ACC5301 International vs US Accounting Standards
Unit IV Research Report: International vs. US Accounting Standards
Comparing Financial Accounting Methods: Ford vs Volkswagen
We often think that numbers are absolute, that quantitative data is exact, objective, and not open for interpretation. But nothing could be further from the truth. Just like how in human conversation the tone of one’s voice or the body language that one uses can heavily impact the meaning of the words being said, how one reports their accounting can impact how that data is viewed and what is being communicated.
One way we see this plurality of financial meaning on display is when a company chooses which accounting standards to employ in their bookkeeping and reporting. In the United States, the most commonly used standard is the Generally Accepted Accounting Principles (GAAP), the standard used by the U.S. Securities and Exchange Commission (SEC). The SEC lets the FASB create these GAAP standards (Dye and Sunder, 2001). By contrast, many international companies use the International Financial Reporting Standards (IFRS), set by the International Accounting Standards Board (IASB) in London.
It seems true that, “The FASB's pronouncements are often used as a model by many other countries, as well as by the IASB itself. No other standard-setting body in the world comes even close to matching the FASB's achievements,” according to one academic journal (Dye and Sunder, 2001). Yet GAAP has not become the defacto international standard.
These US GAAP and international IFRS standards have a variety of differences. One difference that illustrates how important accounting standards can be, is that the GAAP allows first in-first out reporting, whereas the IFRS does not (Palmer, 2019). This type of reporting allows a company to put materials or stock into inventory on top of old stock, then when they sell it, to put the most recently added stock as the “stock out”, leaving the likely less valuable and expensive materials in stock, decreasing their stock on hand and changing their financial portfolio dramatically. U.
This essay looks at the financial accounting practices of U.S. auto maker Ford (using GAAP) and German auto maker Volkswagen (using IFRS).
Part 1 Financial Statement Comparison
Comparing the financial statements between Ford (2019) and Volkswagen (2018) is a challenging process for those not in the accounting profession. The Volkswagen statement (2018) specifically lists an “Accounting Policies” section that specifies that the IFRS standard was used in these records. While, “the majority of the world uses IFRS standards, it is not part of the financial world in the U.S. The SEC continues to review switching to the IFRS but has yet to do so” (Palmer, 2019). Thus, it is not surprising that the Ford statements (2019) use GAAP reporting methods.
Difference #1: Accounting Methods
This is the first major difference in the accounting records – that Volkswagen specifically states, “In accordance with Regulation No. 1606/2002 of the European Parliament and of the Council, Volkswagen AG prepared its consolidated financial statements for 2018 in compliance with the International Financial Reporting Standards (IFRSs), as adopted by the European Union. We have complied with all the IFRSs adopted by the EU and required to be applied” (Volkswagen, 2018).
On the other hand, Ford specifically states that they use GAAP standards, yet not exclusively, writing, “We use both generally accepted accounting principles (“GAAP”) and non-GAAP financial measures for operational and financial decision making, and to assess Company and segment performance. The non-GAAP measures listed below are intended to be considered by users as supplemental information to their equivalent GAAP measures, to aid investors in better understanding our financial results” (Ford, 2019).
Difference #2: Amortizing Intangible Assets
Ford: At Ford (2019), “intangible assets… are not amortized,” which is consistent with GAAP guidelines. While at Volkswagen (2018), “intangible assets are recognized at cost and amortized over their useful life using the straight-line method.” This means that if Ford and Volkswagen each purchase a new software system for $100,000, Ford would show that expense the year it is incurred, whereas Volkswagen can show some percentage of the expense every year for a few years. Let’s say that Volkswagen reports $25,000 a year for three years, then they would show 75% less software spending than Ford that first year, but 25% more spending for the next three years. In short, it can change the short-term financial outlook of the organization.
Difference #3: Last-In / First-Out
GAAP allows for inventory to be tracked as “last-in / first out” (Ross, 2019). This means that if Ford built 1,000 cars in January when steel costs were low, then built 1,000 cars in April when steel prices went up, the cost of the April cars would be higher. Thus, if Ford wanted to show their inventory as lower in value, they would list the first 1,000 cars they sold as the April cars – those that cost more – reducing their inventory on hand costs. Or, they could reverse it, depending on which suits their needs. However, the IFRS standards do not allow this; inventory must be first-in / first-out.
In their financial statements, neither Ford nor Volkswagen mention which method they used. We can assume that Volkswagen, since they are working under IFRS, used first-in / last-out. However, Ford can do it either way; since they did not specify, we simply do not know which they used.
Difference #4: GAAP is Rules Based while IFRS is Principles-Based
GAAP standards are rules based, while IFRS is Principles-Based (Ross, 2019). This might account for the very different “look” of the Ford (2019) and Volkswagen (2018) statements, as listed on their corporate websites. The Ford document is in a downloadable .pdf file. It is designed in a very “white paper” type look, that is text heavy, black and white, and full of tables. It is long, and tedious to read.
In contrast, the Volkswagen statement seems more modern and user friendly because it makes use of menus and formatting to give it a more casual (yet professional) look, and makes it easy to click through to find information. The Volkswagen report is much more user friendly, though the old-style of the Ford report does make it more easily searchable for keywords.
Part 2 International Factors
There are a variety of international factors that can impact the cost of making products around the world. Specifically, some of these heavily impact companies such as Ford and Volkswagen in a variety of ways. Other than tariffs (mentioned in Part 3), three issues are:
Energy prices and technology
An escalating price war between Saudi Arabia and Russian have combined with a pandemic that has everyone stuck at home to create some of the lowest gas prices in years. However, this is a short-term situation. Eventually, prices will go back up, as they have in recent years. The often high and always highly variable price of oil has been a heavy influence on auto makers striving to design and manufacture more fuel-efficient vehicles, including electric and hybrid cars. Additionally, as high-end batteries become more affordable to make and the technology improves, it is also more attractive for automakers to create electric vehicles. But low gas prices right now could see some automakers have short-term issues selling their electric vehicles.
Trade wars seem to be a sign of the times in 2020, as various companies are competing to put sanctions on imports to other countries and add tariffs to the products that do come in. The global economy is sometimes at the mercy of companies (such as with the oil wars noted in number 1) but also politicians (the U.S.A. president Trump has been fighting trade wars with a variety of countries while in office). These wars make it more expensive for certain automakers to import raw materials, as well as electronics and other manufactured parts. For some industries, such as farming, it is heavily impacting labor as well.
In 2019, Covid-19, the novel coronavirus, started to spread throughout China. By 2020 it was a global pandemic. This pandemic has caused tremendous job loss and economic instability. Many working in the auto industry have been laid off, as cars are not selling. Inventory is languishing and it is likely that it will be sold at a steep discount when the economy reopens.
Part 3 Compliance/Regulatory Issues
The auto industry is one of the most highly regulated industries in the world. Every country and even states within the U.S. have different standards they require for size, weight, fuel efficiency, emissions, and so forth. Since both Ford and Volkswagen sell vehicles around the world, they are subject to the same basic conditions.
One area that is making a difference today, however, is steel. Both manufacturers use a lot of steel to build their cars. Given the current trade war with China, a major producer of steel, Ford is paying higher tariffs for the steel used in their USA plants than Volkswagen is for steel used in their German plants.
Conclusions and Recommendations
Years ago, standards set in New York City dominated U.S. accounting, because New York was the center of commerce (Dye and Sunder, 2001). But as the U.S. economy grew, standards became national. Similarly, many have suggested that while the U.S., for some time, dominated the global accounting standards, the world has become so global that it is time to create a true, global standard (Dye and Sunder, 2001).
But we are not there yet. One article in 2000 (Wahlen et al, 2000) discussed the American Accounting Association’s Financial Accounting Standards Committee responding to the suggestion that international standards should be adopted in the United States. The next year, one researcher cited in a peer reviewed journal suggested allowing both FASB and IASB standards to, “operate in the U.S. for five to ten years. With the insights generated by this experience, we could then decide whether to depend on either the FASB's or the IASB's standards, or to allow the standards developed by both to continue to operate in parallel” (Dye and Sunder, 2001). Another financial researcher disagreed, stating that allowing both methods to be used would create a “race to the bottom”, where companies would pick and choose which method to use based on which was easiest or showed them in the most positive light (Dye and Sunder, 2001).
Ten years later, in 2010, another scholarly article was published, this one looking at aligning two specific parts of US and international standards (Colson et al, 2010). Yet in 2020, that has yet to happen.
Colson, R. H., Bloomfield, R., Christensen, T. E., Jamal, K., Moehrle, S., Ohlson, J., . . . Watts, R. L. (2010). Response to the financial accounting standards board's and the international accounting standards board's joint discussion paper entitled preliminary views on revenue recognition in contracts with customers: American accounting association's financial accounting standards committee (AAA FASC). Accounting Horizons, 24(4), 689-702.
Dye, R. A., & Sunder, S. (2001). Why not allow FASB and IASB standards to compete in the U.S.? Accounting Horizons, 15(3), 257-271.
Ford. (2019). Ford Motor Company SEC filing. Retrieved from, https://corporate.ford.com/microsites/sustainability-report-2018-19/assets/files/sr18-form-10-k.pdf
Palmer, B. (2019). IFRS vs. GAAP: What’s the Difference? Retrieved from, https://www.investopedia.com/ask/answers/05/iasvsgaap.asp
Ross, S. (2019). GAAP vs. IFRS: What’s the Differences? Retrieved from,
Volkswagen (VW). (2018). Annual Report 2018. Retrieved from, https://annualreport2018.volkswagenag.com/notes/basis-of-presentation.html
Wahlen, J. M., Boatsman, J. R., Herz, R. H., Jonas, G. J., Palepu, K. G., & al, e. (2000). American accounting association's financial accounting standards committee: Response to the SEC concepts release on international accounting standards. Accounting Horizons, 14(4), 489-499.