Question

As an operations and regulatory compliance manager at Medical Best Company (MBC), a publicly traded company, you’ve been asked to join a committee that is tasked with helping management determine whether your company should expand its operations overseas. Currently, MBC operates in the US only but is considering expanding to select foreign countries since market research performed in these countries indicates strong demand for quality medical products MBC manufactures and services. At a recent executive meeting, concerns were raised about costs of compliance for cross-listing MBC’s stock on US stock exchange and foreign stock exchanges since this course of action would involve preparing a reconciliation of net income and stockholders’ equity from IFRS to US GAAP.

To get the committee started on this project, you were asked to research annual reports of foreign competitors in the healthcare field. Visit the New York Stock Exchange’s (NYSE) web site and locate a list of foreign companies currently cross-listed on US stock exchange in any one of the following foreign stock exchanges: China, Germany, Japan, Mexico or the United Kingdom. Select a company from this list that provides healthcare products or services and locate its most recent publicly available annual report.

Carefully examine the annual report of a chosen company for a reconciliation of net income and stockholders’ equity from IFRS to US GAAP. Discuss pertinent issues from this analysis to your company, MBC. In addition to this analysis, what issues would you recommend the committee investigate in order to reach a decision on overseas expansion? What preliminary results will you offer to the committee based on your analysis?

If reconciliation is not available, critically comment on main differences you’d identified based on the company’s current reporting and IFRS or U.S. GAAP.

Answer 1

it’s important for business owners and accounting professionals to be aware of the differences between the two predominant accounting methods used around the world.

International Financial Reporting Standards (IFRS) – as the name implies – is an international standard developed by the International Accounting Standards Board (IASB).

U.S. Generally Accepted Accounting Principles (GAAP) is only used in the United States. GAAP is established by the Financial Accounting Standards Board (FASB).

Major Differences:

1. Local vs. Global

IFRS is used in more than 110 countries around the world, including the EU and many Asian and South American countries.

GAAP, on the other hand, is only used in the United States. Companies that operate in the U.S. and overseas may have more complexities in their accounting.

2. Rules vs. Principles

GAAP tends to be more rules-based, while IFRS tends to be more principles-based.

Under GAAP, companies may have industry-specific rules and guidelines to follow, while IFRS has principles that require judgment and interpretation to determine how they are to be applied in a given situation.

3. Inventory Methods

Both GAAP and IFRS allow First In, First Out (FIFO), weighted-average cost, and specific identification methods for valuing inventories.

However, GAAP also allows the Last In, First Out (LIFO) method, which is not allowed under IFRS. Using the LIFO method may result in artificially low net income and may not reflect the actual flow of inventory items through a company.

4. Inventory Write-Down Reversals

Both methods allow inventories to be written down to market value. However, if the market value later increases,

only IFRS allows the earlier write-down to be reversed. Under GAAP, reversal of earlier write-downs is prohibited. Inventory valuation may be more volatile under IFRS.

5. Fair Value Revaluations

IFRS allows revaluation of the following assets to fair value if fair value can be measured reliably: inventories, property, plant & equipment, intangible assets, and investments in marketable securities.

This revaluation may be either an increase or a decrease to the asset’s value. Under GAAP, revaluation is prohibited except for marketable securities.

6. Impairment Losses

Both standards allow for the recognition of impairment losses on long-lived assets when the market value of an asset declines. When conditions change, IFRS allows impairment losses to be reversed for all types of assets except goodwill.

GAAP takes a more conservative approach and prohibits reversals of impairment losses for all types of assets.

7. Intangible Assets

Internal costs to create intangible assets, such as development costs, are capitalized under IFRS when certain criteria are met.

These criteria include consideration of the future economic benefits.

8. Fixed Assets

GAAP requires that long-lived assets, such as buildings, furniture and equipment, be valued at historic cost and depreciated appropriately. Under IFRS, these same assets are initially valued at cost,

but can later be revalued up or down to market value. Any separate components of an asset with different useful lives are required to be depreciated separately under IFRS. GAAP allows for component depreciation, but it is not required.

9. Investment Property

IFRS includes the distinct category of investment property, which is defined as property held for rental income or capital appreciation.

Investment property is initially measured at cost, and can be subsequently revalued to market value. GAAP has no such separate category.

10. Lease Accounting

While the approaches under GAAP and IFRS share a common framework, there are a few notable differences. IFRS has a de minimus exception, which allows lessees to exclude leases for low-valued assets, while GAAP has no such exception.

The IFRS standard includes leases for some kinds of intangible assets, while GAAP categorically excludes leases of all intangible assets from the scope of the lease accounting standard.