Foreign Financial Statement Analysis; IASB; International Accounting Standards Board

There are a number of challenges associated with the analysis by credit professionals of foreign financial statement.  The most obvious is that many foreign companies do not produce financial statements in English.  Foreign customers or applicants may and often do report their financial condition in currency other than the U.S. dollar.  Less obvious but certainly less important differences between analysis of U.S. based customer financial statements and foreign financial statements involve the accounting rules that are the basis for the financial information being evaluated.  Differences in accounting rules, in auditing practices, and in required disclosures make understanding financial statements received from foreign customers or applicants more challenging --- especially when we recognize that these differences occur in many instances from country to country.  Some examples of the challenges that credit analysts face include:

*  Rules relating to the valuation of assets and the depreciation of assets.
*  The level of disclosure required. 
*  Secrecy or transparency are culturally significant in understanding what financial information foreign companies are likely to produce, and how accurate and reliable those statements are to a creditor or potential creditor company.

One of the most difficult questions facing the credit analyst involves determining how accurate the financial statements are in describing the assets, liabilities, sales, expenses and income of the company under review.  For example, in the United States accountants and CPA firms apply the Conservatism Principle.  The Conservatism Principle states that if there are two acceptable alternatives for reporting an item, an accountant must choose the alternative that will result in lower net income or a lower asset value.  In order to properly evaluate foreign financial statements including audited statements, the credit professional must know whether local accounting rules follow the Conservatism Principle, or allow financial information to be presented more favorably.  This is only one example of the challenges associated with evaluating the accuracy of foreign financial statements.   To truly understand foreign financial statements, credit professionals must also know which of these other accounting principles apply to the financial statements under review:

• The Economic Entity Assumption
• The Monetary Unit Assumption
• The Going Concern Assumption
• The Time Period Assumption
• The Full Disclosure Principle
• The Cost Principle
• The Matching Principle
• The Revenue Recognition Principle

International Accounting Standards

The International Accounting Standards Board (IASB) based in London was established in 2001.  The IASB is an independent, privately-funded organization responsible for establishing accounting standards. The IASB is committed to developing a single set of high quality, understandable and enforceable global accounting standards that require transparent and comparable information in financial statements.  Funding for the IASB comes from contributions made by major accounting firms, private financial institutions, global industrial companies, as well as central and development banks.

Why Are International Accounting Standards Needed?

They are necessary to create:

• High quality accounting standards critical to development of high quality global financial reporting structure
• To ensure that the financial data as presented meets the varying needs of users in different countries
• To ensure efficient cross-border investment and lending

The International Accounting Standards Board and the U.S. Financial Accounting Standards Board are working together to achieve convergence between International Financial Reporting Standards and U.S. GAAP.  Irrespective of whether the SEC adopts the IFRS, publicly traded companies in the U.S. should be prepared for significant changes in Generally Accepted Accounting Principles following the FASB and the IASB's efforts for convergence. 

Edited by Michael C. Dennis.  Michael can be reached by email at mcdennis13@yahoo.com with questions or inquiries.