Selasa, 08 Mei 2012

Chapter 11 ANALYSIS OF FINANCIAL STATEMENTS INTERNATIONAL


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:
  1. Choi, Frederick D.S., and Gerhard D. Mueller, 2005., Akuntansi Internasional – Buku 1, Edisi 5., Salemba Empat, Jakarta.
  2. Choi, Frederick D.S., and Gerhard D. Mueller, 2005., Akuntansi Internasional – Buku 2, Edisi 5., Salemba Empat, Jakarta.


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