FEI: 19th Current Financial Reporting Issues Conference
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Transcript of FEI: 19th Current Financial Reporting Issues Conference
The Global Economy & International Accounting Standards Developments
Trevor S. Harris
Managing Director, Morgan Stanley Dean WitterProfessor of Accounting, Columbia Business School
FEI: 19th Current Financial Reporting Issues Conference
FEI: 19th Current Financial Reporting Issues Conference
MORGAN STANLEY DEAN WITTER Trevor Harris (212) 761-4713 [email protected] 2Please refer to important disclosures at the end of this report
The Global Economy & International Accounting Standards Developments
Financial Statements: A Means or an End?
Accounting Information as a Product?
Supply and Demand
Market Equilibrium
FEI: 19th Current Financial Reporting Issues Conference
MORGAN STANLEY DEAN WITTER Trevor Harris (212) 761-4713 [email protected] 3Please refer to important disclosures at the end of this report
The Global Economy & International Accounting Standards Developments
The Supply Side
•Enforcement of property rights
•Legal form
•Sources of capital - information asymmetry
•Standard setting institutions
•Private enforcement - auditing
•Public enforcement - security regulation
•Education
FEI: 19th Current Financial Reporting Issues Conference
MORGAN STANLEY DEAN WITTER Trevor Harris (212) 761-4713 [email protected] 4Please refer to important disclosures at the end of this report
The Global Economy & International Accounting Standards Developments
The Demand Side
•Competition for Capital Allocation decisions
•Competition in M&A Barriers to Entry, Price
•Competition in Product Markets Costs/Margins
•Performance Measurement Economic Focus
•Macro Data Global Fiscal Management
•Global Regulation Preventing Chaos
FEI: 19th Current Financial Reporting Issues Conference
MORGAN STANLEY DEAN WITTER Trevor Harris (212) 761-4713 [email protected] 5Please refer to important disclosures at the end of this report
The Global Economy & International Accounting Standards Developments
Competition for Capital
•How level is the playing field today?
– How Companies Actually Trade in U.S. Markets
– Which Companies Actually Trade in U.S. Markets?
– U.S. Investments in Non-U.S. Companies
•What do analysts and investors want?
FEI: 19th Current Financial Reporting Issues Conference
MORGAN STANLEY DEAN WITTER Trevor Harris (212) 761-4713 [email protected] 6Please refer to important disclosures at the end of this report
The Global Economy & International Accounting Standards Developments
Types of ADR’s
No SECNo SEC SEC RegistrationRegistration Registration
No Capital Level ILevel I Level 2Raising
Capital Rule 144ARule 144A Level 3Raising
ADR = American Depository Receipt
FEI: 19th Current Financial Reporting Issues Conference
MORGAN STANLEY DEAN WITTER Trevor Harris (212) 761-4713 [email protected] 7Please refer to important disclosures at the end of this report
The Global Economy & International Accounting Standards Developments
Does ADR Activity Mean U.S. GAAP?
“Level I Depository Receipts are traded in the U.S. over-the-counter (“OTC”) market….The company does not have to comply with U.S. GAAP or full SEC disclosure. A Sponsored Level-I Depository Receipt Program allows a company to create a program to facilitate investment without changing its current reporting process.
The Sponsored Level-I Depository Receipt market is the fastest growing segment of the Depository Receipt market. Of the more than 1,800 Depository Receipt programs currently trading, the vast majority of the sponsored programs are level-I facilities….it is not unusual for a company with a Level-I program to obtain 5 percent to 15 percent of its shareholder base in Depository Receipt form.”
Source: Bank of New York, Depository Receipt 2000 Half-Year Market Review
FEI: 19th Current Financial Reporting Issues Conference
MORGAN STANLEY DEAN WITTER Trevor Harris (212) 761-4713 [email protected] 8Please refer to important disclosures at the end of this report
The Global Economy & International Accounting Standards Developments
Holdings of ADRs: as at 6/00
JanusFidelityCapitalAlliance
Brandes
Total of Top 10Total
FirmValue of Holdings (bill)
Source: J.P. Morgan ADR Website
$28.922.714.413.1
12.0
131.8382.3
6/00$9.217.410.1
n/a
8.2
86.9280.0
6/99
FEI: 19th Current Financial Reporting Issues Conference
MORGAN STANLEY DEAN WITTER Trevor Harris (212) 761-4713 [email protected] 9Please refer to important disclosures at the end of this report
The Global Economy & International Accounting Standards Developments
Annual Dollar Volume of Listed DRs
$ bill
Source: Bank of New York, Depository Receipt 2000 Half-Year Market Review
0
200
400
600
800
1,000
1,200
1,400
1995 1996 1997 1998 1999 Jun-00
Year-End Projection
FEI: 19th Current Financial Reporting Issues Conference
MORGAN STANLEY DEAN WITTER Trevor Harris (212) 761-4713 [email protected] 10Please refer to important disclosures at the end of this report
The Global Economy & International Accounting Standards Developments
Total Capital Raised in Public DR Offerings
0
5,000
10,000
15,000
20,000
25,000
30,000
1995 1996 1997 1998 1999 Jun-00
$ mil
Source: Bank of New York, Depository Receipt 2000 Half-Year Market Review
Year-End Projection
FEI: 19th Current Financial Reporting Issues Conference
MORGAN STANLEY DEAN WITTER Trevor Harris (212) 761-4713 [email protected] 11Please refer to important disclosures at the end of this report
The Global Economy & International Accounting Standards Developments
Capital Raised in Public DR Offerings
Germany12.9%
Netherlands7.1%
Taiwan8.1%
Singapore5.1%
Other10.5%
Mexico17.0%
China16.1%
Korea2.8%
U.K.17.7%
India2.7%
% by Country
Source: Bank of New York, Depository Receipt 2000 Half-Year Market Review
FEI: 19th Current Financial Reporting Issues Conference
MORGAN STANLEY DEAN WITTER Trevor Harris (212) 761-4713 [email protected] 12Please refer to important disclosures at the end of this report
The Global Economy & International Accounting Standards Developments
Top 5 ADR’s by Volume
CompanyVolume
(YTD mil)Price10/10
Ericcson 4,119 15.37Nokia 2,663 37.68Vodaphone Airtouch Plc. 783 42.06
B.P. Amoco 678 53.06Telmex 550 50.68
Source: J.P. Morgan ADR Website
Source: J.P. Morgan ADR Website
FEI: 19th Current Financial Reporting Issues Conference
MORGAN STANLEY DEAN WITTER Trevor Harris (212) 761-4713 [email protected] 13Please refer to important disclosures at the end of this report
The Global Economy & International Accounting Standards Developments
Top 5 ADR: Winners and LosersTop 5 Gainers U.S.GAAP or
Company Exchange ReconciliationBiacore International AB OTC
ILOG S.A. OTCSanyo Electric Co. OTCElan Corp. NYSEProSieben Media AG 144A
Top 5 Losers U.S.GAAP or Company Exchange ReconciliationGold Fields of South Africa Ltd. OTCDanka BusinessSystems, Plc. OTCBaan Company OTCConsorcio G Groupo Dina, S.A. NYSEAsia Pulp & Paper NYSE
NONO
YESYESNO
NONONO
YESYES
Source: J.P. Morgan ADR Website
FEI: 19th Current Financial Reporting Issues Conference
MORGAN STANLEY DEAN WITTER Trevor Harris (212) 761-4713 [email protected] 14Please refer to important disclosures at the end of this report
The Global Economy & International Accounting Standards Developments
Other Examples of Unregistered ADR’s
•Nestle
•Bayer
•Roche
•Nissan
•Volkswagen
FEI: 19th Current Financial Reporting Issues Conference
MORGAN STANLEY DEAN WITTER Trevor Harris (212) 761-4713 [email protected] 15Please refer to important disclosures at the end of this report
The Global Economy & International Accounting Standards Developments
U.S. Investments in Non-U.S. Companies
–American Depository receipts [ADRs] or Direct Trading in the Local Markets?
“With the globalization of financial markets, most U.S. institutional investors are now finding it increasingly easy to operate directly in foreign markets….At the end of 1998 ADRs represented only 23% of the total US Iinvestment in European equities.”
Source: Euromoney, Oct 1999, pg. 80
FEI: 19th Current Financial Reporting Issues Conference
MORGAN STANLEY DEAN WITTER Trevor Harris (212) 761-4713 [email protected] 16Please refer to important disclosures at the end of this report
The Global Economy & International Accounting Standards Developments
Current Alternative Paths
Domestic GAAPDomestic GAAP
U.S. GAAPU.S. GAAPReconciliationReconciliation Full IASFull IAS
?
FEI: 19th Current Financial Reporting Issues Conference
MORGAN STANLEY DEAN WITTER Trevor Harris (212) 761-4713 [email protected] 17Please refer to important disclosures at the end of this report
The Global Economy & International Accounting Standards Developments
What Do Analysts and Investors Want?
•Financial Measures Economic Reality
•Measures which facilitate prediction and comparisons
•Enforcement by High-Quality Auditor and Regulator
FEI: 19th Current Financial Reporting Issues Conference
MORGAN STANLEY DEAN WITTER Trevor Harris (212) 761-4713 [email protected] 18Please refer to important disclosures at the end of this report
The Global Economy & International Accounting Standards Developments
Typical Measures in Use
•P/E - Price/earnings•P/E/EPS Growth [PEG] •P/CE - price to cash earnings•P/B - price to book•EV/EBITDA - enterprise (firm) value to EBITDA•ROE - return on equity•DDM - dividend discount model•DCF - discounted cash flow•Residual Income Approaches….EVA, CFROI...
FEI: 19th Current Financial Reporting Issues Conference
MORGAN STANLEY DEAN WITTER Trevor Harris (212) 761-4713 [email protected] 19Please refer to important disclosures at the end of this report
The Global Economy & International Accounting Standards Developments
Reconciliation of Income to U.S. GAAP
Nokia
FEI: 19th Current Financial Reporting Issues Conference
MORGAN STANLEY DEAN WITTER Trevor Harris (212) 761-4713 [email protected] 20Please refer to important disclosures at the end of this report
The Global Economy & International Accounting Standards Developments Reconciliation of Equity to U.S. GAAPNokia
FEI: 19th Current Financial Reporting Issues Conference
MORGAN STANLEY DEAN WITTER Trevor Harris (212) 761-4713 [email protected] 21Please refer to important disclosures at the end of this report
The Global Economy & International Accounting Standards Developments
Reconciliation of Income to U.S. GAAP
Telefonica S.A.
FEI: 19th Current Financial Reporting Issues Conference
MORGAN STANLEY DEAN WITTER Trevor Harris (212) 761-4713 [email protected] 22Please refer to important disclosures at the end of this report
The Global Economy & International Accounting Standards Developments Reconciliation of Equity to U.S. GAAPTelefonica S.A.
FEI: 19th Current Financial Reporting Issues Conference
MORGAN STANLEY DEAN WITTER Trevor Harris (212) 761-4713 [email protected] 23Please refer to important disclosures at the end of this report
The Global Economy & International Accounting Standards Developments
Local GAAP
Telefonica S.A.
FEI: 19th Current Financial Reporting Issues Conference
MORGAN STANLEY DEAN WITTER Trevor Harris (212) 761-4713 [email protected] 24Please refer to important disclosures at the end of this report
The Global Economy & International Accounting Standards Developments Local GAAP
Telefonica S.A.
FEI: 19th Current Financial Reporting Issues Conference
MORGAN STANLEY DEAN WITTER Trevor Harris (212) 761-4713 [email protected] 25Please refer to important disclosures at the end of this report
The Global Economy & International Accounting Standards Developments Local GAAP
Telefonica S.A.
FEI: 19th Current Financial Reporting Issues Conference
MORGAN STANLEY DEAN WITTER Trevor Harris (212) 761-4713 [email protected] 26Please refer to important disclosures at the end of this report
The Global Economy & International Accounting Standards Developments What are the Analysts Doing?
FEI: 19th Current Financial Reporting Issues Conference
MORGAN STANLEY DEAN WITTER Trevor Harris (212) 761-4713 [email protected] 27Please refer to important disclosures at the end of this report
The Global Economy & International Accounting Standards Developments What are the Analysts Doing?
FEI: 19th Current Financial Reporting Issues Conference
MORGAN STANLEY DEAN WITTER Trevor Harris (212) 761-4713 [email protected] 28Please refer to important disclosures at the end of this report
The Global Economy & International Accounting Standards Developments
What Does the SEC Want?
“International Standards….themselves must be high quality. By that I mean useful to investors in a way that provides transparency, consistency and comparability in the way companies report in a global capital market”
Source: Arthur Levitt, “Quality Information: The Lifeblood of Our Markets” October 18, 1999.
FEI: 19th Current Financial Reporting Issues Conference
MORGAN STANLEY DEAN WITTER Trevor Harris (212) 761-4713 [email protected] 29Please refer to important disclosures at the end of this report
The Global Economy & International Accounting Standards Developments
Why Not U.S GAAP for All?
•“No Taxation Without Representation”
•Prescription vs. Relevance
•Where is U.S. GAAP Heading?–Speed Versus Due Process–Who Actually Sets GAAP?
•Can Supply Keep Up with Demand?
FEI: 19th Current Financial Reporting Issues Conference
MORGAN STANLEY DEAN WITTER Trevor Harris (212) 761-4713 [email protected] 30Please refer to important disclosures at the end of this report
The Global Economy & International Accounting Standards Developments
The Phantom Fleets:Number of Aircraft and Percent Carried Off the Balance Sheet, 1997.
British Airways
KLM Royal Dutch
0 100 200 300 400 500 600
Cathay
China Eastern
Japan Airlines
Singapore Airlines
30%
22%
41%
42%
Delta
NorthWest
SouthWest
UAL
27%American
29%
22%
20%
0%
Lufthansa
Ryanair
3%
15%
51%
5%
21%
Pacific
Qantas
Fleet Owned
Fleet Under Operating Leases
Source: Morgan Stanley Dean Witter Research
FEI: 19th Current Financial Reporting Issues Conference
MORGAN STANLEY DEAN WITTER Trevor Harris (212) 761-4713 [email protected] 31Please refer to important disclosures at the end of this report
The Global Economy & International Accounting Standards Developments
Future Directions
•Final Decision of SEC Acceptance is a Political One
•What Will U.S. Companies Do?
•What Will Happen to National Regulators?
•Will Changing Demand Force A New System?