Matakuliah
Tahun
: F0142/Akuntansi Internasional
: 2006
Session 10
International
Financial Statement Analysis
1
FASB, IASB, and IAAER Project on
Financial Reporting
• Questions addressed in this project
include
– Should the performance (income) statement
be the primary focus of financial reporting?
– How should the performance statement
complement the other financial statements?
– How should the cash flow statement be used?
– What information should be presented in the
performance statement?
– Is one approach applicable to all countries?
2
International Accounting Differences
and Financial Statement Analysis
• The key question
– How do differences in accounting affect
earnings and cash flow assessments?
• These assessments are important to
– Investors
– Corporations concerned with foreign direct
investment
• Many companies are listing on
international exchanges (London, New
York)
3
Stock Market Comparisons
4
Accounting Diversity and Economic
Environments
5
International Accounting Differences
and Financial Statement Analysis
• A tendency exists to looks at earnings
from a home country perspective
– This tendency may ignore accounting
differences
• A need exists to better understand foreign
accounting principles in the context in
which they are derived
• International comparability is important in
considering alternative investments
6
Major Differences in Accounting
Principles Around the World
• Inventory
measurement
– Generally based on
“lower of cost or
market” with market
defined as either
• Net realizable value
• Replacement cost
– LIFO is permitted for
tax purposes in U.S.
and Japan, but not in
the EU
• Construction
contracts
– Wide usage of
percentage-ofcompletion method
– Completed contract
method – Switzerland,
China, Japan
7
Major Differences in Accounting
Principles Around the World
• Measurement basis
used
– Historical cost is used
in the U.S., Brazil,
Switzerland, China,
and Japan.
– More flexible approach
with some
restatements to market
value or replacement
cost – U.K., Holland
• Depreciation
accounting
– Useful economic life
concept – U.S. and EU
– Accelerated methods –
France, Germany,
Switzerland, Japan
8
Major Differences in Accounting
Principles Around the World
• R&D costs
– Expensed immediately
in Anglo-American and
Germanic countries
– Brazil has a more
flexible approach
– Some countries allow
capitalizing the
borrowed cost of
assets
• Retirement benefits
– Generally accounted
for on the basis of
accrued and/or
projected benefits
payable to employees
– Pay-as-you-go
approach in Brazil and
China
9
Major Differences in Accounting
Principles Around the World
• Taxation
– Accounting income
strongly influenced by
the tax system in
France, Germany,
Brazil, Switzerland
• Business
Combinations
– Varies with allowance
of pooling-of-interests
– Purchase method is
generally required
– Goodwill is amortized
in Brazil, China, and
Japan
– Goodwill impairment
tests are used in U.S.,
U.K.
10
Major Differences in Accounting
Principles Around the World
• Intangibles
– Generally are capitalized and subject to
amortization or impairment tests
– Exception – Switzerland
• Foreign Currency Translation
– Choice between average or closing rate
– Generally flexible; actual or average rate
allowed
• Big Question: Do these differences
matter?
11
The Impact of U.S.-U.K. Accounting
Differences
Index of conservatism (Gray, 1980)
1 – [RA – RD / l RA l]
Where RA = adjusted earnings (or returns)
RD = disclosed earnings
Therefore,
1 – [U.S. GAAP Earnings – U.K. GAAP Earnings /
l U.S. GAAP Earnings l]
If index value > 1, U.K. GAAP earnings are less
“conservative”
If index value < 1, U.K. GAAP earnings are more
“conservative”
12
The Impact of U.S.-U.K. Accounting
Differences
Example 1
Example 2
U.K. earnings
U.K. earnings
£90 million
£110 million
U.S. earnings
U.S. earnings
£100 million
£100 million
Index
1 – [100-100]/100 = 1.1
Index
1 – [100-90]/100 = 0.9
13
The Impact of U.S.-U.K. Accounting
Differences
It is possible to establish the relative effect
of individual adjustments with partial
indices of adjustment
Partial index of “conservatism”
1 – [partial adjustment / l U.S. GAAP Earnings l ]
14
The Impact of U.S.-U.K. Accounting
Differences
Example
Millions of Pounds
U.K. GAAP earnings
Adjustments for U.S. GAAP:
Deferred taxation
Goodwill amortization
Adjusted earnings per U.S. GAAP
Overall index of ‘conservatism’
Partial index for deferred taxation
15/100] = 1.15
Partial index for goodwill
120
(15)
(5)
(100)
1.2
1 – [1 – [-5/100] = 1.05
15
The Impact of U.S.-U.K. Accounting
Differences
• Differences between methods are
illustrated in the Form 20-F report
• Form 20-F can be used to test how
conservative U.S. and U.K. GAAP are in
comparison with each other
• Form 20-F is reliable because it is
provided by the company itself
• Research findings show U.K. GAAP to be
less conservative
16
A Global Perspective on Earnings
Management
• How do Anglo-American earnings compare with
continental Europe and Japan?
• Continental Europe
– Gray (1980) compared French and German
companies to British companies
• Insert Exhibit 5.8, 5.9
• French and German earnings are more conservative
than British earnings
– Weetman and Gray (1991) found that
• Netherlands was less conservative that Sweden, U.K.
• Swedish methods were more conservative than U.S.
GAAP
17
A Global Perspective on Earnings
Management
• Japan
– Earnings are relatively understated compared to the U.S.
(33.9%, according to Aron (1991)
– Historically high PE ratios were deflated by adjustments for
reserves, consolidation practices, depreciation, crossholdings, and differences in capitalization (Morgan Stanley)
– Higher levels of gearing (leverage) and short-term
payables are tolerated because of long-term relationships
with bankers and suppliers
– Emphasis tends to be on long-term growth rather than
instant profitability
18
Factors Influencing Measurement
Differences
• U.S. and U.K.
– Stock market is the dominant influence
• Information needs of investors encourage a more
“optimistic” view of earnings and higher share prices
–
–
–
–
Accounting principles are flexible
Accounting profession is independent
Tax rules have a limited influence
Cultural values motivate a less conservative
approach to measurement
19
Factors Influencing Measurement
Differences
• Continental Europe and Japan
– Taxation and sources of finance are influential
– Tradition of commercial codes and accounting
plans
– Tendency to report lower earnings for tax
purposes
20
Factors Influencing Measurement
Differences
• Continental Europe and Japan
– Users of financial information may be more
concerned with balance sheet information
• Black and White (2003) findings
– Balance sheet info is more informative in Germany, Japan
– Income statement is more relative in the U.S.
– Professional influence is low due to legal
requirements related to accounting
– Cultural values motivate a more conservative
approach
21
Global Accounting Convergence
• IASB sets IFRS
– Goal is to develop comparable international
standards with low cost to MNEs
– Provides a model for developing countries
– More uniform standards have been
developed to aid in capital raisings and
stock exchange listings
– Core standards program with IOSCO was
completed in 1998
– May 2000 – IOSCO endorsed IFRS
– EU will adopt IFRS in 2005
• Will the U.S. accept IFRS?
22