Good Example Of Understanding Balance Sheets Essay

Differences in approach to valuation by US GAAP and IFRS

There are several differences in approaches to valuation between US GAAP and IFRS. The general frameworks differ in that US GAAP is known to be a “rule based” system, while IFRS is known to be “principle based” and thus more flexible. With regards to the balance sheet, differences include the order of section, the treatment of inventories, and write-downs among others. Firstly, the way inventories can be measured differ, because US GAAP allows inventories to be measured using FIFO (First-in First-Out) or LIFO (Last-in First-Out) methods, while IFRS only allows the FIFO method. Secondly, inventory write-downs are definitive under US GAAP (this is rule-based) while IFRS allows reversals under certain conditions (this is principle-based). Thirdly, the order of display varies as current assets and liabilities are displayed before long-term assets and liabilities under US GAAP (going from most liquid to least liquid) while IFRS usually shows non-current assets and liabilities before current assets and liabilities (see PWC, 2014).

Distinction between an expense (expired cost) and an asset

Expenses (expired cost) and assets are both uses of funds for companies, but they differ materially. An asset is a resource acquired by a firm from which the owner can expect probable future economic benefit. An expense on the other hand represents a cost incurred by the business to generate revenues. Assets are listed on the balance sheet while expenses are shown on the income statement.

Distinction between current and long-term assets

Current and long-term assets differ in their expected lifespan (i.e. liquidity). Current assets are assets that can be turned into cash or cash equivalents within one year. Long-term assets are thus assets that either cannot be turned into cash equivalents within a year, either are expected to be held by the firm for a period longer than a year. Note that this is the case under both IFRS and US GAAP. Typically, current assets include cash and cash equivalents, inventories, trade receivables and other current assets. Non-current assets typically include property, plant and equipment (PP&E), deferred tax assets, long-term financial assets, etc.

Distinction between current and long-term liabilities

Similarly to the difference between current and long-term assets, the difference between current and long-term liabilities is liquidity. Current liabilities are liabilities expected to be paid within a year, while long-term liabilities are expected to be paid in more than a year. As with assets this treatment is similar under both US GAAP and IFRS. Current liabilities typically include short-term debt, trade payables, etc. Long-term liabilities typically include long-term debt, pension provisions, and any other long-term claim on the business.

Review of Apple’s balance sheet

The last available balance sheet of Apple is dated September 27, 2014. At this time, the firm had total assets of $231.8 billion and total liabilities of $120.3 billion. These are further decomposed into $68.5 billion current assets, $163.3 billion long-term assets, $63.4 current liabilities and $56.8 long-term liabilities. Apple’s current assets are composed of the traditional items (cash and cash equivalents, inventories and accounts receivables) but they also include short-term marketable securities in the amount of $11.2 billion and deferred tax assets in the amount of $4.3 billion. Apple’s long-term assets include property plant and equipment, but also long-term marketable securities, goodwill and acquired intangible assets. Goodwill and acquired intangible assets amount to $4.7 billion, which is normal for Apple considering the firm holds a lot of intellectual property and patents, and made several acquisitions. Looking at the liabilities, we can see that short-term liabilities include accounts payable, commercial paper, deferred revenues and accrued expenses. Accrued expenses amount to $18.5 billion and represents expenses already incurred and to be paid in the near future such as wages, taxes, interests, etc. Long-term liabilities include the non-current portion of deferred revenue, long-term debt and other non-current liabilities. Long-term deferred revenues of $3 billion refers to a service for which the cash has been received but for which the company still needs to deliver the product or service. It is thus held as a liability until the service is provided (see Apple, 2014).

Discussion of retained earnings

Retained earnings of Apple on September 27, 2014 are $87.1 billion, down from $104.3 billion on September 28, 2013. Retained earnings represents the earnings the business did not use to pay dividends or debt and retained for future opportunities. The retained earnings in a given year – all else equal - will be equal to the retained earnings of the previous year, plus the net income earned during the year, minus the dividends paid out to the shareholders during this year. In our case, we know that for the year ended September 27, 2014 Apple generated a positive net profit of $39.5 billion. Therefore, the $17.2 billion decrease in retained earnings between 2013 and 2014 must come cash being redistributed to shareholders, and Apple does this both with dividends and share buybacks.

Differences between Apple’s and Samsung’s balance sheets

Apple and Samsung’s balance sheet differ in many ways. Firstly, the most obvious difference is that the reporting currency and the reporting date differ. Samsung, being a Korean company, reports both in US dollars and Korean won, while Apple only reports in dollars. Samsung’s balance sheet gives the financial position of the firm at December 31, 2014 while Apple’s financial position is given at September 27, 2014. Secondly, when looking at assets we see that Samsung reports a line named “Associates and joint-ventures” of $4.9 billion in its long-term assets while Apple does not. This highlights differences in the two firms’ business models. Thirdly, Samsung reports prepaid expenses in both its current and long-term assets segments, while Apple does not. When looking at liabilities, we can see that Samsung reports net defined benefit liabilities of $191.2 million while Apple does not, which shows differences in the employees’ retirement benefits at the two companies (Samsung, 2015).

Debt profiles of Apple and Samsung

Apple’s total liabilities were $120.3 billion as of September 27, 2014, while Samsung’s total liabilities were $59.2 billion as of December 31, 2014. Thus we can infer that Apple has more debt in absolute terms, although a few caveats must be raised. First, we do not compare the debt held by the two firms at the same date, because of reporting differences. Second, we compare the absolute value of the debt, but Apple having more debt than Samsung is not necessarily a problem per se – for this one should compare the debt to the equity (i.e. a debt/equity ratio).

Conclusion on relative sizes of both companies

The total assets off Apple are $231.8 billion, while the total assets of Samsung are $218.9 billion. Therefore, Apple is bigger than Samsung, because the company controls more valuable assets. These assets belong to both the stockholders and debtholders of the business.

References

Apple Inc. Form 10-K. (2014). Retrieved March 29, 2015, from http://files.shareholder.com/downloads/AAPL/4165053516x0x789040/ED3853DA-2E3F-448D-ADB4-34816C375F5D/2014_Form_10_K_As_Filed.PDF
PWC. (2014, October). IFRS and US GAAP: Similarities and differences. Retrieved March 29, 2015, from http://www.pwc.com/en_US/us/issues/ifrs-reporting/publications/assets/ifrs-and-us-gaap-similarities-and-differences-2014.pdf
Samsung Consolidated Statements of Financial Position. (2015). Retrieved March 29, 2015, fromhttp://www.samsung.com/us/aboutsamsung/investor_relations/financial_information/downloads/2014/2014_con_quarter04_bs.pdf