Background to Anixter International Company
Anixter International Company was established in 1957 and deals with supplying security and communication products, electronic and electrical wire, fasteners, and other small components. It has its head quarter in Glenview, Illinois, USA. The company supplies its products in more than 50 countries and has operations in 260 countries. In the year 2002, the company was selected as the one of the best performing company by the Forbes magazine. Anixter is a publicly traded in the NYSE as NYSE: AXE. The company conducts all of its operation by using the principles of GAAP to account for financial statements. One notable year when the Anixter prepared its financial statements under the US GAAP principles was the year 2011. This paper will seek to show a connection between the US GAAP and the IFRS by showing how the figures would appear under the two methods. The paper will also note some of the of principles that are embedded in the principles of these two methods and show how the balance sheet would have appeared if it had considered the IFRS as opposed to using US GAAP.
IFRS and US GAAP
IFRS are accounting standards issued by IASB. They are used in more than 110countries around the world. On the other hand, are accounting procedures that are used by some USA based companies in their accounting and financial reporting. On the conceptual level, US GAAP is considered as more of a “rule based” as compared to IFRS, which is considered more of a “principles based.” It is arguable that IFRS captures and represent economic transactions well than US GAAP by inclining more to principles basis (Meulen, Gaeremynck & Willekens, 2007). In addition to this, the two accounting methods defers in the manner in which different financial transactions are treated. The two methods also offer differences in how they account for figures by choosing to address uniquely the products and the services that are accounted. A simple notable case is seen in the methods that are applied when evaluating stocks in which case the two companies use two different methods of accounting for stock.
Comparison of use of US GAAP and IFRS
USA GAAP allows both LIFO and FIFO inventory accounting while IFRS allows only FIFO. US GAAP prohibits reversing inventory write down which is allowed by IFRS. An asset is considered as a future economic benefit under GAAP while IFRS recognize it as a resource that will generate future economic benefit. UNDER GAAP, extraordinary items are shown below net income, and EPS calculation average individual interim period incremental shares. IFRS does not segregate extraordinary items and computation of average individual interim period in determines EPS (Madura, 2014). The two methods have similarities that include requiring presentation of changes in shareholder equity and having a complete set of financial statements that include statement of income, balance sheet, and cash flow statement.
AXE Corporation use of LIFO
AXE Corporation International uses the LIFO inventory accounting technique. The LIFO method reserve was valued at $15,000 on the start of the year and $20,000 at the end of the year.
Defence and criticism of USA GAAP
US GAAP does not facilitate financial reports comparability. Statements prepared under GAAP are not well understandable by investors. GAAP does not recognize loss immediately and reduce transparency and consistency, which limits access to capital market. On the other hand, the use of GAAP inflates the value of the inventory, which gives tax advantage to the company. GAAP does not set a period within which the financial statements should be prepared giving the company more flexibility. Use of GAAP enables the companies to maintain consistency in financial report presentation and limit the misrepresentation risk, which forms the main objective of carrying out financial reporting.
Balance sheet, income statement, and cash flow statement under IFRS (Bloomberg Business 2014):
- a) Balance sheet
| Anixter International | |||
| Balance sheet | |||
| As at 31st December 2011 | |||
| ASSETS | US GAAP | Adjustments | IFRS |
| Current Assets | |||
| Cash | 33000 | 33000 | |
| Accounts receivable | 25000 | 25000 | |
| Investment | 10000 | 10000 | |
| Inventory | 50000 | 20000 | 70000 |
| Total current Assets | 118000 | 138000 | |
| Non-current Assets (PPE) | |||
| Asset Cost | 100000 | 5000 | 105000 |
| Accumulated depreciation | 30000 | 5000 | 30500 |
| Intangible assets | |||
| Goodwill | 7000 | 7000 | |
| Trademark | 5000 | 5000 | 10000 |
| Total Non-current Assets | 12000 | 17000 | |
| Total Assets | 200000 | 29500 | 229500 |
| EQUITY AND LIABILITY | |||
| Current liabilities | |||
| Taxes payable | 5000 | 750 | 5759 |
| Accrued expenses | 15000 | 15000 | |
| Accounts payable | 20000 | 20000 | |
| Total current liabilities | 40000 | 750 | 40750 |
| Non -current Liabilities | |||
| Contingent liability payable | 0 | 6000 | 6000 |
| Non-current Taxes | 0 | 4500 | 4500 |
| Bonds Payable | 50000 | 50000 | |
| Total non-current liabilities | 50000 | 10500 | 60500 |
| Total liabilities | 90000 | 11250 | 101250 |
| EQUITY | |||
| Common stock ($ 1 per) | 50000 | 50000 | |
| Surplus deficit | 0 | 5000-2000+3000 | 6000 |
| Retained earnings | 60000 | 10500+1750 | 72250 |
| Total equity | 110000 | 28250 | 128250 |
| Total liabilities and shareholders’ equity | 200000 | 29500 | 229500 |
- b) Income statement
| Income statement | |||
| Amounts ($ 000) | Adjustment’s | IFRS | |
| Sales | 250000 | 250000 | |
| Cost of sales | 175000 | 5000 | 180000 |
| Gross profit | 75000 | 70000 | |
| Selling and administrative expenses | 31000 | 31000 | |
| Earnings before interest Taxes | 45000 | 39000 | |
| Amortization and depreciation expense | 10000 | 10000 | |
| Earnings before Interest and Taxes | 34000 | 29000 | |
| Interest expense | 4000 | 4000 | |
| Income before tax | 3000 | 25000 | |
| Tax | 9000 | 1500 | 7500 |
| Earnings from continuing operations before extra-ordinary items | 21000 | 17500 | |
| Extraordinary item | |||
| loss from hurricane (net of 45000 taxes) | 10500 | 10500 | |
| Net Income | 10500 | 7000 | |
- c) Cash flow statement under
| Cash flow statement | |||
| NET INCOME | 105 | 35 | 70 |
| Depreciation & Amortization | 30 | 0.5 | 30.5 |
| Amortization Of Goodwill And Intangible Assets | 11.4 | 0.5 | 11.9 |
| DEPRECIATION & AMORTIZATION, TOTAL | 32 | 32 | |
| Amortization Of Deferred Charges | 21.1 | 21.1 | |
| Asset Write-down & Restructuring Costs | — | ||
| Other Operating Activities | 3.4 | 3.4 | |
| Tax Benefit From Stock Options | -6.9 | -6.9 | |
| Net Cash From Discontinued Operations | 22.6 | 22.6 | |
| Change In Accounts Receivable | -97.2 | -97.2 | |
| Change In Inventories | -199.2 | -20 | -219.9 |
| Change In Accounts Payable | 75.1 | 75.1 | |
| Change In Other Working Capital | 95.6 | 95.6 | |
| Cash From Operations | 145.8 | 138.2 | |
| Capital Expenditure | -26.4 | 26.4 | |
| Cash Acquisitions | 1.6 | 1.6 | |
| Divestitures | 143.6 | 143.6 | |
| Cash From Investing | 118.8 | 118.8 | |
| Long-Term Debt Issued | 1,023.70 | 1023.7 | |
| Total Debt Issued | 1,023.70 | 1023.7 | |
| Long Term Debt Repaid | -1,166.90 | -1166.9 | |
| Total Debt Repaid | -1,166.90 | -1166.9 | |
| Issuance Of Common Stock | 13.4 | 13.4 | |
| Repurchase Of Common Stock | -107.5 | -107.5 | |
| Special Dividend Paid | -0.9 | -0.9 | |
| Other Financing Activities | 2.7 | 2.7 | |
| CASH FROM FINANCING | -235.5 | -235.5 | |
| Foreign Exchange Rate Adjustments | -1.4 | -1.4 | |
| NET CHANGE IN CASH | 27.7 | 18.9 | |
Difference in net income and EPS between US GAAP and IFRS
EPS (earning per share) under IFRS rules
Anixter International Company EPS under the IFRS is given by
Total equity = 128250
Stock =50000
EPS = 128250/50000 = 2.565
EPS under the GAAP is equal to 2.2 difference = 2.2 – 2.034 = 0.166
Income difference total income under the GAAP is equal to $ 10500 000 net income under the IFRS is equal to us $ 7000000
DIFFERENCE
= 10500000– 70000000
= US $ 3500000
Analysis of using IFRS accounting
The IFRS standards is lesser standard as compared to GAAP. It does not offer much detail and it leads to high income before tax, whichincreases the amount of the taxation that the company is supposed to remit to the tax authority. Companies allowed using the method that they prefer in the financial statements, which cause manipulation of the financial reports. However, despite this IFRS are more flexible because they are principles based meaning that the objective of the established standard is to reach reasonable valuation of the economictransactions. On top of this IFRS, use by many countries allows comparability of financialperformance between peer companies as well as the company and its subsidiaries that are located in different countries. IFRS gives a more reasonable value of the company’s performance as compared to GAAP. For example, use of LIFO methods does not offer a fair representation of how the company inventory should be valued; rather it tends to inflate their value, which is mostly used for reducing the amount of taxation.
Most appropriate reporting method for financial reporting proposes
According to Van der Meulen Gaeremynck & Willekens, (2007), IFRS is the most appropriate reporting standard. If every country uses its own GAAP, it becomes difficult for a multinational company to compare the real performance of its various subsidiaries. When big corporates operates only within a given border GAAP is the most appropriate guide for carrying out the financialreporting however, the currentglobalizationnecessitates the production of standard information, which conforms, with the GAAP of many countries without violating that of others. As such, IFRS allows consistency in reporting without necessarilyconsideration the location of the company. Given that the entirefinancial reports sill carried out in the uniform manner under the IFRS, it will lead to low cost of preparing the financial reports especially to the companies that have operations in many countries (Barth, Landsman, Lang & Williams, 2012).
Conclusion
The use of IFRS as an accounting method is the most appropriate although it has its shortcomings as compared to GAAP. GAAP are more based on the rules and thus the investors can rely on them more than they can rely on the IFRS in ensuring that the company issues a financial report that is true and fair (Brigham & Ehrhardt, 2013). Many companieshave, moved from using LIFO method of accounting for their inventory to FIFO method. The LIFO method gives companies tax advantage by inflating the value to the stock. For the case of Anixter International Company, use of combination of both LIFO and FIFO method gives it a small tax advantage. Most of the companies in USA use combination of both LIFO and FIFO in accounting for their inventory. Some of these companies include Starbucks and Anixter International Company. However, the adoption of the IFRS by the global community will force most of the companies that use LIFO to change into FIFO as a way of aligning with the new standards.
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