A. INTRODUCTION
Investors, equity research analysis, financial
managers, bankers and other financial statements users have
a greater need
to read and
analyze foreign financial
statements. Comparison of cross-border
finance becomes important
when analyzing the potential
and financial strength
of foreign direct investment or
foreign portfolio investment. There is tremendous
growth in trade publications and international
capital in the last years due to privatization,
economic growth, relaxation of capital control and
advances in information technology that
constantly occur.
The need to use, and thus understand, the
foreign financial statements also
increased due to merger and acquisition activity
has been happening more and more internationally. The value of cross-border mergers to grow continuously
during the 1990's, and this growth shows no signs of decline.
Finally, as business becomes increasingly
global, financial reports become much more important
than ever before as the basis for competition
analysis, credit decisions, business
negotiations, and corporate control. Reduction
of trade barriers on an ongoing basis, the emergence of Europe as a single market, the convergence of consumer tastes and
preferences, and the growing complexity of penetration by a foreign company to market
the business has increased multinational competition significantly. All this raises the need for further
analysis and assessment of international financial reporting.
B.
OPPORTUNITIES AND CHALLENGES IN THE ANALYSIS OF CROSS-BORDER
A number of
countries have very large differences in accounting
practices, the quality of disclosure, the legal system
and laws, the nature and scope of business risks, and how to run a business. This
difference means that analytical tools are very effective in one area
become less effective
in other regions. The analysts also often face a great
challenge to obtain credible information. In most emerging market countries, financial analysts often have high levels of confidence or of limited reliability.
Analysis and assessment of international finance is characterized by many
contradictions. On the one hand, how quickly the process of harmonization of accounting standards has led to
increasing comparability of financial information around the world. However, a large number of differences in financial reporting
practices still exist.
Some analysts question the extent to which uniformity of the larger accounting standards
will actually result in the provision of information that can be
compared by a number of leading companies in the industry.
Apart from the continuing contradictions, obstacles to the
analysis and assessment of
diminishing international financial
analysts and the
general outlook is still positive.
The globalization of capital markets,
advances in information technology and competition between national governments, stock
exchanges and companies to
attract investors, and trading activities
that increase is
still continuing. Taken together, these forces provide incentives for companies to improve their external financial
reporting practices.
Globalization and improvements in international accounting and disclosure continues to blur the distinction between cross-border financial
analysis and in
a region. Globalization also means that less
domestic analysis is becoming increasingly less relevant.
Interdependence is increasing and
no company can ignore the events happening around the world.
C. BASIC FRAMEWORK OF ANALYSIS
Palepu, Bernard, and Healy makes a useful framework
for analysis and business
valuation using financial
statement data. The basic framework consists of four
stages of analysis, namely:
1.
Analysis of International Business Strategy
Analysis of business strategy
is an important first step in the analysis of financial statements.
This analysis provides a qualitative
understanding of the company and its
competitors related to the economic
environment. This ensures that the quantitative analysis
performed by using a holistic perspective. By
identifying the drivers of profit and the risk of a
major effort, the
analysis of business strategy
helps the analyst
to make a
realistic prediction. Standard
procedure to collect information used in the analysis of business strategy includes
examining the annual reports
and other corporate
publishing, and speaking
with company staff, analysts and other
financial professionals. The use
of additional information sources,
such as the World Wide Web, trade groups,
competitors, consumers, reporters, lobbyists, regulators,
and the business press is becoming increasingly common. Accuracy, reliability, and
relevance of each type of information collected will also need
to be evaluated.
Business strategy analysis
is often complicated and difficult to do in
an international environment. As mentioned previously, the main driver
of profit and the types of business risk
is different in each
country. Understanding each of it all is not possible. Business
environment and legal and corporate objectives also vary around the world. Many of the risks (such as rules of risk,
foreign currency exchange rate risk and credit risk) should be evaluated and viewed coherently.
In some countries, the sources of information are limited and may not be accurate.
Availability of information
Analysis
of business
strategy particularly difficult in some
countries due to lack
of information on macroeconomic
developments andalnya. Governments
in developed countries are sometimes
considered to have published economic
statistics are false
or misleading, the
situation is worse in some developing countries.
Obtain
information about the industry is also very
difficult in many countries and the number and quality of information companies are very different. Availability
of specific information about the company's very,
very low in many
developing countries. Lately, many
large companies that keep records
and raise capital in foreign markets and have
expanded their disclosure voluntarily switch to accounting
principles that are
recognized globally as International Financial Reporting Standards.
Recommendations for Conducting Analysis
Data limitations make the effort to
analyze the business strategy of
using traditional research methods to be difficult.
Often times, made
the trip to study
the local business climate and how the
industry and the company
actually operates, particularly in emerging
market countries. World Wide Web also offers quick access to
information that until recently was not
available or difficult
to obtain.
State information can also be found in the publication of "international broadcasting"
which is spread by large accounting firms, banks, broker. International Federation of Stock Exchanges (FBIV, http://www.fibv.com)
and the Federation of European Stock Exchanges (FESE, http://www.fese.be) publishes an international newsletter is very
informative and Accountancy
magazine, The Economist,
Financial Analysts Journal and Euromoney
provides many articles that are highly relevant to the analysis of international financial
2.
Accounting analysis
The purpose of accounting analysis is to analyze the extent to which the company reported results reflect the economic reality. Analysts need to
evaluate policies and accounting estimates, and analyze the nature
and scope of a
company's accounting flexibility.
To obtain reliable
conclusions, the analyst must adjust the number
of reported accounting to eliminate distortions
caused by the use of accounting methods is not
feasible according to analysts.
Flexibility in financial reporting is important because it allows managers to use accounting measurement that
best reflects the situation and the particular circumstances
of the company's operations.
Healy and her
colleagues suggest the following
process to evaluate the quality
of accounting of a company:
a.
Identify the major accounting policies
b.
Analyze accounting flexibility
c.
Evaluate accounting strategy
d.
Evaluate the quality of disclosure
e.
Identify potential problems (such
as removal of large quantities of assets
that are not usually, a transaction that increases earnings can not be explained or increasing the
difference between income reported
to the company's cash
flow from operations)
f.
Make adjustments for accounting distortions
Two main issues to be a challenge for those who perform
accounting analysis in an international environment. The first is
the difference between countries in quality measurement, quality of disclosure, and
audit quality, while the second mennyangkut
difficulty in obtaining information needed to perform
accounting analysis.
Differences between countries in the quality of accounting measurement, disclosure, and audit are very
dramatic. National characteristics that cause these differences include
the required practices
and generally accepted, monitoring and enforcement, and the scope of management discretion over financial reporting.
External auditors play a crucial role in ascertaining whether
the accounting standards are followed. Legal system
provides mechanisms to ensure enforcement
of the rules of the auditor to remain
independent in practice. However,
the audit environment is not uniform throughout the world. For example, the
auditor's legal guidance is relatively common
in the United States, while in Germany merupaka
something that rarely happens.
Financial
reporting in China shows a second example of how the measurement of accounting,
disclosure and audit quality can be
dramatically different when compared with the accounting practices
in countries where Anglo-Americans. Although China is carrying out large-scale accounting reform as
part of the process of transition
from planned economy
to market economy
under control, until a moment ago the Chinese still do not have the financial
reporting and external
audit in the form of a unusual for a
Westerner. Investors and private creditors are not actually present during
the three decades following the establishment of the People's Republic
of China in 1948, and Accounting Act,
which establishes accounting and reporting provisions,
newly implemented in 1985. Accounting Standards for Business Company,
which specifies that the basic accounting practices such
as multiple books and records must
use the accrual basis, effective in 1993. Audit profession
are also fairly new
in China.
Suggestions for The Analyst
Especially when doing an analysis of companies
in emerging market countries,
analysts have frequently met with management to evaluate
financial reporting incentives and their accounting
policies. Many companies in emerging market countries
are very closed and
the managers may not
have strong incentives to conduct a complete and
credible disclosure. Accounting policies in
some countries may
be similar or identical to IAS (or any other
widely accepted standards), but managers often have
a very large discretion
in determining how these policies are implemented.
3.
International Financial Analysis
The purpose of financial analysis is to evaluate the performance of companies on the present and past, and to
assess whether the performance can be maintained. Ratio analysis and
cash flow analysis is an important tool in conducting financial analysis. Ratio analysis includes comparison of the
ratio between a company with other companies in the same industry, the
ratio of a company's interim or fiscal
period to another, and the ratio of or
comparison to some standard
of reference. This analysis provides input to the degrees
of comparison and the relative importance of financial
statement items and can assist in
evaluating the effectiveness of operating,
investing, financing and retention of earnings management
is taken.
Cash flow analysis focuses
on cash flow statements, which provide information about incoming and outgoing
cash flow companies,
which are classified into operating activities, investing and financing
activities, as well as disclosures
regarding the activities of non-cash investing and
financing activities periodically. Analysts can use the
cash flow analysis to answer many questions
about the performance and
management companies.
Ratio Analysis
There are two issues to be addressed when conducting ratio analysis in an international environment.
The first, whether the cross-country differences in accounting principles
lead to significant differences in the numbers of
reported corporate financial
reports from different countries?
Secondly, how far the differences in culture and local economic
and competitive conditions affecting the interpretation of the size of the accounting and financial ratios, although
the accounting measurement
of the different countries
are presented again in order to achieve "comparability
of accounting"?
Some evidence that strongly suggests the existence of large differences between
countries in profitability,
leverage, and financial
statement ratios and number of
other factors derived
from non-accounting
and accounting. For
example, Frost compared the
sales revenue, net
income and leverage (total
debt / stockholders
equity) of 400
companies, with 80 companies
in each country, namely
France, Germany, Japan,
Britain and the United States.
These three very different financial measures to substantially all of
the sample countries. For example, the median
net income is greater in Britain and the
United States than in Germany and Japan.
Diversity in net
income partially explained by
differences in accounting principles for financial
reporting is generally not too
conservative in the United Kingdom
and the United States,
when compared with Germany and Japan.
Non-accounting factors also affect the
reported net income. For example,
the focus of the creditors in France,
Germany, and Japan
led to lower net
income than in the United States
and Britain as
in countries such managers face pressure not
to report net income increased steadily.
Frost also found that the median
leverage in the United Kingdom and the United States
are lower than in Germany and Japan.
This occurs in part due to the fact that conservative
accounting in Germany and Japan resulted in
the value of shareholders' equity
is lower than that
reported in England and the United States. Value
higher lever in
Germany, Japan, and
France are also due to the higher amount of debt in capital structure,
reflecting the greater reliance on funding from banks
in these countries.
Five different types of financial statements expressed by a large number of issuers is (in
the order): (1) depreciation and amortization, (2) deferred
or capitalized cost,
(3) tax liabilities (4) the pension, and (5)
translational foreign currency.
This study shows that more than two-thirds of issuers that disclose a material
difference in earnings report that profit under
U.S. GAAP is
lower than the non-GAAP earnings in the U.S..
Nearly half of
them reported earnings difference is greater than 25%. Twenty-five of the 87 issuers
that reported earnings under U.S. GAAP is greater than on non
U.S. GAAP reporting
differences greater than 25%. Similar results were found for the reconciliation of shareholders' equity. Overall, the evidence in this
SEC study showed
that the differences in the financial statements under U.S. GAAP and U.S. GAAP is non material for
most companies.
Thus, evidence from the SEC indicated
that disclosure of the
reconciliation GAAP differences
may lead to the
diversity of financial statement numbers
are significant. Analysts
often have to choose
to make financial
statements more comparable to
make adjustments to
the financial statements of accounting principles that are
being analyzed. Even after a number of financial
reports are to be fairly comparable (through adjustment
for differences in accounting principles), the interpretation of these numbers have to consider the differences between countries in the economy and competition,
as well as other industry
differences. Analysis of Japanese companies is a good example. For example, Brown, and
Stickney argued that
the relationship between financial and tax reporting,
the importance of operating through
a group of companies (keiretsu) in Japan and Japanese tolerance for
the use of short-term financial
leverage is very
much to be considered fully when doing analysis
on the company's profitability
and risk Japanese
firms.
Cash Flow Analysis
Cash flow analysis to provide input regarding cash flow and management
of an enterprise. The report is very detailed
cash flow required under U.S. GAAP, UK GAAP, IFRS, and accounting standards in
a number of countries whose numbers
grew. Measures related
to cash flow is very useful especially in
the international analysis because it is less influenced by differences in accounting principles,
compared with earnings-based measures. If the cash
flow statement is presented, often found it
difficult to calculate cash flow from operations and other cash flow
measures to adjust
the accrual-based earnings.
Many companies do not disclose information necessary to make such
adjustments. One example is the balance in
Germany often contain accounts of the amount
of reserve that reflects the
enormous variety of
different types of accrual.
Just a little detail (if any) are presented
in order to be used by users of financial
statements to analyze the implications for cash flows from operating, investing and financing activities.
Mechanisms for Coping
Brown, Soybel, and Stickney described
the use of algorithms to improve the presentation of the repeated cross-country comparisons
of financial performance. They re-present the operating
performance of U.S. companies and
Japanese according to the same reporting basis.
And instead of changing the U.S. data into the financial
reporting basis of Japanese or Japanese
to reverse the
data in the U.S. reporting basis, they
adjust (if necessary) the data both the U.S.
and Japan to achieve the same accounting principles.
The algorithm is relatively simple re-presentation
is effective enough to be used. One approach is to focus on some of the differences
in the financial statements of
the material, where
there is enough information to make adjustments that
can be relied upon.
4.
Prospective Analysis of International
Prospective analysis phase include: forecasting and
assessment. When doing forecasting, analysts make predictions about the prospects of the company is explicitly based on business
strategy, accounting records, and financial
analysis.
When conducting assessments, analysts forecast a
quantitative change into an estimate of the
value of the company. Assessment
is used implicitly or explicitly
in many business
decisions. For example, assessments are the basis of investment advice provided
by equity analysts. When analyzing the possible merger, the prospective purchaser will estimate the value
of the target company. There are many different
assessment approaches used in
practice, ranging from discounted cash flow analysis to a simpler technique is
based on the multiplication-based
pricing.
Discounted cash flow analysis to assess a person's business is
based on the present value of cash
flows are discounted ekspekstasi line with interest
rates that reflect the level of risk
of those cash flows. Although the
principle of this assessment did not differ between developed markets and emerging
markets, most of the input
variables are considered
to exist in developed markets may
not be obtained in a growing economy. Interest
rates of government bonds that are often used as
a benchmark risk-free interest rate, assuming that the government will not default, at least for
local loans. This
is not always happening at the international level. Other input variables
such as risk parameters and the premium is
generally difficult to estimate
due to the small amount of historical data. Similarly, earnings forecasts, which
are used as the basis for estimating future
cash flows, not very reliable.
The use of multiplication (values ) based on prices
in the international environment. Multiplication value as the price
to earnings ratio (price to earnings
or P / E) and price to book value (price to
book or P /
B) is often used
to estimate the value
of a company. One common approach is to
calculate the desired product to a group of
comparable companies (like other companies in
the same industry), and then apply the
multiplication there are companies that are assessed to get
a decent price. For example, if the ratio of price
to earnings on an
industry group is
15, and the company forecast earnings of
$ 1.80 / share,
then a value of $
27.00 / sheet is a decent price for
a company that is being analyzed. A person can use
this approach to determine the
multiplication value to the offer price of potential
candidates for acquisition. If the candidate is
a European company, the company which is comparable to choose from several European
countries.
Dependence of the multiplication
value assumes that
market prices reflect
the future prospects and that the process of price
determination with the company's
financial and operating
characteristics that are similar (such
as companies within the same industry) may be
applied to companies that are
being analyzed because of its
similarity with those companies.
Implementation of multiplication rates in cross-border
environment is quite challenging because of the
deciding factors (determinants)
of each multiplication and multiplication of different
reasons why inter-firm
should be understood in depth.
National differences in accounting principles
is a potential source
of cross-country differences in
the ratio. Differences, for example, causes the P / E ratio in Japan
is generally higher than the ratio in the United States (remember that
the reported earnings in Japan are lower than in
the United States for comparable companies with
similar financial performance). However, even
after adjusting for differences
in accounting, P / E ratio
in Japan is still
much higher than the ratio in the United States.
D. FURTHER ISSUES
The fourth stage of the business analysis (business
analysis, financial accounting, and prospective) is
influenced by following factors:
1.
Access to Information
Information about thousands
of companies from around the world
have been widely available in recent years. Sources of information in countless
numbers up through
the World Wide Web. Companies around the world today have Web sites and annual reports
are available for free of charge from the Internet and
other sources.
Many commercial database providing access
to financial data and market shares of thousands
of tens of thousands of companies around the world. The companies included in commercial databases are
generally large companies whose
financial attracted the attention of users and investors.
Another source of valuable
information are (1) government publications, (2) economic research organization,
(3) international organizations such as the United Nations, (4) organization
of accounting, auditing, and securities markets.
2.
Information Timeliness
Timeliness of financial statements, annual reports,
reports to the regulator,
and press releases relating to accounting reports differ in each State.
Quarterly financial reporting is a common
practice in the United States,
while in other places are still rare. Financial
reporting period can
also be estimated by comparing
a company's fiscal year end to audit
report date. This last date is considered as an
indication of the date when
the company first financial information available to
the general public. In Brazil, Canada, Chile,
Colombia, Mexico, Filipinos, South Korea,
Taiwan, Thailand, and the United States,
the reporting period is reported to range between
30-60 days. While in Argentina, Australia, Denmark,
Finland, Ireland, Israel, Japan, Netherlands,
New Zealand, Nowergia, Potrugal, Singapore, South Africa,
Spain, Sweden, Switzerland,
England and Zimbabwe
the average ranges from 61-90 days.
In Austria, Belgium,
France, Germany, Greece,
Hong Kong, India, Italy Malaysia, Nigeria,
and Sri Lanka get
a period ranging from 91-120 days. And for
Pakistan, the average period of time exceeding 120 days.
Frost further noted
the international differences in timeliness of profits
relating to this press release. He defines the term
as the average number
of days between a company's
fiscal year end and
the date of this press release. This interval ranges from 73 days to companies
that are domiciled in France, 82 days for a German company, 46
days for Japan, 72 days for the UK,
and 26 days for
the United States.
Differences in the timeliness of accounting information adds
to the burden of the readers
of financial statements of foreign
companies. The burden is greater
for firms that have
an environment that constantly changes.
Assessment conducted in order to be meaningful, it needs constant adjustment of the
amount in the report,
by means of conventional or unconventional.
3.
Language barriers and Terminology
Language differences can create barriers between
countries of information for
users of financial statements. Most
companies that are domiciled
in countries that do not use the English language published
its annual report in the State of origin. However, a growing number of relatively large companies that
are in the advanced economies to provide annual
reports in English.
Differences in accounting terminology can also
cause difficulties. For example,
readers in the U.S. stock defines the term as
indicating the ownership of securities companies (stocks). On the other hand, the readers in the UK defines
the term as unsold
inventory from the company. Another example of differences
in terminology between Britain and the United States,
among others, turnover (sales revenue)
and Debtors (accounts
receivable) and creditor
(accounts payable).
In short, many substantial
issues facing the
international financial statement
users. Perhaps the
most difficult issue is related to foreign
currency and the availability
and credibility of financial information. Difficulties in foreign currency may result in an enormous influence in international accounting for some time. Instead, the problems associated with the availability and credibility
of information are slowly diminishing as more and more companies, the competent authorities and
stock exchanges that recognizes the importance to improve
investor access to
information in a timely and credible.
4.
Consideration of Foreign Currencies
Accounts denominated in foreign currency to make the analysts are faced with two kinds of problems. The
first relates to the ease of the
reader, the second concerns the information content.
Most companies around the world establish financial accounts
denominated in the currency of their national domicile.
For a reader who
is familiar with the U.S. dollar,
the analysis of the accounts are expressed in euro
may lead to confusion. Common answer to that
is to translate the balances
in foreign currency into domestic currency. However, most reports of foreign currency is only difficult in
appearance only. Financial ratios
that change nominal
measurement unit (interval)
to the percentage
relationship is not related to foreign currency. Lancer ratios calculated from the balance sheet of a Dutch
company that is
expressed in eoru be the same as that calculated
from the same financial
statements after translated into
dollars.
Readers who prefer a basic
framework of domestic currency at
the time to analyze the accounts
in foreign currencies may apply translation for convenience purposes using the
exchange rate at the end of the
year. However, one must be careful when analyzing
data trends that have been translated. Ease of use
of the exchange rate to translate the accounts in
foreign currency can distort the
financial occur in
local currency.
There is an alternative
approach is to translate
the data in the currency into domestic currency using
the exchange rate at a base year.
If the report has
been translated makes it easy for
the reader to see the accounts in foreign
currency in a currency that is
commonly known, it
may present a true picture is distorted. In particular, changes in foreign exchange rates and accounting procedures
at the same time often results in
an equivalent value in domestic currency as
opposed to the underlying events.
Observation of the translational component of the proceeds from this report reveal
that the real translation
adjustments are not the source or target of the use of
cash. Translation adjustment is calculated by multiplying the beginning balance of
net assets in foreign
currency exchange rate changes
in this current
period, and the second by multiplying the increase or decrease in net assets during the period with the difference between average rate and the exchange
rate at the end of the period. This
procedure and the dual nature of the accounting equation, shows that
the most important component in the
fund statements translated
and the translation is the combined effect of actual cash flows.
Comparison of cash flow between
the functional currency (krona) with the reporting currency (dollars) produced some surprising differences. If the statement of cash flows resulting from the
balance sheet and income statement are translated indicates
that long-term debt
is one of the sources of funds, a
report in the krona does not show the same thing.
5.
Difference in report format
Format of balance sheet and income statement is different in each country.
For example, unlike in the United States where most companies are using the balance sheet format with assets on the left
side and the equity claims on the right side, otherwise the format used
in the UK. The second example, in
contrast with the present balance sheet assets
in the U.S. decreased in the order of liquidity and liabilities in
order of increasing maturity, in many
countries the most liquid assets and liabilities and short term placed
at the bottom of the balance sheet.
International classification differences are also quite a lot going on. For
example, accumulated depreciation
contra asset account
is presented as in
the United States. In Germany,
the assets are depreciated
generally presented net of accumulated depreciation,
but all long-term
changes in asset accounts that occurred in the
period immediately presented in
the balance. In many countries, the
difference between current
and non current liabilities
is one year.
In Germany, the difference often is 4 years old.
Reference books such
as Transactional Accounting
can be used to view the complete treatments
other classification differences that exist in each country.
Although difficult, differences in financial statement format is not very important
because the basic structure of the financial statements fairly similar across the world. Thus, most differences can
usually be reconciled with a
little effort.
Referensi:
- Choi, Frederick D.S., and Gerhard D. Mueller, 2005., Akuntansi Internasional – Buku 1, Edisi 5., Salemba Empat, Jakarta.
- Choi, Frederick D.S., and Gerhard D. Mueller, 2005., Akuntansi Internasional – Buku 2, Edisi 5., Salemba Empat, Jakarta.
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