Investments, tenth edition

 Figure 19.4 

Adjusted versus reported price–earnings ratios  

 Source: “Figure J: Adjusted versus Reported Price/Earnings Ratio” from Lawrence S. Speidell and Vinod 

Bavishi, “GAAP Arbitrage: Valuation Opportunities in International Accounting Standards,”  Financial Analysts 

Journal,  November–December 1992, pp. 58–66. Copyright 1992, CFA Institute. Reproduced from the  Financial 

Analysts Journal  with permission from the CFA Institute. 

makes reported earnings of foreign firms lower than they would be if the firms were 

allowed to use the U.S. practice.  

   • 

Intangibles.  Treatment of intangibles such as goodwill can vary widely. Are they 

amortized or expensed? If amortized, over what period? Such issues can have a 

large impact on reported profits.    

 The effect of different accounting practices can be substantial.  Figure 19.4  compares 

P/E ratios in different countries as reported and restated on a common basis. While P/E 

multiples have changed considerably since this study was published, these results illustrate 

how different accounting rules can have a big impact on these ratios.  

 Some of the differences between U.S. and European accounting standards arise from 

different philosophies regarding regulating accounting practice. GAAP accounting in the 

U.S. is rules-based, with detailed, explicit, and lengthy rules governing almost any circum-

stance that can be anticipated. In contrast, the    international financial reporting standards    

(IFRS) used in the European Union are principles-based, setting out general approaches 

for the preparation of financial statements. While EU rules are more flexible, firms must be 

prepared to demonstrate that their accounting choices are consistent with IFRS principles. 

 IFRS seem on their way to becoming global standards, even outside of the European 

Union. By 2008, over 100 countries had adopted them, and they are making inroads even 

in the United States. In November 2007, the SEC began allowing foreign firms to issue 

securities in the U.S. if their financial statements are prepared using IFRS. In 2008, the 

SEC went even further when it proposed allowing large U.S. multinational firms to report 

earnings using IFRS rather than GAAP starting in 2010. A final integration of U.S. rules 

with IFRS has been long expected but repeatedly delayed. However, even without formal 

adoption of IFRS, the widespread belief is that the U.S. will continue to change GAAP 

over time to more closely conform to IFRS rules. The goal is to make cross-border financial 

statements more consistent and comparable, thereby improving the quality of  information 

available  to  investors.    

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 As cited by John Train in  Money Masters  (New York: Harper & Row, 1987).