Analysis of Foreign Consolidated Financial Statements(1).pptx

consolidation

1. CHAPTER FOUR ANALYSIS OF FOREIGN CONSOLIDATED FINANCIAL STATEMENTS

2. PREPARED BY Solomon Endeshaw GSE/5027/14 Tsega Mamo GSE/4122/14 Yazew Abebe GSE/0568/14 Yonas Mulugeta GSE/1058/14 Yohannes Worku GSE/1789/14 Submitted to Dr , sewale ( phd ) Jan 2022 Addis Ababa, Ethiopia

3. 4.1OVERVIEW OF FINANCIAL STATEMENT ANALYSIS Financial statement analysis is the process of analyzing a company financial statement for decision making purpose. It used by both internal and external users to evaluate business performance and value.

4. 4.1OVERVIEW OF FINANCIAL STATEMENT ANALYSIS External users use it understand the overall health of an organization as well as to evaluate financial performance and business value i.e. creditor, investor, regulatory authority. Internal constituents use it as a monitoring tool for managing the finance. i.e. management

5. 4.1OVERVIEW OF FINANCIAL STATEMENT ANALYSIS Financial analysis can be Horizontal analysis; comparison with time Vertical analysis; comparison with other companies with the same industry. Ration analysis; comparison of different balances from the financial statement, this grouped together to asses a company’s profitability, ability to pay debt and survival in the long term.

6. 4.1OVERVIEW OF FINANCIAL STATEMENT ANALYSIS Financial analysis has four categories Income statement analysis; gross profit as a percent of revenue, depreciation as a percent of revenue, net earning as a percent revenue. Cash flow statement analysis; cash from the operation, cash from financing. Balance sheet and leverage ration; liquidation ration (QR, CR, NET-working capital), leverage ration (DR, Debt to capital), efficiency ration (inventory turnover, A/R Turnover, A/P turnover, TA turnover) ROR(rate on return) and profitability analysis; ROE(rate on equity ratio), profitability,

7. 4.2REASONS FOR ANALYZING FOREIGN FINANCIAL STATEMENTS Making foreign portfolio investment decision ( Investors can diversify risk by investing abroad, To maximize return in other country market return ). Making foreign merge and acquisition(to purchase an international company first need to analyze it financial statement )

8. 4.2REASONS FOR ANALYZING FOREIGN FINANCIAL STATEMENTS To evaluate foreign supply and comparison against foreign competitors (to determine sustainable supply, and measuring the organization on an international market). Making credit decision (to determine the capability of a customer the ability to return it’s credit through the given period of time)

9. 4.3PROBLEMS ENCOUNTERED IN ANALYZING FOREIGN FINANCIAL STATEMENTS Data accessibility (Finding and obtaining adequate/ accurate information about the foreign company) and time. i.e. the database don't conation complete disclosure. Another approach to obtain a copy of the foreign company annual report

10. 4.3PROBLEMS ENCOUNTERED IN ANALYZING FOREIGN FINANCIAL STATEMENTS language and principles that has been used in the financial statement presentation. i.e. Terminology differences that result in uncertainty as to the information provided. Differences in format that lead to confusion and missing information. accounting differences that hinder cross different country comparisons

11. 4.3PROBLEMS ENCOUNTERED IN ANALYZING FOREIGN FINANCIAL STATEMENTS The currency used in presenting monetary amounts lack of adequate disclosures; Some of the most serious disclosure limitation are information on segments, assets valuation, foreign operation, interim statements and reservation.

12. 4.3PROBLEMS ENCOUNTERED IN ANALYZING FOREIGN FINANCIAL STATEMENTS Format of financial statement i.e. it is common in Europe not to provide cost of good sold, so this prevent from calculating gross margin and inventory turnover. German don’t distinguish between CL and NON-CL Timeliness financial statements are not made available on a timely basis

13. 4.3PROBLEMS ENCOUNTERED IN ANALYZING FOREIGN FINANCIAL STATEMENTS Business environment difference differences in business environments that might make ratio comparisons meaning less even if accounting differences are eliminated. e.g. Japanese and K orean companies borrow much more on a short-term basis than U.S. companies, leading to lower current ratio. Also debt ratio I these country be higher as a reason of source of finance and lower profit margin as a result of companies focus on market share

14. 4.4POSSIBLE SOLUTIONS TO PROBLEMS ENCOUNTERED IN ANALYZING FOREIGN FINANCIAL STATEMENTS S ome  of the potential problems can be removed by the 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. restating foreign financial statements to a familiar  basis (IFRS or U.S. GAAP)

15. 4.4POSSIBLE SOLUTIONS TO PROBLEMS ENCOUNTERED IN ANALYZING FOREIGN FINANCIAL STATEMENTS A nalysts  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 i.e. Financial  ratios can differ across countries as a result  of differences  in  accounting principles. 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.

16. 4.4POSSIBLE SOLUTIONS TO PROBLEMS ENCOUNTERED IN ANALYZING FOREIGN FINANCIAL STATEMENTS In order to avoid misrepresentation due to currency exchange, the current exchange rate should be used for all previous year. Foreign company financial statement can be restated in terms of preferred format in order to facilitated cross-country comparisons of financial information. Financial statement user must hire a translation or develop foreign language capability.

17. 4.5RESTATING FOREIGN FINANCIAL STATEMENTS TO U.S. GAAP and IFRS Form 20-F (restate from foreign GAAP to U.S. GAAP) this form reconcile net income and shareholder equity to U.S. GAAP, however there is no requirement to reconcile asset and liabilities. Most other ration cannot be computed as if under U.S. GAAP. Restatement overview The first step, reformatting, involves transforming the financial statement into a U.S format. Presentation and terminology difference also transformed.

18. 4.5RESTATING FOREIGN FINANCIAL STATEMENTS TO U.S. GAAP and IFRS The second step involves restating the foreign GAAP amount to U.S. GAAP amount. This is process is made easier when the company files a form 20-F. In IFRS restating IAS1(if the financial statement is presented in another principle). IAS2. and IAS 10 govern the consolidation steps IAS 21, IAS 29 and IFRS 9 will be the standard that deals with the foreign currency exchange

19. Illustration e.g. restating financial statement Assume that the local GAAP column of the financial statement is being restated has already been reformatted into the U.S. GAAP titles and amounted, these amount include. sales 2,000 cash 500 CGS 1,100 inventory 600 SG&A expense 200 differed liability 50 Other income 100 pension. liability 800 Earning (beg) 500 Earning (end) 1300

20. Illustration Under U.S. GAAP the current pension liability costs are 40 unit higher and the beginning balances in pension liability is 100 unit higher. These cost are accounted for a SG&A expense. Cash realized of 20 unit during the current year is considered a differed liability under U.S. GAAP and is other income under local GAAP.

21. Illustration U.S. format local GAAP Dr. Cr U.S. GAAP Sales 2000     2000 CGS 1100     1100 Gross profit 900     900 SG&A expense 200 40   240 other income 100 20   80 net icome 800     740

22. Retain earning statement U.S. format local GAAP Dr. Cr U.S. GAAP r/e beg 500 100   400 net icome 800     740 r/e end 1300     1140

23. balance sheet U.S. format local GAAP Dr. Cr U.S. GAAP cash 500     500 inventory 600     600           differed liability 50   20 70 pension liability 800   100 940       40   retain earning 1300     1140

24. ILLUSTRATION OF IFRS TO U.S GAAP Xys is a major transportation provider in Switzerland. Its headquarter are located in Bern. The following is a financial statement of Swisscom which is presented in Dutch IFRS format was restated to a U.S. GAAP in order to be avail to a certain American company. Assume the PP&E assets are understated by 106 units. Some expense and liability have to be restated The reconciling adjustment follows in the next slide

25.     Dr, Cr, PP&E   54   Depreciation and amortization   5     Interest expense   13   Retained earning   46         PP&E   107   Other long term lia   98     Restrictions charges   205         Depreciation and amortization   5     PP&E   5         Other non current asset   475   Depreciation and amortization   188     Good and service purchased   370   Retained earning   293         Investment   50     Equity in net loss   50

26.       Recognizing adjustment       IFRS Dr Cr U.S GAAP Cons, statement of operation           Net revenue   9.842     9842 Capitalized cost and changes in inventories   277     277 Total   10119     10119 Goods and services purchased   1,666   370 1296 Personal expense   2584     2584 Other operating expense   2090     2090 Depreciation and amortization   1739 5   1937       5           188     Restructurings charges   1726   205 1521 Total operating expense   9.805     9428 Operating expense   314     691 Interest expense   -428   13 -415

27.   IFRS Dr Cr U.S GAAP Financial income 25     25 Income(loss)before income taxes and equity in net loss of affiliated companies -89     301 Income tax expense 1     1 Income or loss before equity in net loss of affiliated companies -90     300 Equity in net loss of affiliated companies -325   50 -275 Net income or loss -415     25           Cons, retaining statement         Retaining earning -151   46 188       293   Net loss -415     25 Profit distribution declared -1282     -1282 Conversion of loan payable to equity 3200     3200 Retaining earning 1352     2131

28.   IFRS Dr Cr U.S GAAP Consolidated balance sheet         Asset         Current assets         Cash and cash equivalents 256     256 Securities available for sale 51     51 Trade accounts receivable 2052     2052 Inventories 169     169 Other current assets 34     34 Total current assets 2562     2562 Non-current assets         Property, plant and equipment 11453 54   11609     107           5  

29.   IFRS Dr Cr U.S GAAP Investment 1238 50   1288 Other non current assets 220 475   695 Total non current assets 12911     13592 Total assets 15473     16154 Liabilities and sun equity         Current liabilities         Short term debt 1178     1178 Trade account payable 889     889 Accrued pension cost 789     789 Other current liabilities 2213     2213 Total current liabilities 5069     5069 Long term liability         Long term debt 6200     6200 Finance lease obligations 439     439 Accrued pension cost 1488     1488 Accrued liabilities 709     709 Other long term liabilities 338 98   240 Total liabilities 9174     9076   14243     14145

30.   IFRS NOTE U.S GAAP Shareholders equity       Retaining earning 1352 R/E 2131 Unrealized market value adjustment of securities available for sale 39   39 Cumulative translation adjustment -161   -161 Total shareholders equity 1230   2009 Total liabilities and shareholders equity 15473   16154

31.   IFRS U.S GAAP DIFFERNECE 1.Net income /net revenues(net profit margin) - 4.22 % 0.25% -106.02% 2.Operating income /net revenues(operating margin) 3.19% 7.02% 102.06% 3.Operating income/total asset(ROA) 2.03% 4.28% 110.79% 4.Net income/total shareholders equity9ROE) -33.74% 1.24% -103.69% 5.Operating income /total shareholders equity 25.53% 34.40% 34.73% 6.Current asset/current liabilities(current ratio) 0.51 0.51 0.00% 7.Total liabilities/total shareholders equity(debt to equity) 11.58 7.04 -39.20%

32. Thank you