Solved!! International versus U.S. Accounting Standards

International versus U.S. Accounting Standards

For this assignment, you will research and compare international and U.S. accounting standards. This will enable you to see how the different reporting methods affect business and how product costs are affected by international business.The learning objectives of this report are as follows:

1. Compare and contrast basic U.S. and international financial accounting standards.
2. Explain how key international factors affect business reporting.
3. Identify key compliance and regulatory requirements.

Using the  Unit IV Research Report Template , prepare a four- to five-page written report with at least three scholarly sources covering the items listed below.

Introduction

Part 1: Select financial statements for two related (e.g., computer manufactures, pharmaceutical companies, cell phone companies, etc.) businesses; one that uses U.S. accounting reporting and the other that uses international accounting reporting. Identify the following items:

• Provide the name, location, and accounting standards used for each business.
• Compare and contrast three major differences you see in the way the financial data is presented on the financial statements.
• Identify which set of financial statements you think is the easiest to understand and provides you with most accurate cost data as a manager. (Do not forget to look at the notes to the financial statements also.)

Part 2: Analyze and discuss three international factors you think would affect the cost of the products made at the companies you selected and why.
Part 3: Discuss any compliance and/or regulatory issues you think would be involved in the companies you have selected as they relate to the cost of the products made. For example, are there strict regulations on product pricing, tariffs imposed on raw materials needed to make the products, or strict regulations on the wages paid to workers?

Conclusion and Recommendations

Be sure to use APA formatting throughout and reach out to the Writing Center or the Library for assistance with research, writing, and formatting. Include at least two of your scholarly resources from the CSU Online Library in your report.

A+ Expert Answer

Abstract

Companies worldwide use accounting standards to provide accurate and transparent financial reports.  Generally Accepted Account Principles (GAAP) are used in the United States (U.S.), while countries use International Financial Reporting Standards (IFRS) all over the world.  This report compares international and U.S. accounting standards by reviewing the financial statements of NIKE, Inc. and Adidas AG.  After reviewing these two companies, a deep dive into how critical international factors affect business reporting concluded with a look at compliance and regulatory requirements.

International versus U.S. Accounting Standards

Publicly traded companies must use accounting standards when submitting their financial statements.  There are two accounting systems that accountants primarily use when reporting:

GAAP and IFRS.   GAAP is the system used in the U.S. established by the Financial Accounting Standards Board (FASB), which provides rules, regulations, and procedures that companies must follow when filing their financial statements.  IFRS is the international system established by the International Accounting Standards Board (IASB), which outlines how a company’s different events and transactions should be reported when financial statements are filed.  Although the two systems have the same objective, there are some differences.   For instance, “under IFRS last-in, first-out (LIFO) is prohibited while GAAP requires the use of LIFO in order for U.S. companies to receive tax benefits” (King, 2008).  Using LIFO makes it abundantly clear that the financial statements are not identical.  Another difference between these two accounting standards lies in interpretation.  “GAAP is a rule-based system while IFRS is principle-based” (Popatia, 2017).  Again, this difference is based on the interpretation by the system’s user.  This paper will examine the financial statements of two companies, NIKE, Inc., which uses GAAP, and Adidas

AG, which uses IFRS.  

Part 1 Financial Statement Comparison

To fully understand U.S. and International accounting standards, an analysis of financial statements from two sportswear companies is required.  Nike, Inc. is a worldwide American corporation founded in Eugene, Oregon, that uses GAAP accounting standards and manufactures athletic footwear, apparel, and equipment.  Adidas AG is a German corporation founded in Herzogenaurach, Germany, that uses IFRS accounting standards and manufactures athletic footwear, apparel, and accessories.

One of the first differences between the financial statements is the initial report presented by both companies.  Adidas’s financial statement opened with financial highlights from the first half of 2020 and 2021.  In contrast, Nike’s financial statement opened with consolidated statements of income providing data from two prior years and presenting information for the year ending May 2021.  As a result, Adidas’s consolidated income statement is presented much later in its report.  For the most part, a lot of the information on the income statement is the same; however, Adidas does have some additional lines that stand out.  For instance, a line item for royalty and commission income is not an expense represented in Nike’s financial statement.  Adidas also has an interesting footnote on the consolidated income statement that mentions an adjustment to 2020 information due to discontinued operations for the Reebok business. 

           Next, looking at the consolidated statements of comprehensive income shows way more details from Adidas than Nike.  Nike’s report appears to be more of a snapshot versus a detailed report like the one provided by Adidas, which seems to be more transparent upfront.  In addition, the balance sheet shows another difference.  Nike’s balance sheet is presented after the comprehensive income, while Adidas consolidated statement of financial position, which is the comparative statement for the balance sheet, is presented first.

The final takeaway from the financial statements is the footnotes or just notes in Nike’s case.  Adidas provides footnotes on each financial statement, while Nike’s statements do not have any footnotes.  Instead, an entire notes section provides details for each item presented on the financial statements.  This notes section is the case for Nike and Adidas, which is interesting because the overall layout sets these two companies apart.  With all the information reviewed on both companies’ statements, Nike’s seem easier to understand and follow.  Looking over the documents provided by Adidas, the information provided is the same; however, Nike does a much better just of making sense of the data and provides more details.  Additionally, the income statement appears to provide the most accurate cost data.

Part 2 International Factors

International factors heavily impact the cost of products.  For instance, since all of Nike’s footwear and apparel are manufactured outside of the United States, international trade tensions could impact the company.  “Most U.S. footwear manufacturers outsource to foreign contractors in countries like China, Mexico, Italy, and South Korea” (Brodeur & Van Assche, 2014).  Therefore, due to Nike’s outsourcing practices, procurement of materials and international trading could be affected.   Adidas could also be impacted by international trade since the company owns and operates stores in the U.S., which requires importing products to the country.

Another international factor that could impact both companies is COVID-19.  In order to slow the spread of the virus, drastic measures were taken, such as “temporarily closing stores, restricting the movement of people and goods, and halting production of products” (Verdier, 2021).  The measures put into place significantly affect the cost of products.  For instance, stores forced to close are not able to move inventory.  Once a competent medical authority deems that stores can resume operations, there will be an excess of goods that need to selling.

Consequently, it will result in markdowns to products to help reduce inventory.  Additionally, COVID-19 also increases issues with the supply change.  Although the companies manufacture and prepare their goods for distribution, the virus has caused a shortage of goods across the supply change.  Resulting in protective measures such as sanitizing and social distancing that increase the time it takes to fulfill an order, check out customers on the point-ofsale system in the store, and manufacture products. Tariffs and foreign trade policies can also affect the cost of products.  Since the products manufactured by both companies are produced primarily outside of the U.S., increases in tariffs or changing foreign trade policies can impact the cost of products causing them to increase prices for the sportswear companies to generate a profit.

Part 3 Compliance/Regulatory Issues

Sourcing sustainable materials and practicing ethical behavior is crucial to brand-name sportswear manufacturers Nike and Adidas.  Both brands require their contractor suppliers to comply with government laws and regulations.  However, the outsourced manufacturing facilities where products are produced could not comply with labor regulations by operating sweatshops and failing to pay workers a fair wage.  Additionally, trade policies and tariffs could also impact compliance for sustainable source materials.

Conclusions and Recommendations

Financial reporting allows publicly traded companies to provide accurate, transparent financial statements.  Two accounting systems are primarily used: GAAP in the U.S. and IFRS, used internationally.  Both accounting systems have the same objective to establish a framework that accountants will use to prepare financial statements for their company.  As a result, the statements would be relatively comparable regardless of what system is used, with some minor differences.  For instance, Last-in First-out is prohibited when using IFRS, while it is a requirement when preparing statements using GAAP.

Nonetheless, with two different accounting standards being used, things will become more complex over time.  As trade policies and tariffs continue to change, it may be time to establish a standard accounting system to use globally.  Doing so will provide a consistent product that investors, banks, and other entities can use to make future business decisions.

References

Adidas (2021). Adidas Half Year Report. Retrieved from https://www.adidasgroup.com/media/filer_public/5e/b2/5eb2ded7-64fc-4823-adaf-

7bf9102577cb/adidas_h1_2021_report_en.pdf

Brodeur, S., & Van Assche, A. (2014). Nike versus new balance: trade policy in a world of global value chains. International Journal of Case Studies in Management, 12(4). https://link.gale.com/apps/doc/A393352199/AONE? u=oran95108&sid=ebsco&xid=55f5cfd4

King, A. M. (2008). Gaap Vs Ifrs: Will the Real Fair Value Please Stand Up? Financial Executive, 24(10), 14–16.

Nike Inc. (2021) 2021 Annual Report. Retrieved from https://s1.q4cdn.com/806093406/files/doc_downloads/2021/08/Nike10k2021.pdf

Popatia, K. (2017). IFRS & GAAP: Reconciling Differences Between Accounting Systems and Assessing the Proposed Changes to the IFRS Constitution. Northwestern Journal of International Law & Business, 38(1), 137–159.

Verdier, M. D. (2021). Capacity planning in a post-COVID manufacturing world: Capacity and supply-chain strategies help manufactures remain competitive. Plant Engineering, 75(8), 32.

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