Abstract
Financial accounting aims to express an organization’s financial position to interested parties and is conducted by applying the set accounting standards. In the U.S., the FASB sets the U.S. GAAP that companies apply when preparing financial reports, while the IASB develops the IFRS that are used globally.
The study seeks to answer the question of which standards are easy to understand and provide more accurate data. The information is gathered through a literature review, including the financial reports of Krones and WestRock. Data will be collected by comparing the reports to the provisions provided under U.S. GAAP and IFRS.
The findings indicate that U.S. GAAP is easier to understand, while IFRS provides more accurate data. The companies’ business operations can be affected by international forces, including exchange rate fluctuations, tariffs, and raw materials. Financial reporting rules, environmental regulations, labor laws, trade and tariff regulations, and taxation are some compliance and regulatory requirements that can affect each company’s business. In conclusion, accounting standards allow users of information to make financial analysis easy.
Introduction
The purpose of financial accounting is to communicate an organization’s financial status to relevant stakeholders. Accounting standards consist of a structured set of rules and principles designed to direct the preparation of financial statements. The standards are important to all the users of financial information as they facilitate the comparability and analysis of a firm’s financial health. Globally, two main bodies prepare accounting standards that are applied globally. The paper aims to compare and contrast key differences in the presentation of financial data under the U.S. Generally Accepted Accounting Principles (U.S. GAAP) and the International Financial Reporting Standards (IFRS).
The analysis is based on two companies operating in the same business sector, which provides a basis for critical evaluation to identify the standards that are straightforward and deliver more precise cost information. The report further examines the international factors that would affect the cost of the products made at the chosen companies and the compliance and regulatory issues touching on the costs of the produce. The main point in the paper indicates that US GAAP and IFRS have distinct advantages, but only the IFRS is applied globally. The other point is that international factors, including exchange rate fluctuations, tariffs, and raw materials, can influence the companies’ operations. The cost of the products will be further influenced by compliance and regulatory changes that touch on the environment, labor, trade, financial reporting, and taxation.
Financial Statement Comparison
Krones Inc. is a foreign subsidiary, with the parent company, Krones Group, being based in Germany. Even though IFRS are not permitted in the U.S., the Securities and Exchange Commission (SEC) permits foreign entities to use IFRS for SEC reporting purposes. WestRock is based in the U.S.; therefore, its financial reports must be prepared following U.S. GAAP.
Businesses have always desired uniformity in financial reporting, invigorating the push for matching the IASB and US GAAP. Within the past two decades, the endeavor has yielded significant gains despite expecting the process to be concluded promptly. The world is closer to that objective, but accountants still have to prepare two different sets of standards when needed. Some differences exist despite improvements in lease accounting, revenue recognition, and financial instruments.
One main area of concern involves the classification of leases by lessees. According to Krones (n.d.), the company only reported on general leases with no classification, while WestRock (n.d.) indicates reports on the categories, especially on operating leases. The US GAAP requires that lessees categorize the leases into either operating of finance or leases, while such classification is not stipulated under the IFRS.
Additionally, differences still exist about revenue recognition, and this specifically touches on the accounting for inventories. Under US GAAP, companies can use the LIFO method, while IFRS does not. WestRock (n.d.) indicates that the company values its inventories in the country at a lower cost or market price, with the value defined by the last-in-first-out (LIFO) approach. On the contrary, Krones (n.d.) indicates that the carrying value of inventories is set at the lower cost and net realizable value, which is determined using the first-in-first-out (FIFO) and weighted-average cost techniques.
The third key difference involves the classification of financial assets. The difference exists in terms of the categorization of financial assets, such that IFRS stipulates three basic categories (fair value through other comprehensive income (FVOCI), fair value through profit or loss (FVTPL), and amortized cost (AC)). The classification does not exist under the US GAAP; in its place, the U.S. standards allow for varied categorizations and sub-classifications. WestRock (n.d.) only reports on financial instruments with no specific categorization. Krones (n.d.) indicates the three basic classifications defined under IFRS 9. The company’s financial instruments were classified into three classes: FVOCI, FVTPL, and amortized cost.
There are great similarities between US GAAP and IFRS in preparing financial statements. There are slight differences between the two frameworks that may well affect managers’ ease of understanding and accuracy of cost data. Financial statements prepared under US GAAP and IFRS may be equally understandable for managers familiar with the specific framework.
However, US GAAP may be easier for managers to understand even before they familiarize themselves with the rules. The FASB standards provide a more prescriptive rules-based approach, providing explicit guidelines and procedures and not allowing for subjective interpretation. The IFRS is principles-based, which provides a general description that can be interpreted differently and can potentially result in complexities. The key benefit of IFRS is that it provides more accurate cost data to managers since accountants can correctly capture the relevant data.
International Factors
The current globalization trends expose businesses to influences on the international stage. As businesses trade across borders, fluctuations in exchange rates can substantially affect the cost of packaging materials. If the local currency weakens, more funds may be required to purchase materials abroad. Countries and regions are also constantly developing trade policies, such as tariffs, quotas, and embargoes, which can affect the cost of packaging products. Finally, variations in the cost of raw materials, such as paper and plastic, based on international market conditions can cause product costs to vary (DiMatteo, 2021). For example, if there is a shortage of wood pulp used in paper production, the cost of the products for both Krones and WestRock will go up.
Compliance/Regulatory Issues
Krones and WestRock are manufacturing companies, and their operations can be impacted by various compliance and regulatory requirements. In particular, companies use raw materials such as paper, which are mainly derived from the natural environment. Should the U.S. governments introduce new environmental regulations aimed at discouraging the cutting down of trees, Krones and WestRock would have to pay more for materials if required to import.
The other impact could emanate from regulations touching on the industrial operations subject to various environmental regulations, such as waste disposal, air and water pollution standards, and handling hazardous material (DiMatteo, 2021). Compliance with these regulations can be costly should it require additional equipment, training, and monitoring outlay.
Furthermore, the companies may be required to comply with various labor regulations, including minimum wage, overtime, and safety standards. Compliance with these regulations may require additional spending on labor, which would, in turn, cause the cost of their products to increase. Similarly, Krones and WestRock may be subjected to new product safety regulations. They may be required to comply with legal requirements related to labeling, packaging, and testing that can add to the cost of their product (DiMatteo, 2021).
Both companies may be subjected to trade and tariff regulations, which can impact the cost of their products if they import or export goods to other countries. Tariffs can increase the cost of materials or finished products, making them more expensive to produce and sell. Finally, Krones and WestRock may be required to comply with various financial reporting regulations, including taxes and accounting. Compliance with these regulations can add to the business’s administrative costs, leading to an increased cost of their products.
Conclusions and Recommendations
Accounting standards comprise a system of rules and principles developed to guide the preparation of the correct format and content of financial reports. However, the U.S. GAAP and the IFRS have different approaches to reporting on lease accounting, revenue recognition, and financial instruments. Krones and WestRock can enhance comparability by adopting the same approach to financial reporting, preferably the IFRS. The impact of international factors can be managed through strategic management and planning, while compliance and regulatory issues can be handled by proper risk management and mitigation.
References
DiMatteo, L. A. (2021). International business law and the legal environment. Routledge.
Krones Group (n.d.). Sustainable digital annual report 2021. Web.
WestRock (n.d.). Annual report 2021. Web.
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