Take account of differing national accounting, tax and regulatory standards
Accounting, tax and regulatory standards vary from country to country and can have a significant impact on valuation. Valuing international businesses requires a tailored approach for each jurisdiction. Whether it’s a cross-border acquisition or an overseas expansion, it’s essential to take into account local particularities in order to obtain an accurate valuation of the target company.
Differences in accounting standards, tax treatment and regulation can create significant distortions in the perception of a company’s financial health.
Different accounting standards: IFRS vs. GAAP
One of the first questions to ask when valuing an international business is which accounting standards are used. IFRS (International Financial Reporting Standards), which are widely used around the world, co-exist with other systems such as US GAAP (Generally Accepted Accounting Principles). These differences can affect the presentation of financial results, particularly in the treatment of revenue, intangible assets and provisions.
For example, a European company using IFRS may report its income differently from a US company using US GAAP. There may also be differences in the valuation of intangible assets such as patents, trademarks or rights of use. In international transactions, it is good practice to standardise these differences to achieve a comparable valuation. Adjusting accounts in line with local or international standards then becomes a key step in ensuring a consistent reading of financial performance.
The impact of tax systems: disparities in treatment
Taxation is another key factor in the valuation of international companies. Each country has a unique tax system, with different tax rates, tax incentives for certain industries and specific rules on deductions. This can have a direct impact on a company’s net profitability and therefore its valuation.
Take the example of a company operating in France, where the corporate tax rate is relatively high compared to other European countries such as Ireland, which offers an attractive tax environment for multinationals. A company with operations in several countries will therefore need to adjust its cash flow projections to reflect the actual tax burden in each jurisdiction.
Some multinationals use complex pricing transfer or deferred tax structures. It is therefore important to have a clear understanding of the company’s international tax policy, including the risks associated with changes in legislation that could alter these tax benefits.
Local regulations: multiple challenges
In addition to accounting standards and taxation, local regulations are an important factor in evaluating a company. Each country has its own laws on environmental protection, working conditions, data protection and competition. Failure to comply can result in fines or sanctions that affect not only a company’s reputation but also its long-term financial performance.
In heavily regulated sectors such as energy or healthcare, these risks are particularly high. For example, a pharmaceutical company operating in India must comply with local patent and clinical trial requirements, which may differ significantly from those in the US or Europe. The cost of compliance and the impact of regulation on the company’s ability to operate must be factored into the valuation.
Country risk: political and economic stability
Finally, the valuation of an international company must take into account country risk, i.e. the political and economic stability of the country in which it operates. Risks associated with political instability, currency fluctuations or rapid changes in legislation can affect a company’s future profitability.
In emerging markets, for example, currency fluctuations or regulatory reforms can lead to losses or drastically alter the operating environment. For an accurate valuation, it is necessary to incorporate these country risks into financial models, applying adjusted discount rates to compensate for the higher level of uncertainty.
Our experts at your service
At AURIS Finance, we support you in the valuation of international companies, taking into account local particularities. Our industry expertise and in-depth understanding of global tax systems, regulations and accounting standards enable us to provide tailor-made solutions for your cross-border acquisition or divestment projects. Contact us for further information.
