Consider two competing technologically intensive companies that develop exactly the same technology solutions. One of these companies is based in Australia and the other one is based in the US. Assume that the two companies have completely identical business fundamentals in all operational and financing aspects. They have identical products and services, cost of capital, leverage, suppliers, customers, software engineers, shareholders, and managers. The only difference between the two companies is the way in which they do their accounting, as follows: - Company A publishes annual reports in Australia and follows an aggressive financial reporting strategy, by choosing accounting policies that report the highest revenue and assets and the lowest expense and liabilities. - Company B publishes annual reports in the US and follows a conservative financial reporting strategy by choosing accounting policies that report the lowest revenue and assets and the highest expense and liabilities. Required: (a) Explain how you would approach the problem of comparing the performance of these two competing companies, given the knowledge described just above. Also, explain how you can find out that a company may follow conservative or aggressive accounting. (b) Explain how the knowledge that a biotechnology company follows conservative or aggressive accounting could be used to add value to a fundamental equity investor's investment strategy. Consider two competing technologically intensive companies that develop exactly the same technology solutions. One of these companies is based in Australia and the other one is based in the US. Assume that the two companies have completely identical business fundamentals in all operational and financing aspects. They have identical products and services, cost of capital, leverage, suppliers, customers, software engineers, shareholders, and managers. The only difference between the two companies is the way in which they do their accounting, as follows: - Company A publishes annual reports in Australia and follows an aggressive financial reporting strategy, by choosing accounting policies that report the highest revenue and assets and the lowest expense and liabilities. - Company B publishes annual reports in the US and follows a conservative financial reporting strategy by choosing accounting policies that report the lowest revenue and assets and the highest expense and liabilities. Required: (a) Explain how you would approach the problem of comparing the performance of these two competing companies, given the knowledge described just above. Also, explain how you can find out that a company may follow conservative or aggressive accounting. (b) Explain how the knowledge that a biotechnology company follows conservative or aggressive accounting could be used to add value to a fundamental equity investor's investment strategy
