Mock exam 2

Question 1

Explain by your textbook why the company would translate the official financial statements to this document. Include in your answer the term investors.

Answer 1

Companies translate financial statements into languages other than their mother tongue to attract global investors, comply with international regulations, access foreign capital markets, and enhance transparency. This practice facilitates a broader investor base, especially in regions with diverse languages, and aligns with the globalized nature of financial markets. Providing information in widely-used languages improves competitiveness, increases analyst coverage, and signals a commitment to openness. Ultimately, translating financial statements is a strategic move to appeal to a diverse range of investors and foster trust in the global business environment.

Question 2

Explain by your textbook why a company can use IFRS and the additional requirements, in this case, the German Commercial Code (HGB), in one document. In your answer use the term principle-based based and elaborate on that.

Answer 2

A company may choose to incorporate both the International Financial Reporting Standards (IFRS) and the German Commercial Code (HGB) in a single document due to the principle-based nature of IFRS and the specific regulatory framework provided by the HGB. IFRS offers principles rather than rigid rules, allowing flexibility in application. Integrating HGB requirements in the same document enables the company to comply with Germany’s specific legal and regulatory landscape. This hybrid approach ensures alignment with global standards (IFRS) while addressing country-specific statutory obligations (HGB). By combining these frameworks, the company achieves a nuanced and comprehensive financial reporting strategy that reflects both international principles and local legal requirements.

Question 3

Assume that the company reports a value of 1.000 in Property, plant and equipment. Explain and elaborate in the scenario that you would use the following useful lives.
Factory and other buildings 10 to 30 years
Other buildings 5 to 8 years
Technical machinery & equipment Generally 5 years
Office & other equipment Generally 5 years
Equipment leased to others Generally 2 to 5 years

Note you do not have to calculate an amount, explain in words what the effect would be on the value of Property, plant and equipment using your accounting principles.

Question 4

As can be derived from the text in question 3 the company has an impairment process which is not different from the theory. Explain the impairment process by the text of the company and your textbook.

Answer 4

Firstly, it is necessary to assess whether there is any either internal or external indication that an asset might need to be impaired and, thus an impairment process is needed. When there is no reason for the asset to be impaired you stop with the impairment process and do not calculate any further. However, when there is a reason to continue the impairment process the following must be done.

The second step is to calculate the new numbers, you can use the carrying value less the recoverable amount to calculate the impairment loss. The recoverable amount is greater than assets or cash-generating units for a value less cost to sell and value in use. The value in use can consist of the market value, sales value, or fair value, what the value is present day.
In short, how much cash an entity can generate in the long term, the highest of those two is the recoverable amount. Following up an entity can recognize an impairment by applying a model, choosing a cost model or revaluation model depending on the assets in the impairment process.

Question 5

Elaborate on the judgmental elements in the accounting principle for leases-lessee and explain what the effect would be when you use these elements differently.

Answer 5

• A lease shorter than 12 months is operational.
• What is low value?
• The depreciation term and useful life, have a higher depreciation charge so the value would be lower.
• The effect of interest.
• Incremental borrowing rate. When the rate goes down, the effect on value will go up with a higher interest rate than Siemens. The higher the discount factor the lower the value.
• The effective interest method, and what is the effect?
• Extension options are included in the lease term if their exercise is reasonably certain. What is the effect? If we expense it in the profit account lower profit when we capitalize it we have a higher profit. We take it as a cost then we get rid of it, if we are already low in profit, we capitalize on it to increase our profit. When we use it the value of the lease will go up. The initial recording is only on the balance sheet. The higher depreciation charges in the upcoming year.
• Impairment losses could lower the value but with remeasurements, we can also get back the losses.
• Present value
• Remeasured in case of modification or reassessment of the lease. What is the value? You can play with the value of the lease in your financial statements.

Question 6

As mentioned in the text in question 5 the lease liabilities (lessee) are measured at the present value of the lease payments due over the lease term, generally discounted using the incremental borrowing rate. Assume that Siemens uses a rate of 7% in their calculations while your rate would be 5%. What would be the effect on the recorded lease liabilities by your textbook?

Answer 6

If Siemens employs a 7% discount rate to calculate lease liabilities, while my 5%, the discrepancy affects the present value of lease payments and, consequently, recorded lease liabilities. A higher discount rate used by Siemens results in a greater present value of future lease payments, reflecting a higher cost of borrowing and the value goes down. Conversely, your textbook’s lower rate leads to a reduced present value, indicating a lower cost of borrowing and the value will go up. The choice of discount rate influences the accuracy of reflecting the current value of future lease obligations on a company’s balance sheet, impacting financial statement comparability between entities.

Question 7

Explain by your textbook the requirements when to record a provision.

Answer 7

A provision is a liability of uncertain timing and amount, from a present obligation arising from past events. The settlement of which is expected to result in an outflow of economic benefits of an entity. For Siemens the recognize a provision the next all three requirements need to be met. First of all, Siemens needs to have a present obligating event. Following up there needs to be a cash outflow of economic benefits. And there needs to be a reliable estimate of economic benefits that is required to settle the obligation.

Question 8

The company reports certain legal proceedings for which no amount is provided under the provisions. Elaborate by your textbook on the last sentence of the recorded part of the financial statements above ‘For legal proceedings … outcome of the matter’ and why the company is not providing for and disclosing these proceedings.

Answer 8

The company mentions legal proceedings in the financial statements without specifying the amount set aside for them. This lack of provision suggests uncertainty about the outcomes. Although accounting principles call for setting aside funds for likely obligations, the unpredictable nature of legal results makes this challenging. Companies may withhold details to protect confidentiality, legal strategy, and ongoing negotiations, avoiding full disclosure to safeguard their legal position. The absence of a provision might indicate a contingent liability, potential obligations dependent on uncertain future events. Accounting standards encourage transparent disclosure of significant contingent liabilities without recognition until the likelihood of occurrence increases, aligning with principles that avoid prematurely acknowledging uncertain future obligations.

Question 9

Siemens reports a sustainability report of 156 pages. Provide three reasons why companies report on these topics by your textbook and elaborate on the reason you selected these items.

Answer 9

Companies engage in sustainability reporting due to the influence of government regulations, social responsibility for brand reputation, and evolving stakeholder demands. This dynamic landscape demands a more comprehensive and transparent approach to sustainability reporting, aligning with both regulatory requirements and the growing emphasis on ethical, social, and environmental considerations. Companies recognizing this merge position themselves strategically to meet stakeholder expectations and navigate future shifts in regulatory frameworks.

Question 10

Using the financial statements list three items which are important for you to use in analyzing the performance of the company. Elaborate on the reasons why you select these three items. Note no calculations are needed.

Answer 10

• Cash flow
• Gross Operating margin
• The current/quick ratio
• Tangible/intangible, R&D (because Siemens sees itself as a technology company.) Also depends on which items are going to be capitalized.
• Debt to equity
• Product pipeline (If are there no more products then you are gone.)
• Start-ups/ new developments. And do they help?
• Education.
  You analyze the performance of the company, so what is important whether ratios or elements? (What is the company and in what are they specialized?)