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Femsa M.A.J.

This document contains an analysis of financial ratios for FEMSA for 2007 using financial statements prepared under Mexican FRS (Financial Reporting Standards) expressed in pesos and US dollars, as well as US GAAP (Generally Accepted Accounting Principles). The ratios show some differences between the Mexican FRS and US GAAP calculations. The biggest difference is in the profit margin ratio, while the book value per share ratio shows the smallest difference. These differences are due to the use of different accounting standards between Mexico and the US. Analyst reports on FEMSA are typically prepared using Mexican GAAP and pesos, but using US dollars may be preferable for analysis within the US market.

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Leonardo Camero Pedroza
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179 views

Femsa M.A.J.

This document contains an analysis of financial ratios for FEMSA for 2007 using financial statements prepared under Mexican FRS (Financial Reporting Standards) expressed in pesos and US dollars, as well as US GAAP (Generally Accepted Accounting Principles). The ratios show some differences between the Mexican FRS and US GAAP calculations. The biggest difference is in the profit margin ratio, while the book value per share ratio shows the smallest difference. These differences are due to the use of different accounting standards between Mexico and the US. Analyst reports on FEMSA are typically prepared using Mexican GAAP and pesos, but using US dollars may be preferable for analysis within the US market.

Uploaded by

Leonardo Camero Pedroza
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOC, PDF, TXT or read online on Scribd
You are on page 1/ 9

BARRY

BARRY UNIVERSITY ANDREAS SCHOOL OF BUSINESS

Case 3 FEMSA 2007

Dr. Kevin Kemerer, Ph.D.


Contemporary Accounting Theory & Research MSA 660 Fall 2010

Mutasem JamalAlhariry

Requirements 1. Compute the following ratios for 2007 using the financial statements prepared using Mexican FRS and expressed in pesos. (Assume the weighted average number of shares outstanding is 17,891,000) i) Current Ratio
Current Curre assets nt = Current Ratio liabilities 33,485 33,404

= 1.00

ii) Inventory Turnover


Cost of Goods Invento Sold ry = Turnov Average er Inventory * o r Sales Inventori es 147,06 9 10,037 14.6 5

iii) Profit Margin on Sales


Profit Margi n on Sales

Net Income Net Sales

11,936 147,06 = 0.08 9

iv) Debt to Assets Ratio


Debt to Asse ts Rati o Total Liabilities Total Assets

76,142 45.9 = 3 165,79 5

v) Book Value per Share


Boo k = Common 89,653,0 = 5011.

Stockholder's Equity Outstanding Shares Valu e per

00 17,891

07

2. Compute the same ratios listed in 1 using the amounts expressed in US$ i. Current Ratio
Current Curre assets nt = Current Ratio liabilities 3,067 3,060 = 1.00

Cost of Goods Invento Sold ry = Turnov Average er Inventory

ii. Inventory Turnover

* o r Sales Inventori es 13,472 919 = 14.6 6

iii. Profit Margin on Sales


Profit Margi n on Sales = Net Income Net Sales 1,093 = 0.08 13,472

Debt to Asse ts Rati o

iv. Debt to Assets Ratio


Total = Liabilities Total Assets 6,975 = 45.9 3 15,187

v. Book Value per Share


Boo k Valu e per Shar e Common = Stockholder's Equity Outstanding Shares 8,212,00 0 = 459.0 0 17,891

What are the implications for international financial statement analysis? Ratios are measurement to show the relationship between variable. So the implication for international financial statement analysis is that there are almost no differences except for book value per share, that has to be basically with exchange rate.

3. Compute the same ratios listed in 1 using the financial statements prepared using US GAAP. i. Current Ratio
Current Curre assets nt = Current Ratio liabilities 17,007 18,579 = 0.92

Cost of Goods Invento Sold ry = Turnov Average er Inventory

ii. Inventory Turnover

* o r Sales Inventori es 82,887 6,465 = 12.8 2

iii. Profit Margin on Sales


Profit Margi n on Sales = Net Income Net Sales 10,206 = 0.12 82,887

iv. Debt to Assets Ratio


Debt to Asse ts Rati o Total Liabilities Total Assets 41,471 33.2 = 4 124,77 5

v. Book Value per Share


Boo k Valu e per Shar e Common = Stockholder's Equity Outstanding Shares 83,304,0 00 = 4656. 20 17,891

Compare these results to those obtained in 1.


Difference between the results of Mexican FRS in Pesos and US GAAP -0.09 -> -0.09%

Mexic an FRS Pesos Current assets Current = Current Ratio liabilities

US GAAP

1.00

0.92

Cost of Goods Invento Sold ry = Turnov Average er Inventory Profit Margin on Sales Debt to Assets Ratio Book Value per Share

* o r Sales Inventori es 14.65 12.82 -1.83 -> -0.13%

Net Income Net Sales

0.08

0.12

0.04 -> 0.52%

Total Liabilities Total Assets

45.93

33.24

-12.69 -> -0.28%

Common Stockholder's = Equity Outstanding Shares

5011. 07

4656. 20

-354.87 -> -0.07%

What causes these differences? The reason for the differences in is the use of different standards.

4. Determine the percentage difference between the results of your computation in requirements #1 and #3 by using #1 as the base [(#3-#1)/#1]. Which ratio has the biggest difference? Smallest difference? What difference in US and Mexican GAAP do you suspect had the biggest impact on financial statement differences? What are the implications of differences between US GAAP and foreign GAAP for international financial statement analysis? Do you thing the cause of the biggest difference here is unique to FEMSA? As we can see in prior computations on a percentage basis, profit margin on sale has the biggest difference; on the other hand, book value per shear has the smallest difference. The reconciliation of the financial statements under U.S. GAAP does not include the reversal of the restatement of the financial statements as required Mexican FRS, "Recognition of the effects of inflation in the financial information". The differences between Mexican FRS and U.S. GAAP are: The consolidation of Coca-Cola FEMSA:

o Under Mexican FRS, the company consolidates Coca-Cola FEMSA, since it owns a majority of the outstanding voting capital stock and exercises control over the operations. For U.S. GAAP purposes, the Coca-Cola Company qualifies as substantive participating rights and do not allow FEMSA to consolidate CocaCola FEMSA in its financial statements. Therefore, FEMSA's investment in Coca-Cola FEMSA is recorded by applying the equity method in FEMSA's consolidated financial statements.

Restatement of prior year financial statements: o For Mexican FRS, the financial statements for Mexican subsidiaries for prior years were restated using the inflation rate of the country in which the foreign subsidiary or affiliated company is located. Under U.S. GAAP, the company applies the regulations of SEC, which require that prior year financial statements be restated in constant units of the reporting currency which is Mexican Peso.

Classification differences: o Under Mexican FRS, advances to suppliers are recorded as inventories, but under U.S. GAAP, are classified as prepaid expenses. o Impairment of goodwill and other long-lived assets, the gains or losses on the . o Disposition of fixed assets, all severance indemnity charges and employee profit sharing are included in operating expenses. o Under Mexican FRS, deferred taxes are classified as non-current, but under U.S. GAAP they are based on the classification of the related asset of liability.

Deferred promotional expenses: o Under Mexican FRS, the promotional costs related to launching of new products or presentations are recorded as prepaid expenses, but for U.S. GAAP purposes, such promotional costs are expensed as incurred.

Start up expenses: o Under Mexican FRS, start up expenses are capitalized and amortized. In U.S. GAAP these expenses must be recorded in the income statement as incurred.

Intangible assets. Restatement of imported equipment: o Under Mexican FRS, imported machinery and equipment have been restated by applying the inflation rate of the country of origin and translated into Mexican pesos using the year end rate. On the other hand, U.S. GAAP requires that all machinery and equipment, both domestic and imported, be restated using Mexican inflation rate.

Labor liabilities. Statement of cash flows: o Under Mexican FRS, statement of changes in financial position applied by the differences between beginning and ending financial statement balances. Also foreign exchange gains and losses are treated as cash items for the determination of resources generated by operations. Under U.S. GAAP, statement of cash flows is presented in historical Mexican pesos, without the effects of inflation.

5. Obtain through your library, internet, sources or others resources some analyst reports on FEMSA. Determine how their reports are prepared: based upon Mexican GAAP or US GAAP. If they report using Mexican GAAP do they report using the Mexican Pesos or translated US$? Which form of analysis would you prefer to have? From Internet sources, the report that I found were prepared based on Mexican GAAP and it used the Mexican pesos, not the translated US dollar. The form of analysis to be used depend on report's users, if the users need to analyze the information among other data within the United States then the translated US$ information would be more reliable.

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