Liberalisation of the financial sector iceland Essay

Liberalisation of the financial sector iceland - Essay Example The banks in general did not have to worry too much about the competition and customer satisfaction philosophies as the banks had been working under national regulation as part of the public sector. Earlier, Icelandic banks did have international offices to support the domestic customers, e.g. Kaupthing bank's filial in Luxembourg and New York; however most of the business was domestic orientated. Today 70% of profits of Kaupthing bank, the third largest in Iceland, are made outside Iceland - a significant change (Annual rapport 2006, Kaupthing Bank p4). Iceland is an island with many small isolated towns; therefore the cost of having many filial is considerably high. But in view of the local needs, it was a necessity (Jensen 2003). The liberalization process has contributed immensely towards expanding the domestic financial markets. Today the major credit institutions such as pension funds and house founds, which used to be separate units earlier, are today merged with the new commercial banks (sector rapport OECD p43). Therefore the banks have now changed from being mere saving banks to financial institutions (FIs) with a wide portfolio of services from lending money out to holding pensions. Though government still controls the larger household funds, whose job is to lend out money for buying houses. This is seen as a secure investment. In addition it also provides short-term credit for households and businesses as is provided by commercial banks. The longer term financing for both business and housing is largely provided by government investment funds drawn from their resources in private sector pension schemes and foreign borrowings. The Icelandic financial institutions are divided into three main groups, banks, pension funds and government credit funds. The government credit funds can be further divided into 3 minor groups, (insurance, leasing and mutual funds). Looking on the graph at appendix 5 we can see that the pension funds and the banks have the biggest share. The foreign sector who supplies outstanding credit to government and its credit funds -also figures as a dominating group. Controlling of the financial market doing liberalizing period Before the liberalisation process, the government was in control of most of the financial institutions in Iceland including the banking sector. The sectors were missing out on reforms process and modern agreements. The financial sector had more in common with a regulated Pan Atlantic country than the rest of north Europe. This was also due to a smaller economy where the government wanted to protect it against foreign exchange speculations dealers. Iceland has undergone through several years' of weak economy with a high rate of inflation and strong devaluation of its currency. Some of the Icelandic Banks also suffered huge losses while being a part of the public sector. Owing to such losses the Islandsbanki became insolvent in 1995 (Jensen 2006 p7). Banking sector Today, there are 24 smaller 'saving banks' and 3 'major banks' in the financial sector in Iceland. The three banks, Kaupthing Bank, Landsbanki Bank and Glitnir Bank are dominating the

Responsibility Accounting and Transfer Pricing Math Problem

Responsibility Accounting and Transfer Pricing - Math Problem Example Required: a. Calculate depreciation expense and book value of the metal press under both historical cost and price-level-adjusted historical cost. For the historical cost, the metal fabrication press would depreciate $43,500 per year ($522,000/12). In terms of the book value of the metal fabrication press under historical cost, the net book value would be $217,500 ($522,000-($43,500*7)). In comparison, the price-level-adjusted historical cost would give a new cost of $621,180 (Increase of 19% on the original cost. If this is so, the new book value would amount to $316,680 ($621,180-$304,500). Because this value would depreciate over the remaining five years of its life, the depreciation expense would be$63,336 ($316,680/5). b. In general, what is the effect on ROA of changing valuation bases from historical cost to current values? Because assets are generally higher, the return on assets would be lower because a fraction always becomes less when the denominator is increased. This wou ld result in the managers having more motivation to change the equipment because the return on the equipment would not be as great. c. The manager of the investment center with the metal press is considering replacing it because it is becoming obsolete. Will the manager's incentives to replace the metal press change if the firm shifts from historical cost valuation to the proposed price-level-adjusted historical cost valuation? It would not be advisable to do this because the company would need to alter the value of its asset each year. This change would result in giving the actual return at that point of time. However, it would mean that an extra cost would be incurred to fulfil with the accounting standards of the government. This would be too complicated to carry out so it is best to not replace the metal press. Problem 5-15 "U.S Pump Systems" US Pumps is a multidivisional firm that manufactures and installs chemical piping and pump systems. Its valve division makes a single stan dardized valve. The valve division and installation division currently are involved in a transfer-pricing dispute. Last year, half of the valve division's output was sold to the installation division for $40 and the remaining half was sold to outsiders for $60. The existing transfer price of $40 per pump has been set through a negotiation process between the two divisions and with the involvement of senior management. The installation division has received a bid from an outside value manufacturer to supply it with an equivalent valve for $35 each. The manager of the valve division manager has argued that if it is forced to meet the external price of $35 it will lose money on internal sales. The operating data for the last year for the valve division follow: Valve Division Operating Statement-Last year To Installation Division To Outside Sales 20,000 @ $40 $800,000 20,000 @ $60 $1,200,000 Variable cost 20,000 @ $30 (600,000) (600,000) Allocated fixed cost (135,000) (135,000) Gross ma rgin $ 65,000 $465,000 Analyze the situation and recommend a course of action. What should the installation division managers do? What should the valve division managers do? What should the US Pumps senior manager do? From this situation, we can see that the installation division managers are able to achieve the necessary valve division output at a lower price. Also, the valve divisio