There are structural factors in the design of the RapidRatings Financial Health System™ that reduce the potential for miscalculating the risks that companies face when utilizing various accounting conventions. RapidRatings® employs a series of translation algorithms to standardize data, but more significantly, testing and experience has demonstrated that our models are largely unaffected by international variances in reporting standards for the following reasons:
- Breadth of Ratio Analysis
RapidRatings’ model employs 68 financial ratios, significantly reducing the dependence on any one line item, so can easily absorb an accounting convention shock that generally affects only a few ratios. Looking at this many ratios ensures we are not disproportionately dependent on a small number of metrics. Additionally, using ratios rather than raw inputs further mitigates sensitivity to line item variation. Inconsistencies in accounting conventions are rarely significant enough to drive statement wide disparity. Should selected line items be affected, the result on our FHR® might be 1 – 5 points (out of 100), but the overall risk opinion generated by our model will most likely remain stable.
- Introduction of IFRS
International Financial Reporting Standards (IFRS) were introduced by the International Accounting Standards Board (IASB) in the early 2000s. This is the global standard for the preparing of public company financial statements. Obviously, those standards have an important influence on how private companies prepare their financial statements. There are now over 120 countries / reporting jurisdictions that “require or allow” domestic companies to use IFRS standards for preparation of financial statements. Of these 120 jurisdictions, a large majority are active participants.
- Demonstrated Stability
RapidRatings has rated companies from many countries through the process of adopting IFRS and migrating from domestic standards. FHR trends remained stable throughout this process. The only regime shift which had any material effect on ratings was that for Korea GAAP to IFRS. The significant change here was with regard to company family consolidation rules, rather than accounting standards.
We have experience in running rating reports for thousands of firms from around the globe and are confident that we are reasonably on top of any issues that arise. Where a client suggests that there is a problem, we are quite prepared to run simulations and compare outcomes using different data.
Our ratings methodology is unique in the marketplace in that it was designed from the start as a system for rating companies globally. We look to public and private companies globally when calibrating these models, and have generally found that variations across industries are more impactful than variations across regions and countries.