In different countries, varying accounting standards have been adopted. In the United States, the Generally Accepted Accounting Principles (GAAP) is the most commonly used. Among other things, the GAAP outlines the procedures that firms should use when recording financial transactions. The principles also spell out the rules that should be adhered to during financial reporting. In such other countries as Denmark, different accounting standards have been adopted. For example, the country permits domestic and multinational companies with bases there to use the IFRS standard. That different countries have adopted different accounting principles present a challenge for firms with operations in multiple markets. Novo Nordisk is among these companies.
Examining foreign financial statements
It has been pointed out in the introduction above that the different accounting standards that different companies use present a problem. An individual examining the financial statements of a foreign company needs to develop a strategy. Reconciling these statements with such standards as the US GAAP is perhaps the most effective strategy. As they prepare their financial statements, foreign companies often use foreign language, currency and conventions (Sorensen & Kyle, 2007). This means that it is difficult to obtain any insight from the statements. The first step should involve translating the statements into such languages as English. The individual examining the statement then needs to standardize the currency used (Sorensen & Kyle, 2007). For example, for such Danish firms as Novo Nordisk, the currency of choice is the Krone. As part of the process of examining this company’s statements, one needs to convert the currency into the US Dollar or any other standard currency as appropriate. One should also make consideration for such factors as culture and the unique features of the market in which the foreign companies operate (Sorensen & Kyle, 2007). These features tend to define the accounting practices of the companies. One also needs to align the financial statements to the US GAAP. Another key element of the strategy for examining foreign financial statements is paying attention to the method of presentation (Sorensen & Kyle, 2007). One should particularly examine the terminologies used in the statements since they may be carry different meanings.
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As one examines the foreign financial statements, they will need to rely on some additional information and sources. This information includes the country in which the foreign company is based and the company’s internal accounting policies. With this information, one is able to accurately and properly examine the statements. It is also important to understand that there are a number of pitfalls that are usually encountered when examining foreign statements. Inaccuracies in the data that companies report are among these pitfalls. Companies usually commit errors when reporting on financial issues (Jesswein, 2010). To overcome this pitfall, one needs to carefully scrutinize the data. Another pitfall is the expectation that the foreign company uses a familiar accounting standard. One can overcome this pitfall when they adjust their expectations and understand that different markets use different standards (Sorensen & Kyle, 2007). Accepting audited accounts as accurate is another possible pitfall. One needs to recognize that even audited accounts may contain errors. Careful and thorough scrutiny of the statements should be conducted.
Company profile
Novo Nordisk is one of the largest pharmaceutical companies in the world. The firm has operations in a number of countries. The United States is one of the company’s major markets. In its 2016 annual report, the company shared that the US market accounts for nearly half of the firm’s sales. This is clear indication that the US is an important market for the company. Novo Nordisk’s main base is in Denmark. The company trades its shares in a number of stock markets. In Denmark, the company’s stock is listed on the Nasdaq Copenhagen. As already noted, the US is a key market for the company. As expected, the firm’s stock trades on American exchanges. The New York Stock Exchange (NYSE) hosts the firm’s stock trading (“Form 20-F”, 2016).
In an earlier discussion, it was noted that foreign companies often use different languages and currencies when preparing their financial reports. This is true for the report that Novo Nordisk shared with its stakeholders and the wider public. The figures in the report are in Danish Kroner (DKK). In the report for the 2016 financial year, Novo Nordisk clarifies that currencies were measured based on the environment in which its entities operate. This means that for its Danish operations, the Kroner was used. On the other hand, the Dollar was used to measure activities in the US market. The company adopted the International Financial Reporting Standards (IFRS) in the preparation of the report. It joins other firms in the EU which also use this standard. The report was prepared in English. Novo Nordisk did not apply the GAAP standards in any part of the financial statements. It relied entirely on the IFRS.
Compliance with international standards
In an effort to streamline the preparation of financial statements, accounting bodies have developed accounting principles. The fact that it has operations in numerous countries has compelled Novo Nordisk to adopt international accounting standards. As already mentioned, this company uses the International Financial Reporting Standards. In its 2016 annual report, the company describes the IFRS as having received the endorsement of the European Union. This is clear indication that the IFRS is widely employed in the various markets in the European Union. While the company relies mostly on the IFRS, its internal policies also define its accounting principles. It notes that “where necessary, adjustments are made to the financial statements of subsidiaries to bring their accounting principles in line with the Novo Nordisk Group policies” (“Novo Nordisk Annual”, 2016).
Choice of GAAP
It has already been stated that Novo Nordisk has adopted the IFRS instead of the US GAAP. It is important to examine why the company opted for the IFRS. It can be argued that the fact that the IFRS is an international standard that many companies in different markets have adopted is among these reasons. Another reason that may have inspired Novo Nordisk to embrace the IFRS is that this standard has received the endorsement of the European Union. This endorsement is essentially a vote of confidence. The IFRS standard that Novo Nordisk has adopted differs significantly from the US GAAP with respect to presentation and terminology. One of these differences regards the number of accounting periods for which financial statements are presented. The US GAAP requires companies to provide statements for the most recent three years (“US GAAP vs IFRS”, 2013). On the other hand, the IFRS only requires that companies should provide comparative statements for the past year. Novo Nordisk has complied with this requirement. Most of the statements focus on the 2015 and 2016 years while some provide details for the 2014 financial year. Another difference can be seen in how expenses are presented. While the US GAAP does not ask companies to identify the function for which an expense was occurred, the IFRS requires firms to associate expenses with particular functions (“US GAAP vs IFRS”, 2013). Novo Nordisk has done this in its financial statements. For example, in the statement of cash flows, the firm identifies “purchase of treasury shares” and “dividends” as some of the functions for which it incurred expenses.
The differences between the US GAAP and the IFRS extend beyond the presentation. There are also some differences in terminology. The terms that the two standards have adopted for describing contingencies are among the areas where differences exist. In the US GAAP, two categories have been developed for contingencies: contingent losses and contingent gains (“Contingencies: Key Differences”, n.d). On the other hand, the categories of contingencies under IFRS are contingent liabilities, contingent assets and provisions. In its report, Novo Nordisk provides details for contingent liabilities and provisions.
Appealing to the US reader
Given that the US is an important market, it is vital for Novo Nordisk to appeal to the American reader. An examination of the report for the 2016 financial year reveals that the company took steps to appeal to the US reader. Preparing the report in the English language is among these steps. Millions of Americans speak English. Providing details about its operations in the American market is another step. For example, the company identifies some of the products that it markets in the US. These products include Levemir and Tresiba, among others (“Novo Nordisk Annual”, 2016). The American reader is likely to relate to these products and the company at large. Another way that Novo Nordisk tries to appeal to the US reader is through an exploration of health issues that are at the heart of Americans. For example, the firm’s report discusses Diabetes and the efforts to deliver treatment (“Novo Nordisk Annual”, 2016). Diabetes is one of the greatest health challenges in the US as millions are ailing from this condition (CDC, 2017).
Issues disclosed
In the 2016 annual report, Novo Nordisk discloses a number of issues. The report includes letters that some of the company’s leaders have written. The Chairman, the former CEO and the serving CEO have their letters included in the report (“Novo Nordisk Annual”, 2016). Financial statements have also been included in the report. These statements are the balance sheet, the income statement, statement of cash flows and statement of changes in equity. The 2016 annual report also contains a report on the company’s employees. Here, the company details the programs it has undertaken to enhance employee welfare (“Novo Nordisk Annual”, 2016). The company also provides a statement of its social performance. The statement sheds light on the initiatives that the firm has launched in an effort to serve the interests of its employees and patients.
Availability and usefulness of disclosures
The 2016 annual report is comprehensive as it highlights a wide range of issues. Consolidation, intangibles, geographic segments and line of business are some of the major issues that the report sheds light on. On consolidation, the report details how the company merged the operations of its various divisions (“Novo Nordisk Annual”, 2016). The disclosure on consolidation allows readers to understand the impact that the parent company and the various entities had on the operations of Novo Nordisk. In the financial statements, Novo Nordisk discloses the value of intangible assets. This is useful as it enables readers to determine the composition of the company’s asset base. The disclosure on geographic segments and the lines of business are also important as they allow for the contributions that different markets and products make to the company’s operations and performance.
In addition to the issues already discussed, the company also disclosed information on foreign currency translation, inflation, reserves, business risk, foreign currency transactions and social impact/employee report. Regarding foreign currencies, Novo Nordisk states that adjustments were made to account for differences in currencies (“Novo Nordisk Annual”, 2016). The company also highlights the impacts that inflationary pressures had on its operations in such markets as Argentina and Venezuela. The report also details the equity reserves that the company has. A discussion of the business risk that Novo Nordisk faces is also included in the report. Liquidity, credit, foreign exchange and interest risks are some of the hazards that threaten the firm’s performance (“Novo Nordisk Annual”, 2016). All these risks are disclosed in the report. The disclosures are useful as they offer an in-depth view of the Novo Nordisk’s operations. They allow readers to gain deeper insights into the environments in which Novo Nordisk operates.
The disclosures in the Novo Nordisk report allow for the company’s operations to be better understood. The disclosures also offer some insight into the culture in the Danish market where the company is based. That Novo Nordisk is transparent and accountable is one of the issues that one gathers from the disclosures in the report. The company shares information on a wide range of issues with some of this information being unflattering. For example, in the letter contained in the report, the Chairman admits that 2016 was not a good year for the company. The honesty and transparency that the company exhibits can be taken as indication that Danish people are religious. Over 70% of the country’s population is Evangelical Christian (CIA, n.d). The disclosures also shed light on the legislative environment in Denmark. It can be argued that the country requires companies to comply strictly with regulations and guidelines that govern reporting.
Evaluation of investment prospects
Potential investors are among the parties that would benefit from Novo Nordisk’s financial report. In the report, the company details its financial performance and offers an analysis of the operating environment. Based on the financial ratios, trends and the letter from the company’s Chairman, it can be argued that investing in Novo Nordisk would be unwise. In the fourth quarter of 2015, the gross margin stood at 84.0% (“Novo Nordisk Annual”, 2016). This reduced to 83.4% in 2016. The operating margin also reduced from 38.5% to 37.9%. Novo Nordisk also witnessed a decline in equity ratio. It fell from 51.2% to 46.4%. The earnings per share increased from 3.25 to 3.46 (“Novo Nordisk Annual”, 2016). In his letter, the Chairman observes that the company’s performance for 2016 was disappointing. The chairman also admits that the company anticipates further challenges. This should worry investors and convince those considering investing in the company to take their money elsewhere. Novo Nordisk is on a downward trend and its leadership lacks confidence in the ability of the company to stabilize.
While the financial ratios offer insights on the health and performance of a company, they possess some limitations especially when used in an international context. The fact that different terms are used to describe the same ratio in different markets is one of these limitations (Daniel, 2015). This limitation creates confusion and makes comparisons difficult. Another limitation of financial ratios is that they do not provide insights that are necessarily accurate (Hughes, Simpson & Padmore, 2015). It would be unwise to make conclusions on the performance of a company on the basis of some financial ratio alone.
In conclusion, Novo Nordisk remains a key player in the pharmaceutical industry. This firm operates out of Denmark and has set up bases in a number of markets across the globe. Since it is a multinational firm, Novo Nordisk allows for an examination of foreign financial statements to be carried out. As one examines the company’s statements, they are able to recognize the confusion that results from the use of different accounting standards. The confusion underscores the importance of merging different standards and developing a unified set of principles and rules that all companies should use.
References
Centers for Disease Control and Prevention (CDC). (2017). National Diabetes Statistics Report, 2017. Retrieved 17 th October 2017 from
https://www.cdc.gov/diabetes/pdfs/data/statistics/national-diabetes-statistics-report.pdf
Central Intelligence Agency (CIA). (n.d). Denmark. Retrieved 17 th October 2017 from https://www.cia.gov/library/publications/the-world-factbook/geos/da.html
Contingencies: Key Differences between U.S. GAAP and IFRS. (n.d). Retrieved 17 th October 2017 from https://www.iasplus.com/en-us/standards/ifrs-usgaap/contingencies
Daniel, G. A. (2015). A Consensus on Commonly Used Financial Ratios . Retrieved 17 th October 2017 from https://kgk.uni-obuda.hu/sites/default/files/Gencia.pdf
Form 20-F. (2016). Retrieved 17 th October 2017 from http://secfilings.nasdaq.com/edgar_conv_html%2f2017%2f02%2f09%2f0001171843-17-000780.html#FIS_COMPANY_INFORMATION
Hughes, F. J., Simpson, M. & Padmore, J. (2015). Inherent Limitations in Using Financial Ratios to Assess Small and Medium Sized Company Performance. Retrieved 17 th October 2017 from https://www.researchgate.net/publication/228484206_Inherent_limitations_in_using_financial_ratio_analysis_to_assess_small_and_medium_sized_company_performance
Jesswein, K. (2010). Analyzing Financial Statements with Potentially Misreported Cost of Goods Sold Figures. Retrieved 17 th October 2017 from http://www.aabri.com/OC2010Manuscripts/OC10034.pdf
Novo Nordisk Annual Report 2016 (2016). Retrieved 17 th October 2017 from http://www.novonordisk.be/content/dam/Denmark/HQ/AnnualReport/2016/PDF/Novo-Nordisk-Annual-Report-2016.pdf
Sorensen, S. M. & Kyle, D. Y. (2007). Found in Translation. Journal of Accountancy. Retrieved 17 th October 2017 from https://www.journalofaccountancy.com/issues/2007/feb/foundintranslation.html
US GAAP vs IFRS. The Basics. (2013). Retrieved 17 th October 2017 from http://www.ey.com/Publication/vwLUAssets/EY-US-GAAP-vs-IFRS-the-basics-2013/$FILE/EY-US-GAAP-vs-IFRS-the-basics-2013.pdf
