Financial Analysis - Entry Strategy

Accounting and Financial Management

Accounting Standards in China is different from the United Kingdom. In response to further their economic development, China has made significant progress in harmonizing Chinese accounting standards with International Financial Reporting Standards to increase transparency, and compliance. Financial reports and statements for the store in China will be consolidated with the main store in the UK, under Harrods Ltd.

Source of Financing

In the first year under its new owner, Qatar Holdings, Harrods’ profits increased by more than a third. As of January 2012, its net worth was estimated to be £534,500,000. And according to accounts filed at Companies House, on their first year after the sale to Qatar Holdings, Harrods broke the £1 billion sales barrier for the first time by the help of wealthy locals and high-end tourists, 20percent of which were Chinese. (thesundaytimes.co.uk)

(from: http://bizzy.co.uk/uk/00030209/harrods)

Harrods Ltd can fund the investment through capital financing with Qatar Holdings: Qatari’s sovereign wealth fund to avoid high interest payments. Capital budget required depends on the political, economic environment in China.

The Chinese Yuan is also expected to decrease, so Harrods Ltd can consider local debt financing to reduce costs.

Transaction Costs

Transaction costs, local regulations on taxes, interests, and transfer fees should also be taken into account.

The Chinese government and their tax authority are also getting more sophisticated. For a wholly owned foreign enterprise (WOFE), 10% of the annual after-tax profits must be reserved and remain in equity, until the reserve reaches 50% of the registered capital. And corporate income tax in China decreased to 25%, which is only 1% higher than in the UK . (www.journalofaccountancy.com)

The company can reduce fees, and tax liability by using a number of techniques to transfer funds, such as dividend remittances, royalty...