Balance sheet valuation differences between US GAAP and IFRS

Apple and Philips Balance Sheet Analysis

This text examines the balance sheets of both Apple and Philips in greater detail. Amongst other things, the paper will identify a number of differences between IFRS and U.S. GAAP as far as valuation approaches are concerned. Further, in addition to discussing a number of balance sheet items, the paper will also highlight the main differences between the balance sheets of the two companies.

Valuation Differences: U.S. GAAP vs. IFRS

There are several differences that exist between IFRS and U.S. GAAP. This is more so the case when it comes to the valuation of inventory, asset valuation as well as revenue recognition. The two differences I cite herein are largely in regard to valuation. To begin with, assets revaluation is not permitted under U.S. GAAP (Ernst and Young, 2011). However, when it comes to IFRS, "revaluation is a permitted accounting policy election for an entire class of assets, requiring revaluation to fair value on a regular basis" (Ernst and Young, 2011). It is also important to note that when it comes to inventory valuation, LIFO is permitted under U.S. GAAP but prohibited under IFRS (Ernst and Young, 2011).

Balance Sheet Items

In basic terms, an expense according to Porter and Norton (2010) "is the outflow of assets resulting from the sale of goods and services." Towards that end, any cost totally used up in the course of revenue generation can be regarded an expired cost. Some of the expenses captured in Apple's income statement include, but they are not limited to; research development expenses as well as selling general and administrative expenses. An asset on the other hand according to Porter and Norton (2010) "is a future economic benefit to a business." Two of the assets which can be identified in Apple's balance sheet include but they are not limited to inventory and goodwill.

A current asset in the words of Porter and Norton (2010) is "an asset that is expected to be realized in cash or sold or consumed during the operating cycle or within one year if the cycle is shorter…" In Apple's balance sheet, we have receivables (net) and short-term investments as some of the listed current assets. On the other hand, noncurrent assets or what are better known as long-term assets include all those assets whose consumption or sale is not anticipated within an entity's operating cycle or financial year. Long-term assets in the case of Apple include goodwill as well as property, plant and equipment.

A current liability according to Porter and Norton (2010) is an obligation an entity owes to outsiders and whose settlement is expected to be undertaken "within the next operating cycle or within one year if the cycle (as is normally the case) is shorter than one year." Some of the current liabilities captured in Apple's balance sheet include accrued expenses and accounts payable. A long-term liability on the other hand is that obligation whose settlement cannot be undertaken within a period of one year or within an entity's operating cycle (Porter and Norton, 2010). Apple's long-term obligations include deferred revenue (non-current) and what the company refers to as 'other non-current liabilities.'

Retained Earnings

The Retained earnings figure is basically that figure of earnings not issued out as dividends by an entity. An entity could retain a certain percentage of its earnings for a wide range of reasons. The higher the dividends paid out, the lower the retained earnings figure. On the other hand, the higher the net income of an entity, the higher the retained earnings figure. Losses however decrease an entity's retained earnings. Apple's retained earnings figure increased from $37, 169 million in 2010 to $62, 841 million in 2011. This represents a 69% increase in the figure of retained earnings in the period under consideration. The significant increase in the retained earnings figure can be attributed to the company's increased profitability.

Differences between Philip's and Apple's Balance Sheets

To begin with, the value of Apple's assets is significantly higher than that of Philip's assets. A look at Apple's ROA relative to that of Philip's clearly indicates that the former's assets are being utilized more efficiently than those of the latter. Yet another difference between the two companies' balance sheet has got to do with the level of debt. The obligations (in total) Apple owes to outsiders are captured as $39, 756 million. Those of Philips are given as $21, 520 million. Further, the companies' retained earnings figure differs. While Apple had a retained earnings figure of $62, 841 million, Philips' retained earnings figure is given as $16, 039 million. This difference could be as a result of the differences in income over time.