Introduction
Multinational corporations are enterprises that have operational units in more than one country. In particular, subsidiaries of specified Multinational Corporation are managed centrally by a parent company. A parent company is normally located in the corporation’s country of origin. A Multinational Company would therefore be regarded as an enterprise that has production units in the mother country and other nations. Multinational corporations sell their goods both in the host country and in other nations where its investments are located. Often, returns from subsidiaries are sometimes expatriated to respective host countries with productions units (Christos, & Sugden, 2000). This aims at expanding the level of operations among key subsidiaries. In the contemporary world, most profits of multinational enterprises are transferred to parent companies where major decisions concerning the multinational enterprise are made. Although this is common with a good number of multinational corporations, it is notable that subsidiary units pay all costs associated with operations before sending the net income to parent company.
Apparently, it emerged that multinational corporations have substantial impact on the economy and government policies of the host countries. As many would denote, multinational corporations contribute significantly to the economic growth of host countries. On the other hand, international companies are gaining considerably from unpopular environmental and social regulations as well as cheap labor and raw materials availed by the host country. Multinational companies are as well perceived as enemies to usual policies and regulations of the foreign country. Many claim that international corporations sometimes the force government to change its policies for the reason that host government would benefit from favors given by a foreign company. Altogether, international enterprises bring more benefits than harm to any country where its subsidiaries are situated.
Considering that multinational corporations have subsidiaries in different countries, which have diverse policies and regulations regarding the transfer of funds across national boundaries, and tax regulations in both host and mother country, it has come to the attention that accounting standards guiding multinational operations are multidimensional and complex (Zeff, 1998). As a result, an extensive and detailed analysis of accounting policies and procedures should be carried out to determine accurately profitability of international organizations.
Adidas AG
Adidas Group is a multinational Company presently headquartered at Herzogenaurach in Germany. With three subsidiaries that is, Taylor Made, Adidas and Reebok. Adidas AG has grown rapidly to claim a larger share of the athletic footwear market. Adidas Group specifically purchased 25% of the Spanish competitive company referred to as Reebok. Currently, it has about 2270 retail stores based in different parts of the world. Although Nike has recently grown due to its discounting strategy employed in its operations, Adidas AG still leads the athletic footwear and apparel market. Adidas AG commonly sells its items to retailers such as Sports Authority and Dick’s Sporting Goods. However, Adidas realized it was selling goods to several retailers at a wholesale price and sought to increase its net income through sell of its products at retail prices.
The fastest expansion of Adidas AG to emerging markets in both Asia and South America has guaranteed strong market for its products. Currently, Adidas AGF derives a quarter of its sales from North America while a third of the sales are attributed to markets in Asia and Latin America. It is within Asia and Latin America that Adidas AG recorded a sales growth of 25%. The leading strategy of the company, which is commonly referred to as premium price has seen the company target the high-end market. The wealthiest markets are located in a number of countries including Thailand, South Korea, Japan, Indonesia, and New Zealand among other countries.
Market share by sales
Adidas accounts for the largest sales in relation to other Adidas AG brands in the market. In the year 2009, sales for Adidas were approximated at 73%. This is therefore, regarded as the major contributor of the Adidas AG sizeable profit. Adidas participates in two segments namely Sports Style and Sports Performance.
Reebok follows in the second position accounting for 20% of the Adidas AG total sales. Reebok as well boasts of three brands including Reebok as the main brand and Rockport and Reebok-CCM Hockey as the minor brands. Reebok was apparently acquired in 2006. However, the product still struggles in the market since it faces stiff competition from other competitive brands. In order to counter the turbulent market, Reebok sought to discount strategy that aims in increasing sales. In summary, Reebok still suffers from distorted image of its brands in the market, which was partly attributed to low pricing factor.
The third and final brand of Adidas Group is popularly known as Taylor Made-Adidas Golf, which statistically accounts for 7% of Adidas AG sales. Just like other Adidas Group major brands, Taylor Made-Adidas Golf has its own brands. The two major brands owned by Taylor Made-Adidas Golf include Adidas Golf, which is associated with apparel and footwear and Taylor Made, which deals with balls and clubs.
Major Competitors
Nike
Nike dominates other companies in both market share and sales. Adidas Group follows Nike in the second position. Predominantly, Nike is considered to drive its market strength through economies of scale. Nike makes a range of brands including accessories, apparel, and footwear, which tends to make the market more competitive for sports related products.
Puma
Operating through Tretorn and Puma, the company produces wide range of sporting goods including apparel, footwear, and equipment.
Sketchers
Sketchers generally sell a range of footwear using Sketcher as the brand name. However, it has other minor brand names, which principally target certain segments of the market. Sketchers have about 180 selling units worldwide.
Columbia Sportswear Company
The company designs and sells accessories, footwear, equipment, and apparel. Other major competitors include Callway Golf Company, which competes with Adidas AG in the golf industry, and Under Armour, which grows at a rapid pace as comparison to other companies producing sporting goods.
International Financial Reporting Standards
IFRS are accounting standards adopted by the International Accounting Standards Board. The IFRS set rules and guidelines that should be followed by public and private companies intending to prepare their financial statements. However, the rules and guidelines set are not only broad but also specific for certain companies. The guidelines aim at treating items explicitly in an accounting office. Generally, the IFRS comprises of International Financial Reporting Standards, Standing Interpretations Standards Committee, International Accounting Standards and Conceptual Framework for Financial Reporting.
Aim of International Financial Reporting Standards
Rules and regulations provided by the IFSR aim at ensuring that firms publish financial statements that are true and fair. As a result, any firm should consider relevancy and reliability of the information while preparing financial statements (Schermerhorn, 2009).
Financial statements and Adidas Group
Statement of financial position
Statement of financial position is popularly known as Balance Sheet. Balance sheet is commonly used by organizations to show financial position of a firm. In other words, financial position can as well mean financial strength of a firm (McGregor, 1999). The firm’s assets should balance with both equities and liabilities. Statement of financial position enables users of financial reports such as prospective and existing investors to determine financial strength of a firm. Balance Sheets are normally prepared on a monthly, quarterly, semiannually or yearly basis. It is a mandate for all companies in the world to follow the respective requirements. Adidas Group publishes its statement of financial position on a quarterly and annual basis. Its assets stood at 10.6 billion Euros in the year 2010.
Statement of comprehensive income
Statement of comprehensive income is also referred as income statement. Income statement generally shows the expenses of a firm and profits incurred within a specific period. In many cases, income statements are prepared by diverse enterprises to indicate the profitability of a certain segment of the market or efficiency of internal operations of a firm. Adidas prepares its income statement both on quarterly and annual basis. A range of Adidas Group retail stores on average report their income statements with respect to regulations and guidelines provided by the host country (Saudagardan, 2001). However, Adidas Group centrally analyses the financial statement from its headquarters in Germany. It generally analyses Income statement of various stores and subsidiaries in relation to policies and requirements provided by the authority of Germany. Adidas Group closed year the 2010 with a net income of 567 million Euros.
Statement of changes in Equity
Statement of changes in equity shows the capital position of a company. Furthermore, it describes the changes taking place in a firm regarding equity over a given period. Statement of changes in equity enables firms and financial users of multinational financial information to determine the amount of retained earning earnings, ordinary share capital, and preference share capital within a company. Individuals will stand a chance to identify price of shares and therefore be able to deduce future values of stocks. Adidas AG subsidiary, Reebok, which is based in Spain, reports its statement of changes in accordance to regulations governing accounts in Spain. The management, which is located in Germany, revises the statements the subsidiary relating to equity. Adidas AG equity stood at 4,623 million Euros at the end of the year 2010.
Statement of cash flows
Statement of cash flows is a fundamental financial statement with regard to demonstrating changes in cash flows within a company. Chiefly, statement of cash flows indicates the liquidity of a firm. Liquidity shows ability of the company to pay its liabilities as well as its solvency. The retail stores of Adidas separately report their statement of cash flows. Statements of cash flows are then sent to central management, which helps in making major decisions concerning the operations of the firm. Adidas Group had 381 million Euros as cash for the end of year 2010.
Adidas Group and International Financial Reporting Standards
Taxes
Multinational companies are taxed in both the host country and the mother country. Normally, local companies are charged a margin of 30% to 40% of their net income. On the other hand, foreign corporations are charged a higher margin, which is slightly over 40%. Spain charges a standard corporate tax of 35%. Reebok, which is situated in Spain, is subjected to a foreign tax of 45%. Adidas Group owns 25% interest in Reebok Company. Back to home country, the profits of Adidas, which are mostly attributed to operations based in Spain, are exempted from tax, which encourages most German companies to invest externally.
Repatriation and taxes
Adidas Group repatriates 60% of profit made by Reebok Company. However, the amount repatriated is normally subjected to tax deduction of 30%. This reduces the desire by several multinational corporations to invest their assets in Spain (Pactor, 1998).
Exchange rates
Since Adidas Group sells units in several countries, it always faces problems associated with exchange rates. Adidas prefers reinvesting the amount earned in a subsidiary company given that the host country’s currency has weakened to low levels. However, when the host currency strengthens, Adidas Group would prefer repatriating a large part of profit to parent company as opposed to investing in the respective subsidiary.
International Financial Reporting Standard requires that a firm should report its financial statement with respect to current exchange rate between host country and parent company’s nation. In fact, the financial statements should be reported in both host country currency denomination and in the mother country currency (Ball, 2006).
Conclusion
Multinational corporations always extend their operations in other countries in order to find conducive business environments for their activities. The major aim regards searching for cheap labor and materials. However, some individuals invest in other nations with an objective of increasing sales. Because of having different operating units in diverse countries, international corporations face multidimensional and complex accounting procedures, especially those relating to aspects of taxes, repatriation and exchange rates. Adidas Group has its main subsidiary, Reebok, in Spain. However, it has many retail stores worldwide aiming at improving its sales. All operating units are subjected to different business environments. Therefore, the firm records prepares its financial statements with respect to International Financial Reporting Standard.
References
Ball, R. (2006). International Financial Reporting Standards (IFRS): pros and cons for investors. Accounting and Business Research, 6(1).
McGregor, W. (1999). “An Insider’s View of the Current State and Future Direction of International Accounting Standard Setting.” Accounting Horizons June, 2(1), 159-168.
Pactor, P. (1998). “International Accounting Standards: The World’s Standards by 2002.” The CPA Journal July, 4(3), 14-21.
Saudagardan, S. (2001). International Accounting: A User Perspective. Cincinnati, OH: South-Western College Publishing.
Schermerhorn, R. (2009). Exploring Management. New York: John Wiley and Sons.
Zeff, S. (1998). “The IASC’s Core Standards: What Will the SEC Do?” Journal of Financial Statement Analysis Fall, 3(2), 67-78.