The financial reports of The GAP, H&M, and Inditex are expected to differ significantly in some components because The GAP follows the US GAAP while the others use the IFRS standard.
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The GAAP, which stands for generally accepted accounting principles, follows the US standardized guideline while the IFRS, which stands for international financial reporting standards, conforms to the international financial principles.
According to a report by Ernst and Young (2011), the frameworks vary significantly in the fiscal period requirements, debt presentations, deferred taxes, and liabilities in balance sheets. Similarly, every financial guideline has a unique plan for the income statement classifications.
In addition to the differences in the financial presentations of the three companies, the reports differ in the joint venture accounting, equity method investees, and consolidation.
A research by Daniels, Radebaugh and Sullivan (2015) showed that GAAP and IFRS differed considerably in the computed net income and shareholders’ equity. In fact, the findings predicted higher profits with IFRS than with GAAP.
Based on the research, H&M and Inditex would be expected to post higher profits than GAP because of computational variations in net income and shareholders’ equities.
Additionally, the differences in inventory listings and long-lived assets between the accounting standards are expected to change the financial statements of these clothing retailers.
The H&M’s accounting standards and practices are founded on the company’s culture, historical acquisition costs, and the characteristics of the European market. H&M recognizes the significance of the Springfield Armory in streamlining accounting standards.
H&M produced two accounting reports that demonstrated the influence of SA in establishing a standardized accounting structure and practice. The company associated its accounting structure with policies and practices generated from the Foucaldian perspective of America’s accounting history.
In addition, the IFRS standards play a significant role in streamlining corporate objectives to national and international standards. According to PwC (2012), the accounting practices of H&M conform to the IFRS instrumentations.
Additionally, the IFRS provide comprehensive guidelines on the process of consolidating financial statements, as well as disclosure of interest rates in multiple entities. The company follows the foreign currency behaviors to readjust their practices according to the receivables and liabilities before the closing date of a session.
The company’s accounting structures are based on the industrial work of the 19th century. Market competitiveness served as a significant cause of controlling prices (Ernst & Young, 2011). In fact, the researcher reported that the cost of production remained under the control of informal employers.
The historical and financial attributes influence the contents and implementation of the accounting structures and profiles.
The CFO of H&M may be exposed to a balance sheet misrepresentations arising from misclassified assets and liabilities. According to the Ernst and Young (2011) report, IFRS is very specific on deferred tax assets and liabilities.
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However, the GAAP is not very specific and may cause anomalies in the US statements presented to the Swedish headquarters. Additionally, misappropriation of funds may arise when the US reports are presented to the European headquarters.
Whereas the US GAAP issues non-specific requirements on the income statements from extraordinary items, IFRS prohibits all presentations on restricted items. Exchange rate exposures may also affect financial statements produced by H&M subsidiaries.
Inventory losses may emerge from varying presentations of H&M finances. Whereas the GAAP accepts LIFO costing methods, IFRS sets strict measures against its implementation in any financial report. The difference is bound to cause inventory losses that may subject the CFO to financial ligations and misappropriation of funds.
The US GAAP prohibits long-lived assets while the IFRS permits their reevaluation in order to increase asset value. The differences arising from the standardization structures subject the CFOs to multiple litigations and affect a company’s financial performance.
Additionally, PwC (2012) research shows that the officers can make erroneous profit projections based on the type of analysis tool applied.
Payment and liabilities’ exposure can be addressed using exchange-traded funds (ETF). According to Osak (2012), the ETFs serve as a mutual fund substitutes. Additionally, they are widely used when investing in bonds, stocks, commodities, and other asset classes.
The exposures can also be addressed using ETF derivatives, which fluctuate depending on the core currency positions. Additionally, stock market hedging can be used to offset payment exposures. The hedging strategy identifies and invests in the bond markets to create a short-term placement in local and international markets.
Risk exposures can also be addressed using multiple exchange rates over prolonged periods. In fact, this approach is considered among the best operational hedging strategies applied by multinational corporations to deal with fluctuating currencies and commodity prices.
Operational hedging strategies focus on reducing costs incurred from raw materials, pricing options, and logistics. Whereas multinationals identify a centralized source of raw materials, the operational hedging strategies can help in distributing costs to eliminate losses.
H&M can address the financial exposures by identifying its global strengths and applying strategic management practices in its local and global operations. Strategic management practices would address financial losses by mapping the financial trends of major currencies.
Daniels, J. D., Radebaugh, L. H., & Sullivan, D. P. (2015). International Business: Environments and operations. Upper Saddle River, NJ: Pearson Education.
Ernst & Young. (2011). US GAAP versus IFRS: The basics. Web.
Osak, M. (2012). Operational hedging curbs exchange rate uncertainty. Web.
PwC. (2012). IFRS and US GAAP: similarities and differences. Web.