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IFRS (International Financial Reporting Standards) is
actually the global framework of standards concerned with accounting is applied
by companies around the world to present their financial information. This is
derived by a UK based international organization called IASB (International
Accounting Standards Board). This is currently used in more than 120 countries
and all these countries apply the same rules of the IFRS, s. the financial
statements of all these companies are prepared the same way as the others
companies do.
GAAP or Generally Accepted Accounting Principles is the
accounting framework in which the rules must be followed by the companies who
chose to follow GAAP. GAAP is the framework in which the accepting accounting
procedures, the accounting principles and procedures must be followed to
prepare financial statements. As GAAP is a rules based framework, it
communicates the clear information to its users.
Differences between IRFS and GAAP in
implementation of consolidation process
Although there are major difference in both the frameworks
in the consolidation process which will be discussed in detail below, there are
some of the similarities in between both of them e.g. both the frameworks agree
on when to consider a control, in this concept both the frameworks states that
the entities should only be consolidated when one company has control over the
other. But again as both of the frameworks are different, they have certain
major differences in between them which are discussed below:
Consolidation Model:
US GAAP and Difference between
IFRS and GAAP
GAAP use two types of consolidation models for example the variable
interest model or VIM and the model of voting. The parent company is identified
by the model of variable interest by showing which company has the benefits of
controlling the other company and who can influence the decision making process
of the other company. The voting model is identified by the voting rights the
company have and the company can use these voting rights to amend the decision
making of the company.
IFRS and Difference between IFRS
and GAAP
On the other hand the IFRS model uses a single type of model
for consolidation identification. For example it states that the consolidation
process is carried out when the company has rights concerning variable returns
or is exposed with the rights of the subsidiary company or the company is
called a subsidiary if the parent company can alter the returns gaining from
the subsidiary. Even if the above criteria is not met but the parent company
has power over the subsidiary company in different areas, the consolidation
process will be carried out.
De facto control:
US GAAP and Difference between
IFRS and GAAP
The criteria of de factor control are not followed by the US
GAAP. It only look at its models criteria and as stated above the US GAAP is a
rules based framework, it does not show flexibility in its framework. However
what is the de facto control, it will be described in the IFRS below.
IFRS and Difference between IFRS
and GAAP
IFRS does show flexibility in its control criteria over its
subsidiary. For example if the company does not have more than 50 percent
holding or more specifically the company does not have the above mentioned
properties for the consolidation requirement, the company still will follow the
consolidation process if the company has control over the activities of the
subsidiary company.
De facto model can be more cleared as for example if an
investor has more than 50 percent holding in the company, but let’s suppose the
voting power of his shares or investment is not enough to influence the
decision making process of the subsidiary company, this explicitly states that
the financial statements cannot be consolidated even the shareholding is more
than 50 percent. So from this we can say that IFRS shows flexibility in this
case and that is why we say that IFRS is principles based framework.
Preparation of Financial Statements
in general companies:
In terms of general firms, financial statements’ preparation
for example other than the investment companies, have some similarities in the
preparation of financial statements. The consolidation process for both the
frameworks is stated as below:
US GAAP and Difference between
IFRS and GAAP
In US GAAP the consolidation process is required but certain
exemptions exist for the companies. For example there are exemptions available
in the US GAAP in case of the investment companies’ consolidation. During the
financial statements’ preparation which is consolidated, there too is no
flexibility for the criteria. If the above criteria are met, the consolidation
process must be carried out.
IFRS and Difference between IFRS
and GAAP
Here to exemptions exist for certain companies for example
the investment companies. However exemptions are available for instance if the
company that is parent is itself a complete or partial subsidiary, they have
the flexibility to not prepare the consolidated financial statements if some
the conditions identified by the IFRS are complete fulfilled.
Preparation of Financial Statements
in investment companies:
Both the firms here too has a bit of similarity in here for
example the investment companies that are controlled even may not be
consolidated even if all of the conditions for the consolidation process are
fulfilled. However as both are different frameworks certain differences exist
here
US GAAP and Difference between
IFRS and GAAP
In US GAAP the financial statements of the investment
companies are not consolidated even if the criteria for the consolidation
process are fulfilled. Even if the investment company falls under the control
criteria, they must not be consolidated. Instead, they are illustrated in a
satisfactory standard or value in a separate line in the financial statements
which are consolidated of the company that is parent.
IFRS and Difference between IFRS
and GAAP
IFRS too have not to consolidate the financial statements of
the investment companies even if they fall under the criteria of the parent
subsidiary criteria. The investment in such firms are actually illustrated at a
satisfactory standard as a separate and single line in the financial statements
which are consolidated. However the IFRS differentiates from the GAAP in the
way that the parent companies consolidates all the entities whether investment
or not. However if the parent company is itself an investment company then the
subsidiaries are not consolidated.
Different reporting period ends and
Difference between IFRS and GAAP
The different reporting period ends in the consolidation
process have different condition for each in the GAAP and the IFRS. The main
difference in both of them in this case is follows:
US GAAP and Difference between
IFRS and GAAP In this framework of standards the companies if have difference
in the financial statements of 3 months, they are allowed to prepare the
consolidated financial statements and no other steps are required for the
amendment or the preparation of the consolidated financial statements. However
if there takes place any significant event between their reporting period ends
then these are required to be disclosed in specifically the financial
statements’ notes.
IFRS and Difference between IFRS
and GAAP
For financial statements’ consolidation, the companies need
to have same reporting period ends. However if they do not have the same period
ends then they will need to prepare the other financial statements just for the
consolidation process. However there is flexibility for this in here. For
example if the gap terminates in only twelve months and is lower than 3 months,
then the controlled entity does not need to prepare the extra financial
statements. So they amend the yearend financial statements according to the
major events that will incur.
Accounting policies of the parent
and subsidiary company:
The accounting policies too are considered differently under
both the frameworks and are dealt with by different ways. The process of the
operations with the different accounting policies are dealt as follows:
US GAAP and Difference between
IFRS and GAAP
The US GAPP does not require companies to have same
accounting policies. The companies with having different accounting policies
are able to consolidate the financial statements and it is allowed to do this.
IFRS and Difference between IFRS
and GAAP
Under IFRS different companies whose financial statements
will be consolidated are required to have same accounting policies so that the
financial statements are consolidated. We can say that IFRS is more curios here
because of the uncertain activities that could take place due to change of
accounting policies. As there is no flexibility in the IFRS there will be lower
room for the uncertainties that could take place due to error or by self. In
the GAAP consolidation this may create problems for the company in different
areas.
Changes in ownership control without
the loss of control:
US GAAP and Difference between
IFRS and GAAP
Under the GAAP framework, when a company lowers its interest
in the subsidiary company but not has lost its control over its subsidiary, then
minimal or no loss and gain are identified in this case when 1) nonprofit
activity or business is concerned with the subsidiary or 2) nonprofit activity
or the business is not concerned with the subsidiary.
IFRS and Difference between IFRS
and GAAP
Similar to the GAAP, unless these guidelines are applied to almost
all subsidiaries along with all nonprofit or non-business activities and also
those that include gas and oil mineral rights’ conveyance and real estate in
substance
PART 2
Real case acquisition and its
financial overview:
One of the most recent acquisitions that happened and was
major activity in the recent times is the Shazam acquisition by Apple Inc. The
news about the acquisition started in the tail of 2017 and finally happened in
the September 2018. The acquisition of the Shazam Company by the Apple Inc. was
considered as the big announcement because of the extending of the music market
by the Apple Company. However there were two companies involved in the major
purchase of a company. The smart technology giant Apple Inc. and the music
service provider Shazam. A brief introduction of both of them is presented
below:
Apple Incorporation and
Difference between IFRS and GAAP
Apple Incorporation is a multinational technology provider
company which designs, develops and sell the consumer electronics, computers,
smart phones, I pods, I pads, smart watches, watches and other electronic
products throughout the world. Other than these multiple products the Apple
Inc. has been providing the software service in its products which include Mac
operating system, Web browser Safari, media player iTunes, and operating system
OS, productive activities and other latest programs. Its online programs
include iCloud, Mac app store, IOS app store and other services.
Apple was founded in 1976 by Steve Jobs and his fellows and
the company was later incorporated in 1977. After a few years, Steve Jobs and
his fellows hired computer design experts and started a production line. Apple
was made public in 1980 and achieves high financial success. They then started
the sale of the products around, but I did not go much because of separation of
the owners. However the Steve Jobs made another company with the same employees
called neXT. This company due to financial problems did not perform well and
after the purchase of NeXT by a director called the Jobs back. After the financial difficulties were gone,
they purchased multiple companies in order to spread the portfolio of the
company.
Apple is well known for its revenue and growth. Apple is the
largest technological company with respect to the revenue which recorded a
total of 265 billion dollars in 2018 and is considered as the third largest Smartphone
manufactures in the world. It was the first public company in 2018 that was
valued at more than one trillion dollars. It has employed more than 123000
employees and has 524 retail stores in 28 countries as of financial year 2018.
Shazam:
Shazam is an application established by Shazam entertainment
Ltd. It is an application over the online smartphones app stores that provide
the music, movies, advertisements and the online televisions shows. In
September 2018 the application was purchased by the Apple Inc. and can be
accessed on IOS store, android store and the windows. Shazam was developed in
1999 and has been operating till now. In 2013 its CEO claimed that Shazam has
been now one of the top ten most used apps in the world. In 2014 the company
has claimed to have more than 100 million active users within a month and is
installed on more than 500 million mobile devices. In 2014 it has achieved a
major milestone of identifying more than 15 billion songs on its application.
In late 2017, Apple announced that they will be acquiring
the Shazam Company for 400 million dollars or 300 million pounds. The European
commission started investigating the purchase. The European commission
investigated the whole scenario in September 2018 later in this month the
acquisition was announced and completed.
To grow its market and spread itself over the area it
started partnerships with other established entities and hence Shazam
established its first partnership with Entertainment UK. Shazam approached the
Entertainment UK to increase their database of more than 1.8 million songs.
As the user base of the Shazam Company increased throughout
the world, they needed to improve and update the storage of the songs they
have. In 2013 a partnership with Beat Port was established which added the
electronic bunch of music to the interface of the Shazam Application. Later it
added to its storage of the music further million songs when it added an Indian
storage and supplier of songs called Saavn. In 2014 it established a program in
which the users could access the some of the televisions broadcast. Further the
Shazam added with itself the radio stations in which the users can access these
radio channels. (Shazam.com, 2018)
Process and reasons to buy Shazam:
It is a general perception all over the world that the purchase
of different companies diversifies the risk of the company and reduces the
risks it faces by doing single operational business. This along with other
incentives has added a lot to the Apple Inc. incentives to buy the Shazam Ltd.
As Apple Inc. had already entered in this area, they wanted to buy the music
service providers giant player Shazam Ltd. According to the experts the process
and the reasons by which the Shazam Ltd was purchased are as follows:
As the Apple is a big company and want to increase the wealth
of the shareholders along with to diversify them, they wanted to purchase the
Shazam App because it had 20 million users in a single day. Other than that
without the app downloading revenue the Shazam Company is making revenues by
making ads and by referring the links to the users to download songs and other
apps etc.
The process, by which the Shazam Company was purchased, was
like that the Apple tipped off the information in December 2017 that they were
buying the Shazam Company. This was really raised up by the public and the
European Commission wanted to investigate the case as if the acquisition was
fair and according to the rules. In the start of the September of 2018, the
European Commission announced that there is nothing wrong with the acquisition
process of the Shazam Company and in the end of September 2018; the Apple Inc.
announced the purchase of Shazam Company.
According to experts the Apple Inc. is not a type of
acquirer organization, a question arises why they had purchased a 400 million
dollars company. According to Thomson Reuters the Shazam Company is its 5th
acquisition in this year while as a whole it is 68th acquisition, so what made
the Apple make to purchase the Shazam Company. The following are the reasons
why the Apple Inc. has purchased the Shazam Company.
Loyal users and Difference
between IFRS and GAAP
Shazam has maintained a serious customer base and their
loyalty is respected by providing quality service. According to the Shazam
representatives the application of Shazam has been downloaded more than one
billion times and there are active users of more than 120 million who use the
application more than 20 million times a day. According to the Apple Inc. this
loyalty could add value to their own service of Apple Music.
Recurring Revenue and Difference
between IFRS and GAAP
The Shazam Application has continues revenue earned by the
ads displayed by the app on the screen of the user. These ads also generate
revenue for the Shazam Company when the ad is clicked by the user. Other than
that the Shazam App recommends the other music applications for certain songs
for example the Apple music, Shopify or the song can be downloaded from the
iTunes. The idea of the earning revenue and the process is that when a song is
suggested by the Shazam or the user selects a certain song, the user is
directed to the most suitable platform of the song for example Apple Music, Shopify
or downloaded from iTunes.
With its large user base of millions there is available with
the Shazam a large amount of data. This data includes the choice of the public
and is analyzed as where the market or the public’s choice is moving. This data
can be used by the artists, movie makers, singers and other users of the data
as to assess the choice of the public and then work on the kind of songs that
will attract the public to the music of their choice.
Intellectual property and
Difference between IFRS and GAAP
Shazam Company has been facing high competitions from its
major competitors for example the QQ China Music and the Sound Hound etc. but
the Shazam Company has got about 200 patents about its audio recognition and
technology.
The technological development of the Shazam Application is
up to the extent that it can analyze the environment and then suggest different
movies based on it. Sometimes it can scan the posters of the movies and then
suggest the background or primary music.
So this technology that the Shazam Company had received
throughout its life will be received by the Apple Inc. and more interestingly
it will be a readymade business which will match to the technological abilities
of the Apple Inc.
The different Apple Applications that are operating already
can be merged with the Shazam and hence can take the app to its next
achievements. According to CNBC, they have approached to the representatives of
the Apple Company to have comments about the Shazam App but they said they were
not available for the comment now.
Financials of the Shazam and Apple
Inc. after and before the acquisition:
The purchase of the Shazam Company must have added value to
both the Shazam and the Apple Inc. for example we could say that the investors
of the Shazam Application had to get returns over their investments, and after
the acquisition of the Shazam the investors would have received a lump sum
amount. This is the case that the Shazam’s investors must have enjoyed. On the
other side the Apple Inc. the technological giant has added another source of
technology to their portfolio and will hence develop their area of online music
service. Other financial results that the Apple Inc. has got by the purchase of
the Shazam Co.
As there exist an incentive for the Apple Inc. to earn more
money and increase its revenue by the Shazam App they have announced that they
are going to make the App ad free. For example there would be no revenue earned
by the Apple Co by the ads. This is one of the financial aspects for the Apple
Co that they will have to give up.
According to the resources the Shazam Company was purchased
for 400 million dollars. According to the sources, the purchase was large for
the company. There is another financial affect over the company for example the
400 million cash got out of the hands of the Apple Co. while on the other hand,
the company will be making high returns, reducing their risks and the share
price hiking up which will gain high capital gains for the investors of the
company and hence increasing the value of the company. These are the most
important financial considerations that the intellectual public will be
considering.
Although the company has more than billion downloads but
still the Shazam Company has never turned the loss into the profit. In
September 2017 the financial statements of the fiscal year 2016 were issued in
which they have reportedly made revenues of about 54 million dollars. It made a
loss of 4 million Pounds in 2016 however it was much lower than the losses made
in the 2015 which were reported as about 16.6 million Pounds.
The Apple Inc. has been doing really good in terms of
financial performance for the company and its investors. According to the
financial experts the Apple Inc. has been doing really well for the growth of
the company and increasing its music service subscribers. According to
forecasts and graphs the company has been achieving a growth of one million per
month. As of September 2017 the Apple Inc. has reported thirty million
subscribers.
The company has been
doing efforts to perform well in terms of the revenue and to add value to the
investors. They have been planning
already to charge 4.99 dollars per month to students, 9.99 dollars per month to
the individuals and the 14.99 dollars per month to the families. If they
succeeded in this aim they will be making billions of revenues.
References of Difference between IFRS and GAAP
Europa.eu.
(2004). CASE M.8788 – APPLE / SHAZAM. 2017.
ey.com. (2018, February 23). US GAAP vs. IFRS: The Basics.
Retrieved from https://www.ey.com/ul/en/accountinglink/publications-library-us-gaap-vs--ifrs--the-basics
Iasplus.com. (2017). International Financial Reporting
Standards. Retrieved from https://www.iasplus.com/en/standards
Ifrs.org. (2017). Conceptual Framework for Financial
Reporting. Retrieved from
https://www.ifrs.org/issued-standards/list-of-standards/conceptual-framework/
Ifrs.org. (2018). Required IFRS Standards 2018—new books
available. Retrieved from
https://www.ifrs.org/news-and-events/2018/01/new-required-ifrs-standards-books/
JOHN, T. K. (2018). Strategic Analysis of Apple Inc.
Retrieved from
https://www.scribd.com/doc/57894180/Strategic-Analysis-of-Apple-Inc
Rsmus.com. (2014). U.S. GAAP VS. IFRS: CONSOLIDATIONS AT-A-GLANCE.
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