Financial accounting case study 3

¶ … globalization has been pushing many countries to create standards for accounting procedures that can be used around the globe. This is designed to improve transparency and the accuracy of financial information that is being provided (IFRS guidelines). To fully understand how this is taking place we will examine the differences between IFRS and GAAP standards. This will be accomplished by carefully examining the accounting procedures used by Apple and Philips. Once this occurs, is when we will have the greatest insights as to underlying differences between both procedures.

Is there a difference in approach to valuation by U.S. GAAP and IFRS?

To fully understand the dissimilarities between the two standards we will examine several different factors to include: the way an expense / asset are accounted for, how current / long-term assets are calculated and the way current / long-term liabilities are determined. Once this takes place is when we conduct a comparison of the approaches used by Apple and Phillips. This is when we can see the disparities between the two systems.

Distinguish between an expense (expired cost) and an asset.

Under IFRS standards costs are calculated based on the time frame that they are incurred or when the company can demonstrate the point that they are capitalized. This is when executives are writing the cost off as depreciation over several quarters against the firm's earnings. While assets are listed on the company's balance sheet during the research and development phase. However, using GAAP standards, costs and assets are based upon specific rules that apply for each category. This is important, because GAAP is focus on precise areas to account for these parts of the balance sheet. Whereas IFRS guidelines; are based upon a principals that are outlined under these procedures. ("Comparing the Differences between IFRS and U.S. GAAP," 2011) ("Capitalization," 2011)

Distinguish between current and long-term assets.

IFRS guidelines do not have any specifications for separating current and long-term assets. While GAAP requires that firms must list them in the order of liquidity. Under both standards, long-term assets are measured based upon its fair values minus disposal costs. (Flynn, 2011)

Distinguish between current and long-term liabilities.

In the case of current liabilities, IFRS allows organizations to use a range and report figures that are in the middle of this scales. While the GAAP has a similar range, but permits firms to report figures that are in the lower end of the series. Under long-term liabilities, financial instruments (i.e. bonds and preferred stock) are listed as a part of the liabilities. Whereas GAAP standards; are recording them as equity. (Flynn 2011)

Review Apple's balance sheet and provide two examples of each of the above categories

As far as expenses are concerned this includes: interest and taxes. While assets are listed as: goodwill and plants. In case of current assets these include: cash and short-term marketable securities. Whereas, the long-term assets are: long-term marketable securities and property / plants / equipment. When it comes to current liabilities these include: accounts payable and deferred revenues. While that long-term liabilities are: commitments / contingencies and stockholder equity. ("Apple 2011 Earnings," 2011)

Discuss retained earnings and how income or loss and dividends affect this account. Review Apple's retained earnings account and explain how it changes between the two past years.

Retained earnings will determine how much money the company can reinvest back into its business. While dividends will decide how much money the firm is paying out to shareholders. Over the past two years, these numbers have increased from $15.19 billion to $23.3 billion. The reason why this change has occurred is because there was an increase in the total number of sales. ("Apple 2011 Earnings," 2011)