International Accounting Project

Posted: August 26th, 2021

Student’s Name: kamyar Taghavi

Instructor’s Name: Omar ROUBI

Course: international accounting

Date:7/14/2020

International Accounting Project

The businesses across the world adopt different accounting systems when reporting their financial statements in preparation, presentation, and accounting information disclosure.  Companies that are domiciled in U.S.A often use Generally Acceptable Accounting Principles (GAAP) when preparing their financial reports. Other different international corporations adopt International Financial Reporting Standards (IFRS) (Dayanandan et al. 28.  The two accounting standards are used by investors evaluating the financial health of a company and the utilization of accounting information in financial statements.The financial statements depict an accurate and fair value of a company’s performance(Doupnik, Timothy &Hector 76). Thus, they can beimplemented to show horizontal or vertical comparison while providing crucial information on the net assets, free cash flow, revenue, outstanding debt, and equity.

Further, the significant difference between GAAP and IFRS accounting systems is that IFRS is based on principles. In contrast, GAAP is based on rules that lead to variances in the classification of financial statementreports(Doupnik, Timothy &Hector 127). Consequently, they also exhibit various variations in presentation, disclosure, and valuation. This is exemplified the financial statement reports of the Royal Bank of Canada and Capital One Bank. Therefore, it is not easy to compare the financial statements of the two companies.

The Royal Bank of Canada is the largest bank by valuation in the Canadian financial services sector. It has over 86,000 employees, with about sixteen million customers worldwide. It was formed in Nova Scotia in 1846, with its corporate headquarters based in Toronto. Equally, the bank is listed on the New York Stock Exchange. It has adopted the IFRS accounting system in the preparation of its financial reports, which is the primary accounting system adopted in Canada (Royal Bank of Canada – Annual Report 2019). Conversely, Capital One Corporation is an American bank headquartered in Virginia. It is one of the top ten largest banks in the U.S.A with approximately 50,000 employees. The bank is also listed on the New York Stock Exchange, which requires all American companies to adopt the GAAP accounting system as stipulated by the U.S securities commission (Capital One Financial Corporation – AnnualReports.com).Thus, the financial reports of the two companies adopt a completely different structure in their financial statements.

Presentationof Balance Sheet Items

The balance sheet under GAAP is formatted differently compared to the IFRS system. For instance, Capital One uses the GAAP requirements and the word balance sheet as its heading and a classified balance sheet(Shroff 20). The subtitles of the respective category, such as assets, liabilities, and shareholder’s equity, are indicated and bold (Shroff 20). Besides, the current holdings of Capital One bank are listed first according to the decreasing liquidity order of the assets. At the same time, the non-current assets are listed on the permanency basis per the GAAP requirements. The current and non-current assets are distinguished(Doupnik, Timothy &Hector 73). Their respectivetotals in each categoryare indicated,as shown in figure 1 below. Thus, the format requires that the sums of assets should be equal to the aggregate amounts of liabilities and shareholders’ equity.

Figure 1: Balance sheet for Capital One Bank for the year ended 31st December 2019

On contrarily, the IFRS system adopted by the Royal Bank offers a different presentation as balance sheet items are arranged in order of liquidity. Still, there is no classification of non-current, current assets, liabilities, and the owner’s equity (Dayanandan et al. 31). All assets and liabilities are presented on most liquid orders providing relevant and reliable financialinformation. More so, non-controlling interest in the shareholder’s equity is also disclosed in the balance sheet, unlike in GAAP, as shown in figure 2 below.

Figure 2: Balance sheet for Royal Bank for the year ended 2019

Presentation of Cash Flow Statement

The financial items in the cash flow statement are treated differently in both accounting systems. The significant difference is mostly on how dividends and interest are classified. Under the GAAP system, the interests paid and received are classified as operating activities, as observed by Capital One bank(Doupnik, Timothy &Hector 89). Similarly, the dividends paid are disclosed in the cash flow financial section, while dividends received are accounted for in the operating part, as shown in Figure 3 below.

Figure 3: Capital One statement of cash flows

On the other hand, the IFRS system is more flexible than the GAAP regarding the classification of interest. The interest paid or received are categorized under the cash flows operating or financial section (Shroff 20). In this case, the Royal Bank of Canada has classified interest paid and received in the operating section. Also, dividends received and paid are recorded in the operating section of the cash flow statements. Even in IFRS, companies can get a leeway of choosing between categorizing the dividends paid or received in the financial or operating section. The case is different in GAAP, whereby a standard guideline is set (Dayanandan et al. 31). Figure 4 shows the interest and dividend disclosure in the Royal Bank of Canada that observes the IFRS accounting system.

Figure 4: Royal Bank of Canada interests and dividends in operating activities.

Presentation of Income Statement

The IFRS accounting system does no stipulate any income statement format. Thus, a company is required to choose a suitable method to present expenses either by nature or function(Dayanandan et al. 28). The system recommends a company to have categories such as revenue, finance costs, tax expenses, post-tax loss or profits, and profit or loss. The gain or loss from minority interests and parent entity are disclosed separately according to the IFRS (Dayanandan et al. 31; Doupnik, Timothy &Hector 102). More so, unusual items are not separated in the income statement but reported as a block amount, unlike GAAP. For example, the Royal Bank of Canada prepares its income statements per IFRS accounting system, as shown in figure 5.

Figure 5: Royal Bank of Canada income statement

On the other hand, the GAAP system offers two formats of preparing income statements, that is, the single-step and multiple-step method. In the single-step format, all company expenditure is classified by function and the aggregate amount deducted from the total income to profit before tax(Doupnik, Timothy &Hector 102). However, a multi-step format involves deducting the cost of goods sold from the sales to give the gross profit. The adjustments are made for expenses and other income after being categorized by function to get profit before tax. Also, the minority interests are presented in the net profit or loss per the GAAP regulations. Besides, the unusual items under GAAP are separated and displayed as other comprehensive income below the net income figure in the income statement(Doupnik, Timothy &Hector 113). While Under IFRS, the details are included in the income statement and not separated. Hence, the Capital One bank uses a single-step in preparation for its income statement, as shown below in Figure 6.

Figure 6: Capital One income statement for the year ended 31st December 2019

Inventory Valuation

The treatment of inventory is also different in both accounting systems. Whereas GAAP allows the use of last-in-first-out (LIFO), IFRS does not recognize this type of inventory valuation management (Doupnik et al., 100). Nonetheless, both GAAP and IFRS allow the weighted average cost approach and first-in-first-out (FIFO) in inventory management. Thus, although GAAP does not permit reversals in inventory, it does allows stock revaluation, which is not the case in IFRS.

Assets Valuation

The GAAP system evaluates non-current assets like property, plant, and equipment (PPE) using the cost model that is the historical value minus accumulated depreciation in the period under consideration (Doupnik et al., 40). In GAAP, the intangible assets are valued at present fair market value without future payments, while in IFRS, the assets are only recognized if they realize future economic benefits. On contrarily, IFRS values the fixed assets using the fair value that involves assets revaluation, fewer impairments losses accumulated depreciation (Doupnik et al., 42). Furthermore, the recognition of intangible assets is different in the two systems.

Disclosures

In the GAAP system, it is required that companies should provide financial reports that show the cash flows, profit-generating activities, and overall business performance. The companies are required to prepare three primary financial reports, that is, cash flow statements, balance sheets, and income statements (Doupnik et al., 15). Yet, under the IFRS accounting system, it is required that companies disclose financial positions at the beginning and end of the accounting period,  statements of comprehensive income, notes, changes in equity, and cash flow statements (Doupnik et al., 23). Hence, the significance of disclosures varies depending on the system used in preparing financial statements between IFRS as compared to GAAP accounting systems.

In addition, GAAP advocates for the full disclosure principle that requires companies to disclose all material information in their financial reports. The disclosure majorly includes relevant information to the users of financial reports. The principle safeguards the users to get adequate financial information and protects stakeholders such as creditors and investors by safeguarding their interests besides ensuring all relevant financial information is disclosed, and they are aware of it (Doupnik et al., 20). Moreso, the fundamental objective is to avoid accountants and managers from manipulating the financial reports to look more significant than they are. The principle implies sharing internal information with external users from historical information to future projections depicting a transparent, correct, and accurate view. Consequently, the financial information that should be disclosed under this principle includes accounting policies, changes, and justification on accounting policies, inventory losses, and all financial statements and their respective footnotes. Also, non-financial information, future expectations on VAT rates adjustments, contingent liabilities, and other material financial information should be disclosed.

On the other hand, under IFRS 7 on financial instruments disclosure, the financial information that is significant to an entity, extent, and nature of the risk expressed in quantitative and qualitative terms from financial instruments should be disclosed. Under the financial position statement, relevant information that should be disclosed includes loans and receivables, assets available for sale, amortized liabilities, and financial instruments held for collateral, among others (Doupnik et al., 24). In the statement of comprehensive income, disclosures include financial instruments accounting policies and hedging account information. Equally, under the IFRS, disclosures are done under fair value hierarchical technique in levels 1, 2, and 3. Level 1 reports similar financial instruments quoted prices, level 2 observable market inputs not present in level 1, and level 3 show inputs not under observable market data. Thus, the financial instruments are reported under qualitative and quantitative disclosures and credit, liquidity, and market risk per extent and nature of risk.

Works Cited

Capital One Financial Corporation – AnnualReports.com. “Capital One Financial Corporation – Annualreports.Com.” Annualreports.Com, 2020. Accessed on 10^th September 2020 from http://www.annualreports.com/Company/capital-one-financial-corporation.

Dayanandan, Ajit, et al. “IFRS and accounting quality: legal origin, regional, and disclosure impacts.” International Journal of Accounting and Information Management, 2016.

 Doupnik, Timothy S., et al. International accounting. New York, NY: McGraw-Hill Education, 2020. Print.

Royal Bank of Canada – Annual Report 2019. “Royal Bank of Canada – Annual Report 2019”.     Royal Bank of Canada, 2020, https://annualreports.rbc.com/ar2019/.

Shroff, Nemit. “Corporate investment and changes in GAAP.” Review of Accounting Studies      22.1 (2017): 1-63.