2.6 Companies in Domestic and Global Markets

Companies come in various forms, from domestic to global, each with unique operational scopes and challenges. Understanding these differences is crucial for grasping how businesses function in today's interconnected world and how they report their financial information.

Financial reporting standards vary globally, with GAAP used in the US and IFRS adopted internationally. These differences impact how companies present their financial data, affecting everything from revenue recognition to inventory valuation. The SEC's EDGAR system provides transparent access to this crucial financial information.

Types of Companies and Financial Reporting

Domestic vs international vs global companies

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• Domestic companies operate solely within their home country (United States) and are subject to the laws, regulations, and economic conditions of that single market
• International companies maintain operations in multiple countries (Canada, Mexico) while still having a significant presence in their home country, adapting to the various legal and regulatory environments and being exposed to the economic conditions of these different markets
• Global companies have operations spanning numerous countries worldwide (Coca-Cola, Apple) with no strong ties to a single home country, must comply with a wide range of laws and regulations across many jurisdictions, and are impacted by global economic conditions and international trade dynamics
  • These companies often engage in foreign direct investment to establish or expand their presence in foreign markets

GAAP vs IFRS reporting standards

• Generally Accepted Accounting Principles (GAAP) are used primarily in the United States, follow a rule-based approach with specific guidelines for accounting treatments, emphasize historical cost accounting, and allow for LIFO (last-in, first-out) inventory valuation
• International Financial Reporting Standards (IFRS) are used in many countries worldwide (European Union, Australia), take a principle-based approach offering more flexibility in applying accounting treatments, emphasize fair value accounting, and prohibit the use of LIFO inventory valuation
• The differences between GAAP and IFRS can lead to variations in revenue recognition timing, asset and liability valuation, financial statement presentation, and potentially significant disparities in reported earnings and financial ratios

SEC's EDGAR system for financial disclosure

• The Electronic Data Gathering, Analysis, and Retrieval (EDGAR) system is maintained by the U.S. Securities and Exchange Commission (SEC) and serves as a central repository for financial reports and other disclosures filed by publicly traded companies
• EDGAR ensures transparency and equal access to information for all investors, allowing them to access and analyze financial data to make informed decisions
• Types of filings available on EDGAR include:
  1. Annual reports (Form 10-K)
  2. Quarterly reports (Form 10-Q)
  3. Current reports (Form 8-K) for significant events
  4. Proxy statements (DEF 14A) for shareholder meetings and voting
  5. Registration statements for new securities offerings
• The EDGAR system facilitates efficient dissemination of financial information, promotes market efficiency, and reduces information asymmetry between companies and investors

Global Business Environment

• Globalization has led to increased interconnectedness of markets and economies worldwide
• Multinational corporations operate across multiple countries, taking advantage of diverse markets and resources
• Exchange rates play a crucial role in international business, affecting the value of transactions and investments across borders
• Trade agreements between countries can reduce barriers to international commerce, such as tariffs
• Companies may engage in outsourcing to leverage cost advantages in different regions