The Differences And Similarities In The Financial Statements Accounting Essay
Ford Motor Company is a U.S multinational car producer located in the city of Dearborn, Michigan. The company was founded by Henry Ford and on June 16, 1903 it was incorporated. Along with the Ford and Lincoln brands, Ford also owns a small part of Mazda in Japan and Aston Martin in the UK. UK subsidiaries of FORD, Jaguar and Land Rover were sold to Tata Motors in India on March 2008. Ford sold Volvo to Geely Automobile. Ford in 2010 exposed the Mercury brand.( Bak, 2003)
Ford Motor is the second-largest car manufacturer in the United States and fifth largest in the world in terms of the number of annual shipments. By the end of 2010 it was the largest producer of Europe. Ford is the eighth in the order of U.S. companies in the Fortune list for 2010 on the basis of total revenues that are 118.3 billion U.S. dollars. In 2008, production of Ford Motors was 5.532 million and employs were estimated to be around 213,000. During the crisis of the automotives, there was a drop in the production of Ford, with an overall production reaching to 4817000, in 2009. In 2010 Ford had a net profit of 6.6 billion U.S. dollars, reducing its debt by 33.6 billion dollars to 14.5 billion U.S. dollars. The company received quality survey awards form JD Power and Associates, which were more than any other in the automotive industry. Ford took the award for five cars in four categories and a dozen cars in the top three. (Douglas G, 2003)
The company being located in USA has to follow the regulatory frame work of US, i.e. United States generally accepted accounting principles usually abbreviated as the U.S. GAAP.
US GAAP are principles of accounting or simply accounting standards that are used in the preparation and submission financial statements for publicly traded companies and private non-profit organizations and governments. And usually contains generally accepted accounting principles applicable under local accounting standards.
Honda Motor Co., Ltd. is a Japanese multinational car producer. Previously it was known as a manufacturer of cars and motorcycles. It is the world's largest manufacturer of motorcycles, and since 1959 the world's largest manufacturer of internal combustion engines, and has the production volume of more than 14 million engines each year (Bak, 2003). Honda Overtook NISSAN in April 2001, and became the second largest Japanese automobile industry. In August 2008, Honda surpassed Chrysler for the automobile industry and became the fourth largest in the United States. Honda is the largest automobile manufacturer and ranks in the sixth place in the world.
It was Honda's automobile industry which launched a luxury brand for the first time in Japan which was Acura in 1986. Apart from the basic car and motorcycle company, Honda also gardens equipment, marine engines and personal watercraft, generators and others. Since 1986, Honda has contributed to artificial intelligence and robotics research. They dared to enter the aviation industry with the establishment of Aero Engines GE Honda in 2004 and their Honda Jet - 420 is scheduled for launch in 2011. Honda spends about 5% of its revenues in research and development.
("The History of Honda":www.Cars-directory.net.
"Honda Worldwide | History":www.World.honda.com. )
Honda being located in Japan has to prepare its financial statements in accordance with IFRS.
International Financial Reporting Standards (IFRS) are the criteria on the principles, interpretations, and social programs set by the International Accounting Standards.
Many of the rules are part of the international standards known by the former name as International Accounting Standards. On April 1, 2001, IFRS adopted a new computerized National Identity Card Inter-Agency Standing Committee responsible for the development of international accounting standards. Today the International Accounting Standards Board is responsible for the development of new standards (IASB,2008).
Background and problem definition:
The research problem to be addressed would be: "The differences and similarities arising in the financial statements of Honda and Ford car Manufacturers due to different regulatory frameworks"
The researcher will try to answer the following questions:
What are the differences and similarities in the financial statements of the two car manufactures?
What are the two regulatory bodies? their standards and reporting procedures?
What is the role of audit and accounting professions?
The objectives of this research are as follows:
Find the differences and commonalities of the way key assets, liabilities, capital and earnings are recognized and disclosed in the financial statements
legislations relevant to accounting
regulation and enforcement of the regulatory framework by the regulatory bodies.
Literature Review / Theory
International Financial Reporting Standards are the "principles" to regulate the development of general rules regarding accounting practices.
International Financial Reporting Standards include the follows:
International Financial Reporting Standards , and standards published after 2001
International Accounting Standards (IAS), and regulations issued before 2001
Interpretations have been issued in the International Financial Reporting Interpretations Committee after 2001 (IASB.2008)
Committee has issued interpretations of sic before --2,001
Framework for the preparation and presentation of financial statements (1989)
Objectives of financial statements:
The financial statements should present s true and fair view of the organizations accounting practices. In lay man's words it must balance the true image of the organization's activities, since information produced has to be used by various components of the society or regulatory authorities.
Qualitative characteristics of financial statements
Qualitative characteristics of financial statements as follows:
True and fair view / fair presentation
Elements of financial statements
Company's financial statements are basically an overview of financial assistance. These would include the following elements:
Assets: An asset is a resource of the company, incurred as a result of past transactions which will result in future economic benefit to the company or an in-flow of future economic benefits for the company.
Liability: A liability is a present obligation of the company resulted from past events, whose settlement is expected to lead to the out flow of corporate resources.
Equity: Are the company's remaining assets after deduction of all obligations under the historical cost method. It is also well known as the owner's shares.
The financial performance of the company is primarily shown in profit and loss account or balance sheet. Elements of profit and loss account or the elements used in the measurement of financial performance are:
Income: the economic benefits increased during the period in the form of inflows or enhancements of assets or decrease in liabilities or an increase in equity.
Expenses: to increase the benefits of economic decline during the period in the form of outflows or depletion of assets or liabilities, resulting in a reduction of equity.
U.S. generally accepted accounting principles (GAAP)
United States generally accepted accounting principles, and usually abbreviated as the U.S. GAAP are principles of accounting or simply accounting standards used in the preparation and submission of reports and the financial statements for publicly traded companies and private non-profit organizations and governments. And usually contains generally accepted accounting principles applicable under local accounting standards.
Currently, the Financial Accounting Standards Board (FASB) is the highest authority in determining the principles of proper accounting for public companies, private and non-profit organizations. Accounting in the Federal Government is treated by the Advisory Board of the Federal Accounting Standards FASAB.
Comparison between the IFRS and US GAAP
There are a few similarities between IFRS and US GAAP and the differences are rapidly getting reduced. The differences explained below are just a few significant ones and as of this point of time.
With respect to revenue recognition, US GAAP has developed a detailed guidance for different industries incorporating standards suggested by the other local accounting standard organizations in the US. IFRS, on the other hand, mentions two main revenue standards along with a couple of interpretations related to revenue recognition as guidance.
There are also some significant differences related to when an expense should be recognized and the amount that has to be recognized. For instance, IFRS recognizes the expense of certain stock options with vesting over a period of time sooner than the GAAP.
There are also some significant differences between the US GAAP and IFRS with respect to the arena of financial liabilities and equity. Instruments that were regarded as equity by the US GAAP will be considered as debt under the IFRS standards.
The US GAAP has several criteria for consolidation whereas under IFRS, a company can consolidate based on the power it can exercise on the financial and operational policies of the other entity. By being responsible for the reporting and performance of these new entities can affect the company's financing arrangements and several more areas.
Unlike US GAAP, IFRS forbids companies from using the LIFO or the last in, first out method of costing inventory. Companies using LIFO will have to transition to other costing methodologies.
The major difference between U.S. generally accepted accounting principles and IFRS is to allow three different concepts essential to capital and capital maintenance. As approved by U.S generally accepted accounting principles (GAAP) only two concepts of capital and capital maintenance are allowed in times of low-inflation and deflation. While IRFS recognizes all three,
generally accepted accounting principles of America (GAAP) does not recognize the concept of capital (third party) and the preservation of capital in times of low inflation and deflation, and maintenance of any of the authorized capital in units of purchasing power.
Differences in accounting practices and policies
The most important areas of similarities and differences between US GAAP and IFRS are on the financial statements of companies in the European Union, with international standards as adopted by the European Commission. These rules may vary in some cases: international standards by the International Accounting Standards Board
Relevant standards of IFRS:
Form and content concept: (IFRS selected) including the International Accounting Standards still exists and the interpretations specified may be additional requirements under the local law, authorities or stock exchanges.
Relevant standards of GAAP:
The form and content concept: (GAAP) specified in the hierarchy of generally accepted accounting principles. Financial statements in accordance with International Financial Reporting Standards include:
â€¢ Balance sheet
â€¢ Income statement
â€¢ Statement of the following:
1. - Changes in equity or
2. - Changes in equity other than those arising from capital transactions with owners
â€¢ Income and Expenditure
â€¢ cash flow
â€¢ accounting policies and notes
â€¢ The financial statements of assets and liabilities, financial position and results of the company. IFRS requires a true and fair representation of the transactions and events.
â€¢ The application of this standard is for small and medium businesses. Additional information is required if necessary. The findings contained in the financial statements should present a fair view of the financial position and performance for small and medium businesses.
â€¢ The application of international standards for an entity with public accountability is not the same. Financial statements under GAAP comprise of:
â€¢ Total national income. This statement is concerned with profit and loss account or in combination
â€¢ Statement of changes in equity.
â€¢ Cash flow
â€¢ Notes to the financial statements
IFRS has two main expense categorizations:
Nature of expenses
Function of expenses
IAS 1 does not specify the form of income but there is no fixed elements that should appear on the face of the income statement. Additional information is requires and should be mentioned on the face of the profit and loss account in the form of notes (IAS, 2004).
U.S. GAAP does not provide a standard format. Single or multiple stages are acceptable. Supreme Education Council, Sox organization requires that a specific property should be shown on the face of profit and loss account. Time horizon for the continuation of the work is "reasonable period of time not exceeding one year from the date of closure."
Within the framework of international standards (IFRS) a company has a complete the set of financial statements at least once a year. When the changes in the dates of the company's accounting period to the dates of the financial statements submission result in more or less time delay, the company has to provide the following information:
1. The reason for the use of longer or shorter period.
2. Provided that the comparative figures are not in the financial statements (including the notes) the results are quite similar.
Contrary to international standards (IFRS), generally accepted accounting principles (GAAP) if there are changes in the report where the reference period is not exceeding twelve months, the company shall prepare financial statements for the period of transition and the beginning of a new phase of the date should be notified.
Consistency of presentation is same under both regulatory systems.
The company has to maintain the presentation and classification of items in its financial statements from period to period, unless:
Clearly it is identified that after a significant change in the nature of the project or revision in the financial statements (Grant,2003). Another presentation or classification would be more appropriate, provided that the company has taken into account the criteria for selecting and applying accounting policies, as in Article 10 of the accounting estimates and errors, or
Standards required a change in the presentation itself have been met.
International standards (IFRS) require that for small and medium enterprises, the overall result of the statement of changes in property rights to be represented. Under GAAP, it is not required in a separate statement of the rights of shareholders, and can display the difference of capital in the notes to the financial statements. Under IFRS the statement of financial position shall include the following amounts:
-Cash and cash equivalents.
-Receivables and other assets.
-Property, plant and equipment.
-Real estate investments at fair value recognized in earnings.
-Biological assets are stated at cost less accumulated depreciation and depreciation.
-Diversity in the acquired assets at fair value.
-Investments in associates.
-Investments in entities subject to joint control.
-Supplies and services.
-Tax assets and liabilities.
-Deferred tax liabilities and deferred tax assets (which are always long term).
-Provided non-controlling interests in shares separately from the property rights of the owners of the parent companies.
-Equity holders of the parent company.
In contrast to the IFRS for small and medium enterprises, deferred tax assets and liabilities are classified as items of current or long-term for the classification of assets or liabilities that led to the temporary difference.
However, over the years it has been seen that there is a strong International Support for IFRS
At their April 2, 2009 London Summit, the Leaders of the Group of 20 agreed as part of their Declaration to Strengthen the Financial Systemâ€¦
"â€¦to call on the accounting standard setters to
work urgently with supervisors and regulators to
improve standards on valuation and provisioning
and achieve a single set of high-quality global
Many of the comment letters have been written by special interest groups and they are not necessarily representative of the view in the U.S. Two surveys conducted by KPMG in January 2009 show a strong support for IFRS among executives, a survey by Grant Thornton conducted in April 2009 shows a 50/50 'support' for IFRS.
Comment Letter - IDW
"We are not convinced that staggering the transaction in the manner proposed is necessarily the optimal wayâ€¦ given the convergence project and resultant increasing similarities between U.S. GAAP and IFRS the transition ought to be less onerous for U.S.issuers than was the case for German companies, who faced significant challenges in converting to IFRS from a substantially different German GAAP."
"True IFRS convergence ought to involve due consideration of other major national GAAP and also be open to new ideas rather than being restricted to existing U.S. GAAP."
"â€¦ criteria by which the Commission plans to evaluate these factors are not clearâ€¦ In not indicating a firm commitment, but essentially "holding the door open" the SEC makes the prospect of electing for the early use of IFRS significantly less attractive; issuers are unlikely to be prepared to try IFRS for a limited period, especially if they might subsequently need to revert back to U.S. GAAP either voluntarily or at the insistence of the SEC. We therefore urge the SEC to bring forward its decision and indicate a firm commitment to the transition to IFRS, rather than merely introducing the "possibility" of IFRS adoption."
Comment Letter - AAA
(American Accounting Association)
"Financial statements based on IFRS provide good financial reports that are equivalent to those based on U.S. GAAP. We favor giving U.S. companies the choice of using U.S. GAAP or IFRS in their financial reports and hope that other jurisdictions around the world would exploit the advantages of giving choice to their own registrants. This will lead to a gradual and partial adoption of IFRS in the U.S."
KPMG Global Head of Audit
"IFRS brings more discipline and more rigor. Companies say that if IFRS continue to base
themselves on economic realities then they look at their own businesses differently and it helps
them manage themselves better. Companies need to feel the figures are equally relevant for
(KPMG: International Financial Reporting Standards:
Views on a financial reporting revolution, 2006)
A review of the assets, equity and other details of:
Revenue US$128.954 billion (2010)
Operating income US$7.149 billion (2010)
Net income US$6.561 billion (2010)
Total assets US$165.693 billion (2010)
Total equity US$-642 million (2010)
Employees 164,000 (2010)
Revenue US$120.27 billion (FY 2009)
Operating income US$2.34 billion (FY 2009)
Net income US$1.39 billion (FY 2009)
Total assets US$124.98 billion (FY 2009)
Total equity US$40.6 billion (FY 2009)
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