Accounting across borders.

• Author: O'Malley, Shaun F.
• Position: International comparability of financial statements

International comparability of financial statements is the most important accounting issue facing businesses today. Setting broad standards that preserve country-specific rules and harmonize country-to-country differences would go a long way toward meeting this challenge.

With the globalization of business and capital markets, there is an ever increasing need for international comparability of financial statements. Comparable financial statements would bring benefits to U.S. and foreign companies in three main areas of business and finance:

* First, in conducting competitive surveillance. Because of growing foreign competition, CFOs of U.S. companies are users of both their own and other companies' financial statements. It is difficult, if not impossible, to understand the strengths and weaknesses of one's company vis-a-vis its foreign competitors without the solid grasp of relative profitability, liquidity, and financial "staying power" that comparable financial statements can provide.

* Second, in managing relationships with customers, suppliers, and others. To cope with today's rapid pace of change in technology and volatility in world markets, companies need to manage for maximum flexibility. More than ever before, this demands a careful assessment of the financial wherewithal of foreign customers. It also means constantly staying on top of alternative sources of overseas supply and potential foreign business partners for international alliances and joint ventures.

* Third, in raising capital abroad or investing in foreign securities. Companies have more options today in terms of both investing and financing. This relatively recent development has come about as a result of increased capital mobility and an easing of restrictions on foreign investors by local securities regulators. Examples of the latter include the SEC's Rule 144A, which eases restrictions on private placements by foreign companies, and its multijurisdictional agreement, which eases restrictions on some Canadian companies.

Growing numbers of companies are taking advantage of these new options to gain a higher rate of return or lower cost of capital, to diversify their investment portfolios or shareholder bases, or to raise capital abroad because it gives them valuable local publicity for brand names and markets. Whatever the reason, the result is that growing numbers of corporate treasurers - both U.S. and foreign - need to understand other countries' financial statements to facilitate raising capital or managing investments.

In all three of these areas, the lack of comparable financial statements is a problem - probably an even bigger problem than most companies realize. Financial statements are similar in appearance, a similarity that masks very fundamental - and very important - differences in accounting principles.

For example, Telefonica, Spain's largest industrial company and a veteran filer of 20-Fs ever since they floated the world's first multi-country simultaneous offering in the mid-1980s, reported 1990 net income under U.S. GAAP of 176 billion pesetas, more than double the 76 billion pesetas it reported under Spanish GAAP. The difference was due mainly to an add-back of the incremental depreciation on assets carried at historical cost for U.S. GAAP, but written up to more recent market values under Spanish GAAP. The effect of this difference in basis on shareholders' equity, however, went in the...