Question

Hi Tina. Thanks for getting our discussion off to a great start! You made a very good observation related to comparability across entities! It might be interesting to see how this could apply in practice. Let’s say that we wanted to value the following organizations: Walmart Honda Exxon Ebay Local law firm Class, what challenges might we encounter in comparing the values of such entities?

Answer 1

Comparing financial statements between entities become very easy since most of the companies are reporting their financial statements on the basis of the same accounting standards. US companies report their financial statements under US GAAP and companies in most of the other developed countries to report their financial statements under International Financial reporting standards.
It will be challenging to compare financial statements between companies reported under US GAAP and IFRS. Comparing Walmart, Exxon, and eBay will be little easy as these companies reporting their financial statements under US GAAP, even though we will face challenges as these companies belong to different industries. Comparing Walmart, Honda, Exxon, and eBay will be challenging since these companies belong to different industries and Honda is a Japanese company and adopted IFRS for global reporting. Walmart is a retail company, Honda is an automobile company, Exxon is an oil and gas company, and eBay is an e-commerce company.
There is much difference among these four companies in the way they report financial statements. Very important among them are considered. US companies follow taxonomy structure which is very lengthy for reporting financial statement while Honda reports under IFRS which has less number of standards compared to US GAAP. US companies follow the rule-based approach while companies report under IFRS follows principle-based approach. Walmart, Exxon, and eBay have an option to select 2 inventory methods such as LIFO or FIFO, but under IFRS only FIFO can be used. If one of the companies among Walmart, Exxon, and eBay use LIFO while others use FIFO, it will be challenging to compare. Honda capitalized cost incurred for product development under IFRS while Walmart, Exxon, and eBay can not since they are reporting under US GAAP. Exxon will have depletion expense since they have natural resources while other companies do not have any depletion expense. Comparing companies reported under two accounting standards are always challenging and highly essential for companies belong to the same industry to maintain consistency in reporting. In this case, these four companies we considered for comparing belong to different industries, hence we will always face a little challenge in comparing.