Ch05 Int Fin Analysis

(1)

Chapter 5

International Financial Statement

Analysis

(2)

International Accounting Differences

and Financial Statement Analysis



#he "ey $uestion



%o do di''erences in accounting a''ect earnings

and cash 'lo assessments ( are the di''erences

material in the decision process



#hese assessments are important to



In)estors



Corporations concerned ith 'oreign direct

in)estment



roing number o' companies are listing

roing number o' companies are listing on

on

internationa

(3)

(4)

International Accounting Differences

and Financial Statement Analysis



A tendency e*ists to loo"s at earnings 'rom a

home country perspecti)e ( that may or may

not place a high )alue on accounting0



#his tendency may ignore accounting di''erences



A need e*ists to better understand 'oreign

accounting principles in the conte*t in hich

they are deri)ed



International comparability is important in

(5)

Major Differences in Accounting

Principles Around the World



In)entory measurement



enerally based on

1loer o' cost or

mar"et2 ith mar"et

de'ined as either

 et reali3able )alue  Replacement cost



IF4 is permitted 'or

ta* purposes in 0S0

and 6apan, but not in

the E



Construction contracts



7ide usage o'

percentage-o'-completion method ( is

this better 8 more

accurate9



Completed contract

method ( Sit3erland,

China, 6apan

(6)

Major Differences in Accounting

Principles Around the World



Measurement basis

used

 %istorical cost is used in

the 0S0, !ra3il,

Sit3erland, China, and 6apan0

 More 'le*ible approach

ith some restatements to mar"et )alue or

replacement cost ( 0:0, %olland



;epreciation

accounting

 se'ul economic li'e

concept ( 0S0 and E

 Accelerated methods (

France, ermany, Sit3erland, 6apan

(7)

Major Differences in Accounting

Principles Around the World



R&; costs

 E*pensed immediately in

Anglo-American and ermanic countries

 !ra3il has a more 'le*ible

approach

 Some countries allo

capitali3ing the borroed cost o' assets



Retirement bene'its

 enerally accounted 'or

on the basis o' accrued and8or pro<ected bene'its payable to employees

 =ay-as-you-go approach

(8)

Major Differences in Accounting

Principles Around the World



#a*ation

 Accounting income

strongly in'luenced by

the ta* system in France, ermany, !ra3il,

Sit3erland



!usiness Combinations

 >aries ith alloance o'

pooling-o'-interests

 =urchase method is

generally re$uired

 oodill is amorti3ed in

!ra3il, China, and 6apan

 oodill impairment

tests are used in 0S0, 0:0

(9)

Major Differences in Accounting

Principles Around the World



Intangibles



enerally are capitali3ed and sub<ect to

amorti3ation or impairment tests



E*ception ( Sit3erland



Foreign Currency #ranslation



Choice beteen a)erage or closing rate



enerally 'le*ible? actual or a)erage rate alloed

(10)

he Impact of !"S"#!"$" Accounting

Differences# A %uantitati&e 'ook

Inde( of conser&atism )*ray+ ,-./0 , 1 23A 1 3D 4 l 3A l

Where 3A 6 adjusted earnings )or returns0 )i"e" earnings con&erted to an alternate accounting system0

3D 6 disclosed earnings )firm earnings reported on the home countries accounting system0"

herefore+

, 1 2!"S" *AAP 7arnings 1 !"$" *AAP 7arnings 4 l !"S" *AAP 7arnings l

If inde( &alue 8 ,+ !"$" *AAP earnings are less 9conser&ati&e: or more optimistic4aggressi&e

(11)

he Impact of !"S"#!"$"

Accounting Differences

Example 1 !"$" earnings BD million !"S" earnings BDD million Inde(  ( DD-DD8DD G 0 Example 2 !"$" earnings BHD million !"S" earnings BDD million Inde(  ( DD-HD8DD G D0H

(12)

he Impact of !"S"#!"$"

Accounting Differences

It is possible to establish the relati)e e''ect o'

indi)idual ad<ustments ith partial indices o'

ad<ustment ( to assess the accounting policy you

ish to e*amine0

=artial inde* o' 1conser)atism2 - 'irst ad<ust to o)erall comparison accounting method

#hen analy3e the accounting issue in $uestion

 ( partial ad<ustment +accounting policy in $uestion/ 8 l 0S0 AA= Earnings l 

(13)

he Impact of !"S"#!"$"

Accounting Differences

Example

Millions o' =ounds 0:0 AA= earnings D

Ad<ustments 'or 0S0 AA=

;e'erred ta*ation +5/ oodill amorti3ation +less o' issue no/ +5/ Ad<usted earnings per 0S0 AA= +DD/

4)erall inde* o' Jconser)atismK 0

=artial inde* 'or de'erred ta*ation  ( -58DD G 05 =artial inde* 'or goodill  ( -58DD G 0D5

(14)

he Impact of !"S"#!"$"

Accounting Differences



;i''erences beteen methods are illustrated

in the Form D-F report



Form D-F can be used to test ho

conser)ati)e 0S0 and 0:0 AA= are in

comparison ith each other



Form D-F is reliable because it is pro)ided

by the company itsel'



Research 'indings sho 0:0 AA= to be

(15)

A *lo<al Perspecti&e on

7arnings Management



%o do Anglo-American earnings compare ith

continental Europe and 6apan9



Continental Europe

 ray +HLD/ compared French and erman companies to

!ritish companies

 Insert E*hibit 50L, 50H

 French and erman earnings are more conser)ati)e than

!ritish earnings

 7eetman and ray +HH/ 'ound that

 etherlands as less conser)ati)e that Seden, 0:0

(16)

A *lo<al Perspecti&e on

7arnings Management



6apan

 Earnings are relati)ely understated compared to the 0S0

+0HN, according to Aron +HH/

 %istorically high =E ratios ere de'lated by ad<ustments 'or

reser)es, consolidation practices, depreciation,

cross-holdings, and di''erences in capitali3ation +Morgan Stanley/

 %igher le)els o' gearing +le)erage/ and short-term

payables are tolerated because o' long-term relationships ith ban"ers and suppliers

 Emphasis tends to be on long-term groth rather than

(17)

Factors Influencing

Measurement Differences



0S0 and 0:0



Stoc" mar"et is the dominant in'luence

 In'ormation needs o' in)estors encourage a more

1optimistic2 )ie o' earnings and higher share prices



Accounting principles are 'le*ible



Accounting pro'ession is independent



#a* rules ha)e a limited in'luence



Cultural )alues moti)ate a less conser)ati)e

(18)

Factors Influencing

Measurement Differences



Continental Europe and 6apan



#a*ation and sources o' 'inance are in'luential



#radition o' commercial codes and accounting

plans



#endency to report loer earnings 'or ta*

(19)

Factors Influencing

Measurement Differences



Continental Europe and 6apan



sers o' 'inancial in'ormation may be more

concerned ith balance sheet in'ormation



!lac" and 7hite +DD/ 'indings

 !alance sheet in'o is more in'ormati)e in ermany, 6apan  Income statement is more relati)e in the 0S0



=ro'essional in'luence is lo due to legal

re$uirements related to accounting



Cultural )alues moti)ate a more conser)ati)e

(20)

*lo<al Accounting

Con&ergence



IAS! sets IFRS

 oal is to de)elop comparable international standards ith

lo cost to MEs

 =ro)ides a model 'or de)eloping countries

 More uni'orm standards ha)e been de)eloped to aid in

capital raisings and stoc" e*change listings

 Core standards program ith I4SC4 as completed in

HHL

 May DDD ( I4SC4 endorsed IFRS

 E ill adopt IFRS in DD5 ( ill nonlisted companies

adopt9