Question

This course is about Understanding Finanical Statement.

There are two companies which are competitors(same SIC classifications). The Coca Cola Company will be a publicly-traded U.S. company which reports under GAAP and Coca- Cola European Partners will be a foreign competitor, also publicly-traded, which reports under IFRS. Here is the requirement: briefly describe, in your own words and citing company literature where appropriate, the companies under consideration. Finally “which company would be the better investment?” based upon your ratio analysis.

Answer 1

Ans.

Base Of Accounting

US GAAP follows rule-based accounting while IFRS follows principle based accounting. Rule based accounting requires compliances of rules rigidly and there are chances of getting wrong benefits from loophole while principle based IFRS focuses on substance over form, it gives more preference to substance rather than the form.

Examples

As per IFRS Preference share capital is not considered as capital of company, since preference share capital has to be redeemed after a fixed span of time and a fixed amount of dividend has to be paid, therefore IFRS pays more attention to the substance and treat the preference share capital as Long term loans.

Conclusion

In the given situation, Coca-cola company reports under US GAAP and Coca cola European reports under IFRS, Accounting of Coca cola Europen will be more precise and transparent and will give true and fair picture of the state of affairs. Hence, if the fundamentals of Coca cola European are satisfactory,investor should invest in Coca Cola European.