As the global trend toward industrial consolidation continues, news about international mergers and acquisitions is practically a daily occurrence. While mergers are normally rationalized in terms of operating synergies or economies of scale, accounting plays a crucial role in these mega-consolidations as accounting numbers are fundamental in corporate valuation.
For example, corporate valuations are often based on price multiples, such as the price-to-earnings (P/E) ratio. The approach here is to derive an average P/E multiple for comparable firms in the industry and apply this multiple to the reported earnings of the firm being valued to arrive at a reasonable offering price. A major concern of the acquiring firm when bidding for a foreign acquisition target is to what extent the E in the P/E metric is a true reflection of the attribute being measured, as opposed to the result of an accounting measurement difference!
Differences in accounting measurement rules could also create an level playing field in the market for corporate control. Thus, if Company in Country is allowed to take purchased goodwill directly to reserves, while Company B in Country B must amortize purchased goodwill to earnings, Company A may very well enjoy a bidding advantage over B when seeking to acquire a common target company. Company could offer a higher purchase price knowing that its earnings will not be penalized by the hit to earnings of any excessive premiums paid.
