Converting US GAAP Statements to IFRS - Essay Example

Capstone Project- Converting US GAAP Statements to IFRS Name Institution Course Date Accounting Methods for Starbucks Inventories Starbucks use periodic inventory accounting system to record its inventories. In this method, detailed accounting methods are not kept throughout the accounting period (Weygandt, Kimmell, & Kieso, 2009). Instead, the company determines costs of goods sold at the end of an accounting period. Inventories are stated at the market cost. Inventory reserves are based on historical experience. Depreciation The depreciation method used by Starbucks is straight-line. Assets are estimated over their useful lives. This ranges from 2 to 15 years for equipment and 30 to 40 years for buildings. Amortization is done to leasehold improvements over their estimated useful lives. They can also be amortized over their related lease life, generally 10 years. Revenue Recognition The consolidated revenue of the company is recognized after discounts, allowances, returns, and sales incentives are removed. Fixed Asset Fixed assets are carried at cost less accumulated depreciation. These costs include direct costs needed in acquiring and preparing the assets for use. In some cases, this includes overhead and internal labor. Depreciation expense is included in the cost of sales. Moreover, when costs of repairs and maintenance are incurred, they are subsequently expensed. Intangible Asset Intangible assets are generally amortized over their estimated useful lives. It includes definite-live intangible assets such as trade secrets, copyrights, contract-based patents, and acquired rights. They are tested for impairment by first comparing their carrying value to their estimated fair value. An impairment charge is recognized if the carrying value of the asset exceeds its estimated fair value. Long-term Liabilities Long-term liabilities are recognized and disclosed at their fair value on a non-recurring basis. Amortization Assets are generally amortized over their useful lives. Pension Accounting The common stock of Starbucks is given at the fair value of the stock on the day that it is granted. It generally expires after 10 years from the grant date. They are exercised in four equal installments. The term of options is based on historical experience. In this case, consideration is given to the contractual terms and expectations of future employee behavior. Introduction: IFRS versus US GAAP There has been a global movement towards the adoption of International Financial Reporting Standards. Indeed, the capital markets of many countries now require the use of IFRS when publicly-traded companies make their financial statements. In United States, the convergence between IFRS and US GAAP has taking place for many years. Formally, this exercise has been going on since 2002 when Norwalk Agreement was enacted (Smith, 2014). It is very important for people involved with financial reporting to understand IFRS. They include financial analysts, auditors, corporate executives, management accountants amongst others. The first part of this project is to identify and describe the key differences and similarities between IFRS and US GAAP. By studying actual financial statements that were reported under IFRS and US GAAP, findings indicate notable differences between the two accounting reporting standards. However, there are no significant overall differences. Difference between US GAAP and IFRS IFRS and US GAAP differ on a number of areas. It include conceptual framework, fair value measurement, basis of preparation of financial statements, form and components of financial statements and financial periods required. Conceptual Framework for Financial Reporting In IFRS, the people responsible for preparing financial statements use conceptual framework as point of reference when there is no specific guidance. Unlike IFRS, the conceptual framework is not an authoritative guidance used in preparing financial statements. It is not often referred by preparers of financial statements (Santoro & Bielstein, 2014). Fair Value Measurement There is a practical expedient that allow measurement of fair values for certain investments at their net asset value when using IFRS. In US GAAP, practical expedient does not exist and measuring certain investments at their net asset value is not possible. Basis of Preparation of Financial Statements The preparation of financial statements in US GAAP is prepared on a going concern basis. The typical US GAAP requirements are applied unless there is an imminent liquidation. The basis for preparation of financial statements in IFRS is on a going concern. The only exception is when the management intends to liquidate the business and there is no other realistic alternative. Form and Components of Financial Statements A company that has subsidiaries is required to present consolidated financial statements in case of IFRS. If specific criteria are met, there is no need for consolidated statements (Santoro & Bielstein, 2014). Other than investment companies, no exemptions exists from preparing financial statements even when an entity has subsidiaries. Financial Periods Required In general, US GAAP requires presentation of comparative statements. For public companies, SEC rules require presentation of two recent statement of financial position and other statements must be for a three-year period that ends on the statement of financial position date. In IFRS, disclosure of comparative information for all amounts in the financial statements for the previous period is required. Similarities between US GAAP and IFRS There are a number of similarities between US GAAP and IFRS than differences. Both IFRS and US GAAP require preparation of financial statements by using accrual basis of accounting (Gasper, 2014). The exception is preparation of cash flow statement. Moreover, both sets of standards use the same concepts regarding consistency and materiality that entities should consider in preparing their financial statements. Statements of financial position, income statement, cash flow statement, statement of changes in equity, and notes that include accounting policies are presented as complete set of financial statements in both IFRS and US GAAP. ‘Cash and cash equivalents’ include short-term investments in both accounting standards. In measuring fair value of an asset or a liability, the firm will select valuation techniques that are appropriate to a given scenario and for which there is sufficient data to measure fair value. This is true in both IFRS and US GAAP accounting standards. US GAAP Accounting Standard ‘US GAAP’ is a term indicating authoritative body of literature comprising accounting and reporting standards in United States. FASB primarily maintains authoritative US GAAP. US GAAP is used by both profit-oriented entities and those not pursuing profits. Any entity that complies with US GAAP is mandated to comply with all the codification sections that include disclosure requirements. US GAAP has been constantly criticized for being too “rule-based”. Due to its rule-based nature, the accounting standard is based on conservatism (Camfferrman & Zeff, 2015). Due to this, US GAAP has been severely criticized for this approach. This is because economic substance of financial statements is likely to be distorted with this approach. The literature on US GAAP is voluminous. In fact, there is much interpretive guidance which makes it overly complex (Stice, 2012). It also discourages use of professional judgment. Moreover, US GAAP encourages transaction structuring. Despite many criticisms, US GAAP should be applauded for its desirability in some circumstances. US GAAP can be used by both profit and non-profit oriented organizations. Indeed, it contains additional codification topics that are specifically applicable to non-profit organizations. IFRS Accounting Standard ‘IFRS’ is a term that indicates the entire body of International Accounting Standard Board (IASB) authoritative literature. IASB and IFRS Interpretation Committee develop and maintain individual standards and interpretations. IFRS is a better accounting standard because it has improved comparability of financial statements in different financial markets across the world. This has been possible due to standardized financial reporting. It reflects on the economic substance of financial statements more than its legal form. This assists entities to have true and fair view of their firms’ transactions. IFRS is not an ‘all-round’ accounting standard because it is only designed to be used by profit-oriented entities. Non-profit organizations find it difficult to use the standards provided by the accounting body. IFRS has many alternatives and little specificity to various items which can skew the result of financial statements depending on which alternative is used. IFRS is complex and costly. This disadvantaged SMEs that are required or need to adopt IFRS due to large transition costs. Moreover, SMEs may not absorb the complex level of IFRS. Financial Reporting Method There are two main accounting methods used for financial reporting; cash and accrual. The objective of the accounting method that an entity chooses is its ability to measure and control its financial activities. In choosing an accounting method, the most important consideration is the ability to keep records by individuals responsible for making and maintaining financial statements. Cash method is simpler than accrual method. However, accrual method is the most appropriate for financial reporting purposes. Accrual method of accounting is more suitable for reporting the financial activities of an entity as it conform to generally accepted accounting standards (GAAP) (Heintz & Parry, 2014). In the accrual method, revenue is recorded when earned and expenses when incurred. This method best matches revenues and expenses of a company. Moreover, it provides a better picture of company’s financial situation and performance. Under the rules of US GAAP, a company is required to provide comparative information in its annual financial statements. Accrual basis accounting tracks historical revenues and expenses which is helpful in creating financial statements. Balance Sheet under IFRS IFRS Balance Sheet US GAAP-IFRS Financial Statement Reconciliation As of Sep 28, 2014 (In millions) US GAAP Adjustments IFRS Assets Current Assets Cash and cash equivalents 1, 708.4 1, 708.4 Investments 135.4 135.4 Account receivable 631.0 631.0 Inventories 1,090.9 417.0 1507.9 Prepaid expenses and other current assets 285.6 285.6 Deferred income taxes 317.4 317.4 Total current assets 4, 168.7 4585.7 Property, plant and equipment 3,519.0 3519.0 Long-term investments 318.4 318.4 Equity and cost investments 514.9 514.9 Deferred income taxes 903.3 903.3 Other assets 198.9 198.9 Other intangible assets 273.5 273.5 Goodwill 856.2 856.2 Total Assets 10752.9 417 10335.9 IFRS Balance Sheet Assets Liabilities and Shareholders’ Equity Current Assets Current Liabilities Cash and cash equivalents 1, 708.4 Accounts payable 533.7 Investments 135.4 accrued liabilities 1514.4 Account receivable 631.0 insurance reserves 196.1 Inventories 1507.9 deferred revenue 794.5 Prepaid expenses and other current assets 285.6 Total current liabilities 3038.7 Deferred income taxes 317.4 Non-current liabilities Total current assets 4585.7 Long-term debt 2048.3 Property, plant and equipment 3519.0 Other long-term liabilities 392.2 Long-term investments 318.4 Total liabilities 5479.2 Shareholders’ Equity Equity and cost investments 514.9 Common stock (0.001 par value)0.7 Deferred income taxes 903.3 additional paid-in capital 39.4 Other assets 198.9 retained earnings 5206.6 Other intangible assets 273.5 Surplus (deficit) 25.3 Intangible assets Total Shareholders’ equity 5272.0 Goodwill 856.2 Non-controlling interest 1.7 Total Assets 10335.9 Total equity 5273.7 Total Liabilities and Equity 10335.9 IFRS Income Statement As at 28 Sept 2014 Income from Continuing Operations Sales 16447.8 Costs of Goods sold 6858.8 Gross profit 9589 General and administrative expenses 6796.4 Operating income 2792.6 Other income Income from equity investees 268.3 Interest income 142.7 Total income 3233.1 Non-operating income (loss) Litigation charge/(credit) 20.2 Earnings before interest and taxes 3212.9 Interest expense 64.1 Income before tax 3148.8 Tax expense 1092.0 Net income 2056.8 IFRS Cash Flow Statement As at 28 September 2016 Operating Activities: Cash from customers 2067.7 Cash paid to suppliers (60.4) Cash paid to employees (183.2) Cash paid for other operating expenses (4.6) Income taxes paid (309.8) Net cash from operating activities 1509.7 Investing Activities: Purchase of investments (1652.5) Sale of investments 1454.8 Proceeds from sale of equity 103.9 Additions to property, plant and equipment (1160.9) Net cash used by investing activities (1254.7) Financing Activities: Proceeds from issuance of long-term debt 748.5 Proceeds from issuance of common stock 139.7 Repurchase of common stock (758.6) Payment of cash dividends (783.1) Net cash by financing activities (653.5) Net (decrease) increase in cash and cash equivalents (867.3) Cash and cash equivalents: Beginning of period 2575.7 End of period 1708.4 The difference between in net income between IFRS and US GAAP is 10.9; 2067.7-2056.8. EPS US GAAP= 2067.7/753.1=2.75 EPS IFRS=2056.8/753.1=2.73 the difference is minimal= 2.75-2.73=0.02 References Camfferman, K., & Zeff, S. A. (2015). Aiming for global accounting standards: The International Accounting Standards Board, 2001-2011. Oxford: Oxford University Press. Gaspar, J. E. (2014). Introduction to global business: Understanding the international environment and global business functions. Mason, OH: Cengage Learning. Heintz, J. A., & Parry, R. W. (2014). College Accounting: Chapters 1-15, 21st edn. Mason, OH: Cengage Learning. Needles, B. E., & Powers, M. (2012). A guide to international financial reporting standards, 3rd edn, Mason, Ohio: South-Western. Santoro, J., & Bielstein, M.M. (2014). IFRS compared to US GAAP: An overview. London: KPMG’s Global IFRS Institute. Smith, L.M. (2014). Key Differences between IFRS and U.S. GAAP Impact on Financial Reporting. New Jersey: Institute of Management Accountants. Stice, E. K., & Stice, J. D. (2012). Intermediate accounting, 18th edn. Mason, OH: South-Western/Cengage Learning. Weygandt, J. J. (2009). Financial accounting, 7th edn. Hoboken, N.J: Wiley. Read More