Ford Motors – Ifrs Convergence
IFRS Vs.US GAAP is the most controversial topic in accounting forum wherein the former has the advantage of being a financial reporting methodology having universal acceptance and applicability and the latter restricted to USA. Generally Accepted Accounting Principles or GAAP refers to the framework, standard, principles and procedures used by the companies for financial accounting and reporting and are issued by Financial Accounting Standard Board, and it is used for recording as well as reporting the financial data i.e. balance sheet, income statement, cash flow statement, etc.
International Financial Reporting Standard or IFRS as popularly known is a globally accepted methodology of financial reporting used for preparation and presentation of financial statement i.e. balance sheet, income statement, cash flow statement, changes in equity, etc. Since it has global acceptability it ensures comparability and understandability of business which are having global reach. It helps users of financial statement with information about the financial position, profitability, liquidity of the company to help them take a rationale decision. (S, 2015)
One of the key differences between US GAAP and IFRS is that US GAAP is more of a rule based system but IFRS is more principle based
Financial Period requirement
As per US GAAP, generally comparative financial statements, however since FORD is listed and SEC rules requires to present balance sheet for two most recent years, while all other statements must cover the three year period as on the date of balance sheet. (Motors, 2018)
In case of IFRS restatement, only comparative information has been disclosed with respect to previous year for the entire amount reported in the financial statement.
Order of Liquidity
Under IAS 1, the classification of assets and liabilities on the statement of financial position is essential and is to be presented as current and noncurrent assets and current and noncurrent liabilities, each should be presented as a separate classification in the company’s statement of financial position.
Paragraph 54 of IAS 1 also provides a minimum items of assets and liabilities that must be included in the presentation of the financial position like property, plant and equipment, intangible assets, etc. (Foundation, 2017)
In US GAAP financial statement there is no such requirement to present the financial statement with a specific layout as well as current and non-current classification.
Disclosure of Deferred Tax Assets and Liabilities
As per US GAAP the deferred tax assets and deferred tax liabilities are disclosed separately but in case of IFRS they are shown in a netted form. In the case of Ford motors too, we have disclosed the deferred tax asset as a single line item rather than disclosing the deferred tax assets and deferred tax liability separately.
Disclosure with respect to Fixed Assets
IFRS requires the companies to disclose the fixed assets into property, plant and equipment, Investment property, Intangible assets whereas in US GAAP the same has been reported in Net property in Ford financial statement.
The capital work in progress has also been included in the Net property; IFRS requires separate disclosure for the same and cannot be clubbed with property, plant and equipment.
Presentation of debt as current versus non-current
Under US GAAP, debt for which there has been a violation of the covenant may be presented as non-current if a lender agrees to waive off the right to demand repayment for more than one year before the financial statements are issued whereas in case of IFRS debt associated with violation of covenant must be presented as current unless lender agrees prior to the balance sheet date for the waiver. (LLP G. T., 2017)
Inventory valuation differences
Under US GAAP, ford has applied Last in First Out (LIFO) rules to their inventory balance, in period of rising prices this method may lead to higher cost of sales reduced taxable income. However, IFRS doesn’t allow LIFO method of valuation so Ford has to recast the balance sheet either weighted average or First in First out basis of valuation. (LLC, 2008)
Income Statement – Classification of expenses
Under US GAAP, there is no specific requirement to classify expenses in income statement by functions or nature, however since ford is listed it may have to abide by SEC ruling to present expenses on basis of function but US GAAP doesn’t require the same but as per IFRS entities are required to present expenses based on either function or nature. (LLP E. &., 2013)
Research and Development cost
U.S. GAAP requires costs related to research and development be expensed as incurred. IFRS differentiates between “research” and “development” costs, with capitalizing the development costs when the technical and economic feasibility of a project can be demonstrated and further prescribed conditions are satisfied. (LLC, 2008)
Foundation, I. (2017). IAS 1 Presentation of Financial Statements. Retrieved from www.ifrs.org: https://www.ifrs.org/issued-standards/list-of-standards/ias-1-presentation-of-financial-statements/
LLC, D. D. (2008). Technical Accounting Issues. International Financial Reporting Standard Considerations for Automobile Industry, 6.
LLP, E. &. (2013). Financial statement presentation. US GAAP versus IFRS, 6.
LLP, G. T. (2017). Overall Financial Statement presentation. Comparison between U.S. GAAP and IFRS Standard, 11.
Motors, F. (2018, June 5). Annual Report 2016. Retrieved from Ford Motors: http://s22.q4cdn.com/857684434/files/doc_financials/2016/annual/2016-annual-report.pdf
S, S. (2015). Difference Between GAAP and IFRS. Retrieved June 5, 2018, from https://keydifferences.com/difference-between-gaap-and-ifrs.html
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