XBRL: Corporate America Keeping Up With Evolution in Technology

How investors and management can take advantage of this new requirement

We are far from the days when an investor has to go through the trouble of ordering a record of reports from a printing house and get a stack of paper in the mail in order to review a company’s financial filings. As technology becomes more and more integrated with our everyday lives, the SEC is also taking steps to become more technically advanced in the process of financial filings and to provide more efficient ways for investors to review and analyze financial data. From the old school paper submissions to Edgar (Electronic Data-Gathering, Analysis, and Retrieval) filings, and now XBRL, people may wonder what the benefits of these new requirements are, other than saving trees. The fundamental purpose of accounting and financial reporting is to provide a better level of clarity and to help investors to better understand our business and industry. With the market becoming more and more globalized and financial reports becoming more extensive, the simple process of financial analysis is becoming more and more overwhelming for investors. However, with the new XBRL coming into play, investors are able to analyze financial data, and pin point what they need from thousands of numbers much easier with this new format of data submission.

Similar to Edgar submissions, XBRL (eXtensible Business Reporting Language) is written using a fundamental programming language, XML, using the XML syntax and related XML technologies such as XML Schema, XLink, XPath, and Namespaces. It is standardized and regulated by XBRL International, a global organization. Originally developed only for the purpose of exchanging financial data, business regulatory agencies such as the SEC and HMRC soon realized that it can offer much more than simple data communication and has since pushed for the adaptation of XBRL in financial reporting. In recent years, XBRL submission became a requirement for SEC filings of quarterly and annual reports for public companies in the United States. Many other countries are also making the commitment to implement this process in their reporting standards leading to a globalized standard of reporting.

The biggest difference of XBRL data from traditional data submission is that XBRL uses tags to separate each data entry to its own individual “data element” and then reorganizes these individual data elements based on the method of output. This means the raw data can be easily displayed in different formats without repetitive entries. This allows investors or management to be able to extract and display the financial data in any method they choose. It is also easily searchable, and since it is a language specifically written for business and financial reporting it eliminates the overwhelming inflow of junk data that a regular search engine would bring. The standardized Taxonomy used for the tagging provides standard definitions for terms defined by GAAP, which helps set a guideline for filing companies in reporting their data, making it much easier for investors to compare company’s year to year data or even to compare company to company data. The truth is, no matter how specific GAAP gets, accounts with the same items and same calculations don’t always have the same account names, but with XBRL, they will have the same tags. So, with a viewer software, investors will be able to not only view this data in the format they choose, compare and analyze specific data, review the definition of account names and terms, but will also have a quicker understanding of the companies’ financial position. When the XML files are imported into the viewer software, it will be recognized as individual data elements based on tags and the investors will be able to generate analysis based on their focus, such as a comparison of income statement items between company A and company B. Other than the basic viewer software offered by SEC on http://www.sec.gov, filing software companies such as Webfilings and Rivet Software all offer additional detailed XBRL viewer software.

XBRL not only helps the investors in data processing, but companies and regulatory agencies can also benefit as it   provides a convenient way for them to manage data. Data from each year will be stored and can be traced back and compared easily. Generating reports and analysis from these data can be computerized and is much more efficient. The use of the standardized Taxonomy for tags will allow regulatory agencies to better review and audit the financials of the companies. The XBRL language serves as a standardized method for communications between the company, investors and regulatory authorities.

Even though XBRL application has been modified and tested for years, it is by no means a perfect process. The biggest obstacle for a successful global implementation is the learning curve.   It will take some time for companies and investors to get familiar with reviewing data using XBRL. Another obstacle is in the development of the software. Currently, there isn’t an efficient way to convert and extract XBRL data, because it is a language used only for business reporting and not as widely used as other languages such as html, there isn’t a perfect way to complete this data process. XBRL data input currently still requires a large amount of time spent on manual tagging and editing and there is no direct converting method from accounting and ERP systems to XBRL data, but hopefully that will change soon.

Since the establishment of the XBRL language, there have been many changes in the details of this process. It is an innovative idea; this process and its application have great potential for further development and expansion.  There are still many challenges and problems with the process and will have long ways to go before reaching its maturity, but with so many dedicated specialist and increasing number of interested users, this will definitely become the main stream financial data processing language in the near future.

 

Peisha Shen
Executive Assistant
CD International Enterprises, Inc. (NASDAQ: CDII)
431 Fairway Drive, Suite 200
Deerfield Beach, FL 33441

Magnesium is called the Metal of the Future for a Reason: Lillian Wong

Over the past several years, I have gained tremendous experience in the industrial commodities industry, especially the magnesium industry.  I have been privileged to attend annual magnesium conferences around the globe, meet with industry leaders, and learn firsthand about some of the new and exciting developments in this emerging niche market. I would like to share my thoughts and knowledge about this metal, which has been labeled by many industry experts as the metal of the future.

Magnesium is 33% lighter than aluminum, 60% lighter than titanium, and 75% lighter than steel. Yet for many applications it’s stronger per unit volume than all three of those structural metals. I know it sounds incredible, but it’s true! It is also an extremely versatile metal. Besides its basic functions as a component in aluminum alloys, titanium, and steel production, magnesium can also be cast into various mechanical parts and replace aluminum alloys for virtually anything you want to make lighter and stronger.

These days magnesium is making more headlines mainly because the automobile industry is starting to use more magnesium in various auto parts due to the looming CAFE standards and EU emissions standards.  The US EPA CAFE (Corporate Average Fuel Economy) standards require automakers to increase average fleet miles per gallon by 15% to 31.3 by 2014 and 25% to 34.1 by 2016 from the current 27.3 average mpg.   In addition, the Obama administration’s new CAFE standards require vehicles to average 54.5 mpg by 2025. That’s a 100% improvement from where we are today!  With these tough laws in place, automakers are looking to magnesium to shave the vehicle weight drastically in order to meet these stringent mpg guidelines.  Luckily for automakers, almost all of their auto parts, from wheels, engine blocks, panels, and even the entire roof top can be made from magnesium alloys.

For example, The Corvette Z06 uses magnesium roof components to minimize mass. It also uses a magnesium engine cradle.  With the help of magnesium parts, the Corvette Z06 is one of the lightest high-performance vehicles available on the market.  Ford is also doing a lot of work with magnesium. Ford Explorer, the 2011 North American Truck of the Year, uses magnesium seat frames for its third-row passenger seats. Ford recently announced that its F-150 scheduled to debut in 2014 would use extensive aluminum and magnesium in its design.  The Chrysler Group employs magnesium in the interiors of its Grand Cherokee, Wrangler, Liberty, Compass, and Patriot models.  Its instrument panels and front consol are made out of a single-piece magnesium die cast.  Volkswagen AG, one of the pioneers of using magnesium in its auto parts, uses magnesium gearbox and clutch housing in many of its models, including the Golf models.  These are just a few examples of what automobile companies are doing with magnesium and how it’s impacting our lives.

Magnesium usage is not just limited to the automotive sector.  It is also generating a lot of buzz in the sports sector.  It has taken high performance to a whole new level.  Not only is magnesium light-weight, durable, and stronger than aluminum, but it also absorbs 16 times more shock and vibrations, making it the ideal metal that gives competitive sports that extra edge.   Many motorcycle and mountain bike manufacturers have incorporated magnesium in their premium designs for years while new innovations used in the sports sectors are generating additional attention.  Skiers, snowboarders and even ice skaters now find some of their equipment made out of magnesium as it provides much better stability at higher speeds. It is also transforming the sport of golf, where drivers made with a magnesium crown are lighter with better weight distribution to allow golfers to deliver longer and more powerful drives.

Consumer electronics is another area where magnesium and its alloys are playing a major role.  Everyone wants lighter and thinner laptops, cameras, and cell phones that are durable enough to withstand the daily wear and tear.  Magnesium can make a big difference for these fragile products.  The new HP EliteBook uses a magnesium base and aluminum-clad magnesium case and display enclosure that protects the laptop from the usual drop, shock, heat, vibration, humidity, and pressure as it protects the display from expensive repairs.  Canon’s new professional EOS D50 SLR digital camera is protected by a magnesium casing allowing the camera to resist moisture better than its competitors and it weighs just 25.7 ounces.  Not only is magnesium the best metal with the strength to weight ratio, but it is also 100 times better than plastic for heat dissipation.  So next time when you are in the market for a new laptop or cell phone, you might want to think about what’s making this product light-weight and more durable. If you have the choice, what would you choose: magnesium or plastic?

So many incredible innovations are emerging that use magnesium it would be impossible to mention them all. Products from advanced medical equipment to vacuum cleaners are also using magnesium as this metal becomes more embedded in our daily lives each year.  More and more people will see the benefit of magnesium and will want products that are lighter and stronger.  Lasher Sport produces a magnesium sports wheelchair using magnesium alloys.  It weighs just 8.4 pounds without rear wheels; that’s about the weight of a gallon of milk! Innovations like this will trigger other innovations and soon you’ll find light weight baby carriages, magnesium eye-glass frames, magnesium umbrellas, etc. in the marketplace.

Magnesium applications are slowly coming of age and we are just scratching the surface of this metal’s potential.  If you go back in time to the 1850’s, the use of aluminum was just beginning in commercial production and at that time it was more expensive than gold and platinum. By the mid 1900’s, aluminum was embedded in our everyday lives and it is certainly far less expensive than gold or platinum.  Just imagine how much a platinum can of soda would cost you!! Magnesium already has the cost competitiveness to aluminum and as the new kid on the block with only 40 years of commercial applications, I believe magnesium will take an even faster path than aluminum to be used across a broad range of industries.  That is why I believe magnesium is the metal of the future.

Lillian Wong
Director of Investor Relations
CD International Enterprises, Inc. (NASDAQ: CDII)
431 Fairway Drive, Suite 200
Deerfield Beach, FL 33441
Tel: 954.363.7333 ext.317
Email: lillian.wong@cdii.net
Website: www.cdii.net

Fair Value Accounting

Introduction

Fair value accounting is a hot topic currently because many people blame it for the current financial crises. This article explains the fair value accounting concept and standards, discusses its impacts on financial markets and investors, and introduces recent changes on fair value accounting rules.

Fair value accounting definition

“Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date”(FASB, 2006, P6). Fair value accounting records financial assets or liabilities at their current market value in financial statements, which meets the criteria of relevance, objectivity and feasibility in generally accepted accounting principles (GAAP). It provides meaningful and reliable information to investors, but causes fluctuation in financial markets.

Fair value accounting is defined by Financial Accounting Standards Board(FASB). FASB has three important terms in the definition of fair value accounting. The terms are the followings: assets and liabilities, price and principal market terms. The assets and liabilities term explains that a fair value measurement is for a particular asset and liability. The price term is that fair value price should come from a regular transaction. Therefore, the price of an extraordinary transaction such as a forced liquidation should not be considered as a fair value price. The principal market term means a fair value transaction should occur in the principal market. “The principal market is the market in which the reporting entity would sell the asset or transfer the liability with the greatest volume and level of activity for the asset or liability” (FASB, 2006, P7).

FAS157 and FAS159

Fair value market accounting is defined by two accounting standards. They are FAS157 and FAS159. Both standards were effective on November 15, 2007. FAS157 defines fair value, establishes a framework and expands disclosures for its measurements. FAS159 permits all entities, including nonprofits, to measure various financial instruments and other certain accounting items at fair value (“fair value option”). It also reduces accounting complexity of financial instruments and earnings volatility caused by measurement inconsistency of financial assets and liabilities. FAS159 also establishes disclosure statements for an entity to disclose information that helps investors understand the effects of fair value accounting on financial assets and liabilities.

An entity may choose to use fair value accounting for the following eligible items (FASB, 2007, P10):

  • A recognized financial asset and liability, with some exceptions such as an investment in a subsidiary required for consolidation or employers’ obligations for pension benefits.
  • A firm’s commitment that would not be recognized at inception and involves only financial instruments.
  • Non-financial insurance contracts and warranties to pay a third party for goods or services.
  • A host financial instrument resulting from the separation of an embedded non-financial derivative instrument from a non-financial hybrid one.

Fair value accounting and financial crises

Fair value accounting has a direct impact on the current financial crises. The reason for the financial crises is that many financial institutions are insolvent due to huge write-downs for their “toxic” financial assets, otherwise known as credit default swaps according to fair value accounting principles. “A credit default swap (CDS) is a credit derivative contract between two counterparties. The buyer makes periodic payments to the seller, and in return receives a payoff if an underlying financial instrument defaults” (Wikipedia, n.d.).

Many banks hold subprime mortgage-backed CDSs that are used to insure subprime mortgages. When U.S. real estate market meltdown caused a rise in subprime mortgage delinquencies, the market value of the subprime mortgage-backed CDSs has decreased as well. To reflect the decreased value of banks’ CDS holdings, they have to recognize unrealized losses in their accounting statements. As a result, such write-downs force banks to become insolvent or create cash liquidity problems. Based on the arguments provided above, some people argue that fair value accounting caused current financial crises.

Benefits to investors

Despite impact on the financial crises, fair value accounting serves two key benefits to investors. First, fair value accounting represents the most effective way to reflect a company’s value at current market conditions. A company’s value will change if the market values of its financial assets and liabilities change. When a company uses the current market value for its financial assets and liabilities in financial statements, investors can calculate its value from the financial statements and determine whether the investment of the company is worth at the current market conditions. If a company uses its historical price instead of current market price for its financial assets and liabilities, investors can’t determine the company’s current market value based on the financial statements. Consequently, they may lose interest in investments because of the lack of transparency.

Second, fair value accounting provides consistency for investors to compare various companies’ financial statements. Companies may acquire financial assets and liabilities at different prices.  When fair value accounting rules are applied, same financial assets and liabilities are recorded at the same market value in financial statements no matter at what price they were acquired. As a result, investors are able to compare each company’s value based on the same measurement and make the best investment decision. Therefore, fair value accounting is the best accounting method for investors to measure financial assets and liabilities.

Impact on financial markets

However, since fair value accounting impacts companies’ financial statements, it can cause financial market fluctuation. While the market values of financial instruments fluctuate as a result of market price change, the earnings of companies holding those financial instruments can dramatically change from one period to another. For example, companies in the banking industry used to report profitable earnings in the past, but recently they reported losses in their financial reports due to their financial assets write-downs. As a result, the volatility of the financial companies’ earnings can worsen market turbulence.

Meanwhile, companies may face challenges when applying fair value accounting for certain financial assets. The challenges come from different levels of  fair values defined by FASB.  FASB defines three levels of fair value inputs. “Level 1 inputs are quoted price (unadjusted) in active markets for identical assets and liabilities…. Level 2 inputs are other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly…. Level 3 inputs are unobservable inputs for the asset or liability”(FASB, 2007, P15). Based on the definitions, only level 1 fair value inputs are objective and unbiased, and level 3 and some level 2 fair values inputs are subjective and hard to implement. Therefore, companies have to estimate market values of level 3 and some level 2 inputs based on different models, but sometimes those estimations are not always precise.

New rules of fair value accounting

Many people criticize the current fair value accounting rules because the rules force many financial companies to unnecessarily write down their financial derivatives’ value at current market prices. They argue that the derivatives should not be recorded at current market prices in financial statements because the underlying assets backed by some derivatives are rarely traded in the financial market. Due to public pressure, FASB recently issued new guidelines on fair value accounting, which were effective in the second quarter of 2009. “The new guidelines allow the financial assets to be valued at what the banks project they might sell for in the future, rather than in the current, distressed environment” (Gordon, 2009).

Summary

In conclusion, fair value accounting provides more relevant information for investors to understand a company’s financial position. Although fair value accounting may impact the current financial crises, I believe it helps improve market efficiency by providing transparency for investors and is the right direction in accounting.

List of references

FASB(September, 2006). Fair value Measurements, Statement of Financial Accounting Standards No: 15. Retrieved Apr 11, 2009 from http://www.fasb.org/pdf/fas157.pdf

FASB (February, 2007). The Fair value Option for Financial Assets and Financial Liabilities, Statement of Financial Accounting Standards No: 159. Retrieved Apr 11, 2009 from http://www.fasb.org/pdf/fas159.pdf

Gordon, M. (Apr 2, 2009). FASB relaxes accounting rules for banks on assets. Retrieved Apr 11, 2009 from http://finance.yahoo.com/news/FASB-relaxes-accounting-rules-apf-14836397.html

Wikipdia (n.d.). Credit Default Swap. Retrieved Apr 11, 2009 from http://en.wikipedia.org/wiki/Credit_default_swap

 

 

Mandy Fang

Accounting Director

CD International Enterprises,Inc. (NASDAQ: CDII)

431 Fairway Drive, Suite 200

Deerfield Beach, FL 33441

Website: www.cdii.net

Internal Control and a safe working environment in developing economies

A month ago, Apple became the first technology company to join the Washington-based non-profit Fair Labor Association (FLA), a group of businesses and universities focused on improving working conditions around the world.

On February 13, 2012 Apple announced that auditors from FLA have started assessing the work environment at its final assembly suppliers, including Foxconn Technology Group (Foxconn) facilities in Shenzhen and Chengdu, China. A series of suicides at Foxconn plants in 2010 and two factory explosions in 2011, one at a Foxconn facility and one at a Pegatron facility, drew world-wide criticism for the working conditions at some of Apple’s partners’ plants. According to informationweek.com, in its September 2011 report, Students & Scholars Against Corporate Misbehaviour (SACOM) exposed various problems at those plants, including withheld wages, forced and unpaid overtime, exposure to harmful chemicals, and uncaring management.

Public responses to Apple’s decision to launch the investigation are mixed. Investors gave their thumbs up; Apple shares hit an all-time high as the company announced that it would investigate the alleged ‘sweat shop’ conditions in its supplier’s factories. However, the announcement has also prompted more outcries for Apple to find the solutions over the labor and environment problems at its products assembly facilities. ‘‘The reason why Apple is having this FLA inspection is not because they want to solve the problems; instead, it’s because Apple wants to get publicity and rebuild its positive image,” Li Qiang, executive director of China Labor Watch (CLW) said in a statement made after Apple’s decision. “What Apple should do now is to take action to solve the problems and improve the labor conditions in their supplier factories.”

Apple has made the right move as positive images, I believe the smart management of Apple understand, are not built on scandals. As a public company, Apple gets audited of its internal control over financial reporting and the effectiveness of its internal control system.  It may be time for Apple to apply the same internal control principles to its suppliers, balancing risks and controls.

The risks brought about by not tackling the dire working environments at its suppliers’ facilities are as follows:

*  Loss of public trust;

*  Loss of future investment funds;

*  Injury to the company’s reputation;

*  Increased legislation;

*  Violation of laws;

*  Default on a project;

*  Bad publicity;

*  Drop in the stock price.

Apple needs to create a control-conscious environment not only within Apple

but also at its suppliers’ facilities. The control environment is the control consciousness of an organization where people are committed to following an organization’s policies and procedures and its ethical and behavioral standards.

The followings are the action steps that would help Apple and its suppliers to encourage ethical behavior:

*  Set up policies and procedures, in this special case, labor standards at its suppliers’ factories;

*  Communicate up and down that the policies and procedures are important and should be followed;

*  Make suppliers fully aware of their responsibilities to enforce internal control measures;

*  Document key policies and procedures;

*  Send key employees of the suppliers to ethics and internal control training;

*  Evaluate suppliers not only on the quality of Apple’s products but also performance related to internal controls;

*  Take disciplinary or other actions for non-performance, discontinuance of contracts, for example;

*  Monitor the internal control system on an on-going basis, e.g., audits by Apple’s internal auditors or by external auditors like FLA;

*  Establish a whistle-blower system that provides a channel for disgruntled employees at Apple’s suppliers’ facilities to report violations of labor standards or vent their dissatisfaction or resentment on corporate unethical behaviors; and put control measures in place so that all misbehaviors are properly and promptly corrected.

Controls come with costs. To continue being successful, Apple needs to balance risks, controls and control-related cost. Fortunately, Apple’s suppliers like Foxconn also produce for other reputable technology companies like Sony, Nintendo and Hewlett Packard (HP). Apple is the only one who has been working with FLA, for which we should applaud. We ought to make sure that we do not punish the leader of righteousness (犯枪打出头鸟的错误.)

To conclude, to create a safe and healthy working environment in developing economies requires the work of a team of law makers, government regulators, organizations like FLA and CLW, and corporations from developed nations like Apple, Sony, and HP.

Huaqin Kim Chen, MBA

Financial Controller

CD International Enterprises, Inc. (NASDAQ: CDII)

431 Fairway Drive, Suite 200

Deerfield Beach, FL 33441

Supplying Iron Ore to China – a Lawyer’s Perspective

China is the world’s largest importer of iron ore used for both domestic consumption and for production of finished goods for export.  China has seen increases in imports of iron ore of over 11% per year on average over the past five years and is expected to continue average annual increases of over 7.0% per year over the next five years.

In the wake of this enormous demand and the expected increases in import activity, dealing with the legal aspects of contracting for the supply of iron ore to companies in China is critical to the success of such endeavors.  The following are some insights and experiences from a legal perspective with regard to doing this type of business that I believe should not be overlooked.

Customers drive the procurement process by indentifying required product specifications, expected pricing and payment terms, and quantities.  They also have standardized contract terms and conditions, warranty conditions, quality and inspection criteria and logistics requirements. While the significant business terms are common in most agreements across the globe, when dealing in China, customers use a variety of forms in Chinese and English that often times require significant expertise with individuals capable of working in both languages in order to finalize a contract to include all of the agreed on business terms in the proper form for all parties.

While standard terms are often not altered, business negotiators must work closely with legal counsel to negotiate only the issues that will have a significant business or legal affect on the successful completion of the contract. This requires experience in dealing with the supplier to know what accommodations they will accept based on prior business dealings and liability exposure.  Also, it is necessary for both the business negotiator and legal counsel to be sensitive to regional cultures and personalities. For example, the concept of guanxi is essential to the success of every business deal. Guanxi describes the importance of doing business based on personal relationships; it is one of the key social concepts that unite China culturally. However, guanxi can be interpreted differently by members of different generations, and can be accorded different levels of importance by those of the same generation. Individuals who are sensitive to the subtle cultural nuances can distinguish between essential parties and time-wasters and identify euphemisms to distinguish between good and bad reactions to negotiations. Once these key social concepts are understood and put into practice, the terms and conditions of the contract can be easily worked out to everyone’s satisfaction. The ability to understand and apply these cultural aspects of negotiating contracts with customers in China is critical and often very challenging without an experienced multi-cultural team.

Take-it-or-leave-it deals in China are culturally rooted — inexorable situations that force suppliers to take on some amount of risk. In these instances, it is important to recognize the difference between real risk and theoretical risk. The lawyer must put into perspective how contract terms will play out and much of this is derived from experience in completing actual transactions with Chinese companies rather than a theoretical approach.

One of the most significant aspects of an iron ore supply contract for delivery into China is that all iron ore imports are required to be inspected by China Inspection and Quarantine (“CIQ”) to confirm their weight, mineral composition and moisture content.  Results of this inspection which are used to calculate final pricing of a deal often times differs from inspections performed at the port of loading.  Consequently, this contract clause must be carefully negotiated to include a conflict resolution mechanism.  In addition, careful supervision by experienced personnel of the inspection process at all phases of the production and shipping process are essential to ensure the proper application of the agreed on pricing terms. For our transactions dealing with these issues, we have developed workable contract terms that are acceptable to all parties.  Also, we have experienced personnel stationed at each phase of production and the port of loading and the port of discharge in China to ensure that the expected economic results of each transaction are achieved.

We expect to ride the wave of the projected 7% annual growth in demand for iron ore in China using the experience of our worldwide, multi-cultural staff and tools we have developed to ensure success in completing supplies of iron ore to China.

 

Lazarus Rothstein

Executive Vice President and General Counsel

CD International Enterprises (NASDAQ: CDII)

431 Fairway Drive, Suite 200

Deerfield Beach, FL 33441

How IFRS Impacts Real Estate Industry

IFRS, which stands for International Financial Reporting Standards, is a set of accounting principles that has gained worldwide acceptance. It is published by the London-based International Accounting Standards Board (IASB), and is more focused on objectives and principles and less reliant on detailed rules than U.S. GAAP standards.

The SEC is scheduled to vote whether to adopt the 2500-page IFRS over the 25000-page GAAP for U.S. issuers. It is becoming evident for U.S.-based companies that adopting IFRS would be beneficial in an increasingly globalized world, where many countries have already adopted or is in the process of adopting IFRS. As companies think through the issues around IFRS, it would be beneficial to understand how IFRS would impact the role of Accounting Information Systems in a company. Here, I just want to briefly talk about the impact in the real estate industry from a strategic level and an execution level. Since real estate industry is global and competitive, it is vital for real estate executives to pay more attention to IFRS.

Strategic level: (a) IT infrastructure (ERP system, Data Warehouse): As many real estate companies expand rapidly, the accounting information system in these companies becomes harder to understand.  Many companies currently operate a mix of legacy accounting and ERP system, which leads to many errors in adjustments. Moving to IFRS provides a chance to streamline and integrate these separate systems. According to various needs of companies, major ERP transformation project may be designed in order to fully integrate IFRS into its systems and processes.

(b) Control environment as a result of IFRS: Earlier adoption of IFRS could be influenced to support the strategy of the company. As a global industry, real estate companies have many global operations and want to expand their international influence.  A carefully designed adoption process of IFRS will improve the possibility of identifying its value, which may show itself to public in some forms, such as reducing costs, standardized reports, and enhanced controls over foreign sub branches.

Execution level: (a) capturing of data/information: With the rapid expansion of real estate industry, the needs for IT are extensive at the same time. From leasing data to depreciation schedules to tax recordkeeping to recording the fair value of investment properties, there’s plenty of information for real estate companies to keep track of. The single consolidated system is no longer competent for the complicated situations. The real estate companies have launched  planning or engaged in major IT initiatives by integrating separate systems into comprehensive ones to better capture data needed in the transactions. The benefits of efficiency, productivity and compliance are potentially significant to companies within the real estate industry. During this integration process, the factor and impact of IFRS must be taken into consideration. This process should not only take into account of the present needs, but must be able to handle any future needs. As we all know, reporting under IFRS will be become  inevitable. If IFRS conversion is not considered during the upgrade process at the very beginning, it may cost a lot of time and money to compensate in the future. Also, a change in accounting standards will probably require modifications to the financial reporting systems in order to accommodate information not currently required under GAAP. It may also be necessary to revise some IT systems related to business processes, especially those that are relied on accumulated data that are  entered into the financial accounting systems.

(b) Storage of data/information: Data drives many business decisions in today’s enterprise, and finding ways to better manage that data and use it to accelerate business growth is a key challenge for many real estate companies. Real estate industry is concerned with conquering the data storage challenges. Under IFRS reporting, various data storages can be separated, and reporting can support multiple analyses at any time for any date. To some extent, this simplifies the way that companies manage their data storage. Some ERP system, such as Oracle, combines industry-leading performance and efficiency with a rich series of integrated data services and storage management software that is included at no extra cost. Never before has storage been so flexible, so powerful, while also helping to reduce operating costs, making it the perfect storage platform for mission-critical deployments in the modernized datacenter.

Also, during the early period of conversion from GAAP to IFRS , companies still have to generate IFRS-compliant comparative financial statements, which mean that companies may need to run two parallel financial statements during the year of the conversion. Therefore, these companies must consider the following questions, such as whether the system can handle parallel processing, does the company have data storage and memory capacity to keep all the financial information required, does the financial department have the capacity to enter data into two system, does the financial department have access to the level of data required to run financial statements using various accounting standards. Thinking about these challenges, companies need new technologies to overcome shortcomings.

(c)Pervasive and application level controls: Pervasive controls protect an organization’s resources, ensure that business processes operate as planned, assist in the achievement of an organization’s objectives, and ensure effective IT operations.

Changing to IFRS may probably influence the hiring, training, compensation practices and policies of the real estate industry. First, the company may want to add a personnel inventory to the IFRS work plan to have a clear idea of the number of financial staffs who are currently familiar with IFRS. To train the other staff with the knowledge and usage of IFRS, the HR department must first recruit someone knowing these kinds of information. Second, as is known to all, real estate companies usually pay their sales representatives commissions based on sales or rental revenue. But revenue recognition rules are different between IFRS and GAAP, which means that sales or rental revenues under GAAP might be treated in another way under IFRS. Furthermore, some other compensation in real estate industry may be based on net asset value, which is also handled in a different way between IFRS and GAAP. Finally, many real estate companies calculate bonuses for top executives based on profits. In many conditions, using IFRS for reporting may change the amounts. The HR department may also need to revise the executive compensation plan.

Many companies outside US have already adopted IFRS, and there is more and more evidence showing that US companies will also use IFRS instead of the current GAAP standards. If most of the companies over the world accept IFRS, it becomes easier for company to compare with each other, thereby achieving the goal of global integration.

 

Xiao Zhou
Accountant
China Direct Industries, Inc
431 Fairway Drive, Suite 200
Deerfield Beach, FL 33441
Phone: 954-363-7333
Email: info@cdii.net

CDII Official Website: cdii.net

Facebook: https://www.facebook.com/CDII.ChinaDirectIndustriesInc

 

 

Conducting International Research

Perhaps the most difficult aspect of conducting international business is getting legal questions answered.  Every nation has its own set of laws, loop-holes and governmental agencies which closely scrutinize and capitalize on the business activities within the respective countries.  Furthermore, the cultural and governmental differences make it extremely difficult to obtain a correct answer from research alone.  However, with the right tools, one could save a substantial amount of time and money by conducting preliminary research before contacting outside counsel.

Before the type of law is narrowed in scope and breadth, to assist in researching, you will need to understand the structure of the government you are dealing with.  Is it a Civil law country?  A Common law country?  Perhaps mixed?  This information will help you decide, (1) where to find the information and, (2) what law is binding in the specific international jurisdiction.  It is important to note however, that certain jurisdictions’ courts are very inequitable, and often times unconscionable with their rulings and or decisions.  Therefore, specific research on the jurisdictions’ courts should also be addressed with a particular eye on the country’s economic, social and political landscape.  This can be completed by researching specific case law and court rules on the jurisdictions webpage or jurisdiction specific database software.  Despite the fact that the website may be in another language, there are tools today which can translate the source code of the website.  This effectively allows the internet user to see the webpage in its original form fully translated.  This can be conducted automatically with an internet browser such as Google Chrome.  Case law and Code research are extremely beneficial in a common law based, or case law based judicial system.

After conducting the initial governmental research, a logical next step is to determine what type of law you are dealing with.  There are different types of international law.  The first type is Public international law which governs interactions between states, between states and international bodies and between international bodies themselves. This law derives from international agreements, customary law, judicial decisions and academic writings.  Private international law deals with relations between individuals over state boundaries and it is regulated by treaties or domestic lawMost contracts and recognition of judgments are governed by this type of law.  Corporate attorneys engaging in international transactions should be very familiar with this type of law as it pertains to the validity of contracts and principals of comity, or international reciprocity.  Supranational law encompasses regional agreements (like the EU) where the laws of nation states may be invalidated if they conflict with the laws put forth in the agreements.  Foreign law is also very important as it contains laws such as constitutions, statutes, regulations, and court decisions.  It does not have effect outside the nation, however; some foreign law may regulate foreign entities.  Foreign law is also very important when dealing with international trade because, when doing business in a foreign county, one is governed by the law of the land.  This will give you a fundamental and comprehensive starting point in finding the answer to your legal question.

After this information is obtained, you must consult the sources that are most applicable to your specific legal issue and specific type of law.  Similar to legal research in American jurisdictions, the best place to start is a secondary source.  A secondary source is a compilation of various legal issues and laws, which help guide you to the correct sources and law. Generally a secondary source enables you to locate primary sources posted elsewhere.  Primary sources are the original source of law, the law you want to use when analyzing a specific legal question. A great source, often found via the internet at a relatively low cost is the Foreign Law Guide: Current Sources of Codes and Basic Legislation in Jurisdictions of the world, T Reynolds & Flores.  “This site is [designed] for the practitioner, scholar, and researcher and provides essential information on primary and secondary sources of foreign law—what it is, where to find it, and how to use it. It contains information on more than 170 jurisdictions from major nations to crown colonies, semi-independent states and [supranational] regional organizations. The work is comprehensive in content and global in scope and contains exhaustive links within the work to many URLs on the world level.”[1]  Furthermore, this source provides various language translations of most entries on the site.  The cost is $2,075 dollars per year.  Other sources readily available are Globalex, http://www.nyulawglobal.org/globalex/index.html.  This website has various countries guides which are available, in addition to guides on international and comparative legal research topics which encompass public, private, foreign and supranational law.  Most information on this site is available for free. Another research website is FLARE: Foreign Law Research Guide, http://ials.sas.ac.uk/library/guides/research_guides.htm#flare. This website is a collaboration between the major libraries collecting law in the United Kingdom and various other jurisdictions.  Lastly, perhaps the most beneficial source is LLRX Comparative and Foreign Law Resources Center, http://www.llrx.com/category/1050.  This site includes research guides and directly or indirectly links you to various other legal resources such as the following large databases, (1) World Legal Information Institute, http://www.worldlii.org, (2) The Law Library of Congress,http://www.loc.gov/law/help/guide.php and (3) The Law Library of Congress, Global Legal Information Network, http://www.glin.gov/search.action. It is substantially likely that secondary sources will lead you to the right set of laws, most often found via the World Wide Web.  In developing countries it may be more difficult; however, there are alternatives to finding out the applicable information.

Today current technology is increasing at astronomical rates.  This technology allows a user to contact any location across the world with an internet access at relatively low costs.  Generally contacting another country requires diverse linguistics but often times individuals working within the governments speak English.  In addition, the information can be translated instantaneously if sent electronically though Skype or translation programs.  Contacting local municipalities or local companies who specialize in the legal issues which you are seeking may be extremely beneficial especially in developing countries where the information is not readily available on the internet.  If you cannot get in touch with appropriate persons or you feel the information lacks legal credibility, the next best step is to contact local counsel to assist in the matter.

There is no substitute for being on the ground in the region you are conducting business.  Speaking with locals and establishing connections in the specific jurisdiction enables you to communicate face-to-face with local municipalities to learn the law from the source.  However, with evolving technology there are other alternatives which can save you time and money which can be the life blood of a new or existing international business. Of prime importance, however, is keeping a keen eye on the countries’ political, social and economic differences in relation to your legal question.

Brett Schater
CDII Trading, Inc.
Third Year Law Student
Member of Law Review
Legal Clerk with CDII Trading Inc.
431 Fairway Drive, Suite 200
Deerfield Beach, FL 33441
Website: www.cdiitrading.com

[1]  http://www.foreignlawguide.com/visitors.htmAlphabetical List of Countries and Jurisdictions available:

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