Question

Explain the concept of Analysis of Foreign Financial Statements

Answer 1

Reasons to analyze foreign financial statement

a. Foreign portfolio investment

Investors can diversify away some risk by investing internationally. - While stock returns in many countries are positively correlated with U.S. returns, these correlations are far from perfect.

b. International mergers and aquisitions

The frequency and size of international corporate mergers has increased in recent years. Examples include Daimler and acquisitions by ford Motor such as Volvo of Seden. The purchaser of an international companhy needs to analyze the target company's financial statements to determine the aquisition price.

c. Other reasons

Extending credit for foreign customers

Evaluationf foreign vendors

Comparison to international competitors

Problems in Analysis of foreign financial statements

a. Data accessibility - Relative to the U.S., financial information is difficult to obtaon in may countries

b. LAnguage - Many international companies do not produce financial statements in English

c. Currency - Many international companies do produce financial statements in currency other than U.S. Dollars

d. Terminology - Difference in terminology exist between countries using the same language.

e. Format - Some format differnces are not problematic because the information is given, just in a differnec place. However, other format difference are a problem because the information is not provided.

f. Extent of disclosure - Disclosure internationally tends to be limited compared to the U.S. where full disclosure is fundamental.

g. Timeliness - Timeliness is one factor of the relevance of information. This varies significantly internationally since filing deadlines differ from country to country.

h. Difference in accounting principles - Difference in accounting principles often result in significantly different income and other financial statement amounts.

There can be solutions to theses problems.