H&M: The Challenges of Global Expansion and the Move to adopt International Financial Reporting standards Hennes & Mauritz AB (also known as H&M) , the Swedish MNE that is a trendsetter in the latest fashion trends, has a stated goal “to give customers unbeatable value by offering fashion and quality at the best price.” It doesn’t own any factories, but rather outsources production to independent suppliers, primarily in Asia and Europe. H&M also rents space from international and local landlords rather than owning its own stores. H&M is a major firm in the apparel retail market where fashion trends are critical and where goods move quickly. In this industry, the key buyers are consumers, and the key suppliers are clothing manufacturers and wholesalers, and designers are king and a fast, well-organized supply chain is essential. Depending on the individual firm strategy, the apparel retail market doesn’t have to be capital intensive, but the largest players in the industry are very international, both in retail footprint and suppliers. The biggest companies in the industry are U.S.-based The Gap, H&M, and Spain- based Industria de Diseno Textil, S.A. (Inditex), better known by its flagship brand, Zara. All three companies have different store brands: Gap, Banana Republic, Old Navy, and Athleta for The Gap; H&M, COS (collection of style), Monki, Weekday, and Cheap Monday for H&M; and Zara, Bershka, Pull and bear, Massimo Dutti, Stradivarius, Oysho, Zara Home and Uterque for Inditex. Both of H&M’s competitors are very international. H&M operates about 2,800 stores in 49 markets, whereas The Gap operates 3,100 company stores and over 300 franchise stores worldwide, and Inditex operates in a network of over 5,000 stores in 77 countries. Zara has the largest geographic spread within Inditex with stores in 74 countries. Hennes & Mauritz AB started as a single women’s wear store in Sweden in 1947. Today, H&M’s business is much broader and currently includes the sales of clothing, accessories, footwear, cosmetics, and home textiles. Although H&M is known as one of Sweden’s premier MNEs, it generates 21.5% of its sales in Germany, 8.9% in the United States, and 7.4% in the United Kingdom, compared to only 5.8% of total sales in Sweden. H&M and Zara have very different strategies. Zara delivers new products to its stores twice a week. Because of its highly organized supply chain, Zara only takes 10–15 days to go from design to the stores. Although it sources its apparel from around the world, it has adopted just-in-time manufacturing from the auto industry and established 14 highly automated Spanish factories where robots cut and dye fabrics creating the unfinished “gray goods” which are the foundation for their final products. It then takes the gray goods and outsources them to a network of small shops in Portugal and Spain to do the finish work. Store managers are constantly sending updated information on consumer demand so that they can move to the n.

1. H&M: The Challenges of Global Expansion and the Move to adopt International Financial
Reporting standards Hennes & Mauritz AB (also known as H&M) , the Swedish MNE that is a
trendsetter in the latest fashion trends, has a stated goal “to give customers unbeatable value by
offering fashion and quality at the best price.” It doesn’t own any factories, but rather outsources
production to independent suppliers, primarily in Asia and Europe. H&M also rents space from
international and local landlords rather than owning its own stores. H&M is a major firm in the
apparel retail market where fashion trends are critical and where goods move quickly. In this
industry, the key buyers are consumers, and the key suppliers are clothing manufacturers and
wholesalers, and designers are king and a fast, well-organized supply chain is essential.
Depending on the individual firm strategy, the apparel retail market doesn’t have to be capital
intensive, but the largest players in the industry are very international, both in retail footprint and
suppliers. The biggest companies in the industry are U.S.-based The Gap, H&M, and Spain-
based Industria de Diseno Textil, S.A. (Inditex), better known by its flagship brand, Zara. All
three companies have different store brands: Gap, Banana Republic, Old Navy, and Athleta for
The Gap; H&M, COS (collection of style), Monki, Weekday, and Cheap Monday for H&M; and
Zara, Bershka, Pull and bear, Massimo Dutti, Stradivarius, Oysho, Zara Home and Uterque for
Inditex. Both of H&M’s competitors are very international. H&M operates about 2,800 stores in
49 markets, whereas The Gap operates 3,100 company stores and over 300 franchise stores
worldwide, and Inditex operates in a network of over 5,000 stores in 77 countries. Zara has the
largest geographic spread within Inditex with stores in 74 countries. Hennes & Mauritz AB
started as a single women’s wear store in Sweden in 1947. Today, H&M’s business is much
broader and currently includes the sales of clothing, accessories, footwear, cosmetics, and home
textiles. Although H&M is known as one of Sweden’s premier MNEs, it generates 21.5% of its
sales in Germany, 8.9% in the United States, and 7.4% in the United Kingdom, compared to only
5.8% of total sales in Sweden. H&M and Zara have very different strategies. Zara delivers new
products to its stores twice a week. Because of its highly organized supply chain, Zara only takes
10–15 days to go from design to the stores. Although it sources its apparel from around the
world, it has adopted just-in-time manufacturing from the auto industry and established 14 highly
automated Spanish factories where robots cut and dye fabrics creating the unfinished “gray
goods” which are the foundation for their final products. It then takes the gray goods and
outsources them to a network of small shops in Portugal and Spain to do the finish work. Store
managers are constantly sending updated information on consumer demand so that they can
move to the next hot fashion. The rule at Zara is that if you see it in a store and you like it, you’d
better buy it because as soon as it is gone, you’ll never see it again. Veteran Zara consumers keep
track of when new shipments come in so they can buy the latest stuff. H&M is trendy, but it

2. outsources production to a network of 800 suppliers, 60 percent of which are in Asia. It offers a
main collection twice a year in the spring and the fall with several sub- collections that allow it to
bring in new trendy items. Longer lead time items are produced in Asia, whereas short lead time
items are manufactured in Europe. Currently the second largest apparel retailer behind Inditex,
H&M has met its target growth rate of 10–15% per year, with no plans of slowing its expansion.
Despite its global presence, H&M is listed solely in the Stockholm stock exchange in Sweden
and therefore uses the EU’s accepted IFRS to present its financial statements in both English and
Swedish. The financial statements are reported in Swedish kronor, which also serve as its
functional currency. Because the retail industry is less capital intensive, most companies have no
need to list in any foreign stock exchanges. Zara lists only on the stock exchanges throughout its
home country, Spain, including Madrid, Barcelona, Bilbao, Valencia, and the Automated
Quotation System. Consistent with domestic listings, The Gap, which was founded in the U.S. in
1969, is listed solely on the NYSE. The ability to list solely in the country in which a company is
domiciled can simplify the financial reporting process by avoiding the need to present financial
statements that adhere to the accounting rules of multiple countries. Ericsson, another popular
Swedish MNE, required much more capital and was therefore listed on both the Stockholm
exchange in Sweden as well as the NASDAQ in the United States. As a result, Ericsson has had
to accommodate multiple accounting bodies and become more transparent in its reports because
of its desire to raise capital on foreign exchanges. The Gap, H&M, and Inditex come from
different accounting and regulatory environments. In its 2012 annual report, H&M states that its
consolidated accounts have been prepared in accordance with IFRS issued by the IASB and the
interpretations provided by the IFRS Interpretations Committee. In addition, the IFRS that is
used for its parent company reports are only those approved by the EU. Besides IFRS, H&M
provides disclosures in accordance with the Swedish Financial Reporting Board’s
recommendation RFR 1. Both the parent company and consolidated balance sheets use the
following format: fixed assets + current assets = equity + long term liabilities + current
liabilities. Given that Sweden is a member of the European Union, H&M was required to adopt
IFRS as of 2005, which was a change from its past practices. Prior to that, H&M was using
recommendations issued by the Swedish Financial Standards council, which were largely based
in International Accounting Standards, so the consolidated reports of H&M were already pretty
much adjusted to IAS. In preparation for the switch from Swedish GAAP to IFRS, H&M began a
transition process in 2003 and 2004 that was intensified in 2005. In its 2005 annual report, H&M
reported that the greatest impact of the change was because of financial instruments and hedge
accounting. H&M decided at that time to apply IAS 32 and IAS 39 on financial instruments.
Prior to the adoption of these standards, H&M was holding derivatives for cash flow hedging,
and gains and losses on derivatives were recognized when the hedged transaction took place, but

3. under IAS 39, all derivatives had to be recognized at fair value, so H&M commented that
reported profit was probably going to be more volatile than it was when gains and losses on
hedges were deferred and recognized outside the balance sheet. That is exactly the volatility that
the European, especially French, banks wanted to avoid, resulting in the EU carving out the
treatment of derivatives. Before the Changeover to IFRS Prior to the move to IFRS in 2006,
H&M reported its financial results in compliance with Swedish GAAP—a bit of a mixture
between Anglo-American accounting, which is driven by the capital markets, and Germanic
accounting, which is driven by bank financing and taxa- tion. Swedish reporting tends to be a
little more transparent than German accounting but less transparent than Anglo-American
accounting. Issues of Transparency One reason why Swedish accounting has been less
transparent is its orientation to creditors, government, and tax authorities. In addition, because
the Swedish Stock Exchange has become a focal point for listings by Nordic companies, the
influential Swedish accounting profession has pushed for consolidated accounts to represent the
needs of shareholders, whereas the parent-company accounts have reflected Swedish legal
requirements. Swedish accounting tends to be very conservative due to the importance of taxes
to fund extensive social welfare programs and the tendency of the Swedish government to use
tax policies to influence investment in areas deemed important to the government and its social
objectives. Sweden and the EU Since Sweden entered the EU, its accounting has evolved to
incorporate EU accounting directives and philosophies. The Swedish government established an
Accounting Standards Board (BFN) in 1976 to recommend accounting principles that fit within
the framework of the Company Law. The Swedish Financial Accounting Council (RR) was
established in 1991 to take over the role of the accounting profession in making
recommendations on accounting practices, especially with respect to how to prepare an annual
report according to the Annual Accounts Act. The Swedish Stock Exchange has supported the
efforts of the Accounting Council and the BFN, even though the recommendations of both
bodies are voluntary and subject to the Company Law. However, the decision by the EU to
require firms to use IFRS for consolidated financial statements takes precedence over everything
for consolidated financial statements. Conversion Costs H&M didn’t provide much information
about the cost of converting to IFRS in 2005, but Ericsson, another Swedish company did.
Ericsson provided more information because it was listing on NASDAQ as well the Swedish
stock exchange, so it had to provide a Form 20F reconciliation between Swedish and U.S.
GAAP. Because of its higher level of disclosure, Ericsson estimated that the conversion to IFRS
in 2005 would result in a difference of about 1.5 billion Swedish kronor for 2004 net income and
a difference of 5.7 billion kronor for equity as of January 1, 2005. Net income under Swedish
GAAP would have been 17,539 million kronor under IFRS, compared with 19,024 million under
Swedish GAAP. In addition, the recognition of cash on the balance sheet appears to be quite

4. different under IFRS than it is under Swedish GAAP, with cash under IFRS being SEK46.1
billion less than cash under Swedish GAAP. From Ericsson’s Form 20-F report, one can also see
that cash at the end of 2004 was the same under
Solution
As companies look at global expansion, the need to raise capital becomes increasingly important.
Companies like H&M will have to adopt to International Financial Reporting standards (IFRS)
in its quest to raise capital from other stock exchanges like NYSE.
As of 2005, H&M was required to adopt IFRS. The accounting impact will be mostly on
financial instruments and hedge accounting.
As per H&M's annual report of 2012, the e parent company applies the Swedish Annual
Accounts Act and the Swedish Financial Reporting Board’s recommendation RFR 2. It means
that the IFRS is applied. The parent company does not apply IAS 39 or IAS 38.
In 2005, when H&M shifted to IFRS, the effect was limited to IAS 32 - Financial instruments -
disclosure and presentation, and IAS 39 - Financial Instruments - recognition and measurement.