Another factor contributing to the growing importance of international accounting is the phenomenon of global competition. Benchmarking, the act of comparing one’s performance against an appropriate standard, is not new. What is new is that standards of comparison now transcend national boundaries. The relevant question today is not “How am I doing relative to my competitor who may be right across the street?”, but “Am I adding more value to my customer base than my counterpart who may be located in another country?”
In benchmarking against international competitors, one must be careful to ensure that comparisons are indeed comparable. For example, one frequently used performance metric is return on equity (ROE). In comparing the ROE of an American telecom company with India’s Infosys, are you really comparing apples to apples or are you comparing apples to oranges? Exhibit 1-5 suggests that differences in accounting measurements between countries could complicate meaningful comparisons. Exhibit 1-5 begins with the net income of Infosys as reported in its recent consolidated financial statements. For the convenience of U.S. investors, Infosys has translated its financial statements from Indian GAAP to U.S. GAAP. Net income and shareholders’ equity figures are first reported.
Indian GAAP. These metrics are then modified by a series of adjustments that restate them to a basis consistent with U.S. GAAP. A comparison of the unadjusted ROE with the adjusted ROE yields return statistics of 33.8% versus 29.5%. While adjustments from Indian GAAP to U.S. GAAP did not have a significant effect on earnings, it did have a 13.4% effect on equity. Statement readers who are not aware of national measurement differences and required accounting adjustment algorithms are obviously at a disadvantage.
