Monday, September 2, 2019
Heineken IFRS vs US GAAP Essay
Like IFRS, reports prepared under US IFRS are presented: (i) statement of financial position, (ii) statement of comprehensive income, (iii) statement of changes in equity, (iv) statement of cash flows, and (v) notes including accounting policies. Unlike IFRS it is not required under US GAAP to present a statement of financial position as the beginning of the earliest comparative period. However, SEC registrants are required to present statements of financial position as of the end of the current and prior periods. There are more specific format and line item disclosure requirements for SEC registrants. Unlike IFRS, it is needed to present statements for the most recent quarters. Basis of accounting Both standards are prepared on a modified cost basis with growing emphasis on fair value. Financial statements can be measured into a non-highly inflationary currency. When an economy becomes highly inflationary, an entity makes price-level adjustments prospectively. Consolidation and non-controlling interest in consolidated financial statements Consolidation under IFRS is based under control model, which is assumed to exist when a parent company owns more than half of an entityÃ¢â¬â¢s voting power, or has legal rights. US GAAP uses a bipolar consolidation model, which distinguishes between a variable interest model and a voting interest model. Business combination The receiving entity records the net assets at their carrying amounts in the accounts of the transferor (historical cost). Functional and presentation currency HeinekenÃ¢â¬â¢s consolidated financial statements are presented in euro, which is the CompanyÃ¢â¬â¢s actual functional currency. Once the acquisition is done, the local currency would be euro, the functional currency would be US dollar, and the reporting currency would be US dollar as well. Considerations assumed in the determination of functional currency: Ã¢â¬ ¢The majority of the sales are going to be invoiced in U.S. dollars so that their cash inflow would be generated in greater proportion in that currency. Furthermore, most of the purchases of would be paid in U.S. dollars. Ã¢â¬ ¢After the acquisition, sale prices will be settled in U.S. dollars, according to the budget made at the departmental Controlling of CBA. Ã¢â¬ ¢The accounts receivable transactions (trade and related party) and accounts payable (trade and related parties) would be made in U.S. dollars. Foreign currency transactions Transactions in foreign currencies are translated to the respective functional currencies of CBA entities at the exchange rates at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies at the reporting date are retranslated to the functional currency at the exchange rate at that date. The foreign currency gain or loss arising on monetary items is the difference between amortized cost in the functional currency at the beginning of the period, adjusted for effective interest and payments during the period, and the amortized cost in foreign currency translated at the exchange rate at the end of the reporting period. Non-monetary assets and liabilities denominated in foreign currencies that are measured at fair value are retranslated to the functional currency at the exchange rate at the date that the fair value was determined. ItÃ¢â¬â¢s important to say that unlike IFRS, US GAAP does not address whether an entity may have more than one reporting currency. However, the SEC has indicated that the foreign private issuer may select any reporting currency that the issuer deems appropriate. Also, under US GAAP the financial statements of a foreign operation in a highly inflationary economy are re-measured as if the parentÃ¢â¬â¢s reporting currency were its functional currency with the translation gains and losses recognized in profit or loss. Unlike IFRS, this accounting is followed for financial statements of the period that begins after the economy becomes highly inflationary. Property, Plant and Equipment (PPE) Heineken measures its items of PPE at cost less government grants received accumulated depreciation and accumulated impairment losses. Heineken also depreciate its PPE items under straight line basis, and major components that are accounted for separately, since this most closely reflects the expected pattern of consumption of the future economic benefits embodied in the asset. ItÃ¢â¬â¢s important to call that under US GAAP, estimates of useful and residual value, and the method of depreciation, are reviewed only when events or changes in circumstances indicate that the current estimates or depreciation method are no longer appropriate. Unlike IFRS, the revaluation of property, plant and equipment is not permitted. Inventories Heineken: Inventories are measured at the lower of cost and net realizable value. The cost of inventories is based on the weighted average cost formula, and includes expenditure incurred in acquiring the inventories, production or conversion costs and other costs incurred in bringing them to their existing location and condition. Net realizable value is the estimated selling price in the ordinary course of business, less the estimated costs of completion and selling expenses. Unlike IFRS, inventories are measured at the lower of cost and market. Under US GAAP FIFO (first in first out) method is allowed. Also, inventory is written down to market when net market is less than the cost, in difference with IFRS that states that it should be done when the realizable value is less than the cost. Leased assets Leases in terms of which Heineken assumes substantially all the risks and rewards of ownership are classified as finance leases. Upon initial recognition PPE acquired by way of finance lease is measured at an amount equal to the lower of its fair value and the present value of the minimum lease payments at inception of the lease. Lease payments are apportioned between the outstanding liability and finance charges so as to achieve a constant periodic rate of interest on the remaining balance of the liability. Other leases are operating leases and are not recognized in Heineken statement of financial position. Payments made under operating leases are charged to profit or loss on a straight-line basis over the term of the lease. When an operating lease is terminated before the lease period has expired, any payment required to be made to the lessor by way of penalty is recognized as an expense in the period in which termination takes place. IAS 17 and US GAAP are conceptually similar, but ISAS 17 provides less specific guidance than US GAAP and leaves it to interpretation, substance over form.