Question :

Consider you have been hired as a consultant to Philan Manufacturing Company located at 1 Main St., Worcester, MA 01560. Presently, Philan only operates in the United States. In your discussions with Anne Phillips, the CEO of the company, you find out that Philan is presently evaluating two initiatives that could turn it into a "global" company: (1) setting up a sales office in France and (2) acquiring an interest in a manufacturing company in China. Ms. Phillips has asked your suggestion about the potential positives and negatives of expanding worldwide.

Also, in reviewing the financial statements for the possible acquisition target in China, Ms. Phillips noticed that they were prepared using International Financial Reporting Standards (IFRS). Ms. Phillips, who is not an accountant, asks you if IFRS is the similar thing as United States Generally Accepted Accounting Principles (US GAAP). She says, "My controller says that we have to follow definite rules (US GAAP) when we put together our financial statements. I consider that since English is a common language used around the world, the same thing applies to accounting, and that US GAAP is given by companies in other countries such as France and China."

Prepare a letter to Ms. Phillips addressing all of the subsequent:

1. What are the complexities, complications, and challenges of operating a global business? In other words, what issues will Ms. Phillips have to consider that she didn't have to consider when operating domestically? Identify at least two complications or complexities and describe why they are complications or complexities. Also, show how they might affect the financial results of Philan (e.g., potential effect on revenues, assets, expenses, liabilities, etc.).

2. Is Ms. Phillips' assumption about US GAAP being used world-wide correct?

3. What are International Financial Reporting Standards? Who determines these standards? What is the process for standards being passed and becoming part of IFRS?

4. Check one area where the accounting rules are different between US GAAP and IFRS and give details on how the accounting differs.

5. Show the existing progress toward "convergence" of accounting standards worldwide. What progress has been made in the US toward convergence? (Be precise - find actual milestones) Show the desirability and the questions of achieving convergence, as well as on the consequences of not achieving it. Based on the SEC's statements and actions, what is expected to happen in the future related to convergence in the US?