Research Paper on "IFRS US GAAP Comparative Report"

Research Paper 15 pages (4642 words) Sources: 15

[EXCERPT] . . . .

IFRS/U.S. GAAP Comparative Report

The GAAP (United States Generally Accepted Accounting Principles) and the IFRS (International Financial Reporting Standards) have similarities and differences that have to be carefully addressed in order to compare and contrast them. In 2002, the Norwalk Agreement made the similarities more solid and mitigated some of the differences but the two types of reporting are still not the same. The Norwalk Agreement was a memorandum between the U.S. And the International Accounting Standards Board (Financial, 2002). The understanding and agreement indicated that both sides wanted to see accounting standards that were compatible and that could be used domestically and with cross-border companies and investors (Financial, 2002).

By providing companies with compatible standards, there is a bigger opportunity to help investors decide what companies would be best for them to invest in. Mergers and acquisitions, along with other kinds of financial transactions, are generally easier to complete if accounting requirements are similar between the countries in which the merging or acquiring companies are based, as that causes fewer problems (AICPA, 2008; American, 2009).

In order to clearly realize the similarities and the differences between GAAP and IFRS, it is important to discuss the prominent issues that are seen between the two systems. That way, the reader can analyze where the problems are and consider how these issues affect the international finance field. Companies that want to do business with other companies across international lines have to be able to understand the way reporting is done (Ball, 2006; Spiceland, et al., 2009). In order to showcase that there will be two companies addressed here that will provide information about accounting from a GAAP and from an IFRS standpoint.

BAE Systems Profile/Analysis

BAE systems is a British company. It deals with security, aerospace, and defense, and is considered to be multinational (Sparaco & Morrocco, 1997). The headquarters of BAE are in London, but the company operates on a worldwide basis. When it comes to defense contractors, BAE is among the largest (Warwick, 2004). Based on the revenue it acquired in 2011, BAE was ranked third-largest when it came to defense contractors. It supplies the U.S. Department of Defense, as well as other organizations and companies, and is most active in the U.S. And the UK (Warwick, 2004). Because BAE is a UK company but sells the majority of its wares to the U.S. DOD, there can be some concerns about accounting systems and whether anything can be misinterpreted.

Many companies were around before BAE and were bought up by the company over time. These included Marconi and Vickers Shipbuilding (Spiegel, 2004). For the most part, the company was interested in buying up other British and foreign companies that used the same accounting system as was used by BAE, and that allowed the investors who were interested in these companies to understand just what they were getting or agreeing to. In short, this made mergers and acquisitions much faster because there were no questions about whether a company was providing the "right" sort of information for other companies to consider from a financial standpoint.

There are several major defense projects in which BAE is involved (Warwick, 2004). Everything from airplanes to submarines are very important for defense and they are part of the category of defense projects on which BAE is working. However, BAE is not without controversy. It has been the subject of various types of criticism, including those who oppose the arms trade. There have also been allegations of corrupt and unethical practices, but it does not appear that anything has been proven in regard to those practices. BAE is on the London Stock Exchange (Warwick, 2004). While the company is very strong, there are concerns with the European and U.S. economies that could affect BAE and its dealings in the defense field. It remains to be seen what kinds of changes BAE may need to make in order to be certain it can continue to be competitive in today's market.

Because BAE is so well established and has been in existence since 1999, the likelihood of it failing because of an economic downturn is extremely small. With production of both military and civil defense items, BAE has many choices for what it produces for other companies and countries (Warwick, 2004). The companies that merged to create BAE were both well established in the defense field before they consolidated, and that helped BAE to be strong from the beginning of its time instead of working to establish itself and catch up with companies that were already making gains in the aerospace and defense industries. That is part of why BAE remains so valuable today.

Lockheed Martin Profile/Analysis

Lockheed Martin is very similar to BAE in what it does, with the main difference being that it is an American company. This means that it is subject to GAAP accounting standards as opposed to IFRS rules. The company was founded in 1995 (Hartung, 2010). It came from other companies that merged and consolidated, however, because the aerospace and defense industries had been going strong in the United States for many years before that. Defense contractors were one of the strongest companies in the country beginning in the 1950s (Edwards, 1979). Lockheed Martin is headquartered in Maryland and does most of its business with the United States military (Hartung, 2010). While there are some civilian sales, they make up only about 26% of the total revenue of the company.

More than 123,000 people are employed by Lockheed Martin across the world (Hartung, 2010). There are four segments to business in which Lockheed Martin operates. These are space systems, electronic systems, information systems and global solutions, and aeronautics. The company was on the top of the list of U.S. federal contractors in both 2008 and 2009 (Hartung, 2010). Lockheed Martin is developing many different kinds of aerospace and defense equipment and has won many awards for that during its time in existence. It also lobbies with a political action committee in order to help advance its interests. The company is committed to providing great service and high quality products.

Because Lockheed Martin knows that lives can very easily depend on the equipment and products it creates, the company is careful to focus on product specifications and quality control. That extends to its accounting practices, where it follows GAAP requirements followed by all American companies (Hartung, 2010). The company has largely avoided any criticism of the way it handles it operations, mostly because of its management style. Employees are managed through comprehensive leadership programs using appropriate, current theories, which allows the company to continue to move forward and keep their management team and their employees on track (Hartung, 2010).

Several tiers of employees work in the company (Hartung, 2010). This helps sort out pay grades, security clearances, and other factors that have to be addressed when it comes to company dynamics. It also helps with the separation of tasks and departments, and ensures that people report to the proper management professionals (Hartung, 2010). By addressing these kinds of issues with the way the company is structured, many problems and concerns can be completely avoided. Another thing the structure does is to promote a high level of efficiency in the company, which is always seen as being valuable (Hartung, 2010).

Efficiency and quality are highly important for a company like Lockheed Martin, because the company spends so much of its time focused on military and defense contracts. Lives are at stake, but so is the livelihood of the company itself. If it fails to provide what is needed for the government, it could very well find itself blacklisted by the government. That would sharply reduce its business and could even cause it to have to close its doors. While this kind of a scenario would be unlikely, it would certainly not be impossible and could lead to a complete restructuring and shakeup of the U.S. defense industry.

Comparing the Requirements

In the U.S., the accounting standards include the requirement to provide financial information that is comparative (American, 2009). The reporting standards for the rest of the world - the IFRS - does not have that requirement but most of the companies that are part of that style of reporting realize that it is highly desirable for them to provide reports that can be used to make comparisons with others companies. That can allow investors to make determinations as to whether a company has financial strength, and it can also help investors to compare one company with another to see how they are performing as part of the same industry. Of course, not all companies in the same industry would be expected to be equal. There are size considerations and other issues of which to be aware.

With Lockheed Martin and BAE, however, a comparison would be helpful. In order to have that, both companies would have to subscribe to the same kind of accounting standards. Without an industry comparison it is too difficult for… READ MORE

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