Financial statements are an essential decision-making aspect in every company. These reports are used to project the growth of a company and management use them in deciding the course their organizations should embrace. However, there are two accounting standards mainly used across the globe, including the US Generally Accepted Accounting Principles (GAAP) and International Financial Reporting System (IFRS). The research paper aims to compare the two systems and make conclusions about each of them. To make a better analysis, two companies are used, Apple and Vodafone. One of which uses the US GAAP accounting standards and another that uses the IFRS accounting standards. In addition, the paper looks into regulatory issues that these two companies face during their operations and how they hinder them from making profits as they intended. After analyzing their financial statements, it is evident that IFRS is the best to use in financial reporting.
Keywords: Financial statements, IFRS, US GAAP, accounting standards, regulatory issues
International versus U.S Accounting Standards
International Financial Reporting Standards (IFRS) is a combination of standards that have been developed by the international accounting standards board (IASB). These standards govern how various companies around the world should prepare their annual financial reports. These sets of standards are used in more than 110 countries. The generally accepted accounting principles (GAAP) are set by the financial accounting standards board (FASB). They are used within the United States to guide companies in compiling their financial statements (Corporate Finance Institute, 2015). The two reporting systems ensure there is uniformity while reporting financial statements of any company. This paper’s primary purpose is to explore the similarities and differences between the two financial reporting systems. Also, to determine which reporting system is preferred b companies and why they prefer one over the other. To make a conclusive report, we are going to use Apple and Vodafone companies for comparison.
Vodafone’s headquarters are in London. It is one of the world’s largest phone companies, with at least 30 million subscribers worldwide. According to the business standard (2013), Vodafone adopted the IFRS accounting standards in 2012. The company stated that it would be redrafting its financial statements following the new rules in IFRS. Vodafone considered the system as it would enable it to compare its financial statements across the globe. As Moreau (2017) indicates, Apple was founded in the year 1976 in California. Since then, the company has increased in terms of finance. Apple uses the U.S. GAAP mode of accounting standards to file its financial reports. Apple Company’s nature demands it to use this kind of system since it has a great breakdown of financial information.
There exist a tangible difference in the way data is presented when using the two accounting standards. For instance, there is a significant difference in how the two recognize their revenue and asset value. Under U.S. GAAP, there is no change in the balance of assets as the cash lowers and expenses increase. When using IFRS, the financial ratios are affected despite having a balance in credit and debit. U.S. GAAP has to follow the set of the rule provided while in the IFRS, principles guide the way a financial report should appear depending on the situation. The Last in Fast out (LIFO) method used by Apple is not allowed in the IFRS system. However, Apple considers the method as it reports less taxable income. Under the IFRS system, there is volatility in inventory valuation. (Moreau, 2017). Given that this kind of volatility is not allowed under GAAP, the IFRS system has an advantage.
A clear advantage of using IFRS is evident as it uses principles to report its finances, unlike the GAAP system, which uses rules. IFRS can show how much increase in net income and assets is. The fact that one can alter the inventory under IFRS gives it an advantage over GAAP. One can alter a balance sheet’s appearance by listing advertisement costs as prepaid, while in a GAAP system, it is not possible to alter anything. Due to cultural and ethical values in the U.S., GAAP contains many restrictions that the country believes are useful in preparing accurate and reliable financial reports in any company. The analysis of these two accounting standards shows that IFRS is beneficial to companies as it is more conducive and easy to understand (Moreau, 2017). As a manager, I would prefer the IFRS financial reporting system as it has no restrictions than GAAP.
International factors play a significant role in determining the cost of a product. According to Akanksha (n.d), demand for the product is a significant determinant of the set prices. Apple and Vodafone companies need to evaluate the demand for their products so that they set the prices. If these products’ demand is high, the companies can utilize this trend and set their prices. Consequently, if the demand is low, the products may not be sold at all. Any company must identify its competitors before pricing its goods.
Given that there are other companies in the phone industry, it is essential to consider how they price their goods before deciding. Pricing the products higher than the competitors means that their products would be preferred by the customers over yours, given that the product possesses the same features. The government regulates product prices through various acts, such as the Consumer Protection Act. It is essential to follow the regulations set by the government when pricing goods. Putting too high prices on the product can cause the government to cancel the business licenses or even close down the company. There is no doubt that Vodafone and Apple follow these strategies when pricing their products.
Tech businesses have faced challenges both in local and overseas markets due to regulatory issues. According to Pratap (2020), the smartphone industry’s regulation and policies are growing day by day. These regulations are not healthy for companies like Apple as they reduce the level of income earned. Political factors have made the governments tighten regulations for the smartphone industry. For instance, Apple is facing probes involving antitrust. There are emerging issues concerning data and consumer privacy that has made the government drive its attention to the companies. Political changes that involve higher tariffs on Apple and Vodafone products may affect the manufacturing sector as the production cost will increase drastically. This is because these products are spread across the world.
The effect of businesses on the environment has become a significant concern to government agencies. The occurrence has made the government tighten the regulations involving businesses and the environment. Companies such as Apple are encouraged to use sustainable manufacturing and use renewable sources, which will see the cost of production reduce and operational costs. These regulations ensure that the products are not risky to use by the consumers as Apple is going a notch higher in ensuring the products are safe. Legal and law issues are critical factors in the technology sector. The need to have data and consumer privacy have led to more scrutiny of the sector by governments. Ensuring the companies comply with the set regulations is essential in ensuring the businesses succeed. Other regulations the companies face are labor laws. Governments are keen to observe how a company treats and pays its employees (Patrap, 2020). Failure by the companies to adhere to these regulations causes them to pay fines, which affects the company’s growth and image.
In conclusion, IFRS and U.S. GAAP remain the leading accounting standards that companies worldwide have accepted. While IFRS is used in many countries, U.S. GAAP is used only in the United States. Based on each financial reporting system’s analysis, it is evident that IFRS is considered for better results. However, the GAAP system is preferred in the U.S. to avoid inaccurate results as it cannot be altered. Both internal and external factors determine the cost of products. Thus, Apple and Vodafone markets are spread across the globe to consider international factors when pricing their products. Like any business, Apple and Vodafone have faced regulatory issues that they have tried their best to follow to remain competitive in the market. I would recommend that GAAP allow those using it to be free to adjust the balance sheets when making financial reports relevant in all situations.
Akanksha, S. (n.d). Factors affecting pricing decisions. Business management ideas. Retrieved February 10, 2021 from, https://www.businessmanagementideas.com/marketing/pricing-decisions/factors-affecting-pricing-decisions/18821
Business Standard, (2013). Vodafone adopts IFRS accounting; restates results. Retrieved February 10th, 2021 from, https://www.business-standard.com/article/pti-stories/vodafone-adopts-ifrs-accounting-restates-results-113040400457_1.html
Corporate Finance Institute, (2015). What is IFRS vs. US GAAP? Retrieved February 10th, 2021 from, https://corporatefinanceinstitute.com/resources/knowledge/accounting/ifrs-vs-us-gaap/
Moreau, P. (2017). Accounting standards in regards to the mobile tech industry. Sacred Heart University. Retrieved February 10, 2021 from, https://digitalcommons.sacredheart.edu/cgi/viewcontent.cgi?article=1035&context=acadfest
Pratap, A. (2020). Smartphone industry pestle analysis. Notesmatic. Retrieved February 10, 2021 from, https://notesmatic.com/2019/11/smartphone-industry-pestel-analysis-%EF%BB%BF/
Rodrigo (2012), management of financial resources and performance at Vodafone. WritePass journal. Retrieved February 10, 2021 from, https://writepass.com/journal/2012/11/management-of-financial-resource-and-performance-at-vodafone/
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