Accounting in multinational enterprises
International business administration – year 2
Lecture 1
IPO -> Initial Public Offering
Financial reporting: entails the disclosure of financial information about a company’s
financial performance in a certain period.
Financial statements: income statement/balance sheet/cash flow statement/statements of
changes in equity/notes
Accrual accounting
IFRS -> International Financial Reporting Standards
Accrual accounting means that transactions are recorded when they occur, rather at the
time of cash flow, so Net Income = Cash Flow + Accruals.
GAAP -> General Accepted Accounting Practices
Non-GAAP measures are additional not required measures taken by manager, like the
EBITDA.
Lecture 2
Industry analysis: Porter’s 5 forces
- Threat of new entrants
- Buyer power
- Supplier power
- Threat of substitute products
- Competitive rivalry
These factors determine the industry’s profitability
1
,Competitive strategy analysis
Two basic competitive strategies:
1. Cost leadership: produce and sell at a low price
2. Product/service differentiation: differentiate from others
These strategies differ on cost control and investment destinations
Accounting policies: the specific principles, rules, and practices applied by an entity in their
financial statements (‘all machines are depreciated over 5 year’).
Accounting analysis
Three potential sources for noise and bias in accounting data:
1. Noise from accounting rules (different practices used)
2. Forecast errors (estimates are prone to errors)
3. Managers’ accounting choices
Internally generated intangible assets -> brand name
Separately acquired intangible assets -> are capitalized
Market-to-book ratio = market value of equity / book value of equity
Managers have incentives to choose biased accounting policies:
- Compensation contracts
- Debts convenants
- Capital market considerations -> paint a nice picture of their company
- M&A
- Tax and regulatory considerations -> try to look poor to avoid tax
Revenue recognition (5 step approach)
1. Identifying the contract with the customer
2. Identify performance obligations in the contract
3. Determine the transaction price per performance obligation
4. Allocate the transaction price to the performance obligation in the contract
5. Recognize revenue when/as the entity satisfies a performance obligation
Golden rule of accounting: accruals reverse!
- Initial positive (negative) accruals reverse into negative (positive) ones
Accounting analysis pitfalls
- Not all unusual accounting practices are dubious
- Less flexibility does not mean more informative accounting
- Common standards does not mean common practices -> meaning that IFRS does not
lead to all businesses accounting in the same way
Systemize accounting analysis
- Step 1: identify principle accounting policies
- Step 2: assess accounting flexibility
- Step 3: evaluate accounting strategy
2
, - Step 4: evaluate the quality of disclosure
- Step 5: identify potential red flags
- Step 6: undo accounting distortions
Lecture 3
Accounting distortions
When looking at the distribution of
firms in terms of their earnings, there
is a gap between the firms that make
profits and the ones that make a loss.
The firms around the zero point have
discretion and certain incentives to
push their net income just above 0.
Accounting analysis, look at:
- Whether any accounting policies are unusual
- Whether any movement in balances are of notice
- Whether accounting standards show an incomplete picture of the firm
Above are all forms of distortions
Asset: an economic resource controlled as a result of past events. An economic resource is a
right with the potential to produce economic benefits.
Asset distortions arise from ambiguities about whether:
- The firm owns/controls the economic resource (leasing/subsidiaries)
o The economic controller (leaser) will be recognized as owner.
- Doubts about the future economic benefits
o For example, a company that puts maintenance costs on the balance sheet as
asset instead of expense, because it ‘improves’ their company
- The caring amounts on the balance sheet are appropriate
The solution to this kind of problems is IFRS
- Research expenditures -> expenses
o Research is planned search or critical investigation aimed at discovery of new
knowledge.
- Development costs -> assets
o Development is translation of research findings into plan or design for a new
product or to significantly improve an existing product.
Assumptions:
- If capitalized, the useful life of the research asset would be 2 years
- Mid-year convention: amortization is recorded on July 1st of each year
3
International business administration – year 2
Lecture 1
IPO -> Initial Public Offering
Financial reporting: entails the disclosure of financial information about a company’s
financial performance in a certain period.
Financial statements: income statement/balance sheet/cash flow statement/statements of
changes in equity/notes
Accrual accounting
IFRS -> International Financial Reporting Standards
Accrual accounting means that transactions are recorded when they occur, rather at the
time of cash flow, so Net Income = Cash Flow + Accruals.
GAAP -> General Accepted Accounting Practices
Non-GAAP measures are additional not required measures taken by manager, like the
EBITDA.
Lecture 2
Industry analysis: Porter’s 5 forces
- Threat of new entrants
- Buyer power
- Supplier power
- Threat of substitute products
- Competitive rivalry
These factors determine the industry’s profitability
1
,Competitive strategy analysis
Two basic competitive strategies:
1. Cost leadership: produce and sell at a low price
2. Product/service differentiation: differentiate from others
These strategies differ on cost control and investment destinations
Accounting policies: the specific principles, rules, and practices applied by an entity in their
financial statements (‘all machines are depreciated over 5 year’).
Accounting analysis
Three potential sources for noise and bias in accounting data:
1. Noise from accounting rules (different practices used)
2. Forecast errors (estimates are prone to errors)
3. Managers’ accounting choices
Internally generated intangible assets -> brand name
Separately acquired intangible assets -> are capitalized
Market-to-book ratio = market value of equity / book value of equity
Managers have incentives to choose biased accounting policies:
- Compensation contracts
- Debts convenants
- Capital market considerations -> paint a nice picture of their company
- M&A
- Tax and regulatory considerations -> try to look poor to avoid tax
Revenue recognition (5 step approach)
1. Identifying the contract with the customer
2. Identify performance obligations in the contract
3. Determine the transaction price per performance obligation
4. Allocate the transaction price to the performance obligation in the contract
5. Recognize revenue when/as the entity satisfies a performance obligation
Golden rule of accounting: accruals reverse!
- Initial positive (negative) accruals reverse into negative (positive) ones
Accounting analysis pitfalls
- Not all unusual accounting practices are dubious
- Less flexibility does not mean more informative accounting
- Common standards does not mean common practices -> meaning that IFRS does not
lead to all businesses accounting in the same way
Systemize accounting analysis
- Step 1: identify principle accounting policies
- Step 2: assess accounting flexibility
- Step 3: evaluate accounting strategy
2
, - Step 4: evaluate the quality of disclosure
- Step 5: identify potential red flags
- Step 6: undo accounting distortions
Lecture 3
Accounting distortions
When looking at the distribution of
firms in terms of their earnings, there
is a gap between the firms that make
profits and the ones that make a loss.
The firms around the zero point have
discretion and certain incentives to
push their net income just above 0.
Accounting analysis, look at:
- Whether any accounting policies are unusual
- Whether any movement in balances are of notice
- Whether accounting standards show an incomplete picture of the firm
Above are all forms of distortions
Asset: an economic resource controlled as a result of past events. An economic resource is a
right with the potential to produce economic benefits.
Asset distortions arise from ambiguities about whether:
- The firm owns/controls the economic resource (leasing/subsidiaries)
o The economic controller (leaser) will be recognized as owner.
- Doubts about the future economic benefits
o For example, a company that puts maintenance costs on the balance sheet as
asset instead of expense, because it ‘improves’ their company
- The caring amounts on the balance sheet are appropriate
The solution to this kind of problems is IFRS
- Research expenditures -> expenses
o Research is planned search or critical investigation aimed at discovery of new
knowledge.
- Development costs -> assets
o Development is translation of research findings into plan or design for a new
product or to significantly improve an existing product.
Assumptions:
- If capitalized, the useful life of the research asset would be 2 years
- Mid-year convention: amortization is recorded on July 1st of each year
3
