Investments, tenth edition

  International Accounting Conventions 

 The examples cited above illustrate some of the problems that analysts can encounter when 

attempting to interpret financial data. Even greater problems arise in the interpretation of 

the financial statements of foreign firms. This is because these firms do not follow GAAP 

guidelines. Accounting practices in various countries differ to greater or lesser extents 

from U.S. standards. Here are some of the major issues that you should be aware of when 

using the financial statements of foreign firms:

    • 

 Reserving practices.  Many countries allow firms considerably more discretion 

in setting aside reserves for future contingencies than is typical in the United 

States. Because additions to reserves result in a charge against income, 

reported earnings are far more subject to managerial discretion than in the 

United States.  

   • 

 Depreciation.  In the United States, firms typically maintain separate sets of 

accounts for tax and reporting purposes. For example, accelerated depreciation 

is typically used for tax purposes, whereas straight-line depreciation is used for 

reporting purposes. In contrast, most other countries do not allow dual sets of 

accounts, and most firms in foreign countries use accelerated depreciation to 

minimize taxes despite the fact that it results in lower reported earnings. This 

   

8

 Ben Worthen, Paul Sonne, and Justin Scheck, “Long Before H-P Deal, Autonomy’s Red Flags,”  The Wall Street 

Journal,  November 26, 2012. 

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Final PDF to printer

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P A R T   V

 Security 

Analysis

Australia

0

80

70

60

50

40

30

20

10

Reported P/E

24.1

9.1

12.6

11.1

26.5

17.1

78.1

45.1

12.4

10.7

10.0

9.5

United Kingdom

Switzerland

Japan

Germany

France

Adjusted P/E