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IFRS and GAAP Convergence
Briefly describe Walmart
The company establishment was in 1962 by Sam Walton. The company has grown through mergers and acquisitions to become the largest retail outlet in the globe. The main business of the company is corporate retail. The retailer offers a variety of products to its customers at a lower price compared to its competition. According to Fortune 500 ratings, the corporation ranks third among the largest corporations in the globe. The selling point of the company is by ensuring that the customer can find any product in the stores at a competitive price. The company sells its products at a lower price to attract and retain customer. The company helps producers to enable them produce quality products. The company assists through funding, technical advice and promise of a ready market. The producer in turn markets their goods to the company at a discount. The company also has a large employee base to ensure that the customer is satisfied with the products offered. The management trains the staff regularly to ensure professionalism in the workplace. Walmart has outlets in 15 nations using 55 different names. The difference in the currency and accounting standards used in the 15 nations poses a problem to the accounting department.
2. Given the SEC's current position on requiring U.S. publically traded companies to report using the IFRS method of accounting, discuss whether or not it would be beneficial or punitive to the company when adopting IFRS. Explain your rationale.
The home company is located in the United States, which adopts U.S. GAAP accounting standards. The other branches are located in foreign countries that adopt other accounting standards. Adapting IFRS will enable the company to enjoy more benefits than the current accounting standards. The investors need to know how the stock in home and foreign market is performing. Many companies in the foreign market use IFRS thus unification of the accounting standards will ease the burden on the finance department. Adapting a uniform accounting standard will provide comparability. Comparability enhances transparency within the organization, which attracts investors. Walmart will be able to attract and retain its investors through adaptation of IFRS.
Walmart will save on time and cost required to prepare financial statements. Currently Walmart has to convert all the financial statements prepared using other financial standards into U.S. GAAP. Some of the elements of the financial statement depend on the type of accounting standard used in a country. The use of IFRS ensures that the accounts of all the branches are uniform. The use of a uniform accounting standard ensures that the investor can peruse strategies such as global diversification. The funds saved from unification of accounting standards channeled into other activities will increase the revenue generated (Fosbre, Kraft & Fosbre, 2009).
Walmart faces the challenge of reporting using multiple standards. United States should adopt IFRS to ensure that the company reports using one standard. Using multiple reporting standards increases the auditing and accounting expenses for the organization. Multiple reporting standards increase the probability of errors occurring in the financial reports, which affects investor confidence. Adapting to IFRS standards will also enable the company to expand its operations into other emerging markets. The growth of the company affects the accounting standards used in its branches. Using a uniform method of reporting its finances will ensure that the company has adequate resources to sustain expansion into new markets.
Walmart will also benefit from adapting IFRS due to the simplicity of financial records reported using the standard. A simple report is understandable and enables the investors to make informed decisions when investing in the company. The company needs to attract investors to fund its expansion process. The use of simple financial reports will make the investors to make quick decisions. Walmart should adopt IFRS, as it is a clear and productive financial standard adopted by many nations. Adopting IFRS enables the U.S. based company to compete adequately with other players in the market.
3. Determine the differences that would occur (or have occurred) by using IFRS for the income statement, balance sheet, and statement of cash flows, and how these differences may attract investors to the company.
If Walmart adopted IFRS, some significant differences with U.S. GAAP will emerge. According to IFRS, comparative information on all the financial reports should be reported for all transactions. This differs from U.S. GAAP where although comparative information provided, a single balance sheet can be represented depending on the circumstances. There will be a change in the balance sheet layout as required in the regulations. IFRS has a guideline on the minimum number of requirements that should appear on the balance sheet. Debt representation on the balance sheet will change, debt covenant represented as current vs. non-current debts in the balance sheet. Deferred taxes and liabilities represented as noncurrent in the balance sheet compared to the nature of asset or liability used in U.S. GAAP.
The company will experience changes in the income statements concerning revenue classification. The company, which currently uses U.S. GAAP, is required to present its expenses supported by function. The functions considered include administrative and cost of sales. Adaptation of IFRS will mean that Walmart will represent expenses based on nature or function. The use of function requires nature of expense to be included in the notes of the income statement. The notes give certain disclosure regarding the nature of the expense.
The other difference expected from the adaptation of IFRS by Walmart is treatment of extraordinary items in the income statement. IFRS does not allow inclusion of such items in the income statement. U.S. GAAP allows but restricts this entry to items that are infrequent and unusual. Changes will exist concerning discontinued operations presentation. These operations classified as the items held for sales that will yield negligible income. Adaptation of IFRS ensures that these operations are accounted depending on the geographical location or business line. The items covered are for resale in another market in the globe.
A difference noted in all financial reports is the presentation of the performance measures. Key measures used by the organization, represented in certain headings and subtotals include operating profit. The company cannot disclose some non-GAAP measures in its financial report since it is a publicly owned company. Adaptation of IFRS will ensure that the company uses only relevant entries to formulate financial performance measures. The company will require a third balance sheet plus notes, not used in the U.S. GAAP accounting standards. The third balance sheet is required at the beginning of the earliest comparative period when the organization restates its financial statement.
4. Compare and contrast the differences in the financial statements, and the advantages and disadvantages of using IFRS vs. GAAP reporting.
The differences that arise during the presentation of the financial statement using both standards are the titles. Although both standards recognize four main statements, the titles of the statements vary. U.S. GAAP has the balance sheet, which refers to as the statement of financial position. Income statement is the statement of comprehensive income, retained earnings is the statement of change in equity and the cash flow is the statement of cash flow. The difference in title does not have a significant influence on the accounting standard. The reporting period differs in the two standards. U.S. GAAP reports its finances using two of the latest periods while IFRS uses only one year.
A demerit of adopting IFRS is that accountants in office will have to learn the new accounting standards or risk loss of employment. Perfection of the accounting standard will take time since it will be new in the country, the time difference may cause the organization to lose customers. Adoption of IFRS will make the organization susceptible to international competition that avoids U.S. GAAP. Increase competition in the domestic market will result to a decline in revenue for Walmart. Adaptation of IFRS will result to an increase in operating expenses for the company. The increase in operating expenses will reduce the profitability of the organization in a volatile economy. Increased operating expenses may lead to the closure of some of the outlets owned by the company (Bohusova & Nerudova, 2009).
Adaptation of new accounting standards in the country poses a significant risk to the business. U.S. GAAP standards have evolved over time to control businesses in the nation. The standard ensures that all stakeholders in the business are safe. The new standards may provide a new environment that scares investors thus a decline in investments. Adopting international accounting standards creates a monopoly like situation that may affect the business negatively. Adaptation of international standards affects the quality of standards formulated and thus the operations of Walmart.
The benefits of U.S. GAAP are that fraud reduces, it is easy to implement as it has existed for a long time and the operating costs of the company stagnate. IFRS adaptation ensures that the organization saves on operating cost, the financial reports are clear and transparent and audit efficiency prevails. Adaptation of…[continue]
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