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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 IFRS. 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 financial statements; i.e., oriented toward more macro decisions vs. micro decisions.
International Business Strategy Analysis

Information gathering includes recourse to



Annual reports Company staff, financial analysts, and other financial professionals World Wide Web Trade groups Competitors Reporters Lobbyists Regulators Financial press
Chapter 6
International Financial Statement Analysis
YanLin Jiang
Accounting Department
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What is a Logical Approach to Analyzing Foreign Financial Statements?
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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.
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How Does Diversity in International Accounting Impact Financial Statement Analysis?

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
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Pitfalls in Conducting International Ratio Analysis

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.
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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 and business environment that affects the analysis of financial ratios generated in that environment.
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Prospective Analysis

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 country complicating appropriate corporate valuations.

1.Undertake a business strategy analysis. 2.Conduct an analysis of a firm’s financial reporting practices. 3.Conduct a financial analysis using ratio and cash flow data. 4.Do a prospective analysis.
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Steps in Examining Foreign Accounting Practices
1.Identify key accounting policies. 2.Assess a firm’s accounting flexibility. 3.Evaluate the firm’s accounting strategy. 4.Evaluate the quality of its financial disclosures. 5.Identify reporting outliers. 6.Adjust for accounting measurements that distort the underlying economics of a firm’s transactions.
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Pitfalls in Conducting International Ratio Analysis
Examples of environmental differences: 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.
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International Business Strategy Analysis

Strategy analysis = getting to know a company and its competition in relation to its economic environment.
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International Business Strategy Analysis
Difficulties in undertaking an IB business strategy analysis 1.Profit drivers and business risks may be country specific. 2.National business and legal environments differ. 3.Environmental risks such as changing process and FX risk need to be evaluated. rmation sources may be limited or unreliable.