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The practice of accounting is a paramount aspect in the modern day business. There are various principles that govern how accounting is practiced in major organizations. This paper, elucidates the two types of accounting practices namely, Generally Accepted Accounting Principles (GAAP) and, the International Financial Reporting Standard (IFRS). These approaches are analyzed on how they have been applied on the three companies that are discussed. Firstly, Generally Accepted Accounting Principles (GAAP), is used to refer to the common framework and, guidelines for financial accounting used in a given jurisdiction as noted by (Epstein et al., 2008). GAAP incorporate different rules, standards, and conventions that are followed by accountants in preparation, recording and summarizing financial statement requirement. GAAP is a codification on the nature in which CPA firms and corporations present and prepare their organizations assets and liabilities, income and expense on their financial statement. When financial statement is being prepared using GAAP many companies use principles on how they report their business based on various GAAP rule.
On the other hand, International Financial Reporting Standard (IFRS) Norwalk Agreement, is an agreement that came into being on October 2002 following a meeting that, was held jointly in the offices of the Financial Accounting Standards Board in Norwalk, Connecticut. In this meeting, (Hanley, 2010) denotes that, the International Accounting Standards Board and FASB formalized their commitment to the union on established accounting principles in the US GAAP and, the International Financial Reporting Standards (IFRSs) to be done by, issuing a memorandum of understanding (Norwalk Agreement). These standards were meant to make the existing financial reporting standards fully compatible as soon as they become relevant. IFRS requires that, financial statements consist of a statement of financial position, a statement of comprehensive income, a statement of changes in equity, cash flow statement and summary of significant accounting policies.
Consequently, Generally Accepted Auditing Standards (GAAS) are sets of standards besides which the quality of the audit is done and judged. The auditor must have sufficient understanding of an organization including misstatement on the financial statement and internal control. The accountant should make an opinion regarding the financial statement on whether they are presented according to the accepted accounting principles.
International Auditing and Assurance Standards, is an independent standard setting body that issue auditing, assurance, review and quality control standards to be used by global auditing professionals (Hanley, 2010). This body issues guideline for the performance of the audit of financial statements. Ensure that presentation of Financial Statements on non-owner changes in equity is comprehensive.
GAAP and IFRS achieve practical equivalence and many corporations in the United States have shifted from convergence to the adoption of IFRS. US GAAP differs somehow from international financial reporting standards. Currently, International Auditing and Assurance Standards require the auditors to state whether the financial statement are prepared in conformity with US GAAP (O'Grady, 2009). The existing GAAS indicates that the auditor professional judgment with regard to fairness of the overall presentation of the financial statement should be in the framework of U.S. GAAP. Having this in mind, the following case studies have been considered.
Apple Inc. is a large company with wholly-owned subsidiaries that specialize in designs, manufacturing and marketing of a range of mobile communication. They also deal with media devices, personal computers, and portable digital music players. In addition, they also sell a variety of software, networking solutions, peripherals, and third party digital contents and applications. Their products include computers, iPad, Apple TV, iPhone, iPod, Xserve, professional software applications, and consumer.
In the financial results for the fiscal year 2010, the company posted revenue of $15.68 billion and, a quarterly net profit of $3.38 billion as reported by (O'Grady, 2009). These compare to revenue of $11.8 billion in the year ago when the net quarterly profit was $2.26 billion. The gross margin was 40.9% from 37.9% previous year thus indicated an increase. In their report, the company sales amounted to 58% of the quarterly revenue.
Adoption of Amended Accounting Standards
Financial Accounting Standards Board ratification of Emerging Issues Task Force (EITF) on Issue 08-1 and EITF Issue 09-3 resulted in the issuance of standard updates ASU 2009-14 and, ASU 2009-13. Apple adopted the new accounting standards and filed amend Form 10-K. Apple filed Form 8-K that, comprised financial schedule that reflected the impact of retrospective adoption of new accounting standards also reconciling the application accounting principles GAAP, IFRS, Generally Accepted Auditing Standards International Auditing and Assurance Standards to historical balance sheets, cash flow from operations, income statements, deferred revenue and also to the summary data information (Conklin, 2006). The new accounting principle led to the company recognition of all the revenue for iPhone and, Apple TV products when delivered to customers.
Swatch Group Ltd. is a company based in Swiss that specialize in the manufacture of watches. It was formed in the year 1983 by amalgamation of watch manufacturers SSIH and ASUAG. The company recorded gross sales of 6440 million in Swiss francs in 2010. This exceeded the previous year by 18.8% (Swatch, 2011). The company also recorded an operating profit of 1463 million Swiss francs. This represents an operating margin of 23.5% which, was greater than the previous year where a margin of 17.6% had been recorded. In their report, there was a considerable improvement in the net income where an increase of 41.5% was recorded over the previous year where 6.4% net income was recorded.
Their financial reports indicated that there was a substantial equity of about 7.1 billion Swiss francs representing 82.4% of the total liabilities and equity. The previous year had recorded equity of 77.6% and, the average return on the equity was recorded as 16.5% (Switch, 2011). This is seen as an increase when compared to the previous year where, 13.3% equity had been recorded. The was also a significance increase in operating cash flow being attributed to the strength of equity and the high level of liquidity.
Adoption of Amended Accounting Standards
The total operating revenues in calculations of value added used the amended standard methods. The consolidated financial statements of Swatch Group limited were prepared in accordance with International Financial Reporting Standards also the interpretations adopted and utilized by the International accounting Standards Board. IFRS require that the company use some critical accounting estimates and to apply company accounting policies.
Nikon specializes in optical technology worldwide. Some of their products include consumer optics, digital cameras, binoculars and ophthalmic lenses, industrial precision equipments, measuring equipments and microscopes. In the fiscal year that ended on March 2010, the company recorded declined net sales and a net loss was reported (Nikon, 2011). The company was able to secure operating income in the second part of the year due to the restructuring measure in the whole Nikon group. Their financial statement has been presented according to the provision set by the Japanese Financial Instruments and, Exchange Act that is related to accounting regulations and standards. The financial statement has also been prepared in conformity with accounting principles (GAAP) generally accepted in Japan. The principles applied by Japanese are somehow different as to the disclosure and application required by International Financial Reporting Standards.
Comparison of the three companies
As observed from the three companies, Apple Inc adopted financial accounting standards and, the board made an amendment of the accounting standards that, related to some revenue recognition. This significantly changed the company account for some items more so, the Apple TV and the iphone (O'Grady, 2009). The Swatch group adoption of amended International Financial reporting Standards and interpretations helped the company to improve its performance, and changes on the accounting for losses that are incurred by the subsidiary.
Nikon had to apply accounting principle applied in foreign sub diaries to consolidate its financial statements. They saw a need for unification of accounting procedures and policies applied to a parent company to harmonize preparation of financial statement. Japan harmonized their standard ensure that, financial statements prepared in a foreign country by subsidiaries are according to International Financial Reporting Standards or accepted accounting principles in US.
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