Inventory and property valuation differences between US GAAP and IFRS

Accounting

Approach to Valuation by GAAP and IFRS: Key Differences

When it comes to valuation by U.S. GAAP and IFRS, there exists a number of differences in terms of the approaches used. To begin with, in regard to inventory valuation, both FIFO and LIFO are permitted in the case of U.S. GAAP. On the other hand, IFRS do not permit the usage of LIFO. However, in the latter case, FIFO is permitted alongside the weighted average method. Next, under GAAP, historical cost is used for the valuation of PP&E. Further, though assets cannot be written up, they can be written down. However, when it comes to IFRS, fair value is used for PP&E revaluation. Upward revaluation is allowed in those instances where there is an active market in existence for intangibles. Hence under IFRS, there is the likelihood of an increase in book values. Lastly, under each method, financial liabilities and assets are measured differently.

A Distinction between an Asset and an Expense (Expired Cost)

According to Tulsian (2002), when an expense is consumed during an entity's current accounting period, then such an expense is referred to as an expired cost or expense. Thus in such a case, the cost is already recognized as an expense. A good example of an expired cost in this case could be the depreciation expense. On the other hand, an asset is something owned by an entity. Hence in this context, assets include all those things a business entity has acquired over time and which possess a measurable future economic value. It can also be noted that a cost which has been paid in advance is regarded as an asset. Other examples of assets include but are not in any way limited to plant and machinery, cash, goodwill etc.

Distinction between Current and Long-term Assets

Current assets can be defined as all those resources and cash an entity expects to either use up or turn to cash within a period of less than one year (Needles and Powers, 2010). Examples in this case include but are not limited to inventory, prepaid expenses, receivables etc. On the other hand, long-term assets are taken to be all those assets which are not expected (or intended) to be either consumed or converted into cash within a period of less than one year. Examples in this case could be given as goodwill (which is an example of an intangible asset), buildings, investments considered long-term, motor vehicles etc.

Apple's Balance sheet: a Review

From a review of Apple's balance sheet or statement of financial position, it is possible to identify a number of examples relating to each of the above categories. To begin with, for the year ended September 24th 2011, Apple's expenses are listed as research and development as well as selling, general and administrative expenses. The company's assets (both long-term and current) are listed as vendor non-trade receivables, deferred tax assets, goodwill, marketable securities (long-term) etc. Most specifically, examples of current assets in the case of Apple include vendor non-trade receivables, inventories etc. Long-term assets are listed as intangible assets (acquired), goodwill, marketable securities (long-term) etc. When it comes to current liabilities, the financial statements of Apple for the same period I mention above give the current liabilities as revenue (deferred), expenses (accrued) etc. Long-term liabilities in this case include non-current deferred revenues and other liabilities branded non-current.

Retained Earnings and how they are affected by Dividends and Income or Loss

By definition, retained earnings include all those earnings an entity does not distribute to the owners or stockholders. Hence in general terms, that amount of money (net earnings) the company does not distribute to shareholders inform of dividends is what is referred to as retained earnings. According to Stickney et al. (2009), the retained earnings figure can be computed by deducting all dividends from a corporation's net income over the period in which the corporation has been in existence. When it comes to dividends, the more of the same the company pays out to shareholders, the smaller the value of retained earnings. Further, should the company issue less to shareholders in terms of dividends, the retained earnings figure increases. On the other hand, depending on an entity's dividend policy, a profit could increase the retained earnings figure while a loss could decrease the figure of the same. In Apple's balance sheet, the retained earnings figure is captured in the shareholders' equity section. Compared to the previous financial year (2010), the current year's figure for retained earnings is actually higher. For the year ended September 25th 2010, the same was captured as $37, 169, 000. However, in the current financial year, the figure for retained earnings is given as $62, 841, 000. This represents a $25, 672, 000 increase in the figure of retained earnings in the period under consideration. This effectively means that in comparison to the year 2010, the company could have paid less in dividends in the current financial year and hence the higher retained earnings figure. The difference could also be as a result of the higher net income the company raked-in in the year ended Sept 24th 2011 in comparison to the previous financial period.

Differences between Apple's and Philips' Balance Sheet

A comparison of Apple's latest balance sheet and that of Philips highlights several key differences. To begin with, the inventory figure largely differs. While that of Apple is captured as $776, 000; we have Philips's inventory value as $3,865,000. What this means is that Apple prefers having less in terms of inventory in comparison to Philips. Secondly, Apple has a higher total asset value than Philips. Further, a look at the retained earnings figure shows that Apple chose to retain more earnings than Philips did. However, it is important to note that the difference between the two retained earnings figures could have been brought along by differences in net earnings and/or each company's dividend policy.

Apple and Philips: Debt Comparison

In regard to debt, Apple has more of the same than Philips. This assertion is based on Philips' total liabilities figure which stands at $17, 177, 000 in comparison to that of Apple which stands at $39, 756, 000. Hence based on this, it is appropriate to note that in comparison to Philips, Apple has more obligations to settle.

Apple and Philips: A Comparison in terms of Size

In my opinion, Apple is bigger than Philips. My reasoning in this case is based on each company's net worth. Hence in terms of net worth (net assets less liabilities); Apple has a higher figure of the same in comparison to Philips. Apples net worth (net assets less liabilities) is $76, 615, 000 while that for Philips is $15, 092, 000.