What is ADR in accounting?

ADR means American Depository Receipt. ADR is a certificate issued by an American Bank which states that number of shares of another country firm can be traded in U.S. markets. JPMorgan a British departmental store created first ADR in 1927. According to Securities and Exchange Commission (SEC), instead of foreign stock, ADR is more convenient because they have more protection and transparency.

ADR Process includes −

  • Domestic company already in local stock exchange sell the shares in bulk to U.S. bank and listed on U.S. exchange.

  • After bank accepts the shares it will issue ADR to interested investor.

  • Selling of ADR shares will be possible after major U.S. stock exchange list bank certificate for trading.

  • U.S. stock exchange regulated by SEC, check on necessary compliances that needs to be complied by the domestic company.

Type of ADRs includes −

  • Sponsored ADR − There will be a legal arrangement between bank and foreign company. In this, bank will handle investors and control of ADR and its cost by foreign company.

  • Unsponsored ADR − Bank will issue these ADRs according to market demand. In these, there will be no legal agreement with the depository bank, share will be traded based on over the counter market.

ADRs are also classifieds as −

  • Level I − Used for only trading purpose.
  • Level II − Higher visibility and trading volume.
  • Level III − They can trade as well as raise capital.

Advantages of ADRs are −

  • Ease of use.
  • Portfolio diversification.
  • Standard market hours.
  • Currency fluctuation.

Disadvantages of ADRs are −

  • Limited selections.
  • Liquidity.
  • Currency conversion fees.
  • Double taxation.
  • Risk in exchange rate.