Chapter 8 additional financial reporting issues


Schering’s geographic segments are based on customer location. The company complies with the above requirements by reporting “Segment assets by geographic location” and “Investments by geographic loca



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Schering’s geographic segments are based on customer location. The company complies with the above requirements by reporting “Segment assets by geographic location” and “Investments by geographic location.”

In conclusion, Schering AG complies fully with the primary and secondary reporting format requirements of IAS 14.


9. IBM, Johnson & Johnson, and General Motors
a. A commonly used measure of multinationality is the percentage of total sales that are generated in countries other than the United States: Foreign Sales/Total Sales. This ratio can be calculated for each company by subtracting U.S. sales from total sales and then dividing by total sales:

IBM ($96,293 - $35,637) / $96,293 = 63.0%

Johnson & Johnson ($47,348 - $27,770) / $47,348 = 41.3%

General Motors ($193,517 - $134,380) / $193,517 = 30.6%

Based on this measure, IBM is the most multinational company among the three in Exhibit 8.8.

b. International diversification refers to the extent to which a company’s operations are spread across different countries and regions of the world. General Motors appears to be concentrated in a relatively small number of countries, and is therefore not very diversified internationally. Almost 90% of GM’s sales are generated from operations in only eight countries (U.S., Canada and Mexico, France, Germany, Spain, U.K., and Brazil). From Johnson & Johnson’s segment disclosure, it is impossible to know the number of countries in which the company has operations. For example, “Europe” could imply operations in anywhere from one to 30+ countries. One can determine that about 50% of IBM’s revenues are generated in only two countries (U.S. and Japan), but it is impossible to know where in the world the remaining 40% of its sales are generated. We do know that there are no other countries in which IBM believes it has a material amount of revenues, because it would be required to disclose this country separately. This exercise demonstrates the difficulty in assessing international diversification given current segment reporting practices.


10. BMW and Volkswagen
a. A commonly used measure of multinationality is the percentage of total sales that are generated in countries other than the home country: Foreign Sales/Total Sales. This ratio can be calculated for each company by subtracting sales in Germany from total sales and then dividing by total sales:

BMW (€44,335 – €11,961) / €44,335 = 73.0%

Volkswagen (€88,963 – €24,504) / €88,963 = 72.5%

Based on this measure, BMW is slightly more multinational than Volkswagen. Both companies rely very heavily on sales made outside of Germany.



Note that the internationality of the two companies can be directly compared by collapsing VW’s North America and South America segments into one region – America – and by collapsing its Africa and Asia/Oceania segments into one region – Africa, Asia, Oceania.
b. One way to measure international diversification is the extent to which sales are spread out over different regions of the world. Column B in the table below shows that BMW’s sales are more evenly spread over the four segments than are VW’s. Whereas VW generates 72% of its sales in Europe including Germany, BMW generates only 63% of its sale in Europe.



External Sales

Col. A

Col. B

Col. C

Col. D

Col. E
















Year-to-year

BMW

2004

%

2003

%

% change

Germany

11,961

27.0%

10,590

25.5%

12.9%

Rest of Europe

15,823

35.7%

13,389

32.2%

18.2%

America

10,648

24.0%

11,620

28.0%

-8.4%

Africa, Asia, Oceania

5,903

13.3%

5,926

14.3%

-0.4%




44,335

100.0%

41,525

100.0%

6.8%



















Volkswagen
















Germany

24,504

27.5%

23,298

27.5%

5.2%

Rest of Europe

39,755

44.7%

35,723

42.1%

11.3%

America

17,257

19.4%

18,084

21.3%

-4.6%

Africa, Asia, Oceania

7,447

8.4%

7,708

9.1%

-3.4%




88,963

100.0%

84,813

100.0%

4.9%

c. BMW experienced a growth in 2004 revenues of 6.8% (Col. E in table above). Revenues grew in Germany and the Rest of Europe only. The greatest decrease in revenues incurred in America.


Volkswagen experienced an overall increase in sales in 2004 of 4.9% (Col. E). The pattern of revenue growth for Volkswagen is similar to that for BMW. Sales for VW also grew in Germany and the Rest of Europe, with a decline in America and Africa/Asia/Oceania. The largest year-to-year % decline was in America (Col. E).


McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2007

Doupnik and Perera, International Accounting, 1/e 8-







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