The process for identifying potential comparables is one of the most critical aspects of comparability analysis and should be transparent, systematic and verifiable.
The choice of selection criteria has a significant influence on the outcome of the analysis and should reflect the most significant economic characteristics of the transactions being compared.
Once the decision has been made to use internal or external comparables, it is necessary to identify whether they are potentially comparable to the related party transaction. Two approaches are used for this purpose: additive and deductive.
|Additive Approach||Deductive Approach|
|Preparation of a list of unrelated companies that carry out operations similar to the company under analysis.||Extensive search for companies operating in the same sector of activity as the company under analysis.|
|Then, information is collected for each of the operations carried out to verify which of them could be used as comparable.||This search is carried out in databases and has to be refined using both quantitative and qualitative criteria to accept or reject potential comparables.|
|It can be used for both internal and external comparables.||It is mostly used in the selection of external comparables.|
Quantitative and qualitative criteria
Examples of qualitative criteria can be found in product portfolios and company strategies.
The most commonly observed quantitative criteria are:
- Criteria referring to the size of the company based on sales, assets or number of employees
- Criteria linked to intangibles, such as the ratio net value of intangibles/total net asset value
- Criteria related to the importance of exports (volume of exports to total sales)
- Companies that are starting their activity
- Following a bankruptcy process.
The selection and application of a criterion depends on the facts and circumstances of each specific case, and the above list is neither limitative nor prescriptive.
An advantage of the deductive approach is that it is more transparent and reproducible than the additive approach. It is also easier to verify, since the review concentrates on the process and selection criteria used. On the other hand, the quality of the results also depends on the quality of the search tools used.
The optimal degree of transparency of the process will depend on the extent to which the criteria used to select potential comparables can be disclosed, as well as the possibility of explaining the reasons for eliminating them.
Increasing the objectivity and ensuring transparency of the process may also depend on the extent to which the person reviewing the process has access to information about the process and the data sources.