In
Mexico, generally accepted accounting practices (GAAP) don't necessarily
mirror those of the United States or European countries. Beginning in
1997, the National Banking and Securities Commission announced that
the Mexican banking industry will adopt U.S. general accounting practices,
which should make following the Mexican economic situation a little
easier to understand.
Of
further importance is the crisis of confidence concerning the peso that
keeps the Mexican economy in its current helter-skelter situation, according
to Roberto Salinas-León, director of the Center for Free Enterprise
Research (CISLE) in Mexico City. The December 1994 devaluation of the
peso, and the subsequent change to a more flexible, market-determined
exchange rate, introduced a great deal of uncertainty regarding the
day-to-day value of the peso. Business people entering transactions
with Mexican firms now must worry whether the exchange rate they used
to project the costs and benefits of the transactions will change suddenly,
and simultaneously change the feasibility (profitability) of the transaction.
The benefits of the devaluation--a growing trade surplus--have been
offset by this uncertainty as well as growing inflationary pressure.
To
better understand Mexico's economic picture, one can identify several
areas where the country's accounting practices differ from those followed
by companies in the United States.
1.
Inflation Accounting: Here's how inflation accounting
works: If a product generates an actual cost or revenue of 50 pesos,
in a year with 50 percent inflation, the cost or sale is refigured and
recorded as 100 pesos. It's the habit of Mexican companies to restate
figures, taking inflation into account in this manner. This changes
the balances on sales, cost of sales, depreciation, and other accounts
as well as changing the book values of monetary assets and liabilities.
This makes it hard for outsiders to judge a firm's relative performance
across time periods. The adjustments may be openly reported as adjusting
entries to a monetary result account but, to the uninitiated, proper
interpretation of the reports may be difficult. U.S. accountants, more
accustomed to recording and interpreting statements based on historical
(actual) costs, may be particularly handicapped in this regard.
2.
Business Consolidations: When one business entity is
acquired by another, and the two are subsequently treated as a single
firm, a business consolidation has occurred. In the U.S., consolidating
firms are required to provide investors with relevant information on
purchase price, asset values, etc. For example, they must report the
economic circumstances of the parent and subsidiary firms as a unit.
Mexican firms are not required to do this, again making it difficult
for investors and others to make sound judgments regarding the value
or profitability of a consolidated firm.
3.
Deferred Income Taxes: U.S. firms typically record deferred
taxes as liabilities, effectively lowering the net value of the firm.
This is true whether the liability arises from either a recurring or
a non-recurring activity. Mexican firms typically record only non-recurring
liabilities, thus understating the actual liabilities of the firm.
4.Pooling
vs. Purchase Accounting: When businesses are combined, it is
necessary to assess the value of the acquired firm's assets so that
they may be recorded in the books of the combined firm. If pooling accounting
is used, the assets are simply valued at the book value reported by
the acquired firm, regardless of the actual market value of the asset.
Where purchase accounting is used, the asset is valued at its market
value, and any excess is recorded as a payment for goodwill. In Mexico,
only purchase accounting is used, while U.S. companies may use either
method. Investors in Mexican firms, or any firm using purchase accounting,
will need to use care in judging the actual value of the firm's assets.
5.Write-offs:
This is defined as the transfer of the entire balance of an asset account
into an expense or loss account. In Mexico, write-offs for intangible
assets (such as goodwill) must be written off over a 20-year period,
while U.S. companies have 40 years.
6.Investment
Securities: In Mexico, a company's stocks and bonds are "marked
to market," or recognized at the cost on their acquisition date,
with the unrealized gain or loss recorded on the income statement. In
the U.S., investments are separated into three categories: trading account,
available for sale, or health and maturity. Trading account items are
marked to market and appear on the profit-and-loss statement. Available
for sale items also are marked to market and are recognized under shareholder's
equity on a balance sheet. Health and maturity items remain at the lower
market cost. These differences in reporting methods may again make it
difficult for an investor to assess the asset values of Mexican firms.
7.Capitalized
Interest: When a firm acquires a new asset, there may be a
time lapse between the time that the firm begins to pay interest on
the money borrowed to finance the acquisition of the asset, and the
asset actually serving any productive purpose. For example, a firm building
an addition to its factory will need to borrow the necessary funds--and
pay interest on the funds--even before the addition is completed. If
the interest is capitalized, rather than expensed out, the interest
payments are added to the value of the asset. In the U.S., firms must
capitalize the interest paid to finance new construction. Mexican firms,
on the other hand, are able to choose whether to capitalize or expense
their interest charges. This gives them a greater ability to move the
interest expenses into the recording period, which is to their greatest
advantage. If profits in the current period are low, they may choose
to defer the interest cost by capitalization. If profits in the current
period are unusually high, they may count the interest as a current
expense and thus lower their profits and tax liability. In these cases,
current profit results may inaccurately reflect the longer-term profitability
of the firms.