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Financial Statements of Foreign Companies for Investors: Features and the Importance of Reporting
Publication date/update: 04.06.2023
The financial statement is one of the most critical documents for any company, allowing investors and counterparties to examine the key performance indicators of the firm over a specific period of time.
The financial statement enables the identification of fundamental characteristics of the company, its current financial position, and provides insights into the business prospects in the near future. Such reporting reflects all results, regardless of how detrimental they may be to market quotations. Whether a company's quarterly profit turns into a loss, debts increase, or operational activities do not yield income, all of these aspects will be included in the report.
Every public company has a dedicated section on its website for investors, where it regularly publishes data with financial indicators. Besides the company's own websites, there are other resources that compile corporate statements. One such resource is the Center for Corporate Information Disclosure, where reports can be downloaded by anyone interested.
In this article, we will discuss the value of financial statements in the operations of foreign companies.
The financial statement enables the identification of fundamental characteristics of the company, its current financial position, and provides insights into the business prospects in the near future. Such reporting reflects all results, regardless of how detrimental they may be to market quotations. Whether a company's quarterly profit turns into a loss, debts increase, or operational activities do not yield income, all of these aspects will be included in the report.
Every public company has a dedicated section on its website for investors, where it regularly publishes data with financial indicators. Besides the company's own websites, there are other resources that compile corporate statements. One such resource is the Center for Corporate Information Disclosure, where reports can be downloaded by anyone interested.
In this article, we will discuss the value of financial statements in the operations of foreign companies.
Relevance of Financial Reporting for Companies
In essence, all companies, including foreign ones and their branches in Russia, are required to submit financial statements. Changes in legislation in certain countries in Asia, Eastern Europe, and the EU mandate the submission of financial statements to banks, tax authorities, and other financial institutions. This rule also applies to firms registered in offshore zones, such as Belize, Seychelles, and Cyprus, where the submission of financial statements is not required in accordance with their legislation's requirements.
Financial Reporting Standards
Russian investors primarily work with three financial reporting standards:
- 1IFRS - International Financial Reporting Standards.
- 2RAS - Russian Accounting Standards.
- 3US GAAP - Generally Accepted Accounting Principles used by firms whose stocks are traded on the American stock market.
The most relevant standards are IFRS and RAS. Large companies may publish both versions of their financial statements, but more often, firms operate specifically with IFRS.
Characteristics of Financial Reporting
It is essential to note that every company is obligated to publish financial reports quarterly. This document is made public for investors, banks, and counterparts to review. For companies whose stocks are listed on the stock exchange, it is mandatory to prepare financial statements in accordance with IFRS requirements, which facilitate a more precise comparison of two companies' results.
Financial reporting is conditionally divided into quarterly, semi-annual, 9-month, and annual reports. Among all, the most significant is the annual report, which presents the results for the entire year. It serves various purposes, such as:
Financial reporting is conditionally divided into quarterly, semi-annual, 9-month, and annual reports. Among all, the most significant is the annual report, which presents the results for the entire year. It serves various purposes, such as:
- 1Providing a comprehensive assessment of the company's performance over the year.
- 2Understanding its success and financial standing.
- 3Assisting banks in approving or disapproving loans secured by assets.
- 4Informing investors.
- 5Evaluating competitors.
- 6Aiding partners and counterparts in making collaboration decisions.
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The overall volume of any financial report is approximately 90 pages. However, the core information is usually condensed within 5-6 pages, where the following components are presented:
The overall volume of any financial report is approximately 90 pages. However, the core information is usually condensed within 5-6 pages, where the following components are presented:
- 1Balance sheet (financial statement).
- 2Profit and loss statement.
- 3Cash flow statement.
IFRS norms also allow for a statement of changes in equity, if such changes occur. Nevertheless, as share redistribution is a rare occurrence, this type of reporting is not published frequently. Some companies prepare it in a separate form with specific details.
In general terms, the balance sheet indicates the company's assets and liabilities, along with the resources used for their acquisition. The profit and loss statement provides insights into the company's earnings, while the cash flow statement reveals the allocation of funds within the company. It is vital to compare each of these reports with the previous period to understand the development dynamics or identify reasons for stagnation.
In the following sections, we will explore each of these reports in detail.
In general terms, the balance sheet indicates the company's assets and liabilities, along with the resources used for their acquisition. The profit and loss statement provides insights into the company's earnings, while the cash flow statement reveals the allocation of funds within the company. It is vital to compare each of these reports with the previous period to understand the development dynamics or identify reasons for stagnation.
In the following sections, we will explore each of these reports in detail.
Submission of the Balance Sheet
The primary objective of any balance sheet is to comprehend the company's assets and how they have been formed. It answers the question of what the company possesses and the resources behind the formation of these assets. The structure of the document entails two sections – assets and liabilities. Assets represent the company's ownership, while liabilities signify the resources used for their formation. It is crucial to understand that the value of assets is equated to liabilities. This fundamental rule must be strictly adhered to.
Company assets are classified into current and non-current assets. Non-current assets refer to assets with a useful life exceeding one calendar year. Non-current assets can be:
Company assets are classified into current and non-current assets. Non-current assets refer to assets with a useful life exceeding one calendar year. Non-current assets can be:
- 1Intangible assets, including research and development outcomes, patents, licenses, etc.
- 2Tangible assets, representing the company's fixed assets.
On the other hand, current assets have a useful life of less than 12 months. They are the most liquid assets that can be sold or transferred relatively quickly. Examples include cash deposits, inventory, accounts receivable, and others.
The "Liabilities" section comprises two main categories: "Capital and Reserves" and "Liabilities." The "Capital and Reserves" category consists of two main items: "Authorized Capital," which represents the funds with which the company was formed, and "Retained Earnings" (the profit earned by the company during its operation that remains within the company).
The "Liabilities" section is further divided into "Long-term Liabilities" and "Short-term Liabilities." Long-term liabilities refer to obligations that need to be repaid after the next 12 months, while short-term liabilities are obligations that must be settled within the next 12 months.
The "Liabilities" section comprises two main categories: "Capital and Reserves" and "Liabilities." The "Capital and Reserves" category consists of two main items: "Authorized Capital," which represents the funds with which the company was formed, and "Retained Earnings" (the profit earned by the company during its operation that remains within the company).
The "Liabilities" section is further divided into "Long-term Liabilities" and "Short-term Liabilities." Long-term liabilities refer to obligations that need to be repaid after the next 12 months, while short-term liabilities are obligations that must be settled within the next 12 months.
Filing the Income Statement
This document reflects the amount of funds the company has earned during a specific period. When a company sells goods or services, it generates revenue, which often serves as the first item in this statement. Additionally, the document includes:
- 1Cost of goods sold (COGS).
- 2Gross profit - the difference between revenue and the cost of goods sold.
- 3Net profit - the company's income after deducting all expenses.
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It is important to note that gross profit, after deducting commercial and managerial expenses, represents profit from sales. Apart from this, the company may earn income from its participation in other organizations, financial investments, and other sources. It is crucial to understand that cost items can impact these sections. The result of subtracting pre-tax profit from taxes paid reveals the net profit - the most significant indicator in the company's financial report.
Generally, investors and counterparts are mainly interested in two indicators - revenue and net profit. Revenue reflects the company's competitiveness level in the market, while profit represents the primary economic outcome.
Generally, investors and counterparts are mainly interested in two indicators - revenue and net profit. Revenue reflects the company's competitiveness level in the market, while profit represents the primary economic outcome.
The submission of the cash flow statement
The cash flow statement illustrates how the profits generated by the company were distributed. The document consists of three main sections: cash flow from operating activities, investing activities, and financing activities of the organization. The cash flow from operating activities portrays the dynamics of funds from the company's core operations.
For an investor, it is crucial to comprehend whether the core activities generated profits or not. This will help in assessing the need for capital investments, as investing activities often represent a significant portion of the company's expenses. It is in this section that the company's investment program is frequently specified. As for financing activities, it is within this section that the dividends paid to shareholders are recorded— the total amount the company has disbursed to its shareholders.
For an investor, it is crucial to comprehend whether the core activities generated profits or not. This will help in assessing the need for capital investments, as investing activities often represent a significant portion of the company's expenses. It is in this section that the company's investment program is frequently specified. As for financing activities, it is within this section that the dividends paid to shareholders are recorded— the total amount the company has disbursed to its shareholders.
The importance of financial reporting
Any financial statement allows you to:
- 1Identify company weaknesses: If problems affecting your company are detected at an early stage, managers can adjust strategies to improve business efficiency. Some issues are challenging to identify. A company that seems to be making profits but constantly faces a shortage of funds may turn to financial analysis to determine the root cause of the problem. Investors are also interested in identifying problematic companies as early as possible. Nobody wants to remain on a sinking ship longer than necessary. Creditors, on the other hand, evaluate risks and the feasibility of issuing loans based on the information they receive.
- 2Identify company strengths: This allows these strengths to be reinforced and utilized to their fullest potential. Of course, these are not all the outcomes that can be obtained from the analysis, but they represent the main directions of the results.
In case of any difficulties with preparing and submitting financial statements, it is essential to seek assistance from professionals. Experienced auditors from DVP Audit can handle all questions related to document preparation.
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