Financial Statements Under Different

Financial statements are a summary that explains or give a profile of the financial status of an entity or exposes its business performance, and the activities of an organisation within a certain period. Generally Accepted Accounting Principles (GAAP) stipulate that organisations should prepare a comprehensive financial statement that follows the regulatory procedures and are accurate. A comprehensive financial statement comprises of statement of cash flows, income statement and balance sheets (also referred to as the statement of a financial position). A comprehensive financial statement should be understandable and easy to interpret (Walton, Haller, and Raffournier, 2003). Professional financial statements have the potential of helping entities plan for a more profitable future. Besides, financial statements are a summarised report that shows a business’s operating data within a specified period and its fiscal standings. As much as financial reports have a common mandate, they are prepared differently according to the GAAPs in a region/ country (Hope 2003, p. 245). The difference in regional GAAPs leads to differences in the financial statements of companies. The subsequent sections will run a comparative analysis of the financial statements of organisations in different countries, which are L’Oréal (France), GlaxoSmithKline (GSK-British), and Caterpillar (USA). All these companies prepare their financial statements using different GAAPs.


GAAP is a common set of guidelines that stipulate the accepted accounting standards, procedures, and principles that should be used by companies when compiling their financial statements. The main aim of GAAP is to enhance clarity of information in financial statements. Besides, it ensures consistency in an organisation’s financial statements, which renders it easy for investors to extract useful information (Nobes and Parker 2016). Similarly, GAAP and IFRS also facilitates cross comparisons of financial information in different companies as in this case.

According to the US GAAP, which controls how Caterpillar should prepare its financial statements, companies should account for the acquisition expenses of assets and liabilities instead of their fair market value. As per this principle, the information provided by Caterpillar in its financial statements is reliable due to the fact that the company does not have the freedom to give subjective and biased market value, but at the same time, the information is not very relevant.

The second principle deals with revenue recognition. US GAAP stipulates that companies should record their revenues when earned and not when received. This implies that the cash flow statement does not contain any bearing on revenue recognition; this is the purpose of accrual basis accounting (Christensen, Lee, Walker, and Zeng 2015, p. 51). Contrary, losses ought to be acknowledged when their frequency of occurrence is high, whether it has occurred or not (Nobes and Parker 2016).

The third principle is on matching principles; this means that expenses should be matched with revenues when the accountant is justified to do so. Expenses are acknowledged only when the product or service makes its input to income (Gordon 2019, p.10). Besides, if there is no linkage with revenues can be recognised, costs can be altered to expenses of the existing period (Epstein and Mirza 2003).

The last code is the full disclosure principle. Any company using US GAAP should disclose its information based on the analysis conducted on the trade-off, since preparing voluminous information involves extra costs and reasonable use (Ho, Lee, Lin, and Yu 2017, p. 569).

International Financial Reporting Standards (IFRS) aims at bestowing consistency, transparency, and comparability in financial reporting tools around the world. The International Accounting Standards Board is responsible for issuing IFRS. The following IFRS principles majorly inform GSK financial statements.

Uses of estimates; under IFRS, the making consolidated financial statements needs the application of estimations and expectations that might affect the stated assets and liabilities and the revelation of dependent liabilities and assets on the date of the financial reports (Baukmann 2018). As much as these estimates are founded on the accountant’s best evaluation, the final view could differ from estimates (GlaxoSmithKline 2017).

Revenue Recognition; under this principle, product sales are only acknowledged as income once the benefits and the risks that are related to these merchandises have been shifted to the purchaser, in accordance to the agreed standings and conditions (Krahel and Titera 2015, p. 411).

Intangible Assets; Intangible assets include goodwill, copyrights, patents, and trademarks. Intangible assets are majorly recognized in the balance sheet at historic prices minus the accrued depreciation. While calculating depreciation, intangible assets, equipment, plant, and property are quantified at historical cost minus the accrued in a straight-line depreciation, as per their projected operative lifespan and any impairment losses (Nobes and Stadler 2018, p. 610).

According to the French Accounting principles the fundamental financial summary documents include profit and loss accounts, balance sheets, and an appendix that outlines any appropriate fact (Barth, Landsman, and Lang 2008, p. 470). The major differences between the French System, IFRS and GAAP are discussed in the sections below.

IFRS guidelines used by GSK, allowed the company to present its income statement by classifying items of income and expenditure by their nature and functions. Despite the classification, GSK provides a vertical format of income statement; this means that the amount of sales is used to base other elements of the income statement such as operating expenses, costs of sales, income tax, gross profit, and the net income among others, which are depicted as the percentage of sales. Nobes and Parker (2016) argue that the vertical income statement (used by GSK), provides more information on a company’s financial position as compared to other forms of income statements. L’Oréal uses a two-sided income statement, which has categorised expenditure by destination as the cost of sales, selling and general administrative expenses and gross profit before taxation. On the other hand, Caterpillar also uses the vertical income statement, which classifies sales, revenue, and operating costs together (United States Securities and Exchange Commission 2017).

Cost Combination: In L’Oréal’s income statement expenses are disclosed by their nature, which means that the French method used by L’Oréal does not allocate an expense to a specific task, instead they are classified in accordance with the categories they were spent on, for example, advertising. This design also helped the company to clearly indicate the factors that led to these expenses. In the case of GSK, expenses are disclosed by their functions, for example, the cost of sales and in the case of selling and administrative expenses. By using IFRS, GSK is able to calculate its gross profit and display it on the income statement, unlike in the case of L’Oréal. Caterpillar, on the other hand, uses functional classification like in the case of Research and Development expenses, selling, and general administration expenses. Elbakry, Nwachukwu, Abdou, and Elshandidy (2017, p. 17) argued that generally, the use of functional classification in income statements give more detailed information that users can simply understand.

The major difference in balance sheet among these three companies is the diversity in the reporting structure. For L’Oréal, they emphasise on placing assets on top of the balance sheet, which is followed by liabilities and lastly equity. Besides, the company also classifies assets into current and non-current assets and later calculates the total value of assets by adding bot the current and the non-current assets (L’Oréal. 2017). GSK and Caterpillar tend to have a similar balance sheet reporting structures, with assets being on top, followed by Liabilities and lastly Equity. However, for GSK the net assets are calculated by subtracting liabilities from assets; this means that eventually, the equity and the net assets figure will have to balance.

The order of Liquidity; Both L’Oréal and GSK use an increasing format of order liquidity, apart from Caterpillar which exhibits a decreasing format. In the case of L’Oréal, the company presents its assets from the least liquid to the most liquid. When stipulating its assets, L’Oréal starts with non-current assets (which in this case is goodwill). Goodwill is the least liquid asset because it would take a lot of time to be converted into cash. As liquidity increases, Cash is listed as the last item in the asset section of the balance sheet because it is the most liquid asset in any entity (L’Oréal 2017). Like in the case of L’Oréal, GSK’s assets are also structured in a manner that the asset section in the balance sheet, begins with non-current assets such as goodwill, plant property, and equipment, which are not as liquid as other assets including the GSK’s balance sheet (GlaxoSmithKline 2017). When compared to L’Oréal and Caterpillar, GSK comes out different, such that it separates goodwill from other intangible assets (as stipulated by the principles of IFRS in the sections above), while the other two, treats goodwill as part of other intangible asserts. Lastly, in the case of Caterpillar, the company organised its assets in decreasing order of liquidity. This evident in the asset section of the balance sheet, where cash is listed first because it is the most liquid asset and then followed by receivables. Liquidity majorly decreases in the order of assets, which means that assets like goodwill and other intangible assets are listed last (United States Securities and Exchange Commission. 2017). In the current assets’ inventories are listed last, while cash is listed first because of its liquidity levels.

In the case of Caterpillar, the company uses both reducing balance and straight-line method in depreciating its tangible non-current assets. The reducing balance method involves computing depreciation at a fixed rate and presents the asset as a percentage of its book value. While a straight-line method involves depreciating the value of an asset consistently over a time span until it attains its salvage value (United States Securities and Exchange Commission 2017). It computed by dividing the purchase price of the asset minus the salvage value, then divided by the expected useful life of the asset. Caterpillar uses straight-line method to compute depreciation on lease equipment mainly for financial products. At the same time, it uses the reducing balance method to calculate depreciation on plant and equipment (United States Securities and Exchange Commission 2017). GSK uses the straight-line method, whereby property, plant, and equipment are depreciated using the straight-line method, excluding freehold land (as stipulated in the principles of IFRS). In their balance sheet, the company presents its PPE at the cost of purchase minus the provisions for depreciation (GlaxoSmithKline 2017). Both Caterpillar and GSK review the residual value of their assets and adjusts value when necessary. L’Oréal also uses both straight-line and reducing balance method to depreciate its tangible non-current assets. For all other assets, L’Oréal uses reducing balance method to calculate depreciation apart from machinery and equipment, which it uses the straight-line method, assuming a useful life of 10 years (L’Oréal 2017).

L’Oréal uses the straight-line method for amortisable assets such as trademarks. Non-amortisable assets are verified for impairment in a period of 12 months, based on the valuation method that was used when the company was acquiring these assets. For example, intangible assets like patents are amortised with a span of 2 to 10 years, except for goodwill, which is not amortised at all, but is written off in cases where the book value, exceeds the present value of future cash flows. For software, the company uses accelerated tax-driven amortisation, which is calculated annually. Other intangible assets are amortised with a span of not more than 20 years.

Caterpillar uses the straight-line method to amortise finite-lived intangible assets that do not exceed 20 years, and subject to impairment testing if changes in events show that the asset might be impaired (the United States Securities and Exchange Commission 2017). GSK also uses the straight-line method for amortisable assets, and the amortisation period does not exceed 20 years. GSK provides for impairment and recognises it as an expense in the income statement (GlaxoSmithKline 2017). Goodwill and other non-amortisable assets with indefinite useful life, which are not available for sale are subjected to impairment testing yearly.

For L’Oréal it records its goodwill at the purchase cost, which is measured at its fair-value on the date it was acquired. For GSK, it measures its goodwill at cost minus provisions for impairment and amortisation, which is tested every year. In cases where the fair-value of the interests obtained in the company’s assets and liability is more than the consideration paid, the surplus is recognised as a gain in the income statement (L’Oréal 2017). Caterpillar measures, their goodwill at cost minus the fair-value, and is calculated at the reporting unit stage. The company assigns goodwill to their reporting unit on the basis of their integrated plans and the anticipated potential, which results from the acquisition. The entity also re-assigns goodwill when there are changes in the composition of the operating units accordingly. If the fair value exceeds its current value, the goodwill is considered impaired and is treated as impairement loss.

L’Oréal values its inventories using the waited average costs method. For slow moving and obsolete stock, the company makes a provision for impairment that is based on the probable net realisable value, which valuated based on both the and past and predicted data (L’Oréal 2017). For GSK, the company uses fast-in, fast-out (FIFO)method to value its inventories and recognises it in the financial statement at the net realisable value or the lower of cost. When the company wants to launch a new product in the market and anticipates high chances of regulatory limitations, the product is then treated as an asset. GSK makes a provision against the current value to the product’s recoverable amount and later after the confirmation of the high regulatory endorsement, the provision is reversed (GlaxoSmithKline 2017). Caterpillar determines its inventory using the last-in, fast-out (LIFO) method. Besides, it recognises the inventories at the lower of cost or net realisable value just like GSK. If in case, the company could be used FIFO the inventories value could have been higher than the value obtained using LIFO.

Each company prepares its financial statement in accordance with their respective existing accounting policies. As per these policies, the balance sheet and the income statement vary, however, the cashflow statement is similar in all the three companies that are guided by diverse accounting principles. As much as each company uses the stipulated GAAP, at some point, these guidelines harmonise with IFRS at some point, which leads to a globally understandable financial statement. The fact that these companies are directed by different policies, means that their financial reporting tools have been captured in a different format as per their respective guiding policies. For example, both L’Oréal and GSK use an increasing format of order liquidity, apart from Caterpillar which exhibits a decreasing format of arrangement in their balance sheets. Even so, this does not mean that the information portrayed by these financial statements is different from others, but how the information is arranged differs from one company to the other depending on the guiding policy the company is using.

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