Daimlerchrysler Deals With Foreign Exchange Rates example essay topic

Business and International Accounting Over the years business has crossed boundaries, spanned over land and ocean, and generally changed the world. As business continues to evolve more broadly on a worldwide level, an introduction of new products, new jobs, and new ways of operating in the business world has occurred. This evolution does not occur without certain complexities developing, which then fuels a search for more effective ways to be successful worldwide. A major impact is in the accounting policies and methods used by companies operating international subsidiaries. Through a better understanding of international accounting and its affect on a company headquartered in two different countries, these troublesome issues with respect to becoming successful worldwide becomes clear. Accounting encounters more challenges when entering the international arena.

Foreign subsidiaries introduce issues of translation, transaction, and exchange rates. Through exploration of the Federal Accounting Standard 52: Foreign Currency Translation, a better understanding of these three issues becomes apparent. Translation deals with taking one currency such as the U.S. dollar, and translating it into another currency such as the British Pound, for reporting purposes. This represents one of the main difficulties in international accounting - preparing consolidated financial statements when a company has foreign subsidiaries that are included. FAS 52 explains foreign currency translation as, "The process of expressing in the reporting currency of the enterprise those amounts that are denominated or measured in a different currency" (FAS, Appendix E). The transactions deal with the second main difficulty in international accounting, which includes how to account for purchases and sales that are made with foreign currency.

FAS 52 explains foreign currency transactions as, "Transactions whose terms are denominated in a currency other that the entity's functional currency. Foreign currency transactions arise when an enterprise: buys or sells on credit goods or services whose prices are denominated in foreign currency, borrows or lends funds and the amounts payable or receivable are denominated in foreign currency, is a party to an unperformed forward exchange contract or for other reasons acquires or disposes of assets, or incurs or settles liabilities denominated in foreign currency" (Appendix E). Finally, exchange rates are the last big issue in international accounting. Currency values fluctuate from country to country and from day to day. The weight of the currency is mainly reliant on economic and political stability of that country.

This brings about the need to calculate how much one currency is worth compared to another. "The current exchange rate is the rate at which one unit of currency can be exchanged for another currency. For purposes of translation of financial statements, the current exchange rate is the rate as of the end of the period covered by the financial statements or as of the dates of recognition in those statements in the case of revenues, expenses, gains, and losses" (Appendix E). Operations and transactions of a company are affected by the changing prices of goods and services it buys and sells comparable to a particular currency, which may also be used for financial reporting. If the company operates in more than one currency, it is affected by the changing prices of goods and services in more than one economic environment, and changes in values of the different units of currency. This can bring about gains and losses due to exchange rate differences.

One route companies take to guard against losses is forward exchange contracts which are, "an agreement to exchange at a specified future date currencies of different countries at a specified rate" (Appendix E). Also the use of currency swaps, "an exchange between two enterprises of the currencies of the two different countries agree to re-exchange the two currencies at the same rate of exchange at a specified future date" (Appendix E). These issues may be hard to understand just in reading them. By using a specific example of a company dealing with international accounting these issues become much clearer. To make the complexities of international accounting more transparent, we will use DaimlerChrysler as an example. Some background information will prove useful in further explanations of International issues.

On May 7th 1998 a worldwide announcement was made about the merger of Daimler Benz and Chrysler. These two combined to form the world's leading automotive, transportation, and financial services company. This merger brought two different companies and two different worlds together, one headquarters in Stuttgart, Germany, and the other in Auburn Hills, Michigan. The merger has linked two countries together but not without difficulties and differences. Much of what was formally Chrysler territory began to be taken over by the Daimler side, which was greatly aided by the stepping down of Robert Eaton of Chrysler, leaving only one Chairman of the Board, Jurgen E. Schrempp. This merging of companies may be successful in some areas but not without challenges to overcome to be successful in worldwide competition.

Through an interview with Robert E. Menzies, Assistant Controller for Chrysler Brands and Canada at DaimlerChrysler Services I was introduced to the issues of international accounting that really affect the business. The first thing that they have to deal with is the differences in the Generally Accepted Accounting Principles between Germany and the United States. These differences have created different problems with reporting. But it is not only Germany that poses a problem for the United States in terms of GAAP but also Canada and Mexico. DaimlerChrysler Services deals with all of North America and includes Canada and Mexico. DaimlerChrysler consists of 470 German and non-German subsidiaries and one joint venture.

102 of these companies are accounted for in the consolidated financial statements using the equity method of accounting. When consolidated financial statements are made for DaimlerChrysler's annual report they are prepared in terms of U.S. GAAP and also to comply with certain German requirements. "The consolidated financial statements were prepared in accordance with generally accepted accounting principles in the United States of America. The consolidated financial statements were supplemented with a consolidated business review report, which comply with the fourth and seventh directives of the European community. For the interpretation of these directives we relied on the statement by the German Accounting Standards Committee" (Annual Report, 68). The reporting currency for DaimlerChrysler is the Euro, but in the annual report the amounts are also shown in U.S. dollars, "The dollar being unaudited and presented solely for the convenience of the reader at a rate of 1 Euro = $0.8901 the Noon Buying Rate of the Federal Reserve Bank of New York on December 31, 2001" (78).

DaimlerChrysler is also concerned with accounting for translation and transactions. As Mr. Menzies explained, they must first take the different currencies in North America and translate them into the U.S. dollar. So translation entails taking the Mexican peso and the Canadian dollar and converting it into the U.S. dollar. Then they must take the translations they have in U.S. dollars and translate them into the Euro, which is the reporting currency for the financial statements. The way that DaimlerChrysler deals with foreign exchange rates is also something we need to look at. Foreign exchange rate management is something a company like DaimlerChrysler needs to think about, since their business produces cash in various currencies.

Mr. Menzies also informed me of the difference in practices between the German and U.S. sides of the company. In terms of foreign exchange rate on the American side, they use a month end average of exchange rates, which was expected to be good enough for reporting on the balance sheet. A problem arose when translating these figures to match up with Germany. Part of the German GAAP is using an average daily rate, so there are 365 different foreign exchange rates that are averaged together rather then the month end average method. Because these differences cause so much extra work and confusion at Chrysler they have now actually changed over to German GAAP and use their exchange rates to prevent the extra time it was previously taking to reconcile the financial statements. DaimlerChrysler does use some derivative financial instruments like forward foreign exchange contracts, swaps, and forward rate agreements to help control losses in changes in exchange rates.

As a consequence of the global nature of DaimlerChrysler businesses, its operations and its reported financial results and cash flows are exposed to the risks associated with fluctuations in the exchange rates of the U.S. dollar, the Euro and other world currencies. The group's businesses are exposed to transaction risk whenever revenues of a business are denominated in a currency other than the currency in which the business incurs the costs relating to those revenues. As we have seen through the example of DaimlerChrysler international issues do have a great affect on the business and accounting for the company. We have seen that it can sometimes become confusing in dealing with different regulations and different currency for so many companies. These difficulties will hopefully reduce as the International Accounting Standards Committee works towards global accounting that plans to be out in the next 5 to 6 years.

This will help many issues that companies with foreign subsidiaries face, but until then companies will continue to work through what issues they have to compete successfully on the worldwide stage.