Globalization has been a key driver for corporate growth. However, crossborder activity has begun to slow down as evidenced by a decrease of 5 percent in deal value and 4 percent in volume over the last year as cited in our PwC Deals blog. Changes in the regulatory environment and political uncertainty have made international cooperation more challenging.
Notwithstanding these difficulties, the opportunity for growth through globalization remains an important strategic focus for CEOs. Alliances may be the best way to enter a market due to statutory requirements that limit foreign control or to leverage local connections. To pursue a growth strategy, alliance partners will need to have a full understanding of regulatory requirements, financial and operational impacts of cross-border deals, and, of course, of the expected return on investment to measure success.
If a cross-border alliance is entered into, it is possible that the alliance partners will utilize different accounting frameworks. One partner may be a US GAAP SEC filer in the US while the other partner may be an IFRS filer in Europe. Accounting policies governing the activities of the alliance will need to be agreed on. This is especially the case in specialized industries (e.g., oil and gas) where US accounting standards often include industry-tailored guidance that is not found in IFRS or other national accounting standards.
Often, each partner contributes capital or other assets to the new venture at inception. In theory, differences in accounting rules and principles should not impact the valuation of an alliance in situations where a capital infusion occurs. However, parties may focus on different metrics when determining the amount of capital to infuse into the alliance, as well as differing tax treatment under different tax regimes. If unadjusted for GAAP and tax differences, calculations to determine capital infusions by each partner may not be appropriate.
Additionally, different alliance structures may create different earnings impacts depending on the GAAP applied by each partner. The structure may become a negotiating point if one partner is focused on top line revenue whereas the other partner is focused on net income.
US investors in foreign businesses will need to have a comprehensive understanding of accounting differences from US GAAP when considering metrics used in valuation considerations. The level of effort required to conform to US GAAP can vary depending on the size, complexity and structure – at times, these differences can be significant.
Financial Services Deals Leader, PwC US