IFRS Overview.
International Financial Reporting Standards (IFRS) are uniformly accepted accounting standards in running business affairs globally. The role of IFRS is to ensure accounts in a given company are understandable as well as comparable across the globe.
Uniformity
and Transparency are the main objectives of IFRS. The growth in trade and
international shareholding has led to the development of international standards
(Li,
Sougiannis, and Wang, 2017). Thus, the two newly acquired shareholdings must
adopt the IFRS for their financial statement to be reliable and consistent with
the parent company.
he differences in the standards for companies registered in the Sweden Republic and those registered in the USA are as follows. IRFS 3, which deals with business combinations apply when the buyer acquires control of another entity, through legal merges, buying shares, asset acquisition, or reverse acquisition.
Acquisition through mergers in Sweden is unusual, with no restriction
generally on foreign investment. But some are subject to the law and foreign
buyers must get a permit, for instance, restricting merger and acquisition in
the production of military artilleries.
In the preparation of consolidated financial statements that fall under IFRS 1, a limited liability company is supposed to present transactions and other accounting events in financial statements in a given format.
In Sweden, an institution is
obliged to file an annual report to the within 7 months as the guidelines of
IFRS 1 (Jansson,
2018). In the United States, the subsidiary will be governed by the US
Generally Accepted Accounting Principles (GAAP) (King, 2019).
In
the income statement, the treatment acquired tangible assets, such as research
and development, a subsidiary in Sweden will only recognize this as an asset if
it will have a future economic benefit the one in the US will recognize
intangible assets at their fair value. The subsidiary in Sweden will allow the
application of last in first out (LIFO) unlike the one in the USA (Chychyla,
Leone, and Minutti-Meza, 2019).
b)
The
economic factors which could explain Hugh Plc’s decision to acquire the
shareholdings in the subsidiary companies in these locations
Mergers and acquisitions
are facilitated by economic factors. The factors entice the management to take
the bold step to acquire a subsidiary, such factors include,
i)
Growth
Prospects
It may take a
considerable number of years for a company to grow in size, instead of waiting
for such a long time Hugh PLC has decided to acquire the two subsidiaries for
growth prospects. This is usually a case of a horizontal merger, a company
acquiring a competitor for a given cost (Loukianova,
Nikulin, and Vedernikov, 2017).
This will give the acquiring company a chance to grow in market share without
necessarily doing much lifting.
ii)
Eliminate
Competition
To eliminate future
competitors the acquiring company buys out potential
competitors and sweeps them out of the market, thus gaining huge market command
(Loukianova et al., 2017).
iii) Synergy
When the two or more have joint operations, a reflection in an increase in revenues coupled with lower expenses is mostly experienced. For instance, a company may acquire a similar firm, allowing it to expand its product offering and, as a result, increase its sales and revenues.
This could not have
been accomplished had the two firms remained independent. When activities are combined, the overall performance and efficiency
seem to increase (Loukianova et al., 2017). The overall costs as well drop the
acquired company’s leverages off of the parent’s company's weaknesses and vice
versa.
iv)
Tax Purposes
To reduce the tax bill, a company acquires a
subsidiary located in a region where there are affordable and friendly tax
rates. Pushing the merged
company’s tax home overseas to lower affordable
tax rates, this incentive eventually reduces its tax burden (Green, 2016).
v) Managers Incentives
If for instance, the compensation and salary structure of a subsidiary
in the US proves to be well organized and attractive this will be an incentive
to the managers to acquire such a subsidiary. The issuance of end of the year
bonuses and substantial salary from a subsidiary in the US and compensation
based on individual performance in a subsidiary in Sweden (Green, 2016). The
two if aligned will form a good strategy for the overall group strategy.
vi)
Diversification
As a tool of risk management, the Hugh Plc decision to acquire the two subsidiaries is to diversify the overall risk. With a wide range of investments in the Portfolio, it will diversify the risk by investing in different assets in different locations.
To eliminate the unsystematic risk,
the negative outcomes of one subsidiary are neutralized by the positive results
of another subsidiary (Bonaime, Gulen, and
Ion, 2018). By investing both domestically and
in foreign markets the risk is diversified geographically
c)
How
the use of technology can improve financial reporting within Hugh Plc and its
subsidiaries.
The increasing development and innovation in the technology sector have positively impacted the quality of financial reporting. Improving efficiency in the production of financial reports making the reports to be more reliable.
Enhancing the reliability of financial statements is a major contribution of technology in financial reporting. The aspect of the financial reports to trustworthy. The group financial reports are verifiable and can be used by investors and other interested parties consistently yielding the same results. With computerized financial reports across the Hugh Plc, the elements of honesty and completeness are guaranteed.
With the use of technology, understandability of financial
records is also improved, the financial statements being convenient, concise
and easily understood by users with basic business knowledge (King, 2019).
Relevancy is another aspect brought by the use of technology meaning, impacting
the decision of users in pursuit of the financial statements in Hugh Plc. For
example, through the use of technology, if the parent company knowns that in
one of the subsidiaries has an unrevealed and material liability, the parent
will be quick to reverse the decision.
Automated analytical tools will enhance the management and financial team of Hugh Plc to make faster and better financial decisions across the companies since information is readily available at their fingertips. With tools such as key performance indicators, the financial management team can have a better insight into how different subsidiaries are performing.
Digitizing the processes in the Hugh Plc will enhance streamlining the process, thus reducing the overall cost in the group. Comparability is a key element in financial management facilitated by the use of technology. The financial users can compare the results of the previous accounting period and the performance of similar entities and gauge themselves. Audit reports done in an automated financial environment will have more quality and more reliable (Chychyla, Leone, and Minutti-Meza, 2019). To improve engagement with the customers Hugh Plc should embrace technologies such as cloud computing and artificial intelligence.
