BMW and Cadillac Corporation Financial Accounting Standards Research Paper

Introduction

An accounting framework enables a business to monitor a wide range of money-related trade, including sales and liabilities and is equipped for producing factual reports that give administrators or individuals an unmistakable arrangement of information to help in the basic leadership process. Accounting systems track the salary and costs of an association or organization (Abela & Mora, 2012). As a result, accounting strategies are changed to fit the particular bookkeeping needs of an organization.

Representing a development firm is unique about the accounting framework for a retailer. A director needs to characterize the particular accounting needs of the organization or industry and select a framework that meets these necessities. A few organizations require strong inventory requirements while different organizations require definite reports of records receivables. Therefore, accounting concepts and reporting are used by the location and company’s objective.

This paper will discuss accounting concepts, principles, IFRS standards, and audit requirements. The companies use different accounting standards by the financial reporting regulations in their various countries. The paper will study BMW and Cadillac automobile industries. BMW uses the IFRS accounting standards, while Cadillac, a subsidiary of General Motors, uses the GAAP accounting standards. The paper will summarize the accounting standards and compare the similarities and differences. Consequently, the paper will analyze the issues with the non – comparability with financial statements.

International Accounting Standards

Accounting systems control different aspects of a firm’s operations. By implication, an accounting system controls a firm’s expenses, invoice, and cash flows. A firm’s expenses describe the measure cash that leaves the organization in return for merchandise or benefits another firm. In more seasoned bookkeeping programming or a manual framework, for example, Excel, it is important to record, balance, and classify each cost.

Thus, accounting frameworks permit fast passage, categorization, and balance costs. All business liabilities, including creditor liabilities, bank loans to help the business, or personal are called cash flows (Camfferman & Zeff, 2018). An accounting system monitors these liabilities as payable value and reports all repayments when installment is made and debts are paid.

GAAP Accounting Standards

Some standard rules and ideas oversee the field of accounting. These rules are called essential bookkeeping standards and guidelines from the preparation on which more itemized, complicated, and legalistic bookkeeping rules are based. For instance, the Financial Accounting Standards Board (FASB) utilizes the fundamental bookkeeping standards and rules as a reason for accounting reports and a set of bookkeeping guidelines and models (Popatia, 2017).

The expression “generally accepted accounting guidelines” (“GAAP”) comprises of three vital rules:

1. The fundamental bookkeeping standards and rules.
2. Guidelines and measures issued by FASB.
3. GAAP industry practices and standards.

If an organization disseminates its money-related reports to people, it is required to use GAAP standards in preparing the announcements. Consequently, if an organization’s stock is traded on an open market, government law requires autonomous or independent auditors to examine the organization’s money-related reports.

Both the organization’s administrators and the auditors must ensure that the monetary reports and budgetary proclamations have been produced under the GAAP standards (Popatia, 2017). GAAP is helpful because it tries to institutionalize and direct accounting definitions, theories, and strategies. Although accounting standards have variations such as IFRS and GAAP, accountants can make conclusions when contrasting one organization to another, or contrasting one organization’s report on the industry.

Fundamental Accounting Principles and Concepts

Since GAAP is established on the fundamental bookkeeping standards and rules, accounts can comprehend GAAP if they understand accounting concepts and principles.

Monetary Entity Statement

The auditor records the firm’s operations, which differ from the entrepreneur’s deals. For legal reasons, a stakeholder and its proprietor are the same; however, they are different based on accounting principles.

Financial Statement

Financial operations are reported in U.S. dollars, and exchanges that can be communicated in U.S. dollars are recorded. Due to this fundamental bookkeeping guideline, it is accepted that the dollar’s buying power has not changed. Therefore, auditors disregard the impact of inflation on record sums.

Time Statement

This bookkeeping rule suggests that it is conceivable to report the complex and continuous exercises of a business is moderately short, interim such as the five months ended May 31, 2018, or 5 weeks ended May 1, 2017. It is a rule that the time interim must appear in the heading of every wage report on the investors’ value, and proclamation of cash flows (Roe, 2014). Naming one of these financial reports with “June 31” is not enough. The investor has to know whether the announcement covers the whole year.

Cost Principle

From a bookkeeper’s perspective, the expression “cost” alludes to the sum spent when an asset is acquired, regardless of time. Thus, sums that appeared on accounting statements are called authentic cost sums. Based on this rule, cost sums are not altered in the financial report.

Full Disclosure Principle

The financial statement displays information concerning areas of interest to an investor, stakeholder, or customer. Based on this assumption, various pages of “references” are joined to monetary statements. For instance, suppose an organization is named in a claim that requests a measure of cash. At the point, when the budgetary statements are prepared, it may not be clear whether the organization will have the capacity to protect itself or whether it may lose the claim (Roe, 2014). Because of these conditions of the full disclosure, the claim will be portrayed in the notes to the financial report. An organization records its bookkeeping strategies as the principal note of its many related statements.

Going Concern Concept

This bookkeeping rule accepts that an organization will operate as an entity to complete its targets and duties and will not declare insolvency or bankruptcy.

The going concern guideline enables the organization to concede expenditures ahead of time.

Matching Concept

This accounting rule expects organizations to utilize the accrual basis of bookkeeping. Most organizations, including BMW and Cadillac automobile, use the matching concept. Based on this concept, organizations match expenditures with cash inflow. For instance, deals cost should be recorded when the sales were made. Workers’ salaries are accounted as a cost in the week when the representatives worked and not in the week when the representatives are paid. If an organization consents to give its representatives 1% of its 2016 incomes as a reward on January 15, 2017, the organization should report the reward as a cost in 2016 and the sum unpaid on December 31, 2016, as a liability.

Income Recognition Concept

Under the collection’s premise of accounting, incomes are recorded when an item has been sold or services have been performed. Under this fundamental accounting guideline, an organization could acquire and report $40,000 of income in its first month of activity but records $0 in real trade for that month.

Materiality Concept

Based on this principle, an auditor may be permitted to disrupt another bookkeeping rule if a sum is inconsequential. Proficient judgment is expected to choose whether a sum is irrelevant or inconsequential. A case of insignificant activity is the purchase of a $100 wall clock by a very productive multi-million dollar organization. Since the wall clock will be utilized for a long time, the matching concept guides the bookkeeper to record the cost over the five years. The materiality rule enables this organization to disregard the matching concept.

Conservatism Concept

When there are two choices for recording a purchase, the conservative principle guides the bookkeeper to pick the elective that will cause less net pay and expenditure. The Conservative principle helps the auditor to “break a tie.” It does not mandate the auditor to be moderate.

IFRS Accounting Standards

Financial proclamations of BMW AG and its auxiliaries in Germany have been produced using accounting standards by IAS 27 (Consolidated and Isolate Financial Statements). BMW AG is a multi-organization that produces automobiles, power bikes, and aircraft parts (Zicke, 2017). The organization uses the IFRS reporting standards for reporting its income and expenditures. Incomes from sales are reported when its benefits are transferred to the merchant or client if the measure of income can be properly estimated. The financial advantages related to the trade would likely flow to the expenditure if sales can be properly measured. By IFRS standards, incomes are expressed net of settlement rebates, rewards, and discounts.

Revenues additionally incorporate rentals and premium salaries earned by monetary services. Incomes from rents and customer leases are recorded in the financial statement on a straight-line premise over the pertinent term of the rent. Income from leases and merchant financing is recorded utilizing the compelling interest technique and revealed as incomes inside the detail “Interest wage on credit financing”. However, if product sales incorporate a definite sum for other services, related incomes are conceded and transferred to the applicable period.

Profits are recognized as wages by the expenses. Income emerging on automobiles with a repurchase duty is not recorded until payment is delivered to the organization. The vehicles are incorporated in the inventories and expressed as a cost. The cost of offers contains the expenditures of items sold and the procurement cost of purchase products (Zicke, 2017).

Based on the IAS 20 standards, grants are recorded in the financial statement when conditions and requirements are fulfilled. They are recorded as salary over the periods important to coordinate them with the related expenses, which they are proposed to reimburse. Consequently, the firm’s earnings per share are registered based on the IAS33 (Earnings per Share). Undiluted profit per share is computed from the firms, preferred and common stock.

Accounting Standards used by Cadillac Corporation: US GAAP

General Motors, the world’s biggest vehicle maker, plans, fabricates and has advertised vehicles and trucks around the world since 1931. General Motors Corporations established in 1908 have their vehicles sold in more than 190 nations. Cadillac a subsidiary of GM produces exotic and comfort cars in the US. The corporation is listed on the NYSE and is obliged to use the GAAP accounting standards.

The GAAP is an accounting framework that organizations must use when they prepare their financial statements and reports. GAAP is a blend of definitive measures and the usually acknowledged methods for recording and revealing account information. GAAP enhances the lucidity of the correspondence of budgetary data. GAAP guarantees a base level of consistency in Cadillac’s financial disclosure and reports, which makes it less demanding for financial specialists to examine and retrieve valuable data. GAAP likewise encourages the cross-examination of money-related data among similar organizations.

Corporations in the US use GAAP standards as against the IFRS principles. As a result, the GAAP standards are enforced when an organization releases its monetary articulation. Since Cadillac’s stock is traded publicly, the budgetary articulation should likewise stick to rules by the U.S. Securities and Exchange Commission (SEC). The GAAP covers income acknowledgment, monetary record arrangement, and share valuation. Likewise, a few organizations may utilize both GAAP and non-GAAP accounting standards when announcing money-related outcomes. GAAP directions require that non-GAAP measures are distinguished in money-related explanations and other open announcements such as public statements (Yurisandi & Puspitasari, 2015).

Differences between the two Accounting Standards

U.S. GAAP and IFRS standards vary and are based on the accounting concept. The U.S. GAAP is a guideline-based framework, while IFRS is a standard-based framework. This qualification may be disturbing because accountants, auditors, and financial experts in the U.S. have been educated in the tenets of U.S. GAAP.

The differences between both accounting standards include inventory, PP&E and impairment, financial instruments, revenue recognition, research and development, pension, and other post-retirement benefits

Inventory

The LIFO is a major concern for accountants using the IFRS standards. Under U.S. GAAP, Cadillac and other companies can enforce LIFO principles to their inventory. During inflation, this principle prompts higher recorded expenses of revenue, and in this manner diminishes tax income. Nevertheless, LIFO bookkeeping is not permitted under IFRS. As a result, organizations must transfer inventory estimates to weighted accounts for FIFO standards.

Assets Breakdown

Under IFRS, significant segments of an asset must be isolated and deteriorated over their evaluated valuable life span. As a result, distinguishing the significant assets of multinationals like BMW is challenging. For assets that normally require substitution amid the production phase, devaluation might be computed on the units of production.

Organizations that change over to IFRS can expect a complex and possibly extensive procedure to componentize their property, plant, and gear. It will be difficult to distinguish the relevant assets and to change the devaluation estimation of fixed assets (Yurisandi & Puspitasari, 2015).

Asset deficit

Two noteworthy contrasts exist between U.S. GAAP and IFRS standards on asset disability. The differences will be summarized below.

1. While evaluating for disability under U.S. GAAP, a “two-advance approach” is connected. To start with, the asset value is contrasted and the undiscounted estimation of money flows to be generated from the property. Second, where the asset value is higher, the benefit is lowered to a reasonable cost. Under IFRS, the asset value is contrasted with the recoverable sum. By implication, a definitive impact is that debilitation might be recorded prior under IFRS.
2. Under U.S. GAAP, accountants cannot reverse recorded impairments. Nonetheless, under IFRS, where the marker that prompted the hindrance misfortune never again exists, the perceived impairment is reversed. Under IFRS, you should track your property hindrances after preparing them to decide if there should be a reversal. Variations exist in cash determinants for impairment.

Budgetary Instruments

Under U.S. GAAP, Cadillac automobiles have full control of hedging instruments. This approach is restricted under IFRS; rather, viability must be constantly surveyed and estimated, requiring evaluation and documentation of subsidiary instruments. A few contrasts exist amongst IFRS and U.S. GAAP on the financing cost technique, especially the definition of segments of direct expenses between the two model systems. Eventually, the effect of the distinction implies that internal expenses identified with credit starts amortized under U.S. GAAP (Yurisandi & Puspitasari, 2015). The effect of these distinctions could be significant for automobile organizations, especially those OEMs with financial bodies.

Income Recognition

IFRS requirements for income acknowledgment are substantially less challenging than U.S. GAAP. One zone with conceivably significant impact is the direction representing various component plans. While U.S. GAAP reports these plans using simple and effective standards, IFRS does not provide answers to such activity. The ramifications of this contrast go beyond bookkeeping operations but could affect contract requirements and approval.

R&D

U.S. GAAP requires expenses identified with R&D be prepared as incurred. However, IFRS separates amongst “Research” and “Development” expenses, with improvement costs promoted when the specialized and financial process of a task can be illustrated.

Pension and Retirement Package

With the significant number of present and future retirees in the automobile business, annuities, and retirement packages cover a large part of the firm’s financial report. Under U.S. GAAP, such expenditures are recorded in the equity section. However, IFRS does not recognize this expenditure. Consequently, IFRS sets a benchmark for pension packages that must be reported. Companies using GAAP do not have restrictions or pension caps for financial reports (Zicke, 2017).

Similarities between IFRS and GAAP

Auditors using different accounting standards do not accept everything, except there is a colossal shared conviction among specialists and scholastics on what the objectives of the financial reporting framework ought to be. An accounting principle should give information on how well the organization is doing (financial execution) and help speculators and investors in their asset distribution choices (choice importance). Tax auditors collect valuable information from a different framework.

Non-Comparability of Financial Statements in Different Countries

Financial accounting comparability has been perceived as a critical component of accounting and enhancing the value of bookkeeping data. Comprehensively, financial leadership contrasts options while accounting books suggest that financial reports cannot be evaluated as a single entity. The significance of non-comparability of financial statements in different countries is underscored in valuation strategies, for example, pricing issues, audit requirements, and reporting standards.

Thus, standard auditors set comparability as a component of accounting systems. The procedure of synchronization amongst IFRS and US GAAP can be moderate, risky, and a process that is developing. A current study discovered almost half of U.S. – based multinational organizations are either utilizing IFRS in their subsidiaries or have finished an underlying effective evaluation, or are intending to complete an evaluation (Zicke, 2017).

The IFRS impression is expansive and grows as financial globalization expands. Thus, financial regulatory agencies should advocate collaboration with national standard regulators, for example, FASB, and guarantee that IFRS addresses the issues of every single capital market, including the United States (Taplin, 2017). It is imperative to survey the attributes of the two bookkeeping frameworks based on the challenges of supplanting the US GAAP with IFRS standards.

The examination of the contrasts between American principles and the European standards-based, frameworks has been the question of similar research on various accounting frameworks and in various ways to deal with corporate financial control (Taplin, 2017).

The implementations of research results on IFRS are envisioning its global acceptance regardless of the challenges with US GAAP. A scope of various prospects has risen concerning the utilization of US GAAP where the two extraordinary circumstances are spoken to by the upkeep of US GAAP with the acknowledgment of IFRS for international organizations and the formation of I-GAAP as a substitute for international GAAP (Taplin, 2017). The verbal confrontation on IFRS selection in the US is pertinent and the discoveries of a study directed on the financial specialist observations featured the significance of comparability to financial investors (Yurisandi & Puspitasari, 2015).

Conclusion

The paper discussed the importance, concept, definition, and principles of financial accounting standards. Several accounting systems and concepts were analyzed. The concepts include the revenue recognition principle, matching principle, go-concern principle, cost principle, and the full disclosure principle. Consequently, the paper also discussed two accounting standards used by the two automobile industries under review. The automotive industries are BMW and Cadillac Corporation. The difference in the selected accounting standards lies with its inventory, financial instruments, revenue recognition, R&D, and impairment.

Based on the analysis, the research question is relevant because of the challenges in adopting a unified accounting standard. As a result, the target audiences are accountants and decision-makers. The comparability of financial statements is a growing concern for multinational companies. Issues such as mergers create compliance issues for various organizations. As a result, accountants must harmonize their reporting standards to a single entity. It was observed that accounting standards differ in various countries. However, accounting standards provide a platform for a fair and valid reporting framework.

References

Abela, M., & Mora, A. (2012). Understanding the consequences of accounting standards in Europe: The role of EFRAG. Accounting in Europe, 9(2), 147–170.

Camfferman, K & Zeff, S. (2018). The challenge of setting standards for a worldwide constituency: Research implications from the IASB’S early history. Journal of European Accounting Review, 27(2), 289-312.

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), 1-24.

Roe, J. (2014). Transition from US GAAP to IFRS: Analysis of impact on income tax administration in USA. European Financial and Accounting Journal, 9(4), 86-109.

Taplin, R. (2017). Measuring the comparability of company accounts conditionally: A research note. A Journal of Accounting, Finance and Business studies, 53(4), 527-542.

Yurisandi, T., & Puspitasari, E. (2015). Financial reporting quality: Before and after IFRS adoption using Nice qualitative characteristics measurement. Social and Behavioral Sciences, 211(1), 644-652.

Zicke, J. (2017). The effects of accounting standards on the financial reporting properties of private firms: Evidence from the German accounting law modernization act. Business Research, 10(2), 215-248.