International Accounting Convergence and FMCG Company Analysis

This assignment delves into the process of international accounting convergence, highlighting the significance of FASB's involvement in setting high-quality standards. A simplified balance sheet is presented for Ketsu's consolidated financials, while Muji's financial statement serves as a case study for FMCG companies in Japan.

International Financial
Statement

Contents
INTRODUCTION................................................................................................................................3
Question 1.............................................................................................................................................3
Question 2.............................................................................................................................................4
Question 3.............................................................................................................................................5
CONCLUSION..................................................................................................................................10
REFERENCES...................................................................................................................................11

INTRODUCTION
International Finance reporting is international accounting framework in which financial
information is properly organised and reported. There is huge requirement of International financial
reporting standards in accounting framework in more than 120 countries. It requires every
businesses to report all of their financial statements and financial position using same rules and
regulations. In this report, there is proper analysis of the convergence project i.e. Being done by
jointly by International accounting standard board and Financial Accounting Standard Board, which
came out of an agreement by the two boards (IASB and FASB) . As in this report, it has clearly
mentioned about that how they are standard setters in a coordinated manner and how they will be
improving the quality and how it had positively impacted on investors and entities . Like
convergence has made the comparison between the organisation who operates globally. In the
second part of this report, it is all about Ketsu Department stores which is one of the Japan's largest
retailer with many stores throughout Japan. The consolidated financial statements have been drawn
up with standards issued by the international Accounting Standards Committee, in that reference
how simplified balance sheet helps in investment decision making. And more preference is been
given to working capital and its need.
In third part, there is an brief analysis of the financial performance of Muji , FMCG
company of Japan with the help of ratio analysis on the basis of three parameter .The parameters are
Liquidity ratio, Profitability ratio and Solvency ratio. These three parameters are also explained
with the subheading i.e. current ratio, acid test ratio, and return on asset, gross margin ratio, profit
margin ratio, debt to equity ratio and equity ratio with proper interpretation.
Question 1
Explain what the convergence project was intended to achieve and briefly explain the current status
of the project?
International Accounting Standards Board is a London based organisation. This organisation
is given full support of industry and government and it also set standards for accounting procedures.
IASB has responsibility for maintaining International Financial Reporting standards. The parent
entity of IASB is International Accounting Standard Committee. Financial Accounting Standard
Board establishes financial reporting and accounting standards for private and public companies and
the organisations who follow Generally Accepted Accounting Principles and that too they must be
not for procure key issues in it organisations. Their main objective was to eliminate the differences
between US GAAP and Financial reporting standards. FASB is one of the most important partner of
IASB. Board works so closely with national standard setters around the world. FASB got to know
that it does not have all solutions for all accounting issue. Some of the areas of US standard could
be improved where International standards can be easily applied (Jaruga and et.al., 2007).
The convergence project was intended to achieve standardisation with high quality foe entire
world, understandable and IFRS to serve lenders, creditors and ones who are in globalized market.
IASB and FASB made their best efforts to make their financial reporting standards fully practical
and compatible. Efforts were also made for coordinating their future work programs and to make
sure that they are achieved or not. Here the standard needs an improvement of both board, for
improvement they need to work jointly. FASB has involved itself in many different activities in the
context of high quality goal, standards and to increase the convergence of accounting standards
which are used in many countries. The most essential activity of FASB is its collaboration with
IASB to make optimum utilisation of resources. For convergence, staff of both boards made short
and long term strategies. In short term attempt was to remove the differences which appeared from
improvements project which were handled by IASB. Under convergence, IASB and FASB has

undertaken many projects like business combinations. After several years, they will require the best
coordination between boards in context of setting and resource allocation.
Current status of convergence
There is a successful implementation of converging or accepting IFRS. At International level
also there is a positive impact of convergence and combination of accounting principle and
standards. Convergence has given most advantage to India in context of growth with globalization.
If any country does not play active role in process of setting standard internationally. There is an
safer route in converging process to IFRS is endorsement process and accepting temporary rid outs.
All countries have faced various difficulties and challenges earlier but after adopting all IFRSs they
got success from some particular date as it is. Many countries have adopted it even ICAI has also
taken decision to adapt IFRSs.
There is proper guidance on tax perspective, IFRS implications are also considered on direct
and indirect taxes. For more successful implementation, if companies use IFRS on daily basis for
financial reporting as well as to track the performance in budget form, management account and
forecasting (Hail, Leuz and Wysocki, 2010). It needs industry expertness but due to deficiency in
guidance in IFRS. There is also a requirement of improving the disclosures which also gives
support in viewing financial statements not for perspective of compliance but also for
communicating the performance. Basic need or compulsory need to make IFRS complaint
statements along with GAAP complaint statements. Because of complaint statements, problems can
be traced at early stage and can be corrected as soon as possible. For implementing IFRS properly
and efficiently, there is an need of deep international understanding about corporate objectives,
harmonisation goals and objectives and financial reporting objectives need to be achieved. Private
sector and government agencies should not be given stress by political pressure on International
Accounting Standards Board. The standards which are developed should be publicize and
accounting profession, corporate management and member countries all over the world should give
support to international Accounting Standard Board. Even the encouragement should be given by
International Accounting standard Board to all member bodies for adopting IFRS and to make and
remake their rules that they are queued along with IFRS. Proper rules and regulations must be
passed to the effect that if in any change or alteration in international Accounting Standard Board,
the local standards should be queued with this and local stock exchange can cooperate in taking step
forward against companies that fail to be with IFRS. To apply disciplinary procedures in non-
convergence with IFRS, governing bodies of accounting profession can be also used. Convergence
makes the reputation and relationship very well between corporate and community. These standards
will improve the efficiency of all global capital markets by improving comparability, decreasing
cost of capital and enhancing capital governance. Till now convergence of IASB and FASB has
become a great success for investor and entities that are operating globally.
Question 2
Critically discuss the advantages of convergence to BOTH investors and entities that operate
globally?
This convergence has specially focused on the big multinational companies. Convergence
helps in removing all weakness and inconsistencies in the existing revenue requirements. For
addressing revenue issues they provide a robust framework (Carmona and Trombetta, 2010). The
biggest advantage of convergence is enhancing comparability between companies in different
countries. Prior accounting standards were differing from country to country, before any of investor
compares two potential investments, they have to make the same format of accounting of both
companies and same for creditors also while evaluating creditworthiness, there are differences in
accounting standards. This brings huge variation in the financials of the company. This convergence

put comparison on equal heads, which makes easier to the investors and entity for evaluating
international options for investing and managing cash. Many investors do not have enough
resources to effectively compare so if financial statements are more comparable or on equal heads,
then they will be able to compare the financials in house.
This convergence also helps in removing barriers for expansion of companies. If any
company wants to expand internationally then there is need of compliance of international cost. If
they are in same set of accounting standards, then it will create ease in expanding. It gives high
quality, globally recognised accounting standards which gives transparency, efficiency and
accountability. These standards gives transparency by quality of information and globally
comparability, enables investors and others to make prior informed economic discussions. By
reducing gap in information between the capital providers and people whom they have given surety
for money, strengthen accountability (Jackling, Howieson and Natoli, 2012). These standards gives
all the information that is needed by management. It contributes to economic efficiency by helping
out investors in identifying the opportunities and risk across the world. It improves the allocation of
capital. It gives useful information to users of financial statements through improved disclosed
requirement.
All these things helps industry to grow and all the advantages are related to corporate in
country, they also bring consistency between external and internal reporting aligned with risk rating
with all international investors. This international comparison also improves in benefiting all
industrial and capital markets in the country.
Question 3
31/12/15
books Assets
Amount(00
0)
Current assets
Inventories 1505
Trade accounts receivable 2022
Other receivables and
miscellaneous expenses 447
Marketable securities 141
Long term assets
Property, plant and equipment 2606
Investments
Intangible Assets 2111
other investment 102
Shares in associated companies 685
Deferred tax
assetshttps://www.myaccountingco
urse.com/financial-statements/bala
nce-sheet 237

Total Assets 9856
Equities and liabilities
Current liabilities
Trade accounts payable 1029
Borrowings 1915
other liabilities 460
unappropriated profit 131
Long term debt
provisions for pension 1871
other provision 1159
provision for deferred tax 184
Owner's Equity
Minority interests 290
subscribed capital 374
Capital reserve 652
revenue reserves 2028
currency translation difference -237
Total liabilities 9856
Working capital= current asset – current liabilities
= 4115- 3535 - 580
Ketsu's working capital is 580(000) , it has managed effective operation with proper management of
working capital.
Need of working capital
Struggling business always maintain sufficient working capital if there is need of revaluating
that how they run their operation. Cash payments should always be focused because it is a great
boost to any business's working capital. Customer should be encouraged to pay earlier, this means
revisiting accounts receivables policies.
Effective operation of any organisation is based on proper management of working capital.
Every business should predict adequate working capital. Every business needs cash for proper
functioning of their operations and other activities. Fixed assets like fixtures, land and building,
plant and machinery and other fixed assets are the necessity of business. Any capital is used to
retain the fixed capital is called fixed capital (Coetzee and Schmulian, 2012). The business unit
should function properly after establishment.
 Functioning
 Trading
 service

Functioning means activities like trading, manufacturing or service. Trading is selling and buying of
goods without any alteration in goods and service signifies taking care of all intangible things like
electricity, courier service, lorry service and many more like this. Manufacturing is converting raw
materials into finished product for sale.
Each and every business unit has need of working capital for its proper functioning like to
bear daily expenses. That type of capital is known as working capital. Some other names of working
capital are revolving capital and circulating capital (Jackling, 2013).
Net cash
Net cash implies to the difference between cash and liabilities. It is usually used in business
like to determine the current ratio and the ability of company to pay off its all obligations. It can be
also used to know the amount of cash which is left after all transactions.
Ratio books analysis
Liquidity ratio
Current Ratio = Current assets/ Current liabilities
It helps in assessing the health of company. High current ratio indicates that company can
pay off its all short term obligations. Usually a low current ratio gives the problem of inefficient or
lax standards , inventory management problems or any excessive pay outflow of cash. If there is
increase in current ratio then it signifies that company is growing into its capacity. There is an
misleading rule that 2:1 ratio means that company's position is good. Mostly every comparison is
done with the help of current ratio (Daske, Hail, Leuz and Verdi, 2008).
Current ratio 2014 2015
Current
assets 676 758
Current
liabilities 134 257
5.04 2.94
In the above scenario, 2014 current ratio was 5.04 but it decrease in 2015 to 2.94. Both the
situations are indicating that company's position is good in context of current ratio but it there is
huge negative impact as compared to previous year. But at last in this company there is need to keep
watch on inventory, management problem or any outflow of cash because of decrease in current
ratio from 2014 to 2015.

Acid Test ratio / Quick asset ratio= Total current assets- Inventories-
It is also a liquidity ratio which measures the capability of a company to pay off its current
liabilities whenever they come due with only quick assets. Quick assets are those assets which can
easily be converted to cash within 90 days or in the short term.
2014 2015
Total current
assets 676 758
Inventories 130 290
Prepaid
expenses 0 0
current
liabilities 134 257
quick asset
ratio 4.07 1.82
In the above scenario, there is big difference in present year and previous year. As in both
year company has its ability to pay off current liability in short term but in 2014 it was having the
capacity of 4.07 and in 2015 it has only 1.86 . This is not good sign for investors if they will
compare both year. There is need to track the inventory and current liability of the company.
Profitability ratio
Gross Margin ratio
2014 2015
net sales 2020 2400
Gross
margin 515 665
Gross
margin ratio 25.50% 27.71%
It is a profitability ratio, it only makes sense when there are higher ratio. In FMCG industry
24% - 26% is considered as good ratio. In the above scenario company's financial position is good
in context of gross margin ratio. In this it is profitable because company is managing its inventory
properly , i.e. it can sell the inventory as soon as possible because in FMCG industry inventory can
make the stock as scrap. Muji has enough money to pay its operating expenses like utilities, salaries
and rent. Gross margin is measuring the profits from selling inventory, % of sales that can be used
for funding of other part of business (Soderstrom and Sun, 2007).
Profit margin Ratio= net income / net sales
2014 2015
Net income 148 320

net sales 2020 2400
Profit
Margin
Ratio 7.33% 13.33%
In the above scenario, Muji has only converted 13.33% in 2015 and in 2014 it converted
7.33% of her sales into profit. Muji is managing its expenses relative to net sales. This is positive
impact because it is increasing from last year. But Muji should try to increase the profit margin by
cutting some miscellaneous expenses. It can generate more revenue by keeping its expenses
constant or it may keep its revenues constant and lower expenses.
Return on Assets= Net income / Average total assets
2014 2015
Net income 148 320
Total assets 1404 1822
average total
assets 1613
Return on
assets 19.84%
As you can see, Muji's ratio is 19.84%. In other words, every Yen that Muji invested in
assets during the year produced 19.84% of the net income. Depending on income this can be good
return no matter what the investment is. They have taken a step for growth of company by heavily
investing in fixed assets like property, plant and equipment in this year which is also giving an good
return of asset that is 19.84% so they are doing optimum utilisation of resource.
Solvency Ratio
Debt to equity ratio= Total liabilities / Total equity
2014 2015
Total
Liabilities 352 500
Total Equity 1052 1322
Debt Equity
Ratio 0.33 0.37
In the above scenario, 0.33 means that there are 0.33 debt or liabilities then there is equity.
In other words Muji 's asset are less funded but investors to creditors. Lower debt to equity ratio
implies more financially stable but in muji's company it is increasing by 0.05 so track the debt and
equity continuously. ROA is most useful for comparing companies in the same industry but in the
above scenario we are comparing it from last year only. And it is getting more then last year so it is
managing its liability and equity properly (Rahman and Uddin, 2015).
Equity Ratio

Equity Ratio= Total equity / Total Assets
2014 2015
Total Equity 1052 1322
Total assets 1404 1822
Equity ratio 0.74 0.73
As you can see, Muji's ratio is 0.73 in 2015. This means that investors rather than debt are
currently funding more of the assets. 0.73 % of the company's assets are owned by shareholders and
not the creditors. It is a healthy ratio depending on FMCG industry. If there is high investment
levels by shareholders signifies potential shareholders that company is worth investing or not, then
many of the investors are willing to finance the company. Muji's equity ratio is not higher, that
means company is sustainable and not so risky to lend all future loans (Xia, Farmer, Lin and
Avouris, 2010).
Therefore, from the ratio analysis it has been justified that, currently it is in good position
but in previous year that is 2014 the financials were more stable and there is high fall in the
financial position according to current ratio and quick asset ratio.
CONCLUSION
It has been clearly understood that international convergence is a process. Convergence have
been the most realistic method to initiate the use IFRS but it is not sustainable in long term. There is
an growth in cross border investing and flow of capital requires FASB to become an active member
in the process of setting high quality standards. FASB has been giving many significant resources at
different level to this effort and IASB has already started to affect FASB agenda which includes and
with this international accounting has been given more priority that will enhance convergence.
Ketsu's consolidated balance sheet has been drawn in the more simplified balance sheet
which tells about the current asset, long term investments, fixed assets and current liabilities.
Though a balance sheet is extended form of accounting equation. Last but not least, Muji's financial
statement has been provided for investing in this FMCG Company of Japan.

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