International Financial Reporting Standards
The International Financial Reporting Standards (IFRS) refer to accounting rules established by public companies, such as Walmart, to ensure that their financial statements are transparent, consistent, and easily comparable with those of other business organizations globally. Currently, IFRS is used by firms from about 167 jurisdictions, including those in the European Union (Závodný & Procházka, 2023). While the US has been using the generally accepted accounting principles (GAAP), the Securities and Exchange Commission (SEC) recently changed its position on the need for publicly traded companies to report using the IFRS accounting method (Závodný & Procházka, 2023).
The International Accounting Standards Board (IASB) is responsible for issuing IFRS, which is sometimes confused with International Accounting Standards (IAS) (Doupnik, 2019). This accounting method often specifies in detail how public companies must maintain their income and expenses records and reports. They ensure that a common accounting language is used globally, allowing every auditor, investor, government regulator, and other interested parties to understand it effectively. Its standards bring consistency to accounting practices, language, and statements, enabling informed financial analyses and decisions.
Influence of IFRS and US GAAP on Walmart’s Income Statement and Balance Sheet
At Walmart, like any other publicly traded business organization, there will be significant differences in the income statement and balance sheet when using either IFRS or US GAAP reporting. First, there will be a difference in revenue recognition in the company’s income statement and balance sheet. Unlike US GAAP, which has more detailed and specific rules, the principles in IFRS are generally less prescriptive and offer firms some level of flexibility (Bansal, 2022). This can, therefore, result in a difference in Walmart’s revenue classification.
Secondly, the two frameworks differ in their valuation of an organization’s inventory. While IFRS allows firms to utilize a lower value between net or cost-realizable amounts to value inventory, GAAP uses either the lower market or cost value (Bansal, 2022). As a result, Walmart will have variations in inventory valuation on its balance sheet. Other differences will include asset impairments and variations in lease assets.
Impact of IFRS Reporting on Walmart’s Inventory Accounting (IAS 2)
IFRS created Standard 2 to help create appropriate guidelines for reporting inventory. According to this standard, business organizations must report their inventory at a lower cost and realizable value (CFA Institute, n.d.). Among the various methods of measuring inventory, the most effective ones are the First-in, First-out (FIFO) method and the weighted average method (Závodný & Procházka, 2023). Additionally, the business organization reporting its inventory must ensure that it expends its write-downs in the period incurred to attain the net realizable value (CFA Institute, n.d.).
Walmart is a US-based organization that operates a chain of hypermarkets, grocery stores, and discount department stores (US Securities and Exchange Commission, n.d.). While Walmart uses US GAAP, adopting IFRS would require it to value its inventory at the lower of market or cost, using the last-in, first-out (LIFO) method. This will result in a lower reported inventory amount and smaller taxable income. Other impacts include ensuring inventory accounting aligns with the IFRS measurement requirements, complies with required standards, and ensures appropriate cost allocation.
Difference Between IFRS and US GAAP Regarding Revenue Accounting
IFRS and US GAAP differ significantly in revenue accounting. For instance, even though Walmart will have to recognize revenue at a time when it is certain that it will receive economic benefits when using IFRS and US GAAP, US GAAP offers more specific guidance (Bansal, 2022). Additionally, while the two frameworks need performance obligation identification that represents promises of items reaching customers, IFRS is more flexible and depends on judgment (CFA Institute, n.d.).
IFRS and US GAAP also differ in revenue accounting when it comes to allocating transaction prices to goods and services. For example, unlike US GAAP, which uses specific rules, such as Standalone Selling Price (SSP) and Vendor-Specific Objective Evidence (VSOE) for allocating revenue, IFRS requires public companies to allocate based on the relative standalone selling prices (Závodný & Procházka, 2023). IFRS and US GAAP differ in how they account for certain costs related to revenue. IFRS permits firms to adopt a broader approach in identifying costs attributed to revenue, whereas US GAAP mandates a specific approach (Bansal, 2022). Therefore, depending on the approach used, the revenue accounting outcomes will be nearly identical.
Difference Between the Influence of IFRS and US GAAP on Financial Instruments
IFRS and US GAAP differ in their accounting treatment of financial instruments. One of the key distinctions between these two frameworks lies in their approaches to classification and measurement. For instance, IFRS classifies financial instruments into four distinct categories: held-to-maturity investments, available-for-sale financial assets, loans and receivables, and financial assets at fair value (Corporate Finance Institute, 2023).
On the other hand, US GAAP broadly classifies these instruments, including loans and receivables, trading securities, held-to-maturity securities, and many others (Bansal, 2022). Additionally, while US GAAP employs the “probable incurred loss” model, which involves recognizing impaired losses when it is evident that the organization has incurred some losses, IFRS utilizes the “expected credit loss” model, based on probability-weighted estimates (Bansal, 2022). The third difference is that, although IFRS permits a broader hedging range, US GAAP has more specific guidelines and rules for hedge accounts (Bansal, 2022). These differences make each framework distinct in the financial instruments it uses.
Income Taxes and Tax Planning Considerations
The first consideration in Walmart’s income taxes and tax planning is jurisdiction. While Walmart is a US-based company, it also operates in about 20 other countries, including the United Kingdom and Mexico (Walmart, n.d.). As a multinational corporation, it faces numerous issues related to income taxes in various locations.
Walmart’s income tax liability may be affected depending on the jurisdiction’s tax laws. For instance, if two jurisdictions have different tax rates, Walmart will be forced to pay differing amounts, with some being significantly higher. Some may impose tax deductions and credits, which will force organizations to increase their income taxes (Doupnik, 2019).
Another consideration for Walmart is the changes in tax legislation and how they will affect their business operations in different locations. According to Boldycheva & Klonitskaya (2022), changes in a country’s tax reductions, incentives, rates, and regulations have an impact on business organizations’ tax liabilities and strategies. Therefore, if Walmart has a vision of developing an appropriate tax plan, it should consider a jurisdiction’s taxation policies and changes in its legislation. Walmart would have more effective strategies in areas that have unfavorable tax legislation.
The third consideration for Walmart’s income tax and tax planning is its strategies. Tax planning strategies are often implemented to help business organizations minimize their tax liabilities and ensure their operations are not negatively affected in different jurisdictions (Boldycheva & Klonitskaya, 2022). Therefore, in its plan, Walmart should consider implementing various tax planning strategies to minimize its tax liabilities in a legally compliant manner.
One strategy that Walmart can consider is identifying and leveraging tax credits available in various countries or states. The other planning strategies include tax treaty planning, transfer pricing, and accelerated depreciation and amortization (Doupnik, 2019). The fourth consideration is ensuring compliance with tax regulations and laws in various countries, including proper documentation and payment of taxes (Xue, 2021). By considering all these factors, Walmart will be able to develop an effective tax plan to optimize its overall tax position.
Personal Opinion on the US Transfer into IFRS
Over the years, debates have existed on whether the US should adopt IFRS. However, I think moving into IFRS and abandoning the GAAP is the best thing for the nation’s economy. While the US has been the superpower nation, it is evident that it has been losing its global investment to other major markets in Europe, such as the London Stock Exchange (Jaisinghani & Msika, 2023). The nation’s rules are stiff, which scares away investors from other parts of the globe. Therefore, when the US adopts IFRS, it will help attract investors and boost foreign direct investment (FDI).
Advantages of the Convergence
The first advantage of convergence in IFRS is global standardization. As mentioned earlier, approximately 167 jurisdictions worldwide are using IFRS, including those in the European Union (Závodný & Procházka, 2023). IFRS promotes consistency and comparability in the financial reporting of different organizations; its primary purpose is to ensure this consistency and comparability (CFA Institute, n.d.). Therefore, when the US adopts this accounting framework, it would be able to easily transact across borders, invest, and enable its companies to compare with multinational firms.
Secondly, the convergence into IFRS will enable US companies to have a more simplified approach to reporting their finances. Unlike US GAAP, which has numerous specific rules and regulations, IFRS tends to be a less rule-based and more principles-based framework (Bansal, 2022). As a result, US-based companies, such as Walmart, will not face compliance and complexity costs when operating in other nations.
The adoption of IRFS by the US will enable companies in the jurisdiction to easily compare themselves with those in other nations. IFRS often ensures that a public company has its financial data presented uniformly and in a manner that investors, auditors, government regulators, and other stakeholders can understand (Závodný & Procházka, 2023). As a result, companies from different countries will not have an issue reviewing their competitors’ financial reports and staying up-to-date with the latest trends. Other advantages of convergence into IFRS include facilitating international acquisitions and mergers, the rapid creation of financial reports, flexibility in accounting practices, and more.
Disadvantages of the Convergence
Although the convergence of IFRS is associated with numerous advantages, it also has some shortcomings. First, the IFRS is considered less detailed than the US GAAP. According to Bansal (2022), the decisions made by regulators, investors, and the general public often depend significantly on an organization’s financial reporting. This information must be consistent to enable the interested parties to easily evaluate it against the respective industry norm and the jurisdiction’s laws.
However, when compared to GAAP, the IFRS offers less relevant information for investors, regulators, and the public (Bansal, 2022). Additionally, IFRS requires high adoption costs, as the US will need to allocate more resources for retraining and educating accounting professionals. Respective companies, such as Walmart, will also have to spend more time and money on adopting (Závodný & Procházka, 2023). Other disadvantages include differences in nations’ capital markets and norms, an increased workload, and data accuracy issues.
References
Bansal, S. (2022). US GAAP or IFRS: A review of literature. Journal of Accouting, Finance and Auditing Studies, 8(2), 54-66. Web.
Boldycheva, A. G., & Klonitskaya, A. (2022). Tax risks and tax planning. Russian Engineering Research, 42(9), 954-957. Web.
CFA Institute. (n.d.). IFRS: International financial reporting standards. Web.
Corporate Finance Institute. (2023). Financial assets. Web.
Doupnik, T. (2019). International accounting (5th ed.). McGraw-Hill Higher Education (US).
Jaisinghani, S., & Msika, M. (2023). London’s investment appeal is unraveling as arm heads to the US. Web.
US Securities and Exchange Commission. (n.d.). EDGAR—search and access. Web.
Walmart. (n.d.). Home. Web.
Xue, L. (2021). Management and research of enterprise tax planning under the background of information age. Journal of Physics: Conference Series, 1992(4). Web.
Závodný, L., & Procházka, D. (2023). IFRS adoption and value relevance of accounting information in the V4 region. Economic Research-Ekonomska Istraživanja, 36(1). Web.