International Cosmetic\'s Primary Concern Within

¶ … International Cosmetic's primary concern within their financial reporting policy is to mitigate the impact of devaluation and inflation, it seems that their overall strategy of dollar conversion would be only a moderately accurate system. Two main problems arise with dollar exchanges within the balance sheet; the first is the adjustment necessary for liquid assets. International Cosmetics' policy is to use temporal method to make financial adjustments. The problem with this is despite any attempts to adjust for current currency exchange rates, these rates will consistently be out of date. Furthermore, it is precisely because there is consistent fluctuation within the market that this policy is necessary, which means that dollar conversion rates cause the balance sheet to change from month to month. Conversion to U.S. dollars in this case will only standardize the system, but will not make up for any fluctuations that actually happen within the currency market because of devaluation or inflation, thus the whole concept of a standard for Icelandic financial statements does not seem feasible through a simple conversion to U.S. currency.

Furthermore, International Cosmetics' further corrupts their overall financial system by using fixed historical rates to translate their non-liquid assets. The problem with using historical rates is twofold; first it deviates from their policy for liquid assets, which causes a general inconsistency with their valuation process. This implies that while liquid assets fluctuate in value based on the strength of the kronur while nonmonetary assets stays fixed. Although this may be easier for International Cosmetics, the lack of consistency invalidates the use of temporal method to adjust assets. International Cosmetics needs to stick with one strategy or the other, because a combination of both these methods further devalues their attempt to create meaning within their balance sheet.

The use of average exchange rates within the year for income and expenses further does not make sense. This is because this standard appears arbitrary at best, there is no reason why the average of the year applies to incomes and expenses because the current devaluation cycle could be on either extremes and an average of the year's currency value will not reflect the current reality. What international Cosmetics are hoping to do in this circumstance is create an accounting method that will interpret the income and expenses through one-year cycles. The problem with that methodology is that the balance sheet should be reflective of the company position at the current moment, rather than its purported gains or losses during the course of the year. Therefore an average exchange rate does not accurate reflect what the implications of certain income and expenses values.

In the final analysis, I do not believe that International Cosmetic's policies on currency exchange is an effective means to standardize and stabilize the financial statements of its Icelandic operation. This is because fluctuation within the kronur will still be reflected by its relative value in dollars, which means that the fluctuations of kronur currency will still be reflected in the overall balance sheet. This is reflective of the overall balance sheet from 2001 to 2002. The currency exchange between the cash or liquid assets vs. The inventory and liabilities exchange rates do not correlate at all, the entire data appears inconsistent because each financial marker is measured by a different currency exchange standard, which invalidates the meaning of the income statement.

International Cosmetics' claim that their currency exchange automatically compensates for inflation is only partially true. Their theory relies on the direct correlation between currency devaluation and inflation. Their prevailing policy is that if devaluation occurs then the dollar comparison will skew upwards, and as a result it will be reflective of inflationary forces within the Icelandic market. This however is not completely true for several reasons. First, devaluation of currency is the last step taken as far as inflationary policy is concerned. Meaning that devaluation is the "final" indicator that inflation is occurring within an economic system. This is because devaluation is a reactive policy change, and as with any reactive policies it is done in hindsight rather than foresight. The implication is that by measuring devaluation is the standard for inflation, International Cosmetics will always be several steps behind of the present inflation policy. This is evident in the difference in correlation from year to year between CPI and currency exchange. Although on a duration scale this problem might appear to be hidden because over time the devaluation process does match the realities of inflation. However, this policy does not engage the balance sheet as a status update for International Cosmetic's overall Icelandic financial status. A second problem is that devaluation compensates for economic realities with little consideration for the government enacted policies that impact the devaluation process. Many times, governments attempt to curb the affects of inflation or mitigate its financial impact by changing the valuation of its currency. Thus, devaluation in general is more of a government policy indicator rather than an economic indicator. Although it is true that most of the time the government devalues based on current economic forces, this is not always true. The French government for instance has a track record for changing currency flexibility in order to attempt to stimulate the economy. Therefore using the currency exchange process is an indicator of inflation actually provides a false sense of security rather than a real indicator of the economic situation in Iceland.

My recommendations for improving the financial accountability of these accounts are to change the overall format for using conversion exchanges. First, if international Cosmetics is going to continue using currency conversion to U.S. dollars it should stick with one exchange policy through the balance sheet instead of attempting to use modified exchange rates for different assets, liabilities, etc. marker. This is to keep inconsistencies from occurring in the balance sheet and for it to actually do what it is suppose to in terms of creating a real accounting standard. The company will have to choose which of the three different exchange conversion methods to use as a standard. Although the easiest would be to use historical or average exchange rates, the best method would be to use the temporal method throughout the balance sheet to get the most up-to-date conversion and a realistic balance sheet. The problem of course is that such a method would be almost too time-consuming to be worth the constant adjustments necessary. Therefore using the average rate applied over a year might be the most efficient method available. By standardizing the process, the balance sheet will have added meaning because it can be accurately explained in relation to the financial situation in Iceland. However, I believe that the best method is to look alternative methods to access the financial situation in Iceland; the dollar conversion method is already shown to be flawed because it requires constant revision and updates in order to make it a viable system for interpreting financial data. One alternative method is to use a comparable conversion rate in terms of kronurs in relation to the CPI. Rather than directly converting to dollars, convert the kronur in accordance to the consumer price index to reflect buying power. What this means is that instead of creating a constant currency conversion, use the CPI as the standard measure by using it to interpret the currency in terms of the overall consumer buying power. It is basically leveraging the use of currency conversion, but since it is not reliant on government policy or artificial inflators it is the ultimate method for finding the actual financial position for International Cosmetics. Either converting kronur to some arbitrary value in accordance with the CPI can do this, or by simply overlapping the balance sheet with a ratio conversion based on the CPI and allow the viewer to perform their own conversions. Using CPI has the benefits of using currency, which is it provides an up-to-date conversion, but more importantly it is much more flexible and easier to use because the conversion is a consistent ratio rather than a fluctuating one like currency. Furthermore, since the CPI is a direct indicator of the strength of the economy, it is a pro-active measurement rather than a reactive one.