INTERNATIONAL ACCOUNTING

INTERNATIONAL INANCIAL STATEMENT ANALYSIS

By Group 04 :

Ni Putu Shandya Maharani (1506305117)

Putu Nadiani Putri Utama (1506305130)

Ni Made Cahyani Prastuti (1506305)

ECONOMY AND BUSINESS

UDAYANA FACULTY
2017
 TABLE OF CONTENTS
Table of Content ............................................................................................... 2

Summary Chapter 5.......................................................................................... 3

A. International Accounting Differences and Financial Statement Analysis .. 3

B. Major Differences in Accounting Principles Around the World................. 4

C. The Impact of US-UK Accounting Differences: Qualitative Analysis ....... 6

D. A Global Perspective on Earning Measurement ......................................... 6

E. Factors Influence Measurement Differences ............................................... 7

F. Global Accounting Convergence ................................................................. 8

Bibliography..................................................................................................... 10

2
 SUMMARY CHAPTER 5

This chapter examines the importance of differences of international accounting from the
perspective of financial statement analysis. We will also assess the extent to which there are
systematic differences across countries as a result of the differential impact of accounting
principles on measures of earnings and assets. 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. We will look at
the impact of differences in accounting principles around the world, with special reference to
a selection of major countries.

A. INTERNATIONAL ACCOUNTING DIFFERENCES AND FINANCIAL STATE-

MENT ANALYSIS
Just as business and financial markets have become increasingly internationalized, so
has the significance of the differences in international accounting become more important
from the perspective of international financial market analysis. The key question concerns
the extent to which international accounting differences impact assessments of earnings
and future cash flows and their associated risks and uncertainties.
These assessments are important to portfolio investors making their stock (share)
valuations. They are also important to corporations concerned with foreign direct
investment (FDI), which involves the valuation of potential acquisitions and participating
interest/joint ventures or the raising of capital or the listing/trading are listed
internationally. A growing number of corporations are listed internationally, with London
being recently overtaken by New York as the most popular stock exchange, and many
more are seeking to become so. In addition, there has been a dramatic increase in
emerging stock markets and competition for international investment.
International accounting differences pose a number of problems from a financial
analysis perspective. First, in attempting to value a foreign corporation, there is a
tendency to look at earnings and other financial data from home country perspective, and
hence there is a danger of overlooking the effect of accounting differences. Second, an
awareness of international differences suggests the need to become familiar with foreign
accounting. Third, issues of international comparability and accounting harmonization
become highlighted in the context of considering alternative investment opportunities. In
this regard, Choi and Levich (1991) provide a useful framework for analyzing the impact

3
 and relevance of accounting diversity in similar or dissimilar economic environments. In
similar economic environments or situations, accounting diversity is illogical and leads to
non comparable results. Logical practice suggests similar accounting treatments. Where
economic environments are dissimilar, however, as is likely in the case of international
investment, accounting diversity may well be justified, especially where the sources of
such dissimilarity are in the company laws, tax regulation, sources of financial, business
customs, accounting culture, and so on. On the other hand, similar accounting treatments
may be justifiable where such factors are of similar significance. The importance of
understanding environmental and culture factor is thus emphasized.

B. MAJOR DIFFERENCES IN ACCOUNTING PRINCIPLES AROUND THE

WORLD
The extent of accounting diversity around the world is undoubtedly significant
enough to make the job of the financial analyst a very difficult one in terms of making
international comparison.
If we now focus on some key measurement issues in a selection of major countries,
that is, the United States, the European Union (EU) (Including the United Kingdom, the
Netherlands, France and Germany), Brazil, Switzerland, China, and Japan, we can gain
some insight into the variety of accounting principles in use that can impact earnings and
assets differentially.
Depreciation accounting in United States and the EU, especially the United Kingdom,
tends to be based on the concept of useful economic life, whereas in France, Germany,
Switzerland and Japan, the tax rules generally encourage more accelerated methods.
Inventory measurement is generally based on the principles of lower of cost and
market but with some variation as to the meaning of the market, that is, net realizable
value or replacement cost. LIFO (last in, first-out) is sometimes permitted for tax
purposes (for example, in US and Japan), but more often it is not (for example, in the
EU). Construction contract are generally accounted for using the percentage-of-
completion method, but the more conservative completed contract method may be used in
Switzerland, China, and Japan.
Research and Development (R&D) costs are usually expensed immediately in the
Anglo-America and Germanic Countries, though the Brazil is more flexible approach is
generally adopted. A permissive approach is also generally adopted toward capitalizing
the borrowing cost of assets.
4
 The treatment of retirement benefits is generally accounted for on the basis of accrued
and/or projected benefits likely to be payable to employees, in contrast to the more pay-
as-you-go approach of Brazil and China.
The treatment of taxation is a major area of differentiation with measurement of
accounting income strongly influenced by the tax rules in France, Germany, Brazil, and
Switzerland.
The treatment of business combination around the world varies to the extent that
the pooling-of-interest method is required or permitted in certain specified circumstances.
Generally, however, the purchase method is required. But with the purchase method
comes a major area of differentiation and controversy between countries, that is, the
treatment of goodwill. In Brazil, China, and Japan, the amortization method is required in
contrast to the US and the UK, where the amortization method is not required but
valuation are subject to impairment tests.
Related to goodwill is the issue of intangible, such as brands, publishing rights,
and patents, which are generally capitalized, except in Switzerland, nut subject usually
amortization or if not, to impairment less.
Finally, the issue of foreign currency translation is important in that earnings
measures are impacted by the choice between average or closing rates. Here, there would
seem to be some flexibility in general, with either actual or average rates permitted.
Although there is a growing awareness of this diversity of measurement principles
and practice internationally, much less is known about the overall impact of accounting
differences on earnings and shareholder equity. After all, differences with respect to
various aspect of measurement may well compensate for each other to extent that their
overall impact may not be significant. The important question is whether accounting
differences systematically impact measures of income. In the other words, do the
differences really matter?
Although there has been a relatively limited amount of research into the
quantitative impact of international accounting differences, there is growing evidence
concerning relationships between US accounting principles and those in the UK, a
number of EU countries, and Japan.

5
C. THE IMPACT OF U.S. U.K. ACCOUNTING DIFFERENCES ; A QUANTITIVE
ANALYSIS
Let us first examine the question of weather there is an overall quantitative impact on
earning s arising from differences between US and UK accounting principles. Using US
GAAP as the yardstick, we cam make assessment of the relationship between UK
earnings reported under UK GAAP and UK earnings adjusted in accordance with US
GAAP. Given the conservatism is a major influence in measurement practices, then this
relationship can be describe in term of relative conservatism.
Accordingly an index of conservatism can be calculated, as shown by Gray using the
formula :

1( )
||
RA = adjusted earning (or return)
RD = disclosed earnings
In the case of US versus UK accounting principles, this become

1( )
| |
If index value > 1, U.K. GAAP earnings are less conservative or more optimistic/
aggressive
If index value < 1, U.K. GAAP earnings are more conservative
If index value = 1 (equal 1) indicate neutrality between the two systems with respect to
the effect of accounting principle.

In Summary the difference between US and UK accounting principles show that in

practices, UK GAAP is significantly less conservative , or the US more conservative, as
far as the quantitative impact on earnings is concerned.

D. GLOBAL PERSPECTIVE ON EARNINGS MEASUREMENT

The available evidence suggest that earnings measured under UK accounting
principles tend to be systematically higher or less conservative than earnings measured
under US accounting principle. So, what the relative impact of Anglo- American
accounting principles on earnings compared to those of continental Europe and Japan?
a. Continental Europe
An early attempt to quantify, in practice, the impact of France and German
accounting principles compared to UK accounting principle was made by Gray. The

6
 database for this study was provided by DAFSA Analyse of Paris with its data bank
of European company accounts adjusted according to the European Method used by
financial analysts. Using this adjusted basis of earnings as the yardstick for
comparison, we calculated a conservatism index for each company as in the US-UK
comparative analysis.
Earnings tend to be more conservative or understated in France and Germany
than in United Kingdom. And also some research of Gray said that The Netherlands is
at the less conservative end of the spectrum, similar to, but not as extreme as United
Kingdom, while in Sweden the tendency was to be more conservative than US
GAAP.
b. Japan

Despite the growing internationalization of Japanese accounting standards, the

influence of taxation, creditor interests, and a conservative culture have ensured that
measures of earnings are relatively understated compared to the United States. After
making further adjustments for cross-holdings and differences in capitalization, it was
suggested that the average of Japanese Price-Earnings ratio becomes 12.51 and not
34.3. as reported by Morgan Stanley Capital International Perspective.

However, it should be noted that differences in financial ratios such as

corporate liquidity and gearing (leverage) are not just the result of accounting
differences but also differences in financial systems and norms of countries. In Japan,
for example, higher levels of gearing and short-terms payables are considered normal
relative to the United States because of longer-term relationships with bankers and
suppliers. Similarly, a longer-term view tends to be taken of profitability, with much
more emphasis placed on achieving growth in sales and market share.

E. FACTORS INFLUENCING MEASUREMENT DIFFERENCES

The reasons for measurement differences can be found in the environmental and cultural
factors influencing accounting principles in these countries.

a) In United States and the United Kingdom, the stock market is dominant influence,
with the information needs of investors encouraging a more optimistic view of
earnings and hence higher share prices. At the same time, accounting principles are
relatively flexible, the accounting profession is relatively independent of government,

7
 and tax rules have only a limited influence on accounting practice. Underlying
cultural values tend to both motivate and reinforce a less conservative approach to
measurement taken overall.
b) In continental Europe and Japan, on the other hand, taxation and sources of finance
are relatively major influences compared to the stock market. These countries, have
tradition of commercial codes and accounting plans. Moreover, it is common for the
tax authorities to allow for tax purpose only those items charged in the accounts and
to tax earning as reported in the accounts. This tends to lead to a more conservative
application of accounting principles in order to report lower earning for tax purpose.

In addition, the significance of creditors and loan finance relative to equity provides a
further conservative influence in that lower earnings will tend to better meet the interests
of creditors and lender vis--vis shareholders. Black and White (2003) find that balance
sheet information is more value relevant than income statement information in Germany
and Japan. In contrast, they find that income statement information is more informative in
the United States. The legal requirements relating to accounting are also usually more
detailed, with the result that professional influences is relatively low and is limited mainly
to the audit function. Finally, underlying cultural values tend to both motivate and
reinforce a more conservative approach to measurement.

F. GLOBAL ACCOUNTING CONVERGENCE

Although a number of organizations around the world, including the United Nations
and EU, have been concerned with harmonizing international differences in accounting
and reporting, the most important body in recent years has been the International
Accounting Standards Board (IASB), formerly the International Accounting Standards
Committee (IASC) established in 1973, which sets International Financial Re3porting
Standards (IFRSs).

The main reason for developing international standards has been to achieve a degree
of comparability that will help investors make their decisions while reducing the costs of
MNEs in preparing multiple sets of accounts and reports. It is also fair to say that the
IASB sees itself as playing a major role in coordinating and harmonizing the activities of
many agencies involved in setting accounting and reporting standards. IASB standards
are also intended to provide a useful model for developing countries wishing to establish
accounting standards for the first time.

8
 In early days, international standards were developed allowing substantial flexibility
to a accommodate different national interests, but since the late 1980s, there has been
growing pressure to develop more uniform standards to facilitate cross-border capital
raisings and stock exchange listings. International Organization of Securities
Commissions (IOSCO) was completed in 1998. As of May 2000, IOSCO recommended
acceptance of international standards subject to supplemental treatments where necessary.
The IASB is hoping that IOSCOs endorsement will lead to a greater recognition of
International Financial Reporting Standards and the promotion of global convergence. A
growing number of companies are also electing to follow international standards, though
compliance is not always a comprehensive in practice. Most recently, effective 2005, the
EU countries have decided to adopt approved international standards for financial reports
by all listed companies.

9
 BIBLIOGRAPHY

Radebaugh, L. H., Gray, S. J., & Black, E. L. (2006). International Accounting and
Multinational Enterprises, 6th Edition. New York: Wiley.

10