ifrs versus gaap analysis of: &. presentation by: irving alvarez karen deras eduard martirosov...

IFRS VERSUS GAAPAnalysis of:

&

Presentation By:

Irving Alvarez

Karen Deras

Eduard Martirosov

Mirna Migally

Gustavo Tolentino

Overview

Nike’s history Adidas’ history Operating Leases Capital Leases/ Finance Lease Weaknesses in GAAP Strength in IFRS Difference in EPS between Nike and Adidas Difference in Tax Deferred treatments Open the floor to Q&A

Brief History of Nike

Founded in 1964, Oregon Blue Ribbon Sports

Nike Waffle Maker Making the $$$ Currently, the Biggest

Sportswear Company in the World

Brief History of Adidas

Founded in 1926, Germany Gebrüder Dassler Schuhfabrik

Adidas Major Breakthrough; Worn by an

Olympic Athlete Currently, the Second Biggest

Sportswear Company in the World

Capital and Operational

LeasesIFRS vs GAAP

Operational Lease

Are expenses to the lessee. If received in advance should be recognized as a prepaid rent, and as time goes adjusting entries should be made to recognize expenses.

Note that depreciation expense should be made by the lessor since they still hold ownership of the asset.

Capital Leases

If any of the following are achieved, material ownership will transfer to lessee: Lease agreement transfer title to the lessee. Lessee has the option of buying the assets at

(Bargain purchase option) Present value of the annual annuity of rentals

is greater than or equal to 90% of the fair market value of the assets at inception date.

Lease term is equal to 75% or more of assets life.

Potential weakness

Nike’s Leases (GAAP)

Source: Nike, Inc., FY13-10k Form 10-K for the Period Ending May 31, 2013 (filed Sept. 19, 2013), p.61, from Nike Inc. website, http://investors.nike.com/investors/news-events-and-reports/default.aspx?toggle=earnings, accessed November 13, 2014.

Plausible to be reported in the Income Statement

Weakness (GAAP)

Nike can decrease the lease term to make it below the 75% criteria. Thus, the lease will be classified as an operational lease and will decrease capital leases.

In addition, investors will be mislead because operational leases are not reported on balance sheet; therefore, liabilities are hidden.

Weakness continued (GAAP)

Can avoid negatively affecting the debt-equity ratio and other mechanical indicators of riskiness. Thus, further misleading investors and creditors.

Assumes market is naive, and is “fooled” by off-balance-sheet financing.

Adidas Leases IFRS

(Missing leases)

Strengths (IFRS)

On the other hand, IFRS requires capital leases to be executed with professional judgment which makes the company more liable.

Conclusion

In conclusion, in GAAP it is easier to convert a capital term into a operational lease.

In IFRS more liability falls on the justification of the accountant. Thus, there is no criteria to manipulate.

Therefore, investors will have more confidence in IFRS.

EPS (Earnings/share)

IFRS vs GAAP

Adidas EPS (IFRS)

Weighted Avg. number of shares is same for both EPS calculations

IFRS guidelines allow exclusionof certain convertibles, thereforeresulting in same numbers for both basic and diluted EPS

Source: Adidas, AG., FY13-10k Form 10-K for the Period Ending December 31, 2013 (filed Mar. 5, 2014), p.235, from Adidas AG. website, http://www.adidas-group.com/en/investors/financial-reports/#/2013/, accessed November 13, 2014.

Nike EPS (GAAP)

TSM (Assumes conversion regardless of contingency)

Assumed conversion results in a $.06 difference


Conclusion (EPS)

IFRS excludes potentially issuable shares unless certain requirements are satisfied

Both implement weighted average method however...

1. (GAAP) – Incremental shares computed quarterly

2. (IFRS) – Incremental shares computed for the ENTIRE year-to-date period (no quarterly calculations)

Deferred Tax Assets

IFRS vs GAAP

Adidas Deferred Tax Treatment (IFRS)

DTAs are reported strictly as NONCURRENT

Partial Balance Sheet

One-step Approach

Source: Adidas, AG., FY13-10k Form 10-K for the Period Ending December 31, 2013 (filed Mar. 5, 2014), p.190, from Adidas AG. website, http://www.adidas-group.com/en/investors/financial-reports/#/2013/, accessed November 13, 2014.

Nike Deferred Tax Treatment (GAAP)

Partial Balance Sheet

DTAs are separated into current and noncurrent sections


Nike Deferred Tax Treatment (GAAP) Cont.

Two-step Approach


Conclusion (Deferred Tax Treatment)

US GAAP provides specific recognition guidance IFRS does not

US GAAP reports DTAs in conjunction with other assets and liabilities

IFRS DTAs are all NONCURRENT

Questions

Please ask any question you may have at this point

ifrs versus gaap analysis of: &. presentation by: irving alvarez karen deras eduard martirosov...

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