Corporate valuation Essay

On Wednesday, February 24, 2010 the SEC reiterated its support for International Financial Reporting Standards (IFRS), this was conditional upon the accomplishment of a number of milestones. The SEC staff had developed a comprehensive work plan that would help to keep the process moving forward. Including Fiat,more and more huge cooperations are adopting IFRS accounting policies since 2000,not only because it makes more transparency in statements,but it tenses or looses the strict that enhance the efficiency and accuracy of accounting. 1. What are Fiat’s key accounting policies? Which of Fiat’s key accounting policies are affected by the adoption of IFRS? In accordance with the case, the Italy-based Fiat Group’s revenues were mainly generated from the production and sales of passenger vehicles (including large-volume brands and luxury, high-margin brands), tractors, agricultural equipments, and light commercial vehicles. The Group’s main operations was manufacturing cars which needed as many new models, technologies, creativity, and innovations as possible. Consequently, it could be seen easily that the Fiat Group had almost relied on its Research and Development (R&D) activities. Additionally, sales were also a very important activity in every organization, so the Fiat Group was not an exception. Therefore, applying new accounting policy for revenue recognition to show that the Group’s profit was favorable was very vital. The Fiat Group first-time adopted IFRS and the reporting d ate of its first IFRS statement was December 31, 2005. After changing to IFRS, R&D costs were affected the most. Under Italian GAAP, R&D costs incurred were capitalized or charged to operating expenses. For the Fiat Group, it has primarily expensed its R&D costs when they were incurred. Under IFRS, the Group has capitalized development costs in some parts such as the Fiat Auto, Ferrari-Maserati, Agricultural and Construction Equipment, Commercial Vehicle and Components Sectors. The next accounting policy influenced by the first-time adoption of IFRS was revenue recognition – sales with a buy-back commitment. Under IAS 18, sales with a buy-back commitment do not reach the requirements for revenue recognition due to risks and rewards of ownership are not transferred to the buyers. In result, this kind of sales is recorded as an operating lease transaction instead of revenues under Italian GAAP. Last but not least, sales of receivables also were impacted. All receivables through securitization and factoring transactions (with or without recourse) had been derecognized under Italian GAAP while all securitization transactions have been reversed under IFRS and all portfolios sold w ith recourse or without recourse have been reinstated in the IFRS balance sheet. Unlike U.S. GAAP rule-based standards, IFRS standards tend to be principle-based. Typically, rule-based standards are easily applied and enforced when compared to principle-based standards, however, along with rules, come exceptions. Exceptions to the rule-based standards of US GAAP add a level of complexity that often results in application issues. The move towards IFRS principle-based standards, accounts for exceptions to the rules by allowing judgment to exist when applying the standards to a company’s financials. Conversely, US GAAP encourages companies to comply with set laws anddiscourages evaluating the economic substance of a company’s activities The differences between Fiat’s key accounting methods under GAAP and those under IFRS. 1.Substance over form. Example, Recognition of revenue:to recognize revenues of long-term contracts,IFRS does not allow the Recognition from relative subjects but does accept to value it by contract cost. 2.Less flexibility Example: Recognition of R&D cost:GAPP views them as expense,and IFRS acknowledges researching cost as expense as well,but developing cost can be stated as expense or capitalize cost under IFRS,after its feasibility is confirmed. 3.More transparent Example: Income tax paid: CFO takes all the income tax paid obligation under GAAP,while CFO only states operating tax paid obligation,CFF and CFI states capitalizing one and investment one respectively. 4.Retrospective application of the new standards to opening equity as of January 1, 2004 to properly establish IFRS based data What characterizes the differences between the two sets of methods On Wednesday, February 24, 2010 the SEC reiterated its support for International Financial Reporting Standards (IFRS), this is conditional upon the accomplishment of a number of milestones. The SEC staff has developed a comprehensive work plan that will help to keep the process moving forward. The staff will regularly report progress to commissioners and a decision will be made in 2011 as to whether or not IFRS will be incorporated into the U.S. financial reporting system. There are many differences between Italian GAAP and IFRS. 1.Fair value in barter transaction GAAP admits the fair value in barter transaction which is similar to history transactions,IFRS also requires new trade to be similar to history ones but recognizes the fair value as the value in non-barter transactions. 2.Monitor interest It can be viewed as liabilities or equity or mezzanine section Under GAAP,but under IFRS it is illegal unless it is equity. 3.Comprehensive Income It is included in net income under GAPP,but under IFRS it is got rid of. 4.Dividend Received/Dividend Paid Dividend received is included in CFO statement,while dividend paid is included in CFF statement under GAAP,but under IFRS,they two can be allocated in both of CFO and CFF. 5.Upward revaluation(for fixed assets and intangible assets) GAAP does not allow this action but IFRS does. 6.Employee benefits-post employment & long-term Under GAAP,they are kinds of operating expense and actuarial gains and losses deferred and partially amortized over time.Under IFRS,related interest cost is classified in interest expense. 7.Goodwill The period of amortization of goodwill should not exceeding 20 years under GAAP.But under IFRS,goodwill cannot be amortized at all. 8.Sold receivables Under GAAP,it is typically off balance sheet,while it is typically reinstated under IFRS. 9.Start-up and similar charges They are deffered and amortized under GAAP,but are typically reinstated under IFRS. 10.Scope of consolidation Fiat Auto stakes in share parts business is accounted for under equity method under GAAP,while under IFRS,it is consolidated on a line by line basis, Unlike Italian GAAP rule-based standards,IFRS standards tend to be principle-based. Typically, rule-based standards are easily applied and enforced when compared to principle-based standards, however, along with rules, come exceptions. Exceptions to the rule-based standards of US GAAP add a level of complexity that often results in application issues. The move towards IFRS principle-based standards, accounts for exceptions to the rules by allowing judgment to exist when applying the standards to a company’s financials. Conversely, US GAAP encourages companies to comply with set laws anddiscourages evaluating the economic substance of a company’s activities. The trend towards IFRS has evolved around a widespread agreement to synchronize accounting standards internationally. The ultimate goal is to reduce costs for multi-national corporations, and to allow investors to make valid comparisons between companies across the world. Users of financial statements have pushed for the development of global standards that provide more consistent and comparable reporting worldwide. From the perspective of a minority investor in the company shares,I would like to choose IFRS because: Under IFRS minority investors can gain better information IFRS provides more transparent information of company’s management and transaction ,as a consequence minority investors’ confidence enhanced by Fiat’s transparent disclosure thus it leads positive expectation from market Adoption of IFRS is an international trend, competitors such as Peugeot and Volkswagen adopted IFRS. Investor can better understanding both Fiat and its competitors performance The trend towards IFRS has evolved around a widespread agreement to synchronize accounting standards internationally. The ultimate goal is to reduce costs for multi-national corporations, and to allow investors to make valid comparisons between companies across the world. Users of financial statements have pushed for the development of global standards that provide more consistent and comparable reporting worldwide. Summarize the main factors that affect management’s reporting incentives and strategy in fiscal year 2005,which factors might reduce management’s incentive to fully comply with the IFRS? In this part, we would like to conclude what are the main factors that influenced the management incentives and strategy in fiscal year 2005. Under IFRS, FIAT results would be consistent with market standards and they would be more comparable with its competitors from automotive industry. Financial position that was used in the past differs from the IFRS one, because it did not take into consideration financial receivables. Therefore, results, as well as many ratios were different in past. There is also the fact, that many investors did not invest into Fiat because they do not understand to Italian GAAP so much and therefore this investment would involve too much risk. IFRS are able to value the company better than GAAP and there is less space for influencing the financial results. That is also the fact, why IFRS are more beneficial for smaller investors. According to the law, there was a necessity to switch to IFRS but there was not necessity to fully comply with them. Under IFRS, many of financial data are changed. Elimination of goodwill amortisation is able to generate 0,2 billion EUR impact. The goodwill is not longer amortised. There should also be benefit of 0,3 billion EUR from recognition of gains and approximately 0,1 billion gain from impact of development costs. The whole impact therefore creates 0,6 billion euros. Under IFRS, there is different rules connect to selling of products. In connection to that there is the change in equity, which reduced by 0,5 billion Euros. On the other hand, it also increased the debt by 0,8 billion euros. IFRS allow having in consolidated statements only activities that are directly connected to the core business. This is one of the major changes. The company needs to prove, that they are healthy and that the have met or exceeded all their targets. Switching to IFRS could help them with emphasise their good data and performance and increase their value in eyes of investors as well as in eyes of potential creditors.