GAAP Arbitrage

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1/10

CF Institute

GAAP Arbitrage: Valuation Opportunities in International Accounting StandardsAuthor(s): Lawrence S. Speidell and Vinod B. BavishiSource: Financial Analysts Journal, Vol. 48, No. 6 (Nov. - Dec., 1992), pp. 58-66Published by: CFA InstituteStable URL: http://www.jstor.org/stable/4479597 .

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2/10

GAAP

Arbitrage:

Valuation

Opportunities

in

International

Accounting

Standards

Lawrence S. Speideli

and

Vinod

B. Bavishi

Accounting

standards

diffler

greatly

across countries.

But the

differences

can

present opportunities

for

those able

and willing to

make

the

effort

to under-

stand and adjust

for them.

In a recent project,

the ac-

counting

statments

of

over

100 companies in

12

devel-

oped and emerging

coun-

tries were restated

to ap-

proximate

common

accounting

standards.

Companies in Sweden and

Germany

showed

the

big-

gest gains

from

restatement.

On

average,

these

compa-

nies' net incomes increased

by

60%

and

44%, respec-

tively,

while shareholders'

equity

increased by

44%

and

41%.

A

good

plan, violently

exe-

cuted

right

now is far better

than

a

perfect plan

executed

next week.

General

George

Patton

Shareholders, corporations and

governments

depend

more

heavily

now than ever before

on

accurate and

comparable global

financial data. Shareholders,

the

traditional clients

of financial re-

ports,

have become much more

numerous

and widespread.

The global equity

markets now

total over

$12

trillion, compared

with

$2.7

trillion

in

1980.

And the

flow of cross-border

equity

in-

vesting,

now over

$1.2

trillion,

is

expected to

grow

to $2.5 billion

by the

mid-1990s

and $13

trillion

in 20 years.

In

the

U.S.

alone,

institutional

investors

are 6%

in-

vested

abroad

and will shortly

be

moving

to 10%

and more.

Figure

A illustrates

the current

world of

equity

markets,

repre-

sented by

size. The

map

will

change

as equity

capital

markets

grow in the newly capitalistcoun-

tries of

Eastern Europe

and

Asia.

Corporations

have

historically

cared

more about

internal than

external reporting.

But as product

markets are

becoming

more glo-

bal,

merger

activity

has

increased,

with

companies

combining

across country

borders and

across accounting

borders.

Cross-

border mergers

and

acquisitions

have accounted

for

over $200

bil-

lion

annually, stimulated

by

changes

in the European

Com-

munity

and

the raising

of

the Iron

Curtain.

Governments

have

responded

to

the

economic

imperative

of

capi-

talism

and are

scrapping

the

cen-

tral planning

of communist

and

socialist

regimes.

They

all want

to

fulfill

the dreams

of their

people

and

to become

the next Japan,

Korea or Taiwan. This cannot

happen

if capital

is

allocated

sim-

ply where

financial

reports are

clearest,

rather

than

where

costs

are

lowest or profit

opportunities

highest.

The objective

of

an efficient

glo-

bal capital

market

faces

a

major

obstacle

in

the labyrinth

of

com-

plex

and obscure

accounting

practices

prevalent

around

the

Figure

A

1990 Market Capitalizations

of Developed and Emerging

Markets

(millions

of U.S. dollars)

Daen

Nsr

and

o

PlandJ

Lnited Hunnt,

/

BrItinm'' H

gary

tates

D'lvoire

Ca

hnslNeakia

Tnda

4J5Aaeca

XBSt~ ~ ~ ~ ~~~Btsaa

Tnbago


3/10


4/10

LU

LU

UJ

LUJ

z

z

0

z

-J

U

Z

60

History of GAAP

Through he years, ocal practitio-

ners have developed

accounting

standards primarily

to fill

the

needs of local

commerce. Gov-

ernmentshave stepped

n

to con-

trol accounting or tax purposes.

The result is a patchwork f sys-

tems with differing theoretical

and conceptualfoundations.

Fig-

ure

B

diagrams

hese as a

family

tree with two principalbranches-

micro-based,

company-level

ac-

counting,

romwhich the U.S.and

U.K. systems are derived, and

macro-based,

government-im-

posed systems,

often

heavily

in-

fluenced

by

tax

policies,

which

prevail throughout

most of Eu-

rope.

Table

II

Consolidation

Pracdces,

1990

No Consolidation

India

All Subsidiaries Consolidated

Canada

Mexico

United States

Argentina

Brazil

Chile

Venezuela

Austria

Belgium

Denmark

Finland

France

Germany

Italy

Netherlands

Norway

Spain

Sweden

Switzerland

United

Kingdom

South Africa

Hong Kong

Malaysia

Singapore

Thailand

Australia

New Zealand

Domestic

Consolidation,

Others at

Cost

Japan

Korea

Domestic Consolidation, Others at

Equity

Taiwan

Source:Cfarbase.

Table Im Long-Tern Investments

(20%-50% owned),

1990

Equity Method

Canada

United

States

Brazil

France

Netherlands

United Kingdom

South Africa

Taiwan

New Zealand

Cost

Method

Austria

Belgium

Germany

India

Pakistan

Thailand

Cost

and/or Equity Method

Mexico

Chile

Venezuela

Denmark

Finland

Italy

Norway

Portugal

Spain

Sweden

Switzerland

Hong Kong

Japan

Korea

Malaysia

Singapore

Equity

Method but

Partially

Consolidated

Australia

Source: Cfarbase.

Both

the

U.S.

and the U.K.

systems

have spawned siblings

in

related

countries. U.S. GAAP

has a

heavy

influence

in

Canada, Japan, the

Philippines

and

Mexico,

while the

U.K.

system

has

prevailed

in

many

of the Commonwealth countries.

Within

these broad

groups,

how-

ever, there remain many differ-

ences

resulting

from

strong

na-

tional

professional groups.

Despite our

desire for

compara-

bility

in

global accounting,

there

would be no net

gain

if

compara-

bility required undermining

the

vitality

of these national account-

ing

organizations.

Furthermore,

total comparabilitydoes not

seem

likely in the near

fulture,

iven the

vigorous debate at recent ses-

sions of the

international odies.

It is thus important or users of

globalfinancial tatements

o

turn

from

complaints o analysis,and

to view

global accounting

differ-

ences as an opportunity

o

profit

from careful

reconciliation.

Philosophical

Differences

Differences

n

philosophyacross

accountingregimes

are

often

in-

tractable,

because often there

is

simply

no

right

answer.Alterna-

tives exist because different

points of

view can

be equally

valid.Globalcommerce mayone

day produce

a

consensus,but

for

now that

outcome s as unlikelyas

havingautomobilesdrive on the

right side of every nation'shigh-ways.Usersmustbe made aware

of these differences and must

Table

IV

Inventory Valuation

Method, 1990

Mixed

Canada

United States

Chile

Austria

Belgium

France

Germany

Italy

Switzerland

Japan

Korea

Average

Cost Method

Mexico

Brazil

Spain

Hong Kong

Malaysia

Pakistan

Singapore

Taiwan

First-In-First-Out Method

(FIFO)

Denmark

Finland

Netherlands

Norway

Sweden

United

Kingdom

South Africa

India

Thailand

Australia

New Zealand

Last-In-First-Out Method

(LIFO)

Venezuela

Source: Cfarbase.

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5/10

Table V

Depreciation

Method,

1990

Straight-Line

Method

Canada

Mexico

United

States

Argentina

Brazil

Chile

Venezuela

Belgium

Denmark

France

Italy

Netherlands

Portugal

Spain

Switzerland

United

Kingdom

South

Africa

Hong

Kong

India

Malaysia

Pakistan

Singapore

Taiwan

Thailand

Australia

New

Zealand

Accelerated

Method

Sweden

Japan

Korea

Straight-Line

and/or

Accelerated

Method

Finland

Germany

Norway

Source:

Cfarbase.

Table

VI

Frequency

of

Interim

Financial

Statements,

1990

Two

Per Year

France

Germany

Spain

Switzerland

United

Kingdom

Japan

South

Korea

Three Per

Year

Norway

Four

Per Year

Canada

Mexico

United

States

Source:

nternational

Accounting

and

Audit-

ing

Trends, 2nd

ed.

Figure D Classification of Companies by Year-End Dates, Fiscal Year

1990

100

-1

I

Australia 138

Companies

80

7

9

Canada-

315

Companies

72

6 Japan 2,692 Companies

60 -

*

United Kingdom

549

Companieso -

~~~~~~~~~~~~~~~~

2 _United

States

2,919 Companies

47

40 -

28

201

-

14

1

1

7

16

14

14

15t

0

-

1 , 1 11

January

-

March April

-

June July

-

September October

-

December

X,

of

Companies

with Year-End

Dates Between

Source:Cfarbase.

make

their best

effort

to

adjustfor

them.

Major

philosophical

differ-

ences

include

the

following.

Cost

Basis of

Financial

State-

ments:

While historical

cost

was

hardly

questioned 20

years

ago, it

Figure E Business

Segment Data

Australia

76

82

59

Canada

63

82

France

6

28

U

Assets

Germany 2

Income

41

Sales

Japan

2

60

79

Singapore

93

88

13

U.K.

72

80

l I

l

I

0

20 40

60 80

100

% Disclosure

Source:Cfarbase.

tN

14

LL

0)

LU

LU

0

cl

z

z

J

0

U

I,::

z

-

U

z

z

61




6/10

Figure F

Percentage of Companies Audited by Leading Accounting

Firms

U.S.

98%

Italy

97%

Chile

96%

U.K.

94%

Japan

88%

Germany

87%

Spain

80

Mexico

69%

Belgium

69%

Switzerland

65%

France

58%

Brazil

50%

India

27%

Israel ox

7~~~~~ I j# 'g

I

0 20 40 60 80 100

Source:nternational

Accounting

nd

Auditing

Treds,

2nd

edition.

is the sole basis today

mainly in

the

U.S.,

Japan,Germany,Canada,

Switzerland,

Austriaand South

Af-

rica. As

Table

I

shows, adjust-

ments for inflation are

now com-

mon elsewhere.

Consolidation

Practices: Signifi-

cant corporate activities are often

missing from

company reports

because

of

a

failure to

provide

consolidated

statements. This is a

significant problem for

financial

statement users

in

Japan,

Korea

and Taiwan (see Table lI).

Accountingfor Long-Term

Invest-

ments: The pattern of accounting

for investments of 20% to 50% of

equity

is similar to that for con-

solidation of

majority-owned

sub-

sidiaries, as Table ILLhows. Only

in

a few

countries,

including the

U.S.,

the

U.K., Canada,

Singapore

and

Australia,

can one expect all

tcontrol nterests to be fully re-

flected

in the income

stream.

Elsewhere

(most notably in Ger-

many),

these

positions

are ac-

counted

for on a cost basis,

with

only dividends

recognized

in

in-

come.

In

Japan,

where

accounting

for

both

majority

and

minority

inter-

ests varies widely, comparative

analysis

of

companies

is ex-

tremely complex

because

of the

popularity of cross-holdings.

These

are the foundation

of the

powerful

cooperative

company

groups

known as keiretsu.

The

organization

chart

of the Tokyo

Group,

for

example,

looks like

the web of a drunken

spider and

includes

334

firms with interests

in

railroads,

hotels,

construction,

Table

VII

Availability

of English-

Langugage

Financial

Statements,

1990

AlU Conpanies Report in English

Canada

United States

United

Kingdom

South

Africa

Hong Kong

India

Malaysia

Pakistan

Singapore

Australia

New Zealand

More than

40% Report in English

Chile

Venezuela

Belgium

Denmark

Finland

Netherlands

Norway

Portugal

Spain

Sweden

Switzerland

Japan

Taiwan

Thailand

Less than 40% Report

in

England

Mexico

Argentina

Brazil

Austria

France

Germany

Italy

Korea

Source: Cfarbase.

Figure G Percentage of

Analysts

in

Agreement

on Last

Year'sEPS

Canada

100

%

japan

100%

U.K.

100%

U.S.

100%

Germany 99%

France

96%

Spain

88%

Italy

84%

Switzerland

79%

0

20 40

60

SO

100

Source:

/BIE/S.

UJ

LLI

LU

z

D

-J

z

-J

z

6

62




7/10

Figure

H Adjusted versus Reported

Income

Sweden

_ _

______60_

2

26~~~~~4

Germany

28

Japan

1

Italy

Belgium

9

France

6

Net

Income

Australia

=

r 5

1

- Operating

ncome

U.K.

Switzerland

-8

-10 0 10 20 30 40 50 60 70

%

Change

airlines and retail. This

complex-

ity recently increased

when the

group established an

antitakeover

plan

under which 35% of each

listed

company would be held by

other

group

members.

Inventory-Valuation Methods: As

Table IVshows, these

vary widely,

with first-in, first-out

used

in

the

U.K. and Scandinavia, while aver-

age cost is used

nearly every-

where

else. Recently,controversy

increased when the

IASC indi-

cated its

disapproval

of

last-in,

first-out

accounting,

a

popular al-

ternative

in

the U.S.

Depreciation: Depreciation meth-

ods

cause some of the most dra-

matic comparability

problems for

global investors. While

most U.S.

investors expect to see

straight-

line

depreciation, accelerated de-

preciation, which tends to under-

state

earnings,

is

most

popular

in

Japan

and Korea.

Meanwhile,

ex-

cess

(often

arbitrary) deprecia-

tion

charges

are sometimes used

to smooth

earnings

in

continental

Europe

(see Table V).

Quality

Differences

While the many

philosophical dif-

ferences can be

subject

to

endless

debate,

quality

differences can-

not.

High-quality accounting is

imperative, and anything less

costs

companies dearly

in

lower

stock

prices and higher capital

costs. The world standard should

be

full, prompt and reliable dis-

closure, and

in

this

respect, many

nations fall short.

Timeliness: There is no justifica-

tion for a delay of over six months

in

availability of annual reports,

when most U.S.

and

U.K.compa-

nies deliver them

in

three

months. Surprisingly, Germany,

France and Italy are

among the

worst offenders in

this regard

(see Figure C).

Interim Statements:

While quar-

terly reports are the

standard

in

the

U.S.,

Canada and

Mexico,

most companies

in

other coun-

tries provide only semiannual

data

(Table VI).

Comparisons

quickly

lose

validity

when based

on

old data. This problem be-

comes particularly

important

when fiscal-year dates

differ; this

is the case when

comparing most

Japanese companies,

which use a

Marchfiscal year, with those else-

where (see Figure D).

Segment

Disclosure:

In

the

U.S.,

the Financial

Accounting

Stan-

dards Board

mandated

business-

segment

disclosure with State-

ment 16

in

1976.

Elsewhere

many

companies

have

voluntarily

made

this disclosure.

As

Figure

E

shows, however,

coverage

is still

spotty.

Leading Accounting

Firms:While

many small firms do

excellent

work, their

independence is

sometimes subject to question.

Figure I

Adjusted

versus

Reported

Book

Value

Sweden

44

Germany

41

Japan

14

Switzerland

4

Australia l

U.K.

-14

Belgium

-14

France

-28

Italy -28

I

I

II

-40

-30 -20

-10

0

10

20

30 40

50

%

Change

LUl

m

0)

LLU

LU

D

UJ

0

z

U

z

z

63




8/10

Figure J Adjusted versus Reported Price/Earnings

Ratio

Australia

124.1

9

ReportedP/E

France

12.6

11.4

Adjusted P/E

Germany

26.5

71.I

Japan

1

451

Switzerland

12.7

U.K. 1(1.5|

9.5

0 10

20

30

40 50 60

70

80

The leading

accounting

firms up-

hold

a

high

standard,but

smaller

firms, particularly in emerging

markets (such

as India)

may be

heavily

influenced

by

their cli-

ents. Figure

F

shows

the

percent-

age

of various

countries'

firms

audited by large accounting

firms.

Earnings

Per Share:

An example

of

improvement

in

comparability

is

shown in Figure

G, which

re-

flects

the influence

of

I/B/E/S

(the

Institutional

Brokers Estimate

System)

on

financial

analysts'

be-

havior. I/B/E/S

has been

collect-

ing Wall Street

brokers' earnings

estimates

for

U.S. companies

since 1971,

but

it only began

col-

lecting

abroad

in

1986. At

that

time,

analysts

often

could not

agree

on

what

companies

had

earned

in

the

prior

year,

let alone

their estimate

for

the future.

To-

day,

the

situation

is

much

im-

proved,

although

it is still

weak

in

southern Europe.

Language:

While it may seem

ar-

rogant or lazy on

the part

of

En-

glish-speaking

people to

expect

financial statements in English,

our

language

has

become a stan-

dard

for business

around

the

world. Already,

many

companies

publish

English language

annual

reports (see

Table

VII).

We

hope

to see

the

percentage

increase,

particularly

in

continental

Eu-

rope. Users

must be

careful,

how-

ever,

because there

is often more

detail

in

the local language

re-

ports.

Accounting

Adjustments

In the art world,

it is

sometimes

said that a piece is never com-

pleted,

the artist

has simply

stopped

workingon it for

a while.

So too

in

accounting.

Financial

statements

are never

complete or

perfect,

they

are simply

a best

guess at

a given point

in

time.

History

will judge them

to

have

been

close

or otherwise,

but

it

will

rarely

find them

perfect.

This

simplifies the

task of adjustment;

to achieve significant

gains

in

glo-

bal

comparability,

we

need

not

strive for

absolute precision.

We analyzed

over

100 companies

from

12 countries

and five

broad

industrygroups

(consumer

goods,

capital goods,

basic

industries,

utilities

and transportation).

These

companies

were

selected

from the 900

largest global

com-

panies

ranked by

sales,

assets and

market capitalization.

Using a spreadsheet

template,

ad-

justments

were make

to standard-

ize accounting

for depreciation,

non-equity

and discretionary

re-

serves, goodwill,

consolidation,

valuation

of investment,

asset

re-

valuation, inventory adjustments,

intercompany

transactions,

for-

eign currency

translation,

ex-

traordinary

items

and deferred

taxes.

The appendix

describes

the

adjustments

for one company,

Bayer

AG.

Aftermaking

our

adjustments,

we

calculated

the

net changes

in

the

income statement,

balance

sheet

and

ratios

such as

P/E

and

price/

book. Thirty-six

companies

with

extreme

changes

were eliminated

to produce

summary

data for 83

companies.

The changes

of greatest

signifi-

cance

for

valuation may

be

those

affecting

the

income statement.

Figure

H

summarizes

the direc-

tion and magnitude

of

changes

in

operating

income

and net income

by

country (using

the equal-

weighted

average).

When ad-

justed

to

a uniform global

stan-

dard,

Sweden

and Germany

show

the

greatest

gains,

with

net

in-

come

increases

of 60%

and

44%,

respectively. Next come Japan,It-

aly

and Belgium

with

gains

of

12%,11% and

4%. Only

Switzer-

land showed

a decline.

There

were

also significant

changes

on

the

balance

sheet,

shown

in

Figure

I.

Again,

Sweden

and Germany

were

big

gainers,

with

increases

of

44% and

41%

in

Figure

K

Adjusted

versus

Reported

Price/Book

Value

Ratio

Australia

16

2.(4

France

2.32

_3.25~~~~~~~~~~~~~~~~~~~~~~~~~~~~.

Germany

1

1.61

~~~~~~~~~~~~~~~~~~~~~~~~

1.1

Japan

_ _ _

_2.GI_3.18

Switzerland

2._17_Reported

P/BV

1.9.3

2.2()0

Adjusted

P/BV

U.K.

2.30_

0.0

1.0

2.0

4.0

L1J

m

0:

LU

z

64




9/10

shareholders' equity.

At

the

other

extreme,

French and Italian

com-

panies had a 28% reduction

in

equity.

Figures J and

K

show the changes

in P/E and price/book for these

markets when going from re-

ported

to

adjusted

bases.

Conclusion

We

adjusted

standards toward the

U.S/U.K. conventions. This re-

sulted

in

large changes

in

Ger-

man, Japanese,

Swedish

and

Swiss

reported figures. Regardless of

the norm

chosen, however,

those

countries appear

to

understate

values by amounts that are some-

times

very significant.

Furthermore, there is evidence

that capital

markets are not mak-

ing a complete reconciliation for

these differences. Over

time

they

will, as analysts make more com-

plete adjustments and as accoun-

tants make

progress

toward

glo-

bal standards.

As this

occurs,

capital

markets

will

become more

efficient,

and

financial

rewards

will

accrue to those investors who

anticipate

the

direction of

changes

in

valuation.

Meanwhile,

it

is the responsibility

of

investors

and all other users of financial

statements to

press

for

improved

global accounting,

based on full

disclosure,

so

philosophical

dif-

ferences can be

reconciled,

and

on the standard

of

uniform

high

quality

around

the world.

Appendix

Bayer Restatement

Table

AI

shows the accounting

restatement for Bayer. The single

most significant factor in the re-

statement is

depreciation

ex-

pense.

This is true for

many

other

German

companies.

The

method allowed by regula-

tion

is

the

declining-balance

method until the

depreciation by

the straight-line method is

greater. The straight-line method

is used from that point. Also, de-

preciation computed using the

declining-balance method cannot

exceed three times the amount

computed using the straight-line

method

in

any given year (i.e.,

depreciationcharged during

the

year

is limited to three

times the

straight-line epreciation, egard-

less of the method used).

Basedon the rules above,an asset

with a 30-year ife will be fully

depreciated

in

approximately

nine years. Because the majority

of

assetsare depreciated

n

such a

shortperiod,

the

measurement

f

the

actual ife

of

assets s difficult.

One

can

use

the

averagedepreci-

ation

expense

to sales or cost of

goods

sold

of a

similar

company

for estimation.

For

example,

Wella

AG

in

Germanyprovides

depreciation expenses

on the

straight-linemethod (although ts

size is about6%

of

Bayer's).Table

All compares Bayer and Wella.

After the adjustments o Bayer,

accumulated depreciation as a

percentage

f

adjusted

otal

assets

is similar to Wella, at 28%, but

depreciation expense as

a

per-

centage

of sales is still

higher,

at

4%,compared

with

Wella's2.6%.

Alternatively,one can assume

Bayer's perating tructures sim-

ilar to thatof other multinational

corporations n the same indus-

try.The averagedepreciation x-

pense for these major multina-

tional corporations

can then

be

used as an approximationor Bay-

er's.TableAIII llustrates he

pro-

Table AI Accounting Restatement for German Multinational

ChemicalCompanyBAYER G For FiscalYearending on

December

31, 1990 (in

millions

of

DM)

1. Operating Income

As Reported

+

Add back excess depreciation

=

Adjusted Change

3,551

+

1,341 = 4,892 +38%

2.

Shareholders' Equity

*

Add back cumulative effect of excess depreciation after tax

*

Add back special non-equity reserves

As Reported

+

Adjustments

=

Adjusted Change

15,545 6,795

=

22,340 44%

3. Price/EarningsRatio

Will reduce from 7.2 to 5.6 (22% reduction)

4. Price/Book Ratio

Will reduce from

0.9

to 0.6

(32% reduction)

Table All Adjustment for

Depreciation, Method

1

(fiscal year

1990)

Bayer

Wella

Sales

41,643.000

2,562.000

Total Operating Expenses

38,092.002 2,435.000

Total Assets 37,947.000 1,728.000

Gross Fixed Assets

43,800.000

762.000

Depreciation Unadjusted

3,034.000 67.000

(% of Sales)

7.29% 2.62%

Depreciation Exp. Adjusted

1693.000 67.000

(%

of

Sales) 4.00%

2.62%

Depreciation Method Tax Rules

Straight

ine

Accumulated

Dep. Unadj. 29,841.000

394.000

(%

of

Total

Assets)

78.64% 22.80%

(% of Gross Fixed

Asset) 68.13%

51.71%

Adjusted Total Assets

53,013.000

Accum. Dep. Adj.

14,775.000

(%

of

Adj.

Total

Assets) 27.87%

(N

a,

a,

LU

LUS

z

z

D

0

-J

65




10/10

Table AIII Adjustment or

Depreciation,

Method

2

Bayer

ICI

Sandoz

Ciba-Geigy

Sales

in

U.S. Dollars

27,900.810

24,521.400

9,650.000

15,360.000

Pharmaceutical% Sales

19% 11%

46% 32%

Dep. Method

Tax Rules SL

Method SL

Method

Depr. CurrentValue

Unadj.

Dep. Exp. % Sales

7.30% 4.10%

5.80%

5.50%

Adj. Dep. % Sales 4.00%

Accum. Dep. % Assets

Unadj.

78.60% 43.00%

20.40% N/A

Accum.

Dep. % Assets Adj.

27.87

cedure.

One drawback o this

ap-

proach is

that it raises

cyclical

issues in

evaluating

companies

that

are exposed to differing

co-

nomic

conditions in

different

countries.

Non-equity reserves

are also a

problem in

restating Bayer ac-

counting figures.Some types of

reservesareclearly

specifiedand

can

be easily

restated.

However,

reservesare

sometimes

mixed to-

gether

and

not

clearly specified.

At Bayer, for

example,

reserves

for future

uncertain

business risk

are

mixed

with

reserves

or vaca-

tion and bonus.

Some estimates

must be

made to

restate

these reserves.

One ap-

proach

s to estimate

certainparts

of

operating

reserves.

Reserves

for vacation, or example,can be

estimated from

companies

in

neighboringcountries

with simi-

lar cultures.These

estimated

op-

eratingreserves can

then

be de-

ducted

from

mixed

provisions

and

the remaindercan be

added

back to income.

an'

a:'

uJ

Ull

0)

LUJ

U

0

z

z

D

-

-J

lit

a

z

U

z

z

:6

0

L/)

V6

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