Question

Besserbrau AG is a German beer producer headquartered in Ergersheim, Bavaria. The company, which was founded in 1842 by brothers Hans and Franz Besser, is publicly traded, with shares listed on the Frankfurt Stock Exchange. Manufactur- ing in strict accordance with the almost 500-year-old German Beer Purity Law, Besserbrau uses only four ingredients in making its products: malt, hops, yeast, and water. While the other ingredients are obtained locally, Besserbrau imports hops from a company located in the Czech Republic. Czech hops are considered to be among the world’s finest. Historically, Besserbrau’s products were marketed exclusively in Germany. To take advantage of a potentially enormous market for its products and expand sales, Besserbrau began making sales in the People’s Republic of China three years ago. The company established a wholly owned sub- sidiary in China (BB Pijio) to handle the distribution of Besserbrau products in that country. In the most recent year, sales to BB Pijio accounted for 20 percent of Besserbrau’s sales, and BB Pijio’s sales to customers in China accounted for 10 per- cent of the Besserbrau Group’s total profits. In fact, sales of Besserbrau products in China have expanded so rapidly and the potential for continued sales growth is so great that the company recently broke ground on the construction of a brewery in Shanghai, China. To finance construction of the new facility, Besserbrau negotiated a listing of its shares on the London Stock Exchange to facilitate an initial public offering of new shares of stock.

Required: Discuss the various international accounting issues confronted by Besserbrau AG.

Answer 1

Ans.

Brief explanation of case as follows:

Besserbrau AG is a German beer producer headquartered in Ergersheim, Bavaria. To expand its business it decided to sale its product in China. For this company establish a wholly owned subsidiary in china (BB Pijio) to handle the distribution of Besserbrau products in that country. The sales of subsidiary is 20% of the total sale and it will contribute 10% of total profit.As the sale increases frequently their company decided to construct a brewery in Shanghai, China. For finance the construction company has to list its share on London Stock Exchange to facilitate an initial public offering of new shares of stock.

The various international accounting issues confronted by Besserbrau AG as follows:

1. As the Besserbrau export its product to china, it is the sales made to foreign customer in different currency. So it has to translate china's currency (Yuan) into German currency (EURO) .

2.As the company do both export and import it has to translate foreign currency payables and receivables .Company has to hedge the risk occur from these foreign transaction by purchasing or selling forwards or options.

3.As in China the sales is growing rapidly company want to finance the construction and it decided to offer new shares to the public via initial public offer but for this it has to figure out how to make sense of the financial statements of a foreign acquisition target prepared in accordance with an unfamiliar GAAP when making a foreign direct investment decision.

4. Determining prices for inter company transactions (international transfer prices) to achieve objectives of company and also complying with the governmental regulations.

5.Identifying and Complying with the tax laws of both the countries for income earned in foreign country (China). Also it is crucial to know the provisions of Double Taxation Relief to reduce higher tax burden.

6.To establish an effective control over the operations of subsidiary company and evaluating the performance of company as well as its management from time to time.