International Differences in Financial Reporting PDF

International differences in financial reporting Christopher Nobes Ca’ Foscari, 3 April 2024  Learning outcomes Outline the scale of international differences in financial reporting Understand some types of international differences Illustrate differences usi...

International differences in financial reporting Christopher Nobes Ca’ Foscari, 3 April 2024  Learning outcomes Outline the scale of international differences in financial reporting Understand some types of international differences Illustrate differences using real company examples  Examples of Reconciliation of Earnings to US Rules Domestic Earnings US Adjusted Difference Astra-Zeneca: 1998 £2,611m £1,036m -60% (UK-Sweden) 1999 £1,143m £(3,539)m -410% 2002 £2,836m £2,307m -19% 2003 £3,036m £2,268m -25% British Airways: 2000 £(21m) £(451m) -2048% (UK) 2001 £114m £226m +98% 2002 £(142m) £(119m) +16% 2003 £72m £(128m) -278% 2004 £130m £396m +205% Glaxo Wellcome: 1995 £717m £296m -59% (UK) 1996 £1,997m £979m -51% 1997 £1,850m £952bn -49% 1998 £1,836m £1,010m -45% 1999 £1,811m £913m -50% Daimler-Benz: 1993 DM615m DM(1,839m) -399% (Germany) 1994 DM895m DM1,052m +18% 1995 DM(5,734m) DM(5,729m) +0%  Examples of Reconciliation of Shareholders’ Funds to US Rules Domestic US-adjusted Difference Astra-Zeneca: 1998 £10,929m £5,558m -49% (UK-Sweden) 1999 £10,302m £33,375m +224% 2002 £11,172m £30,183m +170% 2003 £13,178m £33,654m +155% British Airways: 2000 £3,147m £2,389m -24% (UK) 2001 £3,215m £2,334m -27% 2002 £2,016m £2,081m +3% 2003 £2,058m £1,932m -6% 2004 £2,218m £2,381m +7% Glaxo Wellcome: 1995 £91m £8,168m +8,876% (UK) 1996 £1,225m £8,153m +566% 1997 £1,843m £7,882m +328% 1998 £2,702m £8,007m +196% 1999 £3,142m £7,230m +130% Daimler-Benz: 1993 DM18,145m DM26,281m +45% (Germany) 1994 DM20,251m DM29,435m +45% 1995 DM13,842m DM22,860m +65% The Group Shareholders P (Italy) S1 (Singapore) S2 (France) S11 (HK) S12 (PRC)  What proportion of the following sets of companies apply IFRS? US listed companies Japanese listed companies Australian listed companies French parent companies (not the group statements) German parent companies (not the group statements) Multiple choice: - 100% - 73% - 42% - 5% - 0%  Examples of Difference 1. Presentation of balance sheets 2. Recognition of intangibles 3. Treatment of goodwill 4. Measurement of non-current assets 5. Depreciation methods 6. Impairment calculations 7. Inventory valuation  Presentation of Balance Sheets Compare GSK with Caterpillar - title of statement? - how many years? - order of assets? - structure of whole balance sheet - terminology  Recognition of Intangibles Under IFRS, are costs treated as assets or as expenses: - purchased patents? - purchased brands? - purchased goodwill? - created brands? - in-house research? - in-house development? The answers can be different under other GAAPs Volkswagen 2001 (from German GAAP to IFRS) €m Equity (German law) 1.1.2000 9,811 Capitalization of development costs 3,982 Amended useful lives and depreciation methods of tangible and intangible assets 3,483 Capitalization of overheads in inventories 653 Differing treatment of leasing contracts as lessor 1,962 Differing valuation of financial instruments 897 Effect of deferred taxes - 1,345 Elimination of special items 262 Amended valuation of pension and similar obligations - 633 Amended accounting treatment of provisions 2,022 Classification of minority interests not as part of equity - 197 Other changes 21 Equity (IFRS) 1.1.2000 20,918  Examples of Difference 1. Presentation of balance sheets 2. Recognition of intangibles 3. Treatment of goodwill 4. Measurement of non-current assets 5. Depreciation methods 6. Impairment calculations 7. Inventory valuation  Group (consolidated) accounting In P’s balance sheet, S2 is shown as an investment in shares P controls S2, therefore controls its assets and liabilities. Therefore, all the assets and liabilities of the group are shown in the consolidated balance sheet.  Treatment of Goodwill (the amount paid in excess of net assets, when buying a subsidiary) Write off against reserves (old Germany and UK) Amortise over life: - 40 years (old US GAAP) - 20 years (UK until 2015, old IAS) - 10 years (IFRS for SMEs, UK now) - 5 years (old Italy) Impair annually (US, IFRS)  Vodafone, UK to IFRS, for the six months to 30 September 2004, £m UK IFRS Revenue 16,796 16,742 Cost of Sales (10,072) (10,410) Gross Profit 6,724 6,332 Selling and distribution expenses (1,005) (1,013) Administrative expenses (7,964) (1,638) Share of result in associates 241 1,078 Operating (loss)/profit (2,004) 4,759 Non-operating income and expense 16 16 Net financing costs (191) (235) (Loss)/profit before taxation (2,179) 4,540 Tax on (loss)/profit (718) (857) (Loss)/profit for the financial period (2,897) 3,683 Less: Minority interest (298) (68) (Loss)/profit for equity shareholders (3,195) 3,615  Measurement of Non-current Assets Cost (depreciated): - US and German - usually IFRS and UK Fair Value (FV): - some IFRS land and buildings, especially investment properties  Depreciation Useful lives Methods: - straight-line, linear - accelerated, reducing-balance Estimated residual value Volkswagen 2001 (from German GAAP to IFRS) €m Equity (German law) 1.1.2000 9,811 Capitalization of development costs 3,982 Amended useful lives and depreciation methods of tangible and intangible assets 3,483 Capitalization of overheads in inventories 653 Differing treatment of leasing contracts as lessor 1,962 Differing valuation of financial instruments 897 Effect of deferred taxes - 1,345 Elimination of special items 262 Amended valuation of pension and similar obligations - 633 Amended accounting treatment of provisions 2,022 Classification of minority interests not as part of equity - 197 Other changes 21 Equity (IFRS) 1.1.2000 20,918  Impairment US GAAP (a) INDICATION (e.g. physical damage) (b) TEST Carrying value (e.g. $10m) v. Undiscounted cash flows (e.g. $9m) (c) MEASURE Carrying value v. Fair value (if no market, DCF, e.g. $6m) IAS 36 COMBINED TEST AND MEASURE Carrying value v. Recoverable amount (higher of DCF and NRV)  Impaired Asset Carrying value (net book value) = 8 Net realisable value = 4 Undiscounted cash flows = 9 Discounted cash flows = 6 IFRS Impairment = ? US Impairment = ?  Impaired Asset Carrying value (net book value) = 8 Net realisable value = 4 Undiscounted cash flows = 9 Discounted cash flows = 6 IFRS Impairment = 2 US Impairment = 0  Inventory Valuation Meaning of cost: is LIFO allowed/used? - No (IFRS, UK, France) - Yes (US, Germany, Italy) Meaning of market: - NRV (IFRS) - CRC (US until 2016) Reversal of loss if market recovers: - Yes (IFRS) - No (US)  Inventory Cost Determination in USA Methods (analysis of 600 companies) Last-in first-out 408 First-in first-out 366 Average cost 235 Other 52 Use of LIFO by the above 408 companies All inventories 31 50% or more of inventories 204 Less than 50% of inventories 93 Not determinable 80 Companies using LIFO 408  Final point Even if all the companies being studied are applying IFRS, there are still differences in practice There are choices in IFRS, and there is judgement  Policy choices: % of index companies Australia UK France Spain Germany 1a) income statement by function 59.3 47.2 54.8 4.0 76.5 1b) by nature 29.6 13.9 45.2 96.0 23.5 1c) neither 11.1 38.9 0.0 0.0 0.0 2 inclusion of a line for EBIT or op profit 51.9 97.2 100.0 96.0 100.0 3a) equity acc included in operating 63.2 24.5 6.9 0.0 18.8 3b) immediately below 15.8 34.0 3.4 8.3 62.5 3c) below finance 21.1 41.5 89.7 91.7 18.8 4 showing net assets 100.0 81.9 0.0 0.0 0.0 5 liquidity increasing 0.0 100.0 100.0 96.3 85.0 6 OCI statement 65.9 83.7 5.7 25.0 21.7 7 indirect cash flows 0.0 98.0 100.0 87.5 100.0 8 dividends received as operating 87.5 36.7 92.9 50.0 66.7  Australia UK France Spain Germany 9 interest paid as operating 90.9 68.4 88.6 38.7 61.9 10 some PPE at fair value 13.6 12.2 0.0 0.0 0.0 11 investment property at fair value 42.9 73.1 0.0 0.0 0.0 12 some fair value designation 29.6 12.5 32.3 12.0 5.9 13 interest capitalization 75.8 47.5 40.0 94.7 22.2 14a) FIFO only 27.3 57.1 11.5 5.9 0.0 14b) weighted average only 59.1 30.6 57.7 88.2 71.4 15a) actuarial gains/losses to OCI 72.7 84.4 20.0 12.5 47.6 15b) to income in full 18.2 3.3 5.7 37.5 0.0 15c) corridor 9.1 12.2 74.3 50.0 52.4 16 proportional consolidation 0.0 22.4 81.3 84.6 31.3