International Accounting, Chapter 9 ch 09

Teks penuh

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International Accounting, 6/e

Frederick D.S. Choi

Gary K. Meek

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Learning Objectives

 What is a logical approach to analyzing foreign financial

statements?

 Why is it difficult to undertake an international business strategy

analysis?

 What are some steps to examining foreign accounting practices?  How do cross-country variations in accounting measurements,

disclosure practices, and auditing standards impact one’s analysis of foreign financial statements?

 How can you cope with differences in national accounting

measurement practices?

 What does international prospective analysis entail and why is it

difficult to perform in an international setting?

 What are some pitfalls to avoid when conducting cross-country

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What is a Logical Approach to

Analyzing Foreign Financial

Statements?

Undertake a business strategy analysis.

Conduct an analysis of a firm’s financial

reporting practices.

Conduct a financial analysis using ratio and

cash flow data.

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International Business

Strategy Analysis

 Strategy analysis = getting to know a company and its

competition in relation to its economic environment.

 Information gathering includes recourse to

 Annual reports

 Company staff, financial analysts, and other financial

professionals

 World Wide Web  Trade groups  Competitors  Reporters  Lobbyists  Regulators

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International Business

Strategy Analysis (contin)

Difficulties in undertaking an IB business

strategy analysis

Profit drivers and business risks may be country

specific.

National business and legal environments differ.

Environmental risks such as changing process

and FX risk need to be evaluated.

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Steps in Examining Foreign

Accounting Practices

Identify key accounting policies.

Assess a firm’s accounting flexibility.

Evaluate the firm’s accounting strategy.

Evaluate the quality of its financial

disclosures.

Identify reporting outliers.

Adjust for accounting measurements that

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How Does Diversity in

International Accounting Impact

Financial Statement Analysis?

Measurement differences within and between

countries make performance comparisons difficult.

Measurement differences may relate to measurement

options permitted by GAAP.

Measurement differences may be due to differences in

management discretion.

Measurement difference may be due to differences in

financial statement orientation; i.e., creditor vs.

shareholder.

Measurement differences may relate to the objectives of

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How Does Diversity in International

Accounting Impact Financial Statement

Analysis? (contin)

Differences in corporate transparency make it difficult:

 to comprehend what measurement rules are being followed  to estimate future performance metrics

 to value forecasted numbers because of large variances of these

subjective probability distributions

 Auditing differences affect the credibility of reported numbers

owing to differences in:

 the information content of the auditors report  the source of auditing standards

 the enforcement of auditing standards  auditor liability to third parties

 auditor qualifications

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Coping Mechanisms

For measurement differences:

Adopt a mutual fund (passive) approach to

investing.

Restate foreign GAAP to domestic GAAP.

Restate foreign GAAP to IFRS.

Rely on non-accounting data using a dividend

discount model or cash flow data.

Immerse yourself in the language, currency and

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Coping Mechanisms (contin)

For disclosure differences:

Undertake company visitations.

Attend company road shows.

Alter investment classifications from speculative

grade (poor disclosure) to investment grade (good

disclosure).

Alter investment strategies from active investing

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Coping Mechanisms (contin)

For audit differences:

Research the auditing environment in the country

being analyzed.

Institutional investors ask for a second audit

opinion or engage a recognized audit firm when

confidence in the integrity of the attest function is

in doubt.

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Prospective Analysis

Prospective analysis: forecasting a firm’s prospects based on

an assessment of a firm’s business strategy, accounting policy, and its financial analysis, and arriving at an estimate of the firm’s value.

 Complicating factors:

 Fluctuating exchange rates make it difficult to forecast a firm’s

future costs and revenues when sales/purchases are invoiced in foreign currencies.

 National variations in measurement, disclosure, and auditing

practices including national enforcement regimes add to the difficulty of achieving forecast accuracy.

 National variations in pricing risk make it difficult to select an

appropriate discount rate for valuation purposes.

 Valuation multiples such as P/E ratios also vary from country to

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Pitfalls in Conducting

International Ratio Analysis

All of the difficulties mentioned previously in

conducting business strategy, accounting,

and financial analysis.

A lack of understanding of the political, legal

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Pitfalls in Conducting International Ratio

Analysis (contin)

Examples of environmental differences:

Government systems

 UK and U.S. governments are more laissez-faire; i.e., ensure free

markets. Self-regulation is encouraged.

 German and Japanese governments are more active in

orchestrating growth. Government has a major role in market regulation.

Legal systems

 UK and U.S. governments are common law countries where

standard-setting is delegated to professional bodies and standards oriented toward investor decisions.

 Germany and Japan are code law countries. Government active

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Pitfalls in Conducting International

Ratio Analysis (contin)

Fiscal systems

 UK and U.S. make a distinction between financial reporting and tax reporting. Emphasis on consolidated reporting.

 Germany and Japan exhibit a degree of tax-book conformity. Parent company financial statements are important.

Capital markets

 UK and U.S. markets oriented more toward equity

investors. They’re more equity-oriented with significant individual ownership. Earnings tend to have an optimistic bias.

 German and Japanese markets traditionally oriented toward creditors. Earnings tend to have a more

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