Introduction
Multinational corporations across the world usually consolidate and present their operational results in financial and non-financial terms at the end of every term, usually a year. The financial aspect of reporting is supposed to comply with a clearly prescribed set of regulatory standards. The adoption of the International Financial Reporting Standards and GAAPs was meant to ensure that all compliant firms across the world produce financial statements that conform to the industry specific reporting frameworks and thus achieve a degree of uniformity in reporting. Different firms in operating in multiple locations operate under the strict guidelines of the specific reporting frameworks.
Description
This paper seeks to evaluate the accounting practices of two firms operating in the same industry, one being a US firm and the other one a foreign entity. Precisely, the paper will examine four international accounting concepts regarding these two firms. It will further analyze the reporting requirements, accounting measurements, similarities, and differences between the accounting systems of the firms and derive a sound conclusion on the research findings.
Therefore, I choose to evaluate two firms operating in the Fast Moving Consumer Goods with global coverage, the US and a foreign firm. The firms to be analyzed are Procter and Gamble and Diageo Plc. The former is a multinational consumer goods entity with its headquarters in Cincinnati, Ohio. The company concentrates on the manufacture and sale of a wide array of consumer goods ranging from household, personal, and family products. Since its inception in 1837, the business has emerged as a global business leader with a global staff base of 110,000 individuals in more than 180 countries located in Asia, North America, Western Europe, Latin America, Central and Eastern Europe and the Middle East and Africa. ("Where We Operate - Procter & Gamble", 2016)The latter is a global business leader in the manufacture and sale of alcoholic and non-alcoholic beverages. Diageo is headquartered in London and has its operations in 21 different global markets located in over 180 countries. The company has a staff base of above 33,000 people working in North America, Europe, Africa, Latin America and the Caribbean, and the Asia-Pacific. ("Diageo annual reports", 2016)
The analytical paper is meant for a general readership and could also be useful for potential investors who wish to derive a comparative understanding of the firms under review. The relevance of this analysis to the target audience is founded on the premise that the investors, for instance, need to gain a clear and deep understanding of the financial standards that govern the operations of the specific companies before making any relevant decisions pertaining investments. Investments are risky opportunities and as such, the investors require a reasonable degree of certainty on the financial compliance which serves as a guarantee for the safety of their finances. The general readers will also get a clear understanding of the various financial guideline frameworks that govern the operations of different local and foreign firms in the US.
The primary listing of Diageo's stock is in the London Stock Exchange while Proctor has its primary stock listing on the New York stock exchange. This analysis will look into the auditing requirements, accounting standards of the IFRS, reporting requirements and accounting measurements adopted and applied by the firms. Being for-profit business entities, the companies operate under strict guidelines outlined in the relevant regulatory bodies governing financial and accounting practices and reporting.
Literature review
This is an analysis of the accounting standards of the IFRS, reporting requirements, audit requirements, and pricing issues for these two firms.
Since the financial reports issued by these two firms are meant for use by investors, regulators, and other interested stakeholders, their reports are usually issued in accordance with the International Financial Reporting Standards. The dependence on IFRS's in reporting is fundamental in the creation of high quality and reliable financial information for the convenient in capital markets. The IFRS’s provide the preparers of financial statements with the relevant guidelines to abide by in the preparation of an entity’s accounts. All global companies that have listed their stocks in public stock exchange markets are under a legal obligation to publish their financial reports by the relevant accounting standards. ("IFRS - What are IFRS Standards?", 2016)
Diageo, in the preparation of its financial statements, has in the past adopted the International Financial Reporting Standards adopted for application in the European Union and as per the issuance of International Accounting Standards Board. The company, due to its presence in various geographical regions across the world, relies on such IFRS’s as IFRS 10 on consolidated financial statements. The company reports its geographical segments such as Europe, America, North America, Latin America, Caribbean and corporate. The accounts reported by Diageo are always as per the specifications of the Company's Act 2006, alongside the UK GAAP's. Further, the consolidated financial statements of Diageo are prepared on a going concern basis and the policy of historical cost accounting. The management of the company is under strict obligation to formulate estimations and assumptions which have an effect on the amounts of liabilities, assets, revenues and expenses reported during the accounting period. Adoption of the going concern basis in the preparation of the financial statements affirms that the business is expected to survive into the near future. Consolidation of the financial statements enables the entity to combine the financial results of its subsidiaries, associates, and other joint ventures. The presence of the company operations in multiple countries that have different currencies also requires the financial statements of the subsidiaries, joint ventures, and associates to be presented in the functional currencies in their economies of operation. However, the consolidated financial statements are all presented in the parent company currency, the Sterling.
The conversion of the foreign currencies into the Sterling is done at the weighted average exchange rates. The company also operates an exchange reserve in which the variances arising from exchange differences are posted. According to accounting policies, the current tax is charged on the taxable profit earned in the year. The differences between accounting and taxable profits are usually occasioned by the presence of some items that are not taxable in the financial statements. The company also operates a deferred tax system that relies on the difference between the carrying values of assets and liabilities for financial reporting.
Procter & Gamble, on the other hand, operate their financial reporting as per the guidelines of the US GAAP's and the regulations of the Securities and Exchange Commission (SEC). Since the company also operates in multiple segments across the world, it incorporates all items to be reconciled and adjust the segmental accounting policies to match the US GAAP’s. Despite the overall legal requirement to prepare the financial reports by the IFRS guidelines, Procter and Gamble prepare their statements as per the US GAAP's. To avoid the risk posed by currency rates variances, the company has opted to use forward contracts whose maturity periods are below eighteen months as a source of operating finances. The exposure on currency rates is created by the fact that the business operates in multiple countries across the world. Procter also uses several non-GAAP measures to increase the value of its financial statements. Such measures include the Organic Sales Growth, Core EPS, and Adjusted free cash flow. The entity also uses financial estimates and assumptions whose effects are manifested in the financial statements as per the provisions of the US GAAP’s.
Reporting requirements that govern the accounting practices at Diageo are also enshrined in the IFRS across all the global operational segments. In all its operations, Diageo presents its financial statements on historical costs and at fair values of the relevant financial instruments. All the financial reports are prepared by the Companies Act 21006 and the UK GAAP. In its reports, the company is exempted in section 408 of the Companies Act from disclosing its actual staff numbers and costs. The firm is also exempted from separate disclosure of transactions in fully owned subsidiaries and information about financial instruments by FRS 1 and FRS 29 respectively. The reporting frameworks also require the firm to present its reports comparatively.
The firm must report all investments in its subsidiaries at historical costs net of any amortization or impairment. Any future events that reduce or increase the impairment loss reported are adjusted on the income statement. The amount of dividends paid or earned by the firm as per the directors' approval must be included in the financial statements issued at the end of the year when such dividends are payable or receivable. Employee benefits and share-based payments are valued using the Monte Carlo or binomial methods and charged to the income statement. Shares owing to its employees are directly reduced from the balance sheet, and any financial change associated with the sale of Diageo shares is treated as an equity movement. All other pension and employee benefit schemes operated by the firm are accounted for as defined contribution plans. The firm also reports the current tax based on taxable profit earned in the year. The financial reports also present a full provision for the deferred tax to cover the possible differences that may arise from the gains and losses that may be triggered by the recognitions of tax computations. The firm's financial reporting does not recognize tax benefits, and the tax charge provision includes all interest and penalties charged on tax liabilities. The presentation of financial instruments by Diageo is reported by recognition on the balance sheet at its fair value, and any changes in the value of derivatives are reported on the income statement.
In the case of Procter, the SEC requires that the investors receive the financial information concerning the securities being offered as well as other relevant financial information. The firm is obliged to refrain from issuing false or deceiving or fraudulent figures during the sale of these securities. The firm is also required to disclose all financial information considered important. The relevance of this reporting requirement is to enable the investors to make well-informed decisions on whether or not to buy such securities. Procter, according to the SEC, must ensure that all its securities are appropriately registered with the essential facts being put clearly forward. The SEC, under corporate reporting, requires that all firms with an asset base of over $10 million and at least 500 shareholders must file all periodic reports in a public manner and avail them at the SEC’s database. The information on materials used to solicit votes from shareholders at the annual or other relevant meetings must be filed with the SEC before any such solicitation. The disclosed solicitations must in all aspects declare any factors deemed important facts about the issues on which the shareholders are requested to vote. Procter is further requires by the SEC to disclose any relevant information to any individual who seeks to acquire and hold more than 5% of the company's shares through a direct purchase of giving an offer in the form of a tender. This serves as an educative strategy to educate the shareholders and enable them make wise decisions on such issues. Insider trading is sharply condemned and criminalized by the act. Any activities that seem to be fraudulent in the sale or purchase of securities are highly prohibited. Procter is mandated to be specific, by the US GAAP’s, in the statement of financial reports on its four global business unit sectors namely, global beauty, health and grooming, fabric and home care, and baby, feminine and family care. The firm is required to recognize the amount of taxes payable on its incomes and the impact of deferred tax assets and liabilities.
The firm also operates a staff post-retirement benefits scheme as well as an employee stock ownership plan for the US employees. Such funds are contributed in proportion to the employee salary base and presented at the fair value on the financial statements. The company, like Diageo, also presents its financial derivatives on the financial statements at their fair values for the qualifying and non-qualifying financial instruments. The presentation of the values of goodwill, other intangible assets, and financial instruments should be done at the market fair values. Due to the business segments operating outside the US, the business also operates under a currency translation policy that seeks to translate all segmental reports to the functional currency for the purpose of comprehensiveness and uniformity. Cash flow statements are prepared and presented via the indirect accounting method for cash while the treatment for property, plant and equipment is recorded at cost and the value reduced by the accumulated depreciation. Depreciation is charged on straight line basis for all PPE. The revenue recognition guidelines for the GAAP require that Procter recognize their revenues when it’s realized or realizable and has already been earned. The GAAP’s allow the management of the firm to make estimations and assumptions that are generally compatible and acceptable by the US GAAP. These assumptions must be based on the best knowledge of the management about the current events and a sound estimation of the future events. The differences that may emerge between the estimates and the actual results are deemed to be negligible by the management and as such cannot have a material effect on the financial statements of the period. The firm as per the requirements of GAAP’s in the US, is required to consolidate the reports from its subsidiaries and affiliates to establish a functional report for the global entity. Intercompany transactions are usually eliminated in the consolidation process.
Audit requirements for Diageo Plc are managed by the group audit and risk committee which receives continuous or periodic updates on the emerging risks. Both firms are required by the relevant regulatory frameworks to operate and maintain in all aspects, effective internal controls over their financial operations and reporting. The GAAP requirement governing the financial reporting at Procter is founded on the internal control – integrated framework (2013) while the IFRS requirements for Diageo pertaining audit requirements are mandated to the audit committee. The audit committee at Diageo must ensure that the annual reports issued are fair, balanced and understandable.
Diageo is proud of wide market coverage across the globe and an outstanding pricing strategy through which it has covered almost all price tiers for every segment. The competitiveness of Diageo's prices enables the firm to seize a reasonable market share and sustain the good performance for long. The pricing a Diageo is categorized according to the products offered and as follows: Ultra premium, super premium, premium, and standard and value brands. Through the investment in multiple brands across various price points and price mixes, the business can drive its ambition. For instance, a previous price increase in t Venezuela contributed to a positive price/ mix that was founded on the growth in crown royal and reserve. The tactical price deductions in spirits and beer in Canada triggered a shared improvement and a negative effect on the price/mix. The realignment of prices in Benelux had a direct impact on reducing the net sales by 10%. Further, in 2015, the Russian volume of sales declined by 14% due to an increase in prices that was triggered by an increase in excise duty.
The impact of price increases is, however, different in emerging markets such as Africa and other regional markets which, due to price increases, recorded 32% growth in Ghana, and an overall growth of 15%. Price increases are expected to trigger a reduction in the volume of sales made by the firm over a particular period. The case is, however, different for Diageo since most price increases have had a positive impact on the volume of sales. The launch of various price increases and careful trade executions in Mexico contributed to 13% increase in the volume of net sales. The situation was, however, different in Chile and the Caribbean where a price realignment triggered a negative sales/mix alongside some minimal benefits. The various effects of price variations vary from one market segment to another and depending on the type of commodity whose price is varying. The price mix also keeps on varying from one time to another as per the impacts arising from the slightest variation in prices.
Pricing issues at Procter are informed by the variation of the prices of the inputs and volatility of such prices as per the forces of weather, political, economic and other relevant factors. As mitigation for the possibility of price volatility, the firm has adopted a policy of applying futures and options whose maturity periods do not exceed one year as well as swap contracts living up to five years.
An evaluation of the accounting concepts in both firms can enable the identification of various similarities and differences. Both firms under US GAAP and IFRS operate on consolidation of the segment reports, have a provision for the application of assumptions and estimates, use the fair value and historical costs for valuation and use foreign currency conversions to draft their final reports from the segment reports. The use of GAAP at Procter and IFRS at Diageo strike a clear difference in the treatment for intangible assets, Inventory costs, and write-downs.
Conclusion
The study of foreign and domestic firms can be summarized to the principle of conveying the accurate financial position and performance of the individual firms to all interested parties. Regardless the different governing reporting frameworks, the firms are under a strict obligation to report accurately and objectively on their businesses at the end of every accounting period.
The importance of understanding different accounting systems is to develop a universal understanding of the financial reports and statements that may be issued from any accounting system. For instance, an understanding of the US and UK GAAP's and the IFRS can put an individual in a good position to understand various business accounting reports without much strain. All international with operations in multiple countries operate on the norm of financial consolidation to put together the different segment reports that are mostly in different currencies and compile the final reports under the functional currency of the firm.
Therefore, all accounting and reporting measurements converge to the same objective of presenting the actual financial picture of the specific firms at any time. The objective of financial reports is to convey a clear image of the firm’s financial position and stature at an appointed period in time. It does not matter if the financial reports are done under the guidelines of GAAP of IFRS, but of more importance is the precision and clarity with which the figures are provided.
References
Diageo annual reports. (2016). Diageo.com. Retrieved 28 July 2016, from
http://www.diageo.com/en-us/investor/Pages/resource.aspx?resourceid=2814
Where We Operate - Procter & Gamble. (2016). Retrieved 28 July 2016, from
https://www.pg.com/en_US/downloads/media/Fact_Sheets_Operate.pdf
IFRS - What are IFRS Standards?. (2016). Ifrs.org. Retrieved 28 July 2016, from
http://www.ifrs.org/about-us/pages/what-are-ifrs.aspx
Comparison of U.S. GAAP and IFRS | Grant Thornton. (2016). Grantthornton.com. Retrieved 29
July 2016, from http://www.grantthornton.com/issues/library/whitepapers/audit/2016/comparison-US- GAAP-IFRS.aspx
International Financial Reporting Standards. (2016). Iasplus.com. Retrieved 29 July 2016, from
http://www.iasplus.com/en/standards/ifrs
SEC.gov | Federal Securities Laws. (2016). Sec.gov. Retrieved 29 July 2016, from
https://www.sec.gov/about/laws.shtml
