International Accounting Standards The ROM Specialty Company is considering buying an interest in CD Limited, a foreign company operating in Europe.

ROM has agreed to pay five times last year’s net income for a 40 percent interest in CD Limited. However, while reviewing the financial statements, ROM discovers that CD Limited has not established an allowance for uncollectible accounts receivable and that CD Limited is using accelerated depreciation for its store fixtures. When ROM inquires, CD’s management says that these accounting practices are required for both tax and financial statement reporting in their country.

a. What should ROM do with respect to these differences in accounting methods when calculating net income to be used in determining the price to pay for CD Limited? Explain.

b. Should ROM go ahead with the original price formula of five times last year’s net income? Why?

c. ROM will hold less than a controlling interest in CD, so it will not consolidate the financial statements of CD with its own. Therefore, is there any point in translating CD’s financial statements into U.S. dollars? Explain.