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Using PPP to Compare Company Financial Statements Across Currencies

Article Quant Q&A · Author: Syed Askari
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Summary

The document asks how to compare companies’ revenues and expenses in a Data Envelopment Analysis when their financial statements use different currencies. It contrasts converting amounts at direct exchange rates with using purchasing power parity (PPP) rates, which adjust for differences in purchasing power across countries. The brief answer recommends considering PPP rather than relying only on market exchange rates.

The response also flags accounting standards as a potentially more significant source of mismatch between companies. Currency conversion alone does not make reported inputs fully comparable, and the note gives no detailed conversion procedure, empirical comparison, or guidance on which PPP measure or reporting period to select. Researchers would need to investigate accounting and measurement differences alongside currency choice before interpreting efficiency scores.

Key ideas

  • The question concerns comparing company financial data in different currencies for Data Envelopment Analysis.
  • Direct exchange-rate conversion is presented as a simple approach, while the answer favors considering purchasing power parity.
  • Differences in accounting standards may undermine comparability even after currency conversion.
  • The response does not specify a PPP series, conversion period, or empirical method.

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# How to compare financial statements of two companies working in two different currencies?


# How to compare financial statements of two companies working in two different currencies?












So I am conducting a research on applying Data Envelopment Analysis (DEA) for comparing efficiencies of different companies working in different countries and thereby publishing their financial statements in different currencies. However, before I plug in the values such as revenues and expenses taken from respective financial statements into the DEA model, I need to make sure I am comparing apples with apples and not oranges. I have one company of US, another of UK and another of Europe therefore I have values of their revenues and expenses in US Dollars, British Pounds and Euros. And these are different companies as opposed to subsidiaries of the same company. I want to know if there is any standard method in research for handling such a case i.e. how to bring all revenues and expenses of all companies on a single currency. An apparent layman approach would be to simply check the exchange rate of respective currency with US Dollar and multiply it to get all values converted to US Dollar equivalents. However, Is it acceptable in research and/or standard accounting practices?

## Answer by Kulendra 'KJ' Janaka (score 0)

https://quant.stackexchange.com/a/69916

My opinion is that you should use at least the PPP currency rate and not the direct currency rate. But like @amdopt said, there might be much more prominent differences in accounting standards.

Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.