1. 2015-5-8 International Accounting and Multinational Enterprises 上海金融学院会计学院 财务管理系 王 纯

2. 2015-5-8 International Financial Statement Analysis Chapter Four

3. 2015-5-8 CHAPTER OUTLINE  International Accounting Difference and Financial Statement Analysis  Major Differences in Accounting Principles Around the World  The Impact of U.S.-U.K Accounting Difference: A Quantitative Analysis  A Global Perspective on Earnings Measurement  Continental Europe  Japan  A Comparative Global Analysis  International Accounting Differences and the Stock Market  Factors Influencing Measurement Differences  Global Accounting Harmonization  Summary

4. 2015-5-8 Introduction For the purposes of financial analysis it is necessary not only to be aware of international differences in accounting but also to be able to assess their impact on earnings and assets and the key indicators and ratios involved, for example, earnings per share, return on equity, leverage (gearing), and so on. 1

5. 2015-5-8 International Accounting Differences and Financial Statement Analysis Impact of international accounting differences:  Earnings and future cash flows;  Stock share valuations; and  Foreign Direct Investment (FDI). Problems:  First, tendency to view financial data from a “home country” perspective;  Second, necessary familiarity with foreign accounting principles; and  Three, comparability and harmonization. 2

6. 2015-5-8 Accounting Treatment Logical Practice Results Comparable Illogical Practice Results Not Comparable Results May or May Not Be Comparable Results May Not Be Comparable Logical Practice Illogical Practice Similar Dissimilar Similar Dissimilar 3

7. 2015-5-8 Major Differences in Accounting Principles Around the World 4 Focus on key measurements of major countries:  United States  United Kingdom  Netherlands  Sweden  Germany  Switzerland  France  Italy  Brazil  China  Japan

8. 2015-5-8 Measurement Basis Historical Cost  Germanic  Latin  Asian Modified Historical Cost  Anglo- American*  Nordic 4 * United States retains historical cost, but permits market valuations for acquisitions and certain intangibles.

9. 2015-5-8 Depreciation Useful Economic Life:  Anglo-American  Nordic Tax encourages acceleration:  Germanic  Latin  Asian 5

10. 2015-5-8 Inventory Measurement LIFO allowed:  United States  Japan LIFO not allowed:  United Kingdom  Germany  France  Italy  Brazil 6

11. 2015-5-8 7 Research and Development Costs Expensed immediately:  United States  Germany Capitalization of R&D:  United Kingdom  Nordic  Latin  Asian

12. 2015-5-8 8 Retirement Benefits Accrued/ Projected Benefits  Anglo-American  Nordic  Germanic Pay-as-you-go  Latin  Asian

13. 2015-5-8 9 Treatment of Taxation Strongly influenced by tax rules:  Germanic  Latin  Asian

14. 2015-5-8 10 Business Combinations and “Goodwill” Purchase Method generally required. Goodwill amortized in:  Latin  Asian Flexible Treatment:  Anglo-American*  Germanic  Nordic * UK is very flexible as to treatment of goodwill.

15. 2015-5-8 11 Foreign Currency Translation Average Rates Vs. Closing Rates Generally flexible, but average rates are prescribed in the United States.

16. 2015-5-8 The Impact of U.S.-U.K. Accounting Differences: Quantitative Analysis Conservatism (Gray) RA = Adjusted Earnings RD = Disclosed Earnings 1- ( RA -RD ) |RA| 12 U.S. Vs. U.K 1- ( US GAAP Earnings - UK GAAP Earnings ) |US GAAP Earnings|

17. 2015-5-8 A Global Perspective on Earnings Measurement Continental Europe  Earnings tend to be more conservative or understated in France and Germany than in the United Kingdom;  In a Simmonds and Azières simulation, the highest most likely net profit and return on assets occurs in the United Kingdom and the lowest most likely net profit and return on assets in Spain, closely followed by Belgium and Germany; and  Weetman’s and Gray’s research tended to suggest that the Netherlands is at the less conservative end of the spectrum, but not as extreme as the U.K., while Sweden tended to be more conservative than U.S. GAAP. 13

18. 2015-5-8 A Global Perspective on Earnings Measurement Japan:  Taxation, creditor interests, and a “conservative” culture ensured that measures of earnings are relatively understated compared to the United States (33.9% in 1990, Aron);  With longer-term relationships with bankers and suppliers, Japanese companies’ higher levels of gearing and short- term payables are considered normal relative to the U.S.; and  Although most Japanese MNE’s report in accordance with U.S. GAAP, conservatism in Japanese accounting can lead to Japanese GAAP income to be up to 50% of what U.S. GAAP income would be from the same financial information. 14

19. 2015-5-8 A Comparative Global Analysis Currently:  U.S. accounting principles regarding earnings are significantly more conservative that the United Kingdom, but less conservative than other European countries;  Other European countries, notably Germany, tend to be more conservative than the U.S.; and  Japan tends to be the most conservative when compared to both U.S. GAAP and U.K. GAAP. 15

20. 2015-5-8 International Accounting Differences and the Stock Market Currently:  Despite the movement toward harmonization of accounting standards, the persistence of significant measurement differences internationally poses problems for financial analysts;  The International Accounting Standards Committee (IASC), established in 1973 with a goal of harmonization, has recently moved toward more uniform standards in cooperation with the International Organizations of Securities Commissions (IOSCO); and  While the future of uniform international standards remains debatable, the question whether IOSCO members will wholeheartedly accept the “global” standards. 16