Through this course we have been taking a closer look into the Generally Accepted Accounting Principles (GAAP) and the International Financial Reporting Standards (IFRS). The book lays out the major similarities and differences between the two separate but equal accounting methods. I say, “Equal”, in the sense that the IFRS and GAAP accounting methods are two different ways that the any company that could come to the conclude the financial statements for any such accounting period. The differences that have apparent between the two methods, GAAP is only used in companies that have been started in the United States, whereas internationally IFRS has been adopted by those prospected companies.
This project will take a closer look into the financial statements of two different companies, Exxon Mobil that follows the GAAP method and British Petroleum (BP) under the IRFS accounting method. Exxon Mobil Corporation is an American multinational oil and gas corporation headquartered in Irving, Texas, United States. It is a direct descendant from John D. Rockefeller’s Standard Oil Company, and was formed on November 30, 1999, by the merger of Exxon and Mobil.
British Petroleum, most often referred to as BP, is a British multinational oil and gas company in London, England, United Kingdom where the company has established their headquarters. It is the fifth-largest energy company by market capitalization, the fifth-largest company in the world measured by 2012 revenues, and the sixth-largest oil and gas company measured by 2012 production. It is one of the six oil and gas “super majors”. BP is not only in the business for distributing oil; rather it is vertically integrated and operates in all areas of the oil and gas industry.
In Chapter 4 we discussed the different types of income statements that we use under the principles of GAAP. Of these include a single step income statement, as well as a multi step income statements. Both statements give information to the future and or present investors of the company with the net income of the company. IFRS has some different methods when dealing with the income statement, of which never mention the use of a single/multi step income statement.
We covered the section dealing with extraordinary items, all of which are included in the multi step income statement. Under IFRS, we can conclude that the use of an extraordinary item is prohibited. When taking a closer look into the two financial statements of Exon and BP, we can conclude that both companies have laid out a their income statements in the similar fashion. Except under GAAP Exxon has only a consolidated income statement; where as BP has a group income statement, as well as group statement of changes in equity.
Another one of the major differences that I have pulled from Chapter 4 examines the different classifications that expenses have when looking at GAAP vs. IFRS. It is stated in the book that under IFRS companies must classify their expense by either nature or function. Which is not a requirement when completing the financial statements under the techniques of GAAP. This distinction creates a break in the similarities when creating the documents.
With this difference, there comes a break in the similarities in the representation of the documents. Therefore creating it harder to compare Exxon and BP because the companies made their financial statements under different accounting principles. These differences between GAAP and IFRS makes it harder for future investors to compare the two companies side by side.
In chapter 5, taking a closer look into the balance sheet and the statement of cash flows. We will find similarities between GAAP and IFRS when dealing with the disclosures of the different accounts in the financial statements. When the company decides to make their financial statements with regards to their accounting policies, whether annually or quarterly, both different sets of principles will be the same in the disclosure in this manor.
The judgments that the management has made in the process of applying the entities will not vary between GAAP and IFRS. As well as, the key assumptions and estimation of the material value adjustments to the carrying amounts of the assets and liabilities. It can be easily seen that the accounts for both Exxon and BP companies have many similarities. The accounts for both GAAP and IFRS have a tendency to be similar, making it easy for the reader to compare the information that is laid out in the financial statements.
Other differences that we will see between the two different policies, when reviewing the balance sheet, are the way in which the assets are listed are in the reverse manor on the balance sheet. When following IRFS, the accounts are listed in the terms of liquidity at the bottom of assets. Under IFRS, the information is presented with the most liquid account listed at the end of the assets division. This dissimilarity will not make a massive impact on what investor’s information on the company that they are reviewing.
The other differences that we will see when dealing with the differences, the terminology is different under IFRS. The balance sheet is no longer stated as the “Balance Sheet”; it is now referred to as the “Group Balance Sheet”. This is not a major difference between BP and Exxon, for example in other companies that follow IFRS, the balance sheet s called the “Statement of Financial Position”. This difference could make it increasingly difficult when comparing two companies for future investors, if that were the case.
GAAP and IFRS have both defined fair value and historical cost in the same way. With that being said, British Petroleum has begun implementing it in day-to-day use of completing the financial reports. The European countries that do their accounting based on IFRS have been using the new sense of fair value within their companies. This difference of accounting makes the IFRS way of seeing out the completion of the financial reports much closer to the real value of the company. The IFRS statements are becoming a “truer” value of the company at hand, therefore playing the upper hand in the eyes of future investors. Exxon mobile still accounts for their assets under historical cost, in hindsight being a misrepresentation of the true value of the company.
To sum up the similarities and differences between Exxon Mobil and British Petroleum, there are no differences that we have not already covered in the articles regarding GAAP and IFRS. The similarities between the two companies include how the both statements give information to the future and or present investors of the company with the net income of the company. As well as both companies find it necessary to lay out a financial document in regards the to the assets and liabilities. Some of the major differences between these two companies deal with how these financial statements are laid out and their format.
Under IFRS, the balance sheet is not in the same order of liquidity as under GAAP. Also, there is a difference when taking into account the way that each method sees out the true valuation of an asset. Under GAAP, Exxon mobile values their assets for example PPE at historical cost; BP under IFRS does this by means of fair value. Even though these two very similar companies have different methods of accounting, this does not mean that investors do not have the means on analyzing these two companies side by side. It is still very possible that interested people still can compare these companies, while having different accounting methods.