A Review of the Persistent Reconciling Items between Financial Statements Using U.S. GAAP and International Financial Reporting Standards for Three Auto Manufacturers

Article excerpt

[Abstract] This paper investigates differences between the financial statements of Volvo Corporation, Daimler AG, and Fiat SPA as prepared under International Financial Reporting Standards (IFRS) and U.S. Generally Accepted Accounting Principles (U.S.GAAP) from 2004-2006. The application of IFRS generally resulted in higher net income than U.S. GAAP. Many differences have already been resolved by the convergence projects of the Financial Accounting Standards Board and the International Accounting Standards Board. However, significant and persistent reconciling items that are likely to affect U.S. automakers' financial statements include: pension and other post-retirement benefits expenses, capitalization of development costs, and minority interests reporting.

[Keywords] IFRS; U.S.; GAAP; auto manufacturer's financial reporting; accounting standard convergence

Introduction and Background

The emergence of multinational corporations and organizations such as the European Union (EU) has heightened demands for a single set of high quality accounting standards that can be used globally. Historically, accounting standards have been developed over many years at a national level. As a result, there are many accounting practices being employed throughout the world. This variation between accounting policies of corporations makes the side by side comparison of financial statements obtuse. The International Accounting Standards Board (IASB) is an independent accounting standard-setting body, housed in London. The IASB grew out of another organization called the International Accounting Standards Committee (IASC), which began issuing standards in 1973 on a part-time basis. The need for international standards development seemed to require the full-time attention of a formal board. The IASB has developed, and continues to refine, the International Financial Reporting Standards (IFRS).

In 2005, the EU required that all publically traded corporations prepare their financial statements based on IFRS. This accelerated the acceptance of IFRS as the global standard. Currently, IFRS has been adopted by nearly 100 countries, with Canada and India making this transition by 2011. Both Japan and Mexico have plans to converge (eliminate significant differences) as well. In August of 2008, the Securities and Exchange Commission (SEC) proposed a timeline for requiring all publically traded companies in the United States to prepare their financial statements in accordance with IFRS effective 2014. Large U.S. corporate filers meeting certain requirements may begin reporting thenresults of operations using IFRS statements as early as 2010 (US SEC, 2008).

In the aftermath of the global credit crisis and the appointment of the new SEC Chairman, Mary Shapiro, there has been a deceleration in the movement toward adoption of IFRS. The SEC has extended the comment period for constituents regarding the timeline, and the ultimate conversion dates are still somewhat in question (Conn, 2009). While the ultimate date of conversion or convergence remains in question, the move toward a global accounting standard is still on the front burner for the accounting profession and financial regulators. In 2002, the Financial Accounting Standards Board (FASB), the promulgators of U.S. accounting standards, reached an agreement, called the Norwalk agreement, with the IASB to converge their standards. Many variations have been ironed out, but significant differences remain: revenue recognition rules, inventory costing methods, reporting stock based compensation, recording research and development costs, among others.

U.S. Generally Accepted Accounting Principles (U.S. GAAP) is a hierarchy of standards and guidance for financial reporting. IFRS is a more concise, principles-based set of standards. U.S. GAAP offers more detailed guidance, "bright-line" rules, and industry specific standards. Until February of 2008, all foreign entities that wished to sell their stock on U. …