreign currency other than the
functional currency or the balance sheet risk incurred on certain monetary assets
denominated in a foreign currency other than the functional currency.

Derivative financial instruments

The Company enters into derivativefinancial instruments principally to manage

its exposure to fluctuation in interest rates, exchange rates, prices of raw
materials, energy and emission rights allowances. Derivative financial
instruments are classified as current assets or liabilities based on their maturity
dates and are accounted for at trade date. Embedded derivatives are separated
from the host contract and accounted for separately if required by IAS 39,
“Financial Instruments: Recognition and Measurement”. The Company measures
all derivative financial instruments based on fair values derived from market
prices of the instruments or from option pricing models, as appropriate. Gains or
losses arising from changes in fair value of derivatives are recognized in the
statement of operations, except for derivatives that are highly effective and
qualify for cash flow or net investment hedge accounting.

Changes in the fair value of a derivative that is highly effective and that is
designated and qualifies as a fair value hedge, along with the gain or loss on the
hedged asset, liability, or unrecognized firm commitment of the hedged item
that is attributable to the hedged risk, are recorded in the statement of
operations.

Changes in the fair value of a derivative that is highly effective and that is
designated and qualifies as a cash flow hedge are recorded in equity. Amounts
deferred in equity are recorded in the statement of operations in the periods
when the hedged item is recognized in the statement of operations and within
the same line item.

The Company formally assesses, both at the hedge’s inception and on an

ongoing basis, whether the derivatives that are used in hedging transactions are
highly effective in offsetting changes in fair values or cash flows of hedged
items. When a hedging instrument is sold, terminated, expires or is exercised the
cumulated unrealized gain or loss on the hedging instrument is maintained in

43 | P a g e
equity until the forecasted transaction occurs. If the hedged transaction is no
longer probable, the cumulative unrealized gain or loss, which had been
recognized in equity, is reported immediately in the statement of operations.

Foreign currency differences arising on the retranslation of a financial liability

designated as a hedge of a net investment in a foreign operation are recognized
directly as a separate component of equity, to the extent that the hedge is
effective. To the extent that the hedge is ineffective, such differences are
recognized in the statement of operations.

Available for sale financial assets classified as Level 1 refer to listed securities
quoted in active markets. The total fair value is either the price of the most
recent trade at the time of the market close or the official close price as defined
by the exchange on which the asset is most actively traded on the last trading
day of the period, multiplied by the number of units held without consideration of
transaction costs.

Derivative financial assets and liabilities classified as Level 2 refer to instruments

to hedge fluctuations in interest rates, foreign exchange rates, raw materials
(base metal), freight, energy and emission rights. The total fair value is based on
the price a dealer would pay or receive for the security or similar securities,
adjusted for any terms specific to that asset or liability. Market inputs are
obtained from well established and recognized vendors of market data and the
fair value is calculated using standard industry models based on significant
observable market inputs such as foreign exchange rates, commodity prices,
swap rates and interest rates.

Derivative financial liabilities classified as level 3 refer to the conversion option

in the €1.25 billion convertible bonds (see note 14). The fair value is derived
through the use of a binominal model.

The following table summarizes the reconciliation of the fair value of the
conversion option classified as Level 3 with respect to the €1.25 billion
convertible bonds and the 800 convertible senior notes for the year ended
December 31, 2009 respectively until the waiver of the cash settlement option:

Portfolio of Derivatives

The Company manages the counter-party risk associated with its instruments by
centralizing its commitments and by applying procedures which specify, for each
type of transaction and underlying, risk limits and/or the characteristics of the
counter-party. The Company does not generally grant to or require from its

44 | P a g e
counter-parties guarantees over the risks incurred. Allowing for exceptions, the
Company’s counter-parties are part of its financial partners and the related
market transactions are governed by framework agreements (mainly of the
International Swaps and Derivatives Association agreements which allow netting
in case of counter-party default).

The portfolio associated with derivative financial instruments as of December 31,

2009 is as follows:

CISCO

Cisco’s financial position is exposed to a variety of risks including interest rate

risk, equity price risk, and foreign currency exchange risk. Cisco conducts
business globally in numerous currencies. The direct effect of foreign currency
fluctuations on sales has not been material because sales are primarily
denominated in U.S. dollars. However, if the U.S. dollar strengthens relative to
other currencies, such strengthening could have an indirect effect on our sales to
the extent it raises the cost of our products to non-U.S. customers and thereby
reduces demand.
A weaker U.S. dollar could have the opposite effect. However, the precise
indirect effect of currency fluctuations is difficult to measure or predict because
our sales are influenced by many factors in addition to the impact of such
currency fluctuations.

Foreign Currency Exchange Risk

The foreign exchange forward and option contracts are summarized as follows
(in millions):

45 | P a g e
Foreign currency fluctuations, net of hedging, increased our operating expenses,
categorized as research and development, sales and marketing, and general and
administrative, by approximately 0.2% in fiscal 2010 compared with fiscal 2009
and decreased the operating expenses by approximately 1.8% in fiscal 2009
compared with fiscal 2008. To reduce variability in operating expenses and
service cost of sales caused by non-U.S.-dollar denominated operating expenses
and costs, the company hedges certain foreign currency forecasted transactions
with currency options and forward contracts. These hedging programs are not
designed to provide foreign currency protection over long time horizons. In
designing a specific hedging approach, several factors including offsetting
exposures, significance of exposures, costs associated with entering into a
particular hedge instrument, and potential effectiveness of the hedge are
considered. The gains and losses on foreign exchange contracts mitigate the
effect of currency movements on the operating expenses and service cost of
sales.
The firm enters into foreign exchange forward and option contracts to reduce the
short-term effects of foreign currency fluctuations on receivables, investments,
and payables, denominated in currencies other than the functional currencies of
the entities. The market risks associated with these foreign currency receivables,
investments, and payables relate primarily to variances from forecasted foreign
currency transactions and balances. The forward and option contracts generally
have the following maturities:

DERIVATIVE INSTRUMENTs

The Company recognizes derivative instruments as either assets or liabilities and

measures those instruments at fair value. The accounting for changes in the fair
value of a derivative depends on the intended use of the derivative and the
resulting designation. For a derivative instrument designated as a fair value
hedge, the gain or loss is recognized in earnings in the period of change together
with the offsetting loss or gain on the hedged item attributed to the risk being
hedged. For a derivative instrument designated as a cash flow hedge, the
effective portion of the derivative’s gain or loss is initially reported as a
component of AOCI and subsequently reclassified into earnings when the hedged
exposure affects earnings. The ineffective portion of the gain or loss is reported
in earnings immediately. For derivative instruments that are not designated as
accounting hedges, changes in fair value are recognized in earnings in the period
of change. The Company records derivative instruments in the statements of
cash flows to operating, investing or financing activities consistent with the cash
flows of the hedged item.

(a) Summary of Derivative Instruments

The Company uses derivative instruments primarily to manage exposures to
foreign currency exchange rate, interest rate, and equity price risks. The
Company’s primary objective in holding derivatives is to reduce the volatility of
earnings and cash flows associated with changes in foreign currency exchange
rates, interest rates, and equity prices. The Company’s derivatives expose it to

46 | P a g e
credit risk to the extent that the counterparties may be unable to meet the terms
of the agreement. The Company does, however, seek to mitigate such risks by
limiting its counterparties to major financial institutions. In addition, the potential
risk of loss with any one counterparty resulting from this type of credit risk is
monitored. Management does not expect material losses as a result of defaults
by counterparties.
The fair values of the Company’s derivative instruments and the line items on
the Consolidated Balance Sheets to which they were recorded are summarized
as follows (in millions):

During the years ended July 31, 2010 and July 25, 2009, the amounts recognized
in earnings on derivative instruments designated as cash flow hedges related to
the ineffective portion were not material, and the Company did not exclude any
component of the changes in fair value of the derivative instruments from the
assessment of hedge effectiveness. As of July 31, 2010, the Company estimates
that approximately $40 million of net derivative gains related to its cash flow
hedges included in AOCI will be reclassified into earnings within the next 12
months. The effect on the Consolidated Statements of Operations of derivative
instruments designated as fair value hedges is summarized as follows (in
millions):

47 | P a g e
The effect on the Consolidated Statements of Operations of derivative
instruments not designated as hedges is summarized as follows (in millions):

Foreign Currency Exchange Risk

The Company conducts business globally in numerous currencies. Therefore, it is
exposed to adverse movements in foreign currency exchange rates. To limit the
exposure related to foreign currency changes, the Company enters into foreign
currency contracts.
The Company hedges foreign currency forecasted transactions related to certain
operating expenses and service cost of sales with currency options and forward
contracts. These currency option and forward contracts, designated as cash flow
hedges, generally have maturities of less than 18 months. The Company
assesses effectiveness based on changes in total fair value of the derivatives.
The effective portion of the derivative instrument’s gain or loss is initially
reported as a component of AOCI and subsequently reclassified into earnings
when the hedged exposure affects earnings. The ineffective portion, if any, of
the gain or loss is reported in earnings immediately. The Company did not
discontinue any hedges during any of the periods presented because it was
probable that the original forecasted transaction would not occur.
The Company enters into foreign exchange forward and option
contracts to reduce the short-term effects of foreign currency
fluctuations on assets and liabilities such as foreign currency
receivables, including long-term customer financings, investments, and
payables. These derivatives are not designated as hedging instruments.
Gains and losses on the contracts are included in other income (loss), net, and
substantially offset foreign exchange gains and losses from the remeasurement
of intercompany balances or other current assets, investments, or liabilities
denominated in currencies other than the functional currency of the reporting
entity.
The Company hedges certain net investments in its foreign subsidiaries with
forward contracts, which generally have maturities of up to six months. The
Company recognized a loss of $2 million in OCI for the effective portion of its net
investment hedges for the year ended July 31, 2010. The Company’s net
investment hedges are not included in the preceding tables.

The notional amounts of the Company’s foreign currency derivatives are

summarized as follows (in millions):

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