Group Members: Jason Pritchard, Matt Garvey, Priscilla Lovejoy, Lisa Hurn
April 26, 2008
As it becomes more apparent that the date when U.S. Generally Accepted Accounting Principles will disappear is sooner rather than later and International Financial Reporting Standards will take center stage, it is increasingly important that the implications of such a transition be understood. Here, the first step towards this is taken through the examination of two similar publicly traded companies, one of which current reports according to U.S. GAAP while the other utilizes IFRS.
In choosing between organizations to compare, specifically in regards to the ways in which assets are treated, retail organizations with a high quantity of turnover in inventories and numerous fixed assets provide an excellent opportunity to do so. Kroger is multi-billion dollar retail supermarket headquartered in the United States and publicly traded on the New York Stock Exchange. As current regulations dictate, the organization reports its financial statements in accordance to US GAAP, which is detailed through the issuance of Statements of Financial Reporting Standards (SFAS) by the Financial Accounting Standards Board (FASB). J Sainsbury, on the other hand, is headquartered in the United Kingdom and traded on the London Stock Exchange. As a result, this similarly large retail supermarket must report its financials in accordance to international standards which are specified through the issuance of Internal Financial Reporting Standards (IFRS) by the International Accounting Standards Board (IASB).
In the following, the implications on certain asset accounts as a result of the use of different reporting standards will be examined. These two retail supermarkets will the subjects of this endeavor. To begin, a more qualitative look at the contrasts between the management discussion and analysis sections will be presented. This will be followed by more a detailed examination of the fixed assets, asset impairment, intangible assets, inventory, and leases accounts. In each of these areas, a summary of the applicable U.S. and international financial reporting standard(s) will be given and then contrasted with the financials of these companies as the vehicle.
The very first thing one can’t help but notice when holding a financial statement prepared in accordance to U.S. GAAP in one hand and in the other a statement prepared under International Standards, is the surprising difference in their relative length. Financial statements prepared under IFRS tend to be of a materially greater length than their U.S. counter parts primarily due to the qualitative sections of the statements. This difference can be related to the greater level of generality of IFRS as compared to the explicit nature of SFAS, leading to a higher burden to be placed upon a company in its efforts for compliance, and the apparent difference in the treatment of the financial statements.
The IASB has adopted statements of a more conceptual nature. This has resulted in companies having to use their own judgments when deciding if they have reached the required levels of compliance to applicable standards. This can be seen in IAS 1, Presentation of Financial Statements, as adopted by the IASB. In the statements, the purpose of financial statements is described as to provide “information about the financial position, financial performance and cash flows of an entity that is useful to a wide range of users in making economic decisions” (paragraph 7). It also states that “outside the financial statements, a financial review by management that describes and explains the main features of the entity’s financial performance and financial position and the principal uncertainties it faces” (paragraph 9). This seems to imply that a company’s financial statements are intended for any and all potential users, not only those with a professional background, and that these users must be adequately informed in words by management of all the business’ deals and potential threats of a material nature.
Statements issued by FASB, on the other hand, are much more explicit in their statements, and as a result businesses seem to be satisfied when these requirements are met and don’t attempt to go beyond what is minimally required. This can be seen in management’s discussion and analysis sections of financial statements. International statements feature MD&A sections of a much more narrative quality, which cover a broader range of issues, while U.S. sections tend to be more line-itemed and touch on only the areas where they are required to. The question must then be asked which method of disclosure provides information in the most relevant and reliable way, the two primary qualities that “distinguish ‘better’ … information from ‘inferior’ … information” (SFAC 2 paragraph 15). Relevance and reliability, as defined by the glossary of the same preceding statement, are “the capacity of information to make a difference in a decision by helping users to form predictions about the outcomes of past, present, and future events or to confirm or correct prior expectations” and “the quality of information that assures that information is reasonably free from error and bias and faithfully represents what it purports to represent,” respectfully. While choosing between these two methods of disclosure, and their relevance and reliability in presenting information, may end up being a matter of opinion, it is the broader and seemingly more open approach taken by international companies that directs in their favor.
This leads to the second aspect where level of disclosure differences can be found between international and domestic financial statements. International companies seem to try and utilize their financials to serve a different function than do U.S. companies. They seem to view their financial statements as the appropriate means by which companies can communicate with the general public, and as a result seem to put more effort in casting their financial statements as not just a source of financial information. This results in financials looking more like a marketing tool than the cut and dry source of financial information which U.S. companies seem to view their financial statements as being.
These differences could be not more apparent then in the cases of Kroger and J Sainsbury. Kroger’s 2007 financial statement contains a twenty page MD&A section covering items such as performance, operations, capital expenditures, and changes in accounting policies to name a few. Each of these areas is covered in a minimalist and straight-forward way, seeking only a basic level of disclosure. J Sainsbury’s financials, on the other hand, contain a MD&A approaching 40 pages with commentary by the chairman of the board, a business review by the company’s CEO, a statement by the operating board, and a section on governance by the company directors. These sections contain numerous graphs, charts, and images much more eye-catching than that which is found in Kroger’s financial report, emphasizing the more marketing-orientated approach found in international annual reports. It would not be surprising if these qualitative factors would lead a more novice user of financial statements to find international statements more satisfactory. Professional users, however, are much more likely to find the international statements to be cumbersome and unnecessary due to the excess flash and wordiness. This raises the question of who exactly is the intended user of financial statements. While IAS 1 states that the user is those “who are not in a position to demand reports tailored to meet their particular needs,” SFAC 1 names potential users as the “owners, lenders, suppliers, potential investors and creditors…” (paragraph 24). With this in mind, it is obvious that the standards placed upon domestic companies using U.S. GAAP, their intended users are of a professional financial background, while international companies must include many more users in their scope.
The methods used for both Kroger and J. Sainsbury to account for fixed asset are very similar, but there are some differences. Kroger complies with US GAAP standards with references to fixed assets found in FAS 34, FAS 157, and FAS 144. Sainsbury, on the other hand, complies with International GAAP through IFRS. IAS 16 is the main source of information regarding fixed assets for international companies. Under US GAAP, Kroger reports property, plant, and equipment as cost less depreciation. In its 2007 financial statements, Kroger reported total PP&E of $22,436 million for 2007 (Kroger 41). They had $9,938 million of depreciation, giving Kroger a net book total of $12,498 million of PP&E (Kroger 41) 1). Kroger depreciates its assets using straight-line depreciation. Building and land improvements are depreciated based on lives 10 to 40 years (Kroger 41). All new purchases of store equipment are given three to nine years life (Kroger 41). Kroger can also capitalize interest costs from construction of new facilities and depreciated it (Kroger 36). This is will accordance to FAS 34, Capitalization of Interest Cost.
Under International GAAP, J. Sainsbury reports property, plant, and equipment at cost less depreciation and any impairment (IAS 16.6) 2). In the 2007 financial statements, J. Sainsbury reported total property, plant and equipment of £11,199 million (Sainsbury 60). They have £4,024 million of accumulated and depreciation and impairment, which gives a net book value for property, plant and equipment of £7,176 million (Sainsbury 60) 3). J. Sainsbury depreciated all assets using straight-line depreciation. The depreciation method “shall reflect the pattern in which the asset’s future economic benefits are expected to be consumed by the entity” (IAS 16.60). In terms of fixtures, equipment and vehicles, they have a life of three to 15 years (Sainsbury 15). Freehold buildings and leased properties have a life of 50 years (Sainsbury 15). The cost of interest in an acquisition or construction is capitalized in the cost of the asset (Sainsbury 15), being different from US GAAP and FAS 34. IAS 16 allows J. Sainsbury to use the reevaluation model. This allows “an item of property, plant, and equipment whose fair value can be measured reliably to be carried as a revalued amount, being its fair value at the date of revaluation less any subsequent accumulated depreciation and subsequent accumulated impairment losses” (IAS 16.36). These reevaluations shall “be made with sufficient regularity to ensure that the carrying amount does not differ materially from that which would be determined using fair value at the end of the reporting period” (IAS 16.31). The reevaluation model is similar to marking items to fair market value, something that has recently caused a controversy in the United States because of the massive write offs in the banking industry.
There were three main differences found between Kroger and J. Sainsbury’s reporting of fixed assets. The first concerns the capitalization of interest cost of assets acquired or being constructed. US GAAP allows interest to be included in depreciation, which is set forth by FAS 34. International GAAP includes the interest in the cost of the asset. The second difference was the revaluation method. US GAAP does not allow the reevaluation, as PP&E is cost less depreciation. Kroger does note under “Recently Issued Accounting Standards” that in September 2006, the FASB issued FAS 157, Fair Value Measurements (Kroger 60). FAS 157 will become effective for the Kroger’s fiscal year that begins on February 3, 2008 (Kroger 60). Kroger is “evaluating the effects of adoption of FAS 157” (Kroger 60). The final difference is in disclosure. On the balance sheet, Kroger shows each item class that is included in PP&E and give a total for the fiscal year end. J. Sainsbury, however, groups PP&E into two kinds of categories: “lands and buildings” and “fixtures and equipment” (Kroger 60). From there they give the cost of each category at the end of the period. They also include additions and disposals. For accumulated depreciation, Kroger shows depreciation as a single number while J. Sainsbury shows deprecation totals plus depreciation expenses for the year and disposals.
Kroger’s relies on rules for recognizing impairments on long-lived assets in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. According to this standard, when the carrying amount of an asset is not recoverable, a company may record a write off of the asset referred to as impairment (paragraph 7). Some events or situations that may trigger impairment of an asset include a significant decrease in the market value of an asset, a change in how the long lived asset is used, or a projection that demonstrates the continuing losses associated with an asset (paragraph 8). Kroger monitors its assets for these events and potential impairment each quarter.
According to SFAS No 144, when a company is not able to recover the carrying amount of the asset, the recoverability test is used to determine if impairment has occurred. The recoverability test is used to determine if impairment has occurred when the company is not able to recover the carrying amount of the asset to (paragraph 9). The recoverability test states that if the sum of the expected future net cash flows (undiscounted) is less than the carrying amount of the asset, the asset is considered impaired (paragraph 7). In the same manner, Kroger’s perform an impairment calculation (recoverability test) that compares the projected undiscounted cash flows, “utilizing current cash flow information and expected growth rates related to specific stores, to the carrying value for those stores” (Kroger’s annual report page15). Next, if impairment is computed from the test, Kroger compares the discounted future cash flows to the asset’s current carrying value. The comparison is done because a balance sheet should report long-lived assets at no more then the carrying amount that are recoverable. Kroger recognizes the impairment loss when the amount by which the carrying amount of the long lived asset exceeds it fair market value (discounted cash flow) reduced by the estimated cost of disposal (Kroger’s page 15). According to the standard, asset impairment is reported as part of the “income from continuing operations” (paragraph 25). This two step approach is very complex and requires a number of factors and assumptions. In the event that no market exists to measure the fair value of the asset, then the present value of the expected future net cash flows determines fair value (paragraph 23).
When property plant and equipment is held for disposal as opposed to held and used, Kroger adjusts the asset to reflect recoverable values, “based on our previous efforts to dispose of similar assets and current economic conditions” (Kroger’s page15). Impairment is recognized “for the excess of the carrying value over the estimated fair market value, reduced by estimated direct costs of disposal” (Kroger’s page 15). Asset impairment is recorded in the ordinary course of business and the cost to reduce the carrying value of long-lived assets is recorded in the “Consolidated Statements of Operations as ‘Operating, general and administrative’ expense” (Kroger’s page15). Asset impairment recorded totaled $24 million, $61 million, and $48 million in 2007, 2006 and 2005, respectively. Since the company will recover the asset held for disposal through a sale rather than operations, Kroger may continually reevaluate the assets. They can be written up or down the asset held for disposal in future periods as long as the carrying value after the write up never exceeds the carrying amount of the asset before the impairment (Kieso page 537). Losses and gains are recorded as part of income from continuing operations.
Many uncertainties lie in the impairment calculations that Kroger utilizes. The estimates of future cash flows include, “assumptions on variables such as inflation, the economy and market competition” (Kroger’s page15). The assumptions used are not always consistent and alternative assumptions could result in “significantly different results” (Kroger’s page15). A concern is that the valuations and recordings may be misleading and unfaithful in representing the true nature of the statements which goes against the main objective of accounting.
In order to tackle some of the fair value assumptions, the FASB issued SFAS No. 157, Fair Value Measurement. This Statement issues a single definition of fair value and establishes a framework for measuring fair value in accordance with GAAP by increasing consistency and comparability of fair value measurements (paragraph 1). The Statement also requires disclosures about how fair value measurements are determined including naming the asset, events leading to impairment, the amount of loss and how fair value was determined (Kieso page 536). SFAS No. 157 will become effective in Kroger’s financial statements for our fiscal year beginning February 3, 2008.
J. Sainsbury recognizes impairment to an asset very similarly to US GAAP. International Accounting Standard 36 addresses Impairment of Assets. The standards main purpose is to ensure that assets are carried on the books at no more than it recoverable amount. Much like SFAS No. 144's step 2 approach, if an asset’s (Fair Value or) “carrying amount exceeds the amount to be recovered through the uses or sale” (paragraph 1), then the asset is considered impaired and an impairment is recognized. Unlike Kroger, J. Sainsbury is required to only assess the indication of impairment “at the end of each reporting period” (paragraph 2). Kroger monitors asses for potential impairment each quarter. If an impairment of the asset is indicated, then J. Sainsbury shall estimate the recoverable amount of the individual asset (paragraph 3). The main difference between the way SFAS and IFRS arrive at impairment is that FASB requires Kroger to uses a two step approach, while J. Sainsbury goes straight to comparing discounted cash flows to carrying amount. The similarity is that they both then write the asset down to the discounted cash flows (fair market value). To assess the reliability writing down assets to the fair market value, the application of accountings main objective is applied. The objective is to enable shareholders and others to predict the amount, timing, and uncertainty of future cash flows. By writing the asset down to fair market, a user of the financial statements of Kroger or J. Sainsbury will have a more reliable amount of impairment to work with. Reliability is defined in SFAC 2 as the quality of information that assures that information is reasonably free from error and bias and faithfully represents what it suppose to represent. Because the written down of the asset reflects the current market value of the asset, the information can be a better predictor of the amount, timing, and uncertainty in future cash flows.
In the instance that it is impossible to estimate the recoverable amount of the asset, the recoverable amount of the “cash-generating unit to which the asset belongs to” (paragraph 3) will be used to determine the recoverable amount. The recoverable amount is determined by the higher of the assets “fair value less cost to sell and its value in use” (paragraph 5). Fair value less cost to sell is determined by the amount that is “obtained from the sale of an asset or cash-generating transaction” (paragraph 7). Value in use, on the other hand, is the “present value of the future cash flows expected to be derived from the asset or cash-generating unit” (paragraph 8). Similarly, Kroger’s elements reflected in the calculation of an asset’s value in use and projections used to estimate future cash flows (paragraphs 9, 10, & 11) are not consistent measures.
So, what if an asset is written down to fair market value of zero but there may still a cash flow? When the asset is written down to zero, the main objective of accounting (predicting the amount, timing, and uncertainty of future cash flows) is compromised. Another concern is whether this new asset fulfills the requirements of an asset. According to FASB in SFAC 6 an asset requires three essentials: probable future economic benefits, to be obtained or controlled by a particular entity, and a result of past transactions or events. Two of the three requirements are met, but since the asset is marked to zero, it does not have future economic benefit to the company and is therefore not a “true” liability.
The impairment loss that arises is recognized only when “the recoverable amount of the asset is less than its carrying value” (paragraph 14) and is immediately recognized in “profit or loss” (paragraph 14). According to IAS 36, the carrying amount of the asset cannot be reduced below the highest of the following located in Paragraph 16 :(a.) the fair value minus cost to sell, (b.) the value in use (or), c.) zero
In J. Sainsbury Group income statement for the 52 weeks to 24 March 2007, the only indication of asset impairment in listed in the profit before tax section. Profit before tax from continuing operations before any gain or loss on the sale of properties is reported at €m 380, while profit on sale of properties has increased 600% to €m 7 for 2007. This is the only indication in J. Sainsbury’s financial statements in which impairment from the sale of properties is addressed and it is a very small portion of the total profit of €m 477. A footnote linked to “Underlying profit before tax” (at €m 380) indicates that. “Profit before tax from continuing operations before any gain or loss on the sale of properties” “are material and infrequent in nature.”
Kroger and J. Sainsbury’s amount of asset impairment is quite different. Kroger recognized 24 million whereas J. Sainsbury recorded €m 7. This extreme difference may be due to a number of factors like Kroger store closings or that J. Sainsbury impairment is infrequent and doesn’t occur too often. Another major instance that International and Domestic standards differ is that the international standard permits write-ups for recoveries of impairment. US GAAP only allows write-ups for assets to be disposed of.
After analysis of the ways in Kroger and J-Sainsbury record impairment losses on assets, there seem to be very few differences. The FASB’s approach is quite long and requires a two-step method rather than IASB’s one step approach. When international and domestic standards converge, there will be little differences to work out between impairment and will hopefully be a smooth transition for American companies like Kroger since they are already implementing standards quite similar to the international standards.
Information about intangible assets can be found in FAS 142, Goodwill and Other Intangible Assets. It addresses “reporting for intangible assets and goodwill acquired individually or with a group of other assets” (FAS 142.1) 4). FAS 141, Business Combinations, addresses “reporting of intangible assets and goodwill acquired in a business combination” (FAS 142) 5). FAS 142 supersedes APB Opinion No. 17, Intangible Assets.
Kroger recognizes liquor licenses, pharmacy prescription file, and leased equities as intangible assets. They “amortized leased equities over the remaining life of the lease” (Kroger 15). Kroger does not amortize owned liquor licenses (Kroger 15). Kroger “does amortize pharmacy prescription file purchases over seven years” (Kroger 15). Kroger “considers these assets annually during their testing for impairment” (Kroger 15). In 2005 and 2006, Kroger did not record any new goodwill. In 2007, they recorded $23 million of Goodwill from the “acquisition of eighteen Scott’s retail food stores in Northeast Indiana and twenty Farmer Jack retail food stores in Michigan” (Kroger 41). Also, goodwill was decreased by $72 million because of the implementation of FIN 48, Accounting for Uncertainty in Income Taxes, which “prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return million” (Kroger 23). Because of this implantation “goodwill and accrual for uncertain tax positions (were reduced) by $72 million to reflect the measurement under the rules of FIN No. 48 of an uncertain tax position related to previous business combinations” (Kroger 23).
Information about intangible assets for International GAAP can be found in IAS 38 and IFRS 3. IAS 38 states that intangible assets may be initially measured at cost (IAS 38.6) 6). Internally generated goodwill is not an asset (IAS 38.48). Also, no intangible asset from research or development may be recognized (IAS 38.54). In accordance with IFRS 3, an intangible asset acquired in a business combination, the cost of the intangible asset is the fair value at the date of acquisition (IFRS 3.7) 7). J. Sainsbury recognized three different intangible assets. They are pharmacy licenses, computer software, and goodwill. Sainsbury’s pharmacy licenses “are carried at cost less accumulated amortization” (Sainsbury 51) and “any impairment loss and amortized on a straight-line basis over their useful economic life of 15 years” (Sainsbury 51). Computer software is cost less accumulated amortization and any impairment loss (Sainsbury 51) and “externally acquired computer software and licenses are capitalized and amortized on a straight-line basis over their useful economic life of three to five years” (Sainsbury 51). Goodwill is the excess of the fair value during an acquisition (Sainsbury 51).
Under U.S. GAAP and IFRS inventories are comprised of all necessary cost. All necessary cost includes all cost to bring the asset to the state and place of its intended use (SFAS 34 paragraph 6). In an attempt to resolve dissimilarity, and bring U.S. GAAP closer to international standards, the FASB issued FAS 151: Inventory Costs, to “amend ARB number 43, chapter 4, Inventory Pricing, to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and spoilage.” In summary, SFAS 151 removed the word “so” from paragraph 5 of chapter 4, in ARB 43. “This Statement also requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities” (pg. 2 Summary). 8)
There are however several notable discrepancies between U.S. standards and international standards (IFRS). Costing methods, cost measurements and reversal of write-downs are the three major differences. Under U.S. GAAP Last-in First-out (LIFO) is an acceptable method for valuing inventory, and GAAP does not require an identical cost method to be used for similar inventories. IFRS on the other hand strictly prohibits the LIFO method, and require companies to use the “same cost formulas for inventories similar in nature” (pg. 13 1st bullet point). ARB 43 states the inventories are to be “carried at either the lower of cost or market,” while IFRS requires “inventory is to be carried at the lower of cost or net realizable value (may or may not be fair value)” (2nd bullet point). The last significant difference between U.S. GAAP and IFRS is the reversal of inventory write-downs. GAAP requires that “inventory write-downs must be to the lower of cost or market” and once the inventory is impaired it “cannot be reversed.” International standards allow a “previously recognized impaired loss to be reversed up to the amount of the original impairment loss, when reasons for impairment no longer exist” (pg. 13 bullet 3). 9)
Kroger calculates their inventories using both the LIFO and FIFO method. “In total, approximately 97% and 98% of inventories for 2007 and 2006, respectively, were valued using the LIFO method. Cost for the balance of the inventories, including substantially all fuel inventories, was determined using the first-in, first-out (“FIFO”) method. All Kroger supermarkets use the item-cost method of accounting to determine inventory cost before LIFO adjustments. The item-cost method involves counting and assigning cost to each item in inventory. This allows for more accurate reporting of regular inventory balances and enables management to better manage inventory” (pg. 19). Kroger “calculates First-In, First-Out (“FIFO”) Gross Margin as follows: Sales minus merchandise costs plus Last-In, First-Out (“LIFO”) charge (credit). Merchandise costs include advertising, warehousing and transportation, but exclude depreciation expense and rent expense. FIFO gross margin is an important measure used by management to evaluate merchandising and operational effectiveness” (pg. 12). 10)
In accordance with IFRS standard IAS 2 “Sainsbury inventories are valued at the lower of cost and net realizable value. Inventory at the warehouses are valued on a first-in, first-out basis. Those at retail outlets are valued at calculated average cost prices. Cost includes all direct expenditure and other appropriate attributable costs incurred in bringing inventories to their present location and condition.” 11)
According to FAS 13 a lease is considered a capital lease, by the lessee, if it meets one of the following four criteria: 1. the lease transfers ownership to the lessee at the end of the lease term 2. “the lease contains a bargain purchase option,” which allow the lessee to buy the asset at a significantly lower price than the fair market value 3. the lease term is equal to or greater than 75 percent of the assets economic life and 4. the present value of minimum lease payment is greater than or equal to 90 percent of the fair value of the leased asset (pg 8). 12)
Kroger operates more than 3,600 stores, (includes supermarkets, warehouses, food processing facilities, convenience stores, and jewelry stores) the majority of which are leased (pg 5). “Lease terms generally range from 10 to 20 years with options to renew for varying terms”(pg. 48). In February 2008 Kroger had approximately $54 million in capital lease obligations and $774 million in operating lease obligations (pg.22). The minimum annual lease payments for capital leases are $54 million in 2008 and $53 million in 2009. Under operating leases the minimal annual rental payments are $774 million in 2008 and $736 million in 2009. The minimum rental payments for operating leases in 2007 equaled $747 million, and in 2006 $753 million, with total rent expense equivalent to $664 million and $649 million, respectively (pg. 48-49). Kroger, “generally owns all store equipment, fixtures, improvements, as well as processing and manufacturing equipment. The total cost of the Company’s owned assets and capitalized leases as of February 2, 2008, was $22,436 million” (pg 5). 13)
IAS 17 states that a lease is classified as a finance (capital) lease, for the lessee, “if it transfers substantially all the risk and rewards incidental to ownership” (pg. 1) 14) Because the IAS 17 criteria are so ambiguous, accountants often times turn to GAAP's bright-line test to define “major part” and “substantially all.” 15) Therefore classifications of operating and capital leases are often the same under FAS 13 and IAS 17.
Similar to Kroger, J. Sainsbury leases the majority of their property, plant, and equipment. J. Sainsbury, “leases various retail stores, offices, depots and equipment under non-cancellable operating leases.” 16) J. Sainsbury’s obligation under finance leases were £51 million in 2007 and £52 million in 2006. (pg. 80) Their obligation under operating leases for 2007 and 2006 were £291 million and £283 million, respectively. “Assets leased under operating leases are not recorded on the balance sheet. Rental payments are charged directly to the income statement” (pg 54). 17)
Jason and All
The implications of certain asset accounts as a result of the use of different reporting standards, U.S. GAAP for companies in the United States and IFRS for international companies, have been examined. The two retail supermarkets Kroger and J. Sainsbury were the subjects of this endeavor due to their comparable sizes, operations, high level of inventory turnover and high value of fixed assets. First, a more qualitative look at the contrasts between the management discussion and analysis sections was presented. This was followed by more a detailed examination of the fixed assets, asset impairment, intangible assets, inventory, and leases accounts. In each of these areas, a summary of the applicable U.S. and international financial reporting standard(s) were given and then contrasted with the financials of these companies as the vehicle.
When it comes to the MD&A section of a financial statement, it is evident that standard setting principles of a more general nature will often result in a broader level of disclosure. This broad level of disclosure, then, provides the opportunity for financial statements to convey more than just financial information, but the ability to become the ultimate means for a company to communicate with the public. In terms of fixes assets, there were three differences between FASB and IFRS. Capitalization of interest costs, reevaluation or fair value, and disclosure in the financial statements were done differently by Kroger and J. Sainsbury. However, with FAS 157, Kroger and other US GAAP companies may be moving close to something similar to the revaluation method used by Inter nation GAAP. When impairing assets, there seem to be very few differences. The domestic approach requires a two-step method rather than IASB’s one step approach, and as a result is longer. When international and domestic standards converge, there will be little differences to work out between impairment. For intangible assets, there were not many difference between Kroger and J. Sainsbury. They both recognized pharmacy licenses and goodwill as intangible assets. In regards to inventory, both U.S. GAAP and IFRS require all necessary cost to be included. About 98 percent of Kroger's inventory was calculated using the Last-in, First-out method. IFRS, however, prohibits the use of LIFO. Therefore J. Sainsbury's inventory was calculated using FIFO, at the lower of cost or net realizable value. In accounting for leases, IAS 17 and FAS 13 require the lessee to capitalize a lease if substantially all the risk transfer to the lessee. The only difference in the two standards is in the wording. The majority of both Kroger and J. Sainsbury's leases are operating leases.
When it becomes time for a transition from U.S. GAAP to international standards, it is apparent that noticeable changes will be necessary, but these changes will not be excessively difficult. The benefits of one universally recognized group of accounting standards will greatly outweigh the costs associated with this transition due primarily to the greater level of comparability between domestic and international organizations. This greater comparability will all for the lines between domestic markets and international markets to become blurred and perhaps consist of the accounting profession’s greatest contribution to a single world economy.