Accounting Reporting Criteria 5

Accounting Reporting Criteria 5

Accounting Reporting Criteria

There are many opportunities as well as challenges for corporations who enter a globalized market. The challenges can be exceptionally difficult for those who prepare and use financial and accounting reports and information for international companies. This is because the accounting reporting criteria differ between the Generally Accepted Accounting Principles in the United States, the Financial Accounting Standards Board in the United States, and the International Accounting Standards Board. The International Accounting Standards Board was formerly known as the International Accounting Standards Committee prior to 2001 and was established to specifically address the differences between financial markets in different companies that operate globally. A comparison of a domestic company and a globally-operating company reveals some of these differences.

When looking at domestic and global companies, with Ford and Honda as our examples, the regulatory environments have many similarities. As a publicly traded American company, Ford is required to adhere to standards and regulations established by United States regulatory bodies. Ford’s 2006 Annual Report includes statements attesting to its compliance to the following regulatory entities: the United States Securities and Exchange Commission (SEC), the Public Company Oversight Accounting Board (PCOAB), the Financial Accounting Standards Board (FASB), and the Committee of Sponsoring Organizations of the Treadway Commission (COSO) (Ford Motor Company,2009).

Surprisingly, Honda must adhere to the guidelines of these same regulators and file an annual report in the United States (Honda Worldwide,2009). This is because Honda is a publicly traded company in the U.S., even though the company is based in Japan. As a foreign company, Honda must be compliant with several additional international regulating bodies. It must follow the standards established by the International Accounting Standards Board (IASB) and the Accounting Standards Board of Japan (ASBJ). As a result of the multitude of accounting policies and regulators that Honda must be accountable for, its financial recording practices need to be more complex than Ford’s.

In today’s age many companies sell internationally. This can be a challenge as many countries utilize, monitor and regulate their own currency. In the global economy, Ford and Honda are two leading car manufacturing companies that distribute their vehicles to their native home nations as well as global partners. When taking into consideration the time it takes to manufacture a vehicle until it reaches the sales contract at a dealership a lot of events can occur. With this delayed time the opportunity for market and currency exchange rates to dramatically fluctuate can occur. Recently TechOn has reported that Honda lost a dramatic amount of profits due to exchange and conversion rates. Author Kariatsumari reports that 193 billion yen was lost primarily due to the changes in exchange rates from when the car was first sent to the US and the time it sold. Likewise, Ford has had exposure to these problem as well. Ford’s primarily international customers are Germany, Japan, Italy and France. 3 of which are European countries that markets and economy are tightly nit and related to each other. In the Securities and Exchange Commission report for Ford Motor Company it is mentioned that Ford takes a very minor hit when it comes to foreign currency and exchange rates. This minimization is lost due to Fords hard work and attempts to enter into situations and contracts that minimize their risk and exposure to foreign currency. Some of Fords management techniques to cut these costs are by investing in the foreign currency through Foreign Currency swaps as well as and primarily from Foreign Currency Forward Contracts.

While both companies will inevitably face downturns and take steps to minimize exposure, it is inevitability an area that some profits will be lost. From typically unpredictable markets in a multitude of investment and strategies to cut losses it’s a never ending battle for these companies. If these auto makers can keep funding strong in these aspects and stick to strict plans, their exposure to the uncontrollable forces of currency exchange can be quite minimal. On the other hand the lack of funding and planning, as shown in Honda’s example, can be the source of a great loss.

Generally Accepted Accounting Principles (GAAP) vary from country to country. When looking into the automotive industry, many different types of car makers and countries are involved. However, the main focus will be placed on Honda versus Ford or U.S. GAAP versus Japanese GAAP. To begin, Japanese GAAP is considered equivalent to International Financial Reporting Standards (IFRS). Likewise, in 2008, the U.S. Securities and Exchange Commission (SEC) proposed that IFRS replace U.S. GAAP for U.S. public companies in 2010 to be completed by 2014 (Epstein, 2008). Surprisingly, accounting standards in compliance with IFRS are less detailed than those of the U.S. GAAP. However, convergence is important for those who participate in the global market.

Despite the possibility of accepting the IFRS, U.S. companies are still required to follow the U.S. GAAP. The following are some examples of differences between the two standards. The 2004 website shows that the pooling of interests method is exceptionally used only when strict criteria are met with the Japanese GAAP versus the U.S. GAAP purchase method only. Goodwill is strictly amortized with impairment with Japanese GAAP and is not amortized with the U.S. Assets are measured by the recoverable amount in Japan versus the fair value in the U.S. retirement benefits are handled differently in that gains or losses are strictly amortized in Japan without corridor while they are corridor amortized in the U.S. The scope of subsidiaries in consolidated financial statements is based on control in Japan and is based on majority voting interest in the U.S.

The U.S. and Japanese GAAP also have many similarities in the measurement of securities, estimating potential credit losses/impairment, recognition of financial assets, measurement of dividends, hedge accounting, basis methods of business combinations, grouping of assets, and income taxes to name a few.

As long as companies choose to operate in a global environment, there will be issues with the accounting reporting criteria based on the country of origin and the country of operations. The differences between Generally Accepted Accounting Principles will continue to plague financial report preparers though some resolution may be in sight. As the United States GAAP merges with the IASB standards, the flow of financial information that does not need adjustment across national boundaries will be expedited. The accounting reports submitted by Ford and Honda will continue to be influenced by the FASB and IASB convergence project in an attempt to make the standards more similar. Some of the standards however, will remain separate and unique due to the factors involving operations and financial aspects of global markets.

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References

Ford Motor Company(2009).Ford Motor Company / 2006 Annual Report. Retrieved February22, 2008, from c. http://www.ford.com/doc/2006_AR.pdf

Honda Worldwide(2009).Investor Relations / IR Library. Retrieved February22, 2009, from http://world.honda.com/investors/annualreport/2007/

Tech-On‘s “Honda Sales, Profit Decline on Currency, Weak Western Market” by Kouji Kariatsumari at: http://techon.nikkeibp.co.jp/english/NEWS_EN/20081029/160317/

Securities and Exchange Commission report on Ford Motor Company located at:http://www.secinfo.com/d1533.b1f.htmhttp://techon.nikkeibp.co.jp/english/NEWS_EN/20081029/160317/

Epstein, Barry J.(2008).IFRS versus GAAP.Russell Novak & Co., LLP. Retrieved February22,

2009, from http://www.ifrsaccounting.com/

(2004).Evolving Japanese GAAP High Quality Accounting Standards. Retrieved February22,

2009, from http://www.iasplus.com/resource/0404japanequivalence.pdf