As more investors expand their portfolios beyond U.S. borders, understanding how to interpret international companies’ earnings reports becomes crucial. However, navigating different accounting standards, currency fluctuations, and reporting practices can be challenging. In this post, we’ll break down three major components you need to know when comparing international vs. U.S. earnings reports:

1. Key differences in GAAP vs. IFRS accounting standards
2. How currency fluctuations affect international companies’ reported earnings
3. Unique research techniques for European, Asian, or emerging-market stocks

Key Differences in GAAP vs. IFRS Accounting Standards

What Are GAAP and IFRS?

• GAAP (Generally Accepted Accounting Principles): The standard framework used by most publicly traded U.S. companies.
• IFRS (International Financial Reporting Standards): A global set of accounting standards used in over 100 countries, including those in the European Union, many Asian countries, and other emerging markets.

Top Differences Between GAAP and IFRS

1. Inventory Valuation:
   • Under GAAP, companies can use Last-In-First-Out (LIFO) or First-In-First-Out (FIFO) methods.
   • Under IFRS, LIFO is prohibited; companies typically use FIFO or weighted-average cost.
   • Impact: LIFO can yield different cost-of-goods-sold (COGS) figures, affecting profit margins and earnings comparisons.
2. Revenue Recognition:
   • GAAP follows a detailed, rules-based approach that provides specific guidelines for various industries.
   • IFRS uses a principles-based approach focusing on the contract’s substance and the transfer of risks and rewards.
   • Impact: Timing of revenue recognition can differ, causing variations in quarterly or annual earnings.
3. Treatment of R&D and Development Costs:
   • GAAP generally expenses research and development costs as they are incurred.
   • IFRS may allow certain development costs to be capitalized if specific criteria (feasibility, intent to use, future economic benefit) are met.
   • Impact: This can cause IFRS-reporting companies to show higher short-term earnings compared to GAAP-reporting companies in certain industries—particularly tech and pharmaceuticals.
4. Impairment of Assets:
   • GAAP uses a two-step impairment test; once an asset is written down, it cannot be written up in future periods.
   • IFRS uses a one-step approach and allows for the reversal of impairments if market conditions improve.
   • Impact: IFRS earnings might see reversals of previous write-downs, leading to volatility but also possible increases in reported earnings after market recoveries.

What It Means for Investors

• Comparing apples-to-apples can be tricky if you simply match line items from GAAP and IFRS reports.
• Focus on key metrics like operating cash flow, free cash flow, and consistent profitability measures.
• To build a more accurate picture, understand each company’s stated accounting policies (usually found in the notes to the financial statements).

How Currency Fluctuations Affect International Companies’ Reported Earnings

When investing in foreign companies, currency fluctuations play a significant role in reported earnings. Even if a company’s fundamentals are strong, exchange rate movements can make results look better or worse than they actually are.

Key Currency Concepts for Investors:

1. Transaction Exposure:
   • Companies that buy or sell in a currency different from their reporting currency face transaction exposure.
   • For example, a U.K.-based company operating in the U.S. and reporting in British pounds can see profits vary if the USD/GBP rate swings significantly.
2. Translation Exposure:
   • When multinational companies consolidate their international subsidiaries’ financial statements, they have to “translate” the foreign currency results into their home currency.
   • Adverse or favorable exchange rates can skew reported consolidated earnings—even if the underlying local currency performance was stable.
3. Currency Hedging:
   • Companies often use financial instruments (like forward contracts or options) to hedge currency risk.
   • A hedged position might reduce short-term volatility but can also add complexity and cost.
   • Check the footnotes or management’s discussion and analysis (MD&A) for disclosures about hedging activities.

Practical Tips:

• Monitor Exchange Rate Trends: Keep a watch on major currency pairs relevant to your holdings (e.g., EUR/USD, USD/JPY).
• Check Constant Currency Results: Many international companies provide “constant currency” figures in their earnings press releases, isolating the effects of currency changes from operating results.
• Diversify Across Regions: Geographic diversification can mitigate the impact of currency volatility in a single market or region.

Unique Research Techniques for European, Asian, or Emerging-Market Stocks

Analyzing non-U.S. companies can be more intricate due to diverse regulatory environments, corporate cultures, and local market conditions. Here are a few techniques and considerations to deepen your research:

Leverage Local Market Reports and News

• Local Market Filings:
  • In the EU, companies file reports with their national regulators and often publish financials in multiple languages. Look for the English versions when available.
  • For Asian markets like Japan, China, or South Korea, some firms publish “English investor relations” sections on their websites with translated or summarized reports.
• Local Business Press and Industry Publications:
  • Reading domestic financial news outlets can provide insights missed by international sources.
  • Keep a list of reputable local journals or news websites for timely industry analysis.

Consider Political and Regulatory Factors

• Regulatory Environment:
  • Understand the country’s approach to corporate governance, audit standards, and anti-fraud measures.
  • For emerging markets, risk factors might include underdeveloped legal systems, regulatory unpredictability, and political interventions.
• Government Policy Shifts:
  • Sudden policy changes (e.g., restrictions on foreign ownership or shifting tax policies) can impact earnings and investor sentiment.
  • Companies in heavily regulated sectors (energy, banking, telecom) may be more susceptible to policy shifts.

Watch Out for Market-Specific Risks

• Liquidity:
  • Smaller exchanges or emerging markets might have lower trading volumes, leading to higher volatility and wider bid-ask spreads.
• Operational Hurdles:
  • Supply chain constraints, infrastructure issues, or geopolitical tensions can directly affect earnings.
• Corporate Governance Culture:
  • Shareholder rights, board independence, and transparency vary widely across regions.

Seek Cross-Border Analyst Coverage

Many brokerage firms have international analyst teams who provide specialized insights. They often publish:

• Sector outlooks (e.g., European banks, Asian tech)
• Company-specific reports with local context (management credibility, consumer trends)
• Macro updates on inflation rates, interest rates, and GDP forecasts

Subscribing to these research platforms or reading executive summaries can help you make more informed investment decisions.

Comparing earnings across borders isn’t just about converting currency or reconciling different line items. You need to account for the nuances of GAAP vs. IFRS, currency fluctuations, and local market conditions. By doing so, you’ll be better equipped to:

• Spot discrepancies in reported figures.
• Understand how global macroeconomic factors (like exchange rates and regulatory shifts) impact a firm’s bottom line.
• Employ specialized research tools and local insights to paint a clearer picture of a company’s true performance.

As you build a globally diversified portfolio, these considerations become increasingly important. Spend the extra time to understand the unique challenges of analyzing international earnings—and you’ll gain a competitive edge in uncovering the next global market opportunity.