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Chapter 5
International Financial Statement
Analysis
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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
roing number o' companies are listing oninternational e*changes +ondon, e .or"/
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Stock Market Comparisons
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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
considering alternati)e in)estments
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Major Differences in Accounting
Principles Around the World
In)entory measurement
enerally based on
1loer o' cost or
mar"et2 ith mar"etde'ined as either et reali3able )alue
Replacement cost
IF4 is permitted 'orta* purposes in 0S0
and 6apan, but not in
the E
Construction contracts
7ide usage o'
percentage-o'-
completion method ( isthis better 8 more
accurate9
Completed contract
method ( Sit3erland,China, 6apan
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Major Differences in Accounting
Principles Around the World
Measurement basis
used %istorical cost is used in
the 0S0, !ra3il,Sit3erland, China, and
6apan0
More 'le*ible approach
ith some restatements
to mar"et )alue orreplacement cost ( 0:0,
%olland
;epreciation
accounting se'ul economic li'e
concept ( 0S0 and E Accelerated methods (
France, ermany,
Sit3erland, 6apan
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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 borroed
cost o' assets
Retirement bene'its enerally accounted 'or
on the basis o' accrued
and8or pro
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Major Differences in Accounting
Principles Around the World
#a*ation Accounting income
strongly in'luenced by
the ta* system in France,ermany, !ra3il,
Sit3erland
!usiness Combinations >aries ith alloance o'
pooling-o'-interests
=urchase method isgenerally re$uired
oodill is amorti3ed in
!ra3il, China, and 6apan
oodill impairment
tests are used in 0S0,
0:0
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Major Differences in Accounting
Principles Around the World
Intangibles enerally are capitali3ed and sub
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he Impact of !"S"#!"$" Accounting
Differences# A %uantitati&e 'ook
Inde( of conser&atism )*ray+ ,-./0
, 1 23A 1 3D 4 l 3A l
Where 3A 6 adjusted earnings )or returns0 )i"e" earnings con&erted toan alternate accounting system0
3D 6 disclosed earnings )firm earnings reported on the homecountries accounting system0"
herefore+
, 1 2!"S" *AAP 7arnings 1 !"$" *AAP 7arnings 4
l !"S" *AAP 7arnings l
If inde( &alue 8 ,+ !"$" *AAP earnings are less 9conser&ati&e: or moreoptimistic4aggressi&e
If inde( &alue ; ,+ !"$" *AAP earnings are more 9conser&ati&e:
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he Impact of !"S"#!"$"
Accounting Differences
Example 1
!"$" earnings
BD million
!"S" earnings
BDD million
Inde(
( DD-DD8DD G 0
Example 2
!"$" earnings
BHD million
!"S" earnings
BDD million
Inde(
( DD-HD8DD G D0H
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he Impact of !"S"#!"$"
Accounting Differences
It is possible to establish the relati)e e''ect o'
indi)idual ad
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he Impact of !"S"#!"$"
Accounting Differences
Example
Millions o' =ounds
0:0 AA= earnings D
Ad
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he Impact of !"S"#!"$"
Accounting Differences
;i''erences beteen methods are illustratedin the Form D-F report
Form D-F can be used to test hoconser)ati)e 0S0 and 0:0 AA= are incomparison 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
less conser)ati)e
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A *lo
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A *lo
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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
approach to measurement
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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 loer earnings 'or ta*
purposes
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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
approach
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*lo
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