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International financial reporting

Christopher Nobes

Robert Parker

THE analysis of financial statements in an international context requires information about:

* aspects of a company's domestic operating environment that exert an influence on its structure and performance; and

* accounting methods that are peculiar to the country in question.

Companies experiencing a demand for this information may respond by supplying it, sometimes because regulatory institutions mandate such disclosures (as is the case in the US, if they do not prepare a full set of accounts based on US rules), and sometime s on a voluntary basis.

Research by Gray, Meek and Roberts (1995) has shown that there are significant differences in financial reporting behaviour between internationally listed and domestic-only listed multinational companies, a conclusion that had also been arrived at by Coo ke (1989) in his review of disclosure levels by Swedish companies. Participation in international capital markets is associated with substantial additional voluntary disclosure in areas such as research and development, future prospects, acquisitions and disposals, director and employee information, and segmental data.

According to Choi and Levich (1990), reporting on interviews with executives of multinational companies, the benefits of lower cost of capital are likely to outweigh the costs of providing the information (including the potential effects on competitivity arising from additional voluntary disclosure).

In fact, companies adopt various approaches to transitional financial disclosure, including:

* the use of notes explaining to the foreign reader the peculiarities of the domestic accounting principles used, perhaps with a glossary of the technical expressions used;

* a restatement of the results in the currency used by the foreign reader;

* a direct translation of their annual report into other languages, or publication of a condensed translated version for foreign users;

* the disclosure of comparable indicators, such as financial ratios; and

* some kind of restatement of the financial results using an alternative set of accounting principles.

Notes and glossaries for the foreign reader

Some of the larger international companies go to considerable lengths to inform their foreign report users of the particularities of the company's operating environment. Some even include a small lexicon within their report, explaining (amongst many othe r things) their distinctive approach to aspects of accounting measurement. For many years, Volvo included a separate Reader's Guide to the English language and French language editions of the annual report, along with illustrative examples of the intrica cies of Swedish accounting. Other companies include supplementary notes to the financial statements, which appear solely in foreign-language versions of the annual report and which tend usually to describe the domestic tax and accounting regulations as w ell as any particular features of the social, legal and financial system(s) within which the company operates.

Translation into foreign currencies

These are known as `convenience currency translations', as the aim is primarily to re-express the financial results in another currency merely for the convenience of the reader. A more interesting case, however, is Unilever, as the Dutch parent company t hat reports in Dutch guilders and the UK parent company that reports in British pounds are linked by an equalisation agreement, and they combine their results to present consolidated figures for the group as a whole.

The group's accounting policy is to consolidate subsidiaries of the Dutch parent into guilders, and subsidiaries of the UK parent into pounds, using average exchange rates. The movements in the guilder and the pound sterling clearly have an interesting e ffect on the representation of Unilever's results in different currencies.

Currency translation can have a significant effect on financial reporting. Many companies make it clear that foreign currency reports are presented ``solely for the purpose of convenience''. Indeed, the present regulations of the US' SEC do not permit tr anslation into US dollars but require the financial statements to be presented in their source currency. However, in their annual reports, we find that companies will use one of a number of different approaches in this unregulated area, such as the follo wing:

* average rates for income statement items and year-end rates for assets and liabilities;

* average rates for all amounts;

* year-end rates for all amounts where, in some cases, the rate for the current year end is applied not only to the current year's figures but also to the corresponding figures for the previous year.

One innovation is the use of composite currencies for reporting on the affairs of an international company to an international investment community. The French company, Saint-Gobain, is known for pioneering the use of the ecu (the European Currency Unit) in this context, and there are other examples of currency cocktails, even Interflora's aptly named `Fleurin'.

Another innovative example of currency reporting used to appear in the annual report of Royal Dutch Shell, which constructed its own currency basket comprising the currencies of major countries weighted by sales proceeds denominated in those currencies. Whilst, in this latter case, the financial statements were not presented using the composite currency, the extracts from the Royal Dutch report show how the company's sales outside North America moved against the dollar over a period of three years.

(Edited extracts from Comparative Financial Accounting.

Book courtesy: The British Council Library, Chennai.

e-mail: contact.chennai@in.britishcouncil.org)