Comparisonof US GAAP and IFRS approach to valuation
Yes,there exists a difference between the United States GenarallyAccepted Accounting Principles (US GAAP) and the InternationalFinancial Reporting Standards (IFRS) for valuation of variouselements on the balance sheet. In assessing the differences, we shallconsider three major components that include research anddevelopment, assets valuation and impairments.
Researchand development (R&D)– US GAAP provides R & D should be considered as a period cost.This implies that the amount incurred on research and developmentmust be treated as an expense in the period it has been incurred.This treatment is in regardless of the possibility of future results.On the other hand, IFRS provides that research and development are acapital expenditure, and hence, it should be capitalized. US GAAP andIFRS differs in the inclusion of the R & D in the financialstatements.
Assetvaluation– according to the US GAAP, assets are valued at their realizablevalue. Realizable value is the price an asset could fetch in themarket if it were to be disposed at that particular time (Kieso &Weygandt, 2012). On the other hand, IFRS provides that assets arevalued at their net book value that is the cost of the asset less thecumulated depreciation. The latter is a clear valuation of assets andmore realistic according to the company’s perspective. This isbecause there might be no market participants to provide the exactvalue of the assents.
Impairments– Impaired fixed assets can only be written down under the US GAAP.On the other hand, IFRS provides that once an asset has beenimpaired, it can be written back if there is a recovery of value. Themain difference here is that U.S. GAAP does not allow recognitions ofrecovered value of assets (Cook, 2005). That is, impairments arepermanent under the Generally Accepted Accounting Principles in theUnited States.
Expenseand Asset– An assent is all tangible and intangible resources owned by anentity and is utilized by for economic sustainability of the business(Kieso & Weygandt, 2012). Examples of assets in the Apple Companyinclude motor vehicle, machinery and property plant and equipment(PPE) among others. The assets determine the financial status of abusiness and its ability to generate income. On the other hand,expenses can be defined as a decrease in the economic value ofassets. This decrease normally results in the utilization of theassets in the generation of revenue. Apple Company has got thefollowing expenses associated with revenue recognition rent,electricity, depreciation, etc. The main difference among the two isalso shown in their representation in the financial statements.Assets of the firm feature in the balance sheet while expenses areshown in the income statement (Kieso & Weygandt, 2012).
Currentand long-term assets– Current assets are the tangible resources that are available tothe firm for utilization in generating revenue within a period ofless than one year, or accounting period whichever is lesser. On theother hand, non-current assets are those resources that are availableto the firm for a period of more than one year. Non-current assetsconstitute of both tangible and intangible resources. From the AppleCompany, current assets include cash at hand, cash at bank, accountsreceivable and inventory. For non-current assets, examples includemotor vehicle, machinery, and property.
Currentliabilities and long-term liabilities– Current liabilities are those obligations of a firm that fall duewithin a period of one year or fewer examples include accountpayable, trade creditors and tax payable. On the other hand,long-term liabilities are those obligations of the firm that becomedue over a period of more than one year they include long-term debt,debentures, 5-years loans.
Thereview and analysis of the financial statements of Apple Company haveshown that there was a positive change of the retained earnings ofthe firm in the financial year 2013 and 2014. The retained earningsin the year 2013 were 37,037 USD and 39,510 USD in the year 2014.This implies that there was an increase in the retained earnings ofApple Company and hence signifies a better performance of the firm.The value of retained earnings is increased by the income of the firmand reduced by the loss incurred during the period. Issuance ofdividends also decreases the value of retained earnings.
Comparingthe balance sheets of Apple and Samsung Companies
Thebalance sheet of Samsung Company showed a higher amount of asset inthe year 2014 than those of the Apple Company. The total assetsrepresented in the balance sheet of Samsung in the year 2014 was104,662,892 million USD while that of Apple Company has a value of231,839 million USD. There is also a difference in the net income ofthe two firms. The net income of Samsung was 6,803,265 million USD in2014 while Apple Company registered a net income of 39,510 millionUSD. Another difference revealed in the balance sheets of the twocompanies is share’s price. Shares of Samsung are trading at $45while that of Apple are trading at $6.49.
Thisreview has shown that Samsung is a bigger company than Apple since itis having more assets and has a high capability of generating hugerevenue that Apple Company. In determining which firm has more debtwe share compare the equity of the firm to the long-term debt(Edwards & Hermanson, 2007). The review of 2014 financialstatements has shown that Apple has an Equity to debt ratio of 25.98%while Samsung has equity to debt ratio of 0.65%. This implies thatApple has more debt than Samsung.
Cook,D. (2005). IFRS/USGAAP Comparison Between International Financial Reporting Standardsand US GAAP(3rd ed.). London: International Accounting Standards CommitteeFoundation.
Edwards,J.D. & R.H. Hermanson (2007) Accounting Principles: A BusinessPerspective. Retrieved December 122015 from http://dl.dropbox.com/u/31779972/Accounting%20Principles%20Vol.%201.pdf
Kieso,D., & Weygandt, J. (2012). Intermediateaccounting(14th ed.). Hoboken, NJ: Wiley.