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Unformatted text preview: Chapter 09 - Analysis of Foreign Financial Statements CHAPTER 9 ANALYSIS OF FOREIGN FINANCIAL STATEMENTS Chapter Outline I. Reasons to analyze financial statements of foreign companies include: • making foreign portfolio investment decisions, • making foreign merger and acquisition decisions, • making credit decisions about foreign customers, • evaluating foreign suppliers, and • benchmarking against foreign competitors. II. There are several problems an analyst might encounter in analyzing foreign financial statements, including: • finding and obtaining financial information about a foreign company, • understanding the language in which the financial statements are presented, • the currency used in presenting monetary amounts, • terminology differences that result in uncertainty as to the information provided, • differences in format that lead to confusion and missing information, • lack of adequate disclosures, • financial statements are not made available on a timely basis, • accounting differences that hinder cross-country comparisons, and • differences in business environments that might make ratio comparisons meaningless even if accounting differences are eliminated. III. Some of the potential problems can be removed by companies through their preparation of convenience translations in which language, currency, and perhaps even accounting principles have been restated for the convenience of foreign readers. IV. A significant number of investors find that differences in accounting practices across countries hinder their financial analysis and affect their investment decisions. Some analysts cope with this problem by restating foreign financial statements to a familiar basis, such as U.S. GAAP. A. Another coping mechanism is to base analysis on a measure of performance from which many accounting issues have been removed, such as EBITDA. 9-1 Chapter 09 - Analysis of Foreign Financial Statements V. Analysts should exercise care in interpreting ratios calculated for foreign companies. What is considered to be a good or bad value for a ratio in one country may not be in another country. A. Financial ratios can differ across countries as a result of differences in accounting principles. B. Financial ratios also can differ across countries as a result of differences in business and economic environments. Optimally, an analyst will develop an understanding of the accounting and business environments of the countries whose companies they wish to analyze. VI. To facilitate cross-country comparisons of financial information, foreign company financial statements can be restated in terms of a preferred GAAP through the use of a reconciliation worksheet in which debit/credit entries summarizing the differences in GAAP are used to adjust the original reported amounts....
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This note was uploaded on 10/07/2011 for the course ACCOUNTING 4220 taught by Professor Brown during the Spring '11 term at UMBC.
- Spring '11