Research Paper on Besserbrau AG: German Beer Producers in Ergershem, Bavaria

Introduction

Besserbrau AG is one of the German beer producers with headquarters in Ergershem, Bavaria. In 1842 brothers Hans and Franz Besser founded the company. Besserbrau traded publicly with shares on Frankfurt Stock Exchange. It brewed in strict accordance with the German Beer Purity Law while using four ingredients to make its products. The four are malt, hops, yeast, and water with malt, yeast, and water locally obtained. Besserbrau had hops imported from the Czech Republic as their hops are considered among the finest globally.

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According to history, products by Besserbrau were exclusively marketed in Germany. Three years ago, it commenced sales in the People's Republic of China, thus expanded its sales. It took advantage of the potentially enormous market for its products. Besserbrau later came up with a wholly-owned subsidiary to deal with the distribution of products.BB Pijio sales accounted for 20% of sales by Besserbrau, whereas BB Pijio's sales to China customers rated for 10% of total profits by the Besserbrau group (Henderson, et al. 599). Sales in China rapidly expanded, creating a potential for significant ongoing sales growth. It led to the company breaking ground for the construction of a brewery in Shanghai. In financing the new brewery construction, Besserbrau made negotiations with a list of its shares on the London Stock Exchange, thus facilitating an opening for the public offering of new shares. However, there are various international accounting issues Besserbrau AG confronted that the term paper will expound.

The issues are:

Foreign Direct Investment

In this issue, Besserbrau had sales in China increase, thereby established a new facility in that location. According to international accounting, that is foreign direct investment. It would require Besserbrau investing in China by coming up with a new branch or manufacture. In this case, there would be primary issues whereby for Besserbrau to continue the foreign direct investment. It would be needed for them in a foreign country to change standard accounting to local standard accounting. Thereby translate Yuan foreign currency into Euros, the local currency. The direct investment will result in accounting issues based on the relation to taxation laws, GAAP, and other regulations (Doupnik et al.). Besserbrau AG will have problems in the financial statements figured as per the China unknown GAAP. For example, there will be issues when converting profits to German GAAP and translating the profit earnings into Germany currency from Chinese. Apart from that, there will be issues in the evaluation of the company performance that accounts for German income generated and Chinese taxation. In considering the taxation laws, the matter would be complying with both Chinese and German laws of taxation. It is likely there would be a challenge from the double taxation. In this case, Besserbrau AG would alternatively go for tax credits to gain relief following the double taxation.

International Income Taxation

China, Germany, and Czech put a tax on their sales while making imports and export. In this case, the countries can opt to make a rule about taxation, thus reduce and avoid double taxation. China's tax rate has a high tariff, unlike the German tax rate. Therefore, it will ensure China's revenues go low compared to Germany, only if they also have tax on sales in China. Besserbrau AG should ensure profits got from foreign sales are taxable from the two countries, Germany and China. In international accounting to do away with the double taxation, Besserbrau AG can take the approach of taking the credit of taxes paid to the foreign state (Doupnik et al.). Besserbrau AG does imports, and exports thus have international trade. However, the international accounting issues brought about by this trade. It is that the company also has to translate the foreign currency payables and receivables from the transactions from imports from the Czech Republic and exports to China. Alternatively, to deal with the issue of international income taxation. They would have to account for both foreign currency forward contracts and options used to protect the foreign exchange risk linked to foreign currency receivables and payables.

Sales to Foreign Customer

Besserbrau AG is known for exporting its products to China. It indicates Besserbrau AG not only sell their products in German but have expanded to sell to foreign clients. The issue at stake from making sales to international clients is the differences in currency. Whereby, we have Besserbrau AG, who uses Euro and on the other hand, BB Pijio in China who uses Yuan. It arises that Besserbrau AG cannot ledger sales transactions made directly using the different currencies. In that case, they have to make transactions of the China currency into German currency. It only happens if the two countries do not adhere to the rule of using one currency. Following the foreign transactions that require conversion of the currencies, the company is at risk as exchange rates tend to differ. However, in instances where the international client purchases in their currency despite being in the Euro, then it makes Besserbrau AG open for foreign exchange risk. Thus in avoiding confronting such issues, Besserbrau AG can buffer the risk of foreign exchange by engaging in foreign currency forward contracts or an option contract (Henderson, et al. 1011).

Hedges of Foreign Exchange Risk

Presumably, in instances, BB Pijio fails to pay for the products using the same currency as that of German. It eventually exposes Besserbrau AG to foreign exchange risk. It is a risk that the foreign currency in the Euro value will decrease over receivable life. In that case, international customers can be needed to pay in Euro for their purchases as an apparent means to hinder the risk. Alternatively, the other method to curb this issue in international accounting is by protecting foreign exchange risk. The hedging of foreign exchange risk can be done by foreign currency options and foreign currency forward contracts. For the foreign currency options are a type of possibilities of derivative financial instrument whose accounting is complex. On the contrary, for foreign currency forward contracts, it is the conventional means to hedging foreign exchange risk.

Performance Evaluation of Foreign Operations

For each country, if we measure the return on investment (ROI), eventually, there would different results. Also, if the return on investment is measured using Euro for each country, then BB Pijio's percentage of ROI will be small compared to Besserbrau AG's return on investment. It is because of the fluctuating Yuan on the Euro. It is an international accounting issue that requires fixing prices while complying with the Chinese governmental laws, thus achieves the company's expectations (Henderson, et al. 1000).

Nonetheless, there will be problems in the evaluation of the performance of operations, investing in China, and management of the firm. In decision making concerning international accounting issues, it must be linked to problems like currency. In that case, an operation done in China has to be on the analysis that Chinese management will at all times take responsibility for acts they have less control over. Besserbrau AG in international accounting has also confronted the issue of not having the capacity to develop an effective internal audit process. In that case, by having regular performance evaluations, it will generate an effecting internal audit process, thereby maintain and control foreign activities happening in China. Also, there would be a need to consider differences in culture and customs.

Conclusion

Besserbrau AG started in 1842 as a German beer producer. It traded publicly with shares on the Frankfurt Stock Exchange while having its production strictly following the 500-year-old German Beer Purity system of laws. Initially, Besserbrau AG marketed only in Germany but eventually took the initiative to expand on sales. However, the company confronted several international accounting issues. They are foreign direct investment, international income taxation as a result of encountering double taxation. The company also conducted sales to overseas customers facing hindrances in the differences in currency. Also, there were issues of hedging of foreign exchange risk and performance evaluation of foreign operations. From all the issues, all were associated with various activities in Besserbrau AG. They ranged from international trade, foreign direct investment in China, Pricing of intercompany sales, ensuring compliance with the transfer pricing regulations of the two countries. The other type of activity related to the international accounting issues confronted by Besserbrau AG was the cross-listing there was on the London Stock Exchange. It further required the company compliance with financial reporting requirements in the London Stock Exchange to avoid international accounting issues.

Works Cited

Doupnik, Timothy et al. International Accounting - 5Th Edition. 5th ed., Mcgraw-Hill Rental, 2020, p. chapter 8.

Henderson, Scott, et al. Issues in financial accounting. Pearson Higher Education AU, 2015, p. 106-1029

Lin, Z. Jun, David C. Yang, and Liyan Wang. Accounting and auditing in China. Routledge, 2018.