Introduction
Repsol S.A. (Sociedad Anonima) is an integrated global company specializing in energy production. Its operations range from the exploration of oil and gas fields to the marketing of petrochemicals, making an important player in the European energy industry. The company was founded in 1987, with the first logo appearing in 1971. The company has adopted a new Growth & Value 2018-2020 strategy that includes such principles as the increase of shareholder distribution, the profitable growth of the company’s business units, the advancement of the energy transition, and the increased financial flexibility.
Repsol operates in upstream and downstream business areas. In regards to the former, the company explores and produces natural gas and oil not only in Spain but also in countries such as Norway, Russia, the US, Liberia, Angola, Colombia, and several others. These operations represent the key driver of growth for the company, which became one of the most influential in the industry, with the possession of over forty fields. In terms of the downstream areas, Repsol is involved in the supply and trade of crude oil, the marketing of petroleum products, the refinement of oil, the marketing and production of chemicals, as well as the development of new energies.
As Repsol is a Spanish company, its accounting standards are different than US GAAP. In the current report, Repsol will be evaluated on the basis of several important aspects. First, cultural differences will be evaluated as the company is based in Spain, and thus the business culture within it will be different from the US organizations. Second, the differences between US GAAP and IFRS accounting standards will be discussed since Repsol is required to adjust to international guidelines. Third, Repsol’s financial statements will be analyzed to assess the company’s financial health and identify any particular areas of financial struggle.
Culture Differences
It is inevitable that a Spanish company will have a culture different from organizations operating in the US context. In order to understand these differences, several aspects of corporate culture will be mentioned. It is important for the management of Atlantis Corp. to understand that doing business with a Spanish company can be a shock. First, Repsol will be hierarchically structured: the company has strictly differentiated divisions and a strong system of hierarchy, which is inherent to the Spanish tradition of doing business. Second, despite the significant divide between departments within organizations, business communication in Spain does not take place on formal levels like it is done in the United States.
It is expected that when communicating with Repsol representatives, they will show interest in speaking to individuals ranked on a similar level. This means that Atlantis Corp. should prepare its employees that the foreign company will only be able to communicate on the basis of rank: those approaching someone above their ranks may not have a fruitful dialogue.
Another important finding in regards to corporate culture is associated with the strategic planning of future business endeavors. While Repsol has developed the 2018-2020 Growth and Value strategy, it is not a strict goal that the company is trying to reach but rather an inspirational and motivational objective targeted at improving the organization as a whole. This is different from US companies that place significant importance on the role of strategy.
Also, the strategic planning of the future is usually the responsibility of managing directors and owners who predominantly make their decisions on the basis of personal judgment and intuition rather than any systematic research.
When it comes to business negotiations, the management of Atlantis Corp. should be prepared for a lengthy process that can take several months. This occurs due to the relational business culture in Spain: companies expect their potential partners to develop personal relationships and establish a sense of trust prior to making any negotiations. Such relationships are developed in personal meetings, social gatherings, lunches, and other forms of interactions that imply face-to-face communication. In terms of bargaining, there are regional differences in the way Spanish businesses approach this topic. For instance, Catalans prefer a professional style of negotiations, in which bargaining is not a priority, which is similar to the US approach.
Lastly, it is worth mentioning that despite the changes in the business culture of Spain and in the general society of the country, the final decisions are made at the level of senior management. Also, more often than not, the senior executive makes a decision alone, which means that the negotiations between Repsol and Atlantis Corp. should target the company’s key executive. Importantly, the final decision may be a great surprise to those participating in negotiations because, in Spain, executives act not only on the basis of business potential but also on the grounds of personal judgment, feelings, and intuition.
Overall, Repsol’s culture as a Spanish company will be different from the context to which most US companies are accustomed. This means that thorough preparation will be needed on the part of Atlantis Corp. in order to make the negotiations fruitful and yield positive results.
Analysis: US GAAP vs. IFRS
The Generally Accepted Accounting Principles in the US (US GAAP) refer to the set of accounting rules that American companies use for organizing, presenting, and reporting their financial statements (Financial Accounting Foundation). In Repsol, however, US GAAP will not apply since Spain requires organizations to adhere to International Financial Reporting Standards (IFRS), which are different from those accepted in the United States. IFRS was developed and issued by the International Accounting Standards Board and contain specific instructions as to how companies should report their financial information (“List of IFRS Standards”).
If comparing IFRS with US GAAP, several significant differences should be noted. The first difference lies in the way that financial ratios are being calculated. For instance, IFRS does imply any strict requirements on how revenue should be defined and also allows organizations to report their revenues sooner. Under US GAAP, the ratio is only recognized when it is realized or realizable and earned. This means that a balance sheet developed on the basis of IFRS may show higher revenue streams than GAAP’s.
Therefore, if Repsol had to prepare its financial statements based on the GAAP standards, it had to show an up-to-date stream of revenue instead of reporting it earlier. This does not mean that the line items pertaining to financial ratios will increase or decrease in the report since the difference lies in the time points at which financial ratios are reported. Net income may decrease because of the need to report not only high but also low revenue streams.
“Another difference between US GAAP and IFRS lies in the fact that the latter has different requirements for reporting organizational expenses” (PWC 80). For instance, if a company is investing or spending money for future development, IFRS does not require to report these costs as an expense and allows them to be capitalized. US GAAP, on the contrary, requires such costs to be reported as expenses.
If Repsol prepared its financial statements according to US GAAP, the company would have to mention more expenses than previously, which means that line items that report organizational expenses (costs) will increase (PWC 85). This has a direct influence on net income: it will decrease because the costs will take away from the total amount of money the organization received within a specific time period.
The third difference between US GAAP and IFRS is associated with the ways of considering and measuring inventory. There are two different methods in which organizations account for their inventory: first in first out (FIFO) and last in first out (LIFO). While the former implies the preservation of the most recent inventory until the older inventory is sold, the latter is associated with the most recent inventory being sold. IFRS prohibits LIFO inventory management, while US GAAP allows companies to choose either of the methods. This difference will not have any significant impact on the way in which Repsol will report the company’s inventory since it will be free to choose between FIFO and LIFO without any significant limitations.
If Repsol chooses to manage its inventory on the basis of the LIFO, then the company will be able to do so since it does not violate US GAAP provisions. The line items of inventory realization will not increase nor decrease since the standard is associated with the manner of reporting. The net income will increase in the scenario if more items are sold using the LIFO method. It will decrease if the method results in a smaller number of items sold.
The fourth difference between the two accounting standards is associated with equity investments. According to the report by PWC, under the US GAAP guidelines, “all equity investments are generally measured at fair value with changes in fair value recognized through net earnings” while under the IFRS, “investments in equity instruments are always measured at fair value” (93).
If Repsol reported its equity investments based on US GAAP guidelines, it would have used net asset value (NAV) without any adjustments, which is not practiced in the context of IFRS. This will decrease the line items in the financial statement pertaining to investments while also contributing to the net income: the net income will increase only in instances when the fluctuations in fair value are lower compared to the initial estimations of equity investments.
Analysis of Financial Statements
For the purpose of the assessment, Repsol, S.A.’s financial statements for years 2017 and 2016 will be analyzed. The total assets of the company for the year 2017 were 59,857 million Euros, while in 2016, they amounted to 64,849 million Euro (“Repsol S.A. 2017 Annual Financial Report”). Thus, there is a decrease in total assets by 4,992 million Euro compared to the previous year. The decrease in the total assets at Repsol compared to the previous year can be explained by several reasons.
First, the price of hydrocarbons decreased by 10%, the sales volumes decreased by 5%, the operating and investment costs increased by 5%, and the unit contribution margin decreased by 5% (“Repsol S.A. 2017 Annual Financial Report”). Issues in the external environment made it harder for the company to maintain its total assets on the same level as during the previous year, which is why there is almost a 5-million Euro difference in the total assets in the 2017 and 2016 financial statements.
Compared to the industry competitor, SOCAR, the total assets of which amounted to 31,65 million Euro in 2017 and 27,35 million Euro in 2016 respectively, Repsol experiences a financial decline (“SOCAR International Financial Reporting Standards Consolidated Financial Statements”). If the company reported the total assets according to US GAAP, the standard of total assets would not have changed.
In addition to the decrease of the total assets, the net equity in 2017 amounted to 30,063 million Euro, which is 1,048 million Euro less if compared to the financial statement of 2016 (“Repsol S.A. 2017 Annual Financial Report”). Considering equity as a positive indicator is important because it represents the number of funds that a company received through the contributions of owners or shareholders as well as through retained earnings (or losses).
The fact that Repsol decreased its net equity points to the weakening of the company’s position in the market as well as the limited contributions of shareholders into continuously growing the company year by year. If compared to the competitor in the industry, SOCAR, the net equity of which amounted to 11.34 million Euro in 2017 and 9,13 million Euro in 2016, Repsol is a minor player in the market (“SOCAR International Financial Reporting Standards Consolidated Financial Statements”). The standard of net equity will not change since it is the same in both IFRS and US GAAP.
On the positive side, Repsol reported an increase in its operating income: 2.789 million Euro in 2017 compared to 1,911 million Euro in 2016 (“Repsol S.A. 2017 Annual Financial Report”). Operating income refers to the amount of profit a company realized from its operations after deducting such expenses as the costs of goods sold, wages, and currency depreciation. It is important to consider the operating income of a company because it is an indirect measurement of efficiency. Increases in operating income suggest that a company is becoming more profitable. It is also essential to understand the difference between operating income and revenue: while the former implies the subtraction of all operating expenses and costs of running a business, the latter does not account for the expenses and covers the total amount of money that a company received in a certain time period.
If to compare the operating income of competitors, the operating income of SOCAR, an Azerbaijan company is 491 million Euro (in 2017), which is hundreds of times more than Repsol reported (“SOCAR International Financial Reporting Standards Consolidated Financial Statements”). This shows that there are companies-giants operating in the energy sector, and comparing them may not be effective. Since SOCAR follows IFRS, if Repsol was to follow US GAAP, the operating income will not decrease or increase due to the standard being universal in both accounting guidelines.
The last aspect to mention is the cash flow from financing activities. Repsol reported to have 2,361 million Euro in 2017 compared to 2,053 million Euro in 2016, showing a decrease of 0,308 million Euro (“Repsol S.A. 2017 Annual Financial Report”). Considering cash flow from financing activities is important because it can also point to the economic health of a company. It measures the cash produced or used by a company within a specific period of time.
The decrease of the cash flow from financial activities points to the limited financial operations with banks, creditors, and other players contributing to the overall ‘health’ of an organization. The company-competitor, SOCAR, reported the following figures for cash flow: 2,07 million Euro in 2017 and 124,356 Euro in 2016 (“SOCAR International Financial Reporting Standards Consolidated Financial Statements”). This shows that Repsol in on a lower spectrum of oil companies in Europe, with the cash flow not changing if reported in US GAAP.
Works Cited
Financial Accounting Foundation. “About GAAP.” Accounting Foundation. Web.
“List of IFRS Standards.” IFRS. Web.
PWC. “IFRS and US GAAP: Similarities and Differences.” PWC, 2018. Web.
“Repsol S. A. 2017 Annual Financial Report.” Repsol. 2017. Web.
“SOCAR International Financial Reporting Standards Consolidated Financial Statements.” SOCAR. 2017. Web.