International Accounting, 6/e
Frederick D.S. Choi
Gary K. Meek
What is a logical approach to analyzing foreign financial
Why is it difficult to undertake an international business strategy
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
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
What is a Logical Approach to
Analyzing Foreign Financial
Undertake a business strategy analysis.
Conduct an analysis of a firm’s financial
Conduct a financial analysis using ratio and
cash flow data.
Strategy analysis = getting to know a company and its
competition in relation to its economic environment.
Information gathering includes recourse to
Company staff, financial analysts, and other financial
World Wide Web Trade groups Competitors Reporters Lobbyists Regulators
Strategy Analysis (contin)
Difficulties in undertaking an IB business
Profit drivers and business risks may be country
National business and legal environments differ.
Environmental risks such as changing process
and FX risk need to be evaluated.
Steps in Examining Foreign
Identify key accounting policies.
Assess a firm’s accounting flexibility.
Evaluate the firm’s accounting strategy.
Evaluate the quality of its financial
Identify reporting outliers.
Adjust for accounting measurements that
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
Measurement difference may be due to differences in
financial statement orientation; i.e., creditor vs.
Measurement differences may relate to the objectives of
How Does Diversity in International
Accounting Impact Financial Statement
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
For measurement differences:
Adopt a mutual fund (passive) approach to
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
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
Alter investment strategies from active investing
Coping Mechanisms (contin)
For audit differences:
Research the auditing environment in the country
Institutional investors ask for a second audit
opinion or engage a recognized audit firm when
confidence in the integrity of the attest function is
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.
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
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
Pitfalls in Conducting International Ratio
Examples of environmental differences:
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.
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
Pitfalls in Conducting International
Ratio Analysis (contin)
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.
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