International Financial Analysis Arun Kottolli

Why & When? MNC operating in several countries, with transactions denominated in several currencies –Intel: Mfg Plants in US & Malaysia To compare companies based in different countries ( but not MNC’s) –e.g Peru Cola & Coca Cola Investors, Bankers & Analysts –e.g Tata Motors from India buys Daewoo in Korea; The deal is funded by an American Bank

Main Challenges Different Accounting Methods –Accounting methods vary country-to-country –Driven by different opinion on accounting policy –Mainly due to different Social & Legal policies –Different Tax laws –Different Financial systems Different Terminologies –Income Statement => Profit or Loss Accounts –Different Languages & currencies Restating Financial Statements

Understanding the Differences Different Legal & Social Systems Different Accounting Rules makes it difficult to compare operations Ability to self-finance depends on Social Systems & Legal rules

Different Financial Systems Liquidity of the Current Assets depends on the Financial System in which the companies operate Accounts Receivable$1000 Bills Receivable$1000 Cash at Bank$925 Trade Debt could appear in any of the following Forms

Different Tax Systems Tax Laws –Vary by Countries –Vary with Time –E.g: Tax Rates in France 27.6% in % in 2000 Each Country has its own Tax laws –R&D is expensed in the same year in US –R&D is capitalized in other countries –Sweden has provision for tax free reserves (upto 20% of EBT cane be set aside as reserve)

International Financial Reporting Mandatory reporting standards vary; Depends on: –Domestic accounting Rules & Operating conditions Wider Disclosure is being pursued 1.Use of Foot Notes 2.Restatement in other currencies 3.Direct Translation to foreign languages 4.Abridged Version to foreign users 5.Restatement in foreign accounting standards 6.Disclosure of comparable indicators such as financial ratios

Infosys Ltd. India

Currency Translation SEC Rules Average Rates for Income Statement Items Year end rates for assets & Liabilities Average Rates for all other amounts Year end rates for all amounts which are compared to the previous year SEC rules require the financial statements to be presented in their source currency Very Useful to predict future EPS & other performance parameters

Financial Ratios Interpretation of financial statements based on Dupont Analysis –ROI, ROA, Inventory Turnover, Cash Coverage Method of ratio calculation varies with countries – e.g Inventory turnover Give Benchmarks w.r.t competitors

Financial Analysis & Capital Markets As capital markets become more international, there is an increasing need for financial information that investors in other countries can understand Harmonization of accounting principles has been slow But provides investors with better EPS information Currently done by analysts

Challenges to Forecast EPS Volatility of EPS Influenced by Accounting Practices –Government (Bank) Oriented –Investor oriented Timeliness & Relevance of Disclosures –Analysts pressure encourages more frequent & timely disclosures –Japan: Neither timely not Conservative –US: Investor driven; Timely and conservative –Germany: Conservative by not timely (Use of Provisions or reserves to smoothen earnings)

Questions??