Comparability Adjustments

Comparability Adjustments

A comparison of the profit level indicators of companies that have differences in their operations can yield misleading results. To account for such differences, the financial data of comparable companies are adjusted to place them on the same operational and transactional level as main comparable entity. The regulations require appropriate adjustments to account for “differences between the tested party and uncontrolled comparables that would materially affect the profits” under the CPM (Treas. Reg. §1.482-5(c)(2)(iv)).

Since the use of a particular inventory valuation method can affect the levels of cost of goods sold reported by a company, both the comparables and the tested parties should be examined using the same inventory accounting method to increase the comparability of the data. Thus, the inventory and costs of goods sold by a company and the comparable companies are presented on a FIFO basis.

The inventory and cost of goods sold for a company using a LIFO method of inventory are adjusted as follows:

ADJINVTyr 0 = INVTyr 0 + LIFRyr 0

ADJCOGSyr 0 = COGSyr 0 - (LIFRyr 0 - LIFRyr -1)

ADJGPyr 0 = GPyr 0 + ADJCOGSyr 0

ADJOPyr 0 = OPyr 0 + ADJCOGSyr 0

Where, INVT = Inventories

LIFR = LIFO Reserve

COGS = Cost of Goods Sold

GP = Gross Profit

OP = Operating Profit

ADJINVT = Adjusted Inventories

ADJCOGS = Adjusted Cost of Goods Sold

ADJGP = Adjusted Gross Profit

ADJOP = Adjusted Operating Profit