Fix assignment (1)
Beast8484
milestone_3.pptxGlobal Market Analysis
Geoff Brown
Professor Duhn
ACC 680
March 5, 2017
Objectives
Introduction
Potential issues in financial statement analysis
Recommendations on the issues
International financial statement analysis potential benefits
2
Introduction: financial statements analysis
Definition; the act of looking at financial statements with a view of evaluating the financial status of the company to make better economic decisions(Brown et.al, 2014)
Financial statements include balance sheet, income statement, statement of equity and cash flow statement among others
Financial analysis uses tools such as financial ratios
Financial statement analysis make the use of various tools. The most common tools is financial ratios. This financial ratios are classified into various categories depending on the objective they are required to achieve. The common financial ratios are classified into liquidity, profitability, solvency, operating financial ratios and leverage ratios.
3
Introduction (continued)
Statement of the problem- effect of global market on financial statement analysis
Scope; financial statement analysis in the us vis a vis the global market
global market of choice is German.
This presentation is intended to give an outline of the various opportunities as well as threats that will be encountered as result of having global operations. The threats and opportunities will have a bias on the various effects this global markets will have on the process of financial statement analysis. This will also be a comparison between the host country, USA and the new country referred to as the global market. The global market in this case is German
4
Potential issues
Legal systems
Tax regulation
Political and political ties
Inflation
Funding mechanism
This are the major determinants of many countries accounting system and by the extension the process of financial statement analysis. They present both threats and opportunities to the business. The will be each be discussed in the subsequent slides.
5
Legal system
There two types of legal systems namely common law and codified roman law
The kind of accounting system is determined by the legal system
German being the global market uses codified roman law.
Accounting profession in German is highly regulated with procedures laid down on particular transaction
In the German law is silent about items such as cash flow statements, leases and also transactions involving foreign currency transactions(Geppert et.al, 2016)
Unlike in the USA and other countries who use the common law legal system, the accounting field is highly regulated in German. In countries operating under the common law regime the laws are left to professional bodies to deliberate on the various contentious issues. In this case various tools such as cash flow statement are very important when it comes to issues such liquidity. Lack of clear direction on such an item can make benchmarking with local entities difficulty.
6
Source of funding
There are two orientations when it comes to funding namely capital markets and credit based system( Brusca et.al, 2016)
There are various requirements any company that is or intends to be publicly traded
For instance there is the requirement for forward looking information that changes the analysis parameters( Brusca et.al, 2016)
German uses a credit based system
Financing is from banks among other lenders
Emphasizes is on profitability
Unlike in the US where the capital markets are well developed, in Germany the main source of funding would be banks. In reporting the emphasize will therefore be on profitability as compared to growth models and ratios.
7
Taxation
In German, financial reports are prepared with a view of or rather form the grounds for taxation( Brusca et.al, 2016)
There are set rules for depreciation of assets and this can be a problem when it comes to the computation of some specialized assets( Brusca et.al, 2016)
In the US financial reporting and taxation are treated as different activities hence statements used for reporting are easily used for decisions such investment. There has to be additional computation done to the statements in the global market in order to rely on them for financial analysis and modeling.
8
Political and economic ties
Refers to economic blocs, treaties and agreements
German is in the EU.
EU has been working towards the harmonization of practices.
German has various agreements with trading partners. This agreements will sometimes touch on accounting standards and taxation among other issues. Familiarizing with this arrangements is will go a long away in doing an objective analysis.
9
Inflation
Affects any analysis using historical prices
Can distort profitability ratios
Requires the use of adjustments for objective analysis
Makes country to country comparison difficulty
Taxation requires careful computation to avoid paying taxes on profits increased by inflation( Zeff, 2016).
The inflation rates will differ from one country to another. The inflation rates in the US are very different from the ones in German. Any objective analysis will have to factor in an inflation factor for analysis and also for comparison between the two countries. Tax is applied on the profit. The profit figure might be high due the inflation in the global market.
10
Opportunities
Disclosure requirement are more lenient
Potential for litigation from stakeholders is minimal
The requirement to report in timely and promptly especially in the case of losses is relaxed
In the German regime only one set of statement is required for reporting and taxation
since the requirement for full disclosure is not strict as compared to common law countries legal disputes arising from investors or other stakeholders who have relied on the information is minimal . The company is required by the law to produce only one set of statement for taxation unlike in the us where statements for taxation are different from statements for financial reporting.
11
Recommendations
Understanding the Generally accepted accounting principles
Understanding the local accounting and reporting requirements.
Clear understanding of accounting standards harmonization.
Autonomy in the preparation and analysis of financial statements
All the countries have borrowed from the generally accepted accounting principles, understanding this on top of the individual countries accounting methods can enable to reconcile any differences. For analysis purposes, separate set of financial statements should be prepared to avoid giving wrong analysis.
12
References.
Brown, P., Preiato, J., & Tarca, A. (2014). Measuring country differences in enforcement of accounting standards: An audit and enforcement proxy. Journal of Business Finance & Accounting, 41(1-2), 1-52.
Brusca, I., Caperchione, E., Cohen, S., & Rossi, F. M. (Eds.). (2016). Public sector accounting and auditing in Europe: The challenge of harmonization. Springer.
Geppert, M., Matten, D., & Williams, K. (Eds.). (2016). Challenges for European management in a global context: Experiences from Britain and Germany. Springer.
Zeff, S. A. (2016). Forging accounting principles in five countries: A history and an analysis of trends. Routledge.
