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Convergence between US GAAP and IFRS

In an economic system recession, good investing is extremely valued more than of all time. In this paper, I wrote a study on investing options for the investor wishing to put for maximal capital grasp in the long tally. I chose Tesco and Wal-Mart, which are listed severally on London Stock Exchange and New York Stock Exchange. I have done some analysis demoing the ground why Tesco and Wal-Mart are deserving puting. Besides, the two companies report under different accounting criterions. The illustrations of the impact of different sets of criterions are shown in this paper. Finally, the force per unit area of the convergence of IFRS and US GAAP are discussed.


To: Potential Investors

From: Investing Adviser

Subject: Investing advice


Dear Sir or Madam, this study has been written at your petition to urge investing options. In your petition, I understand that you are looking for maximal capital growing in the long tally. For that affair, I suggest that we should see puting in cardinal industries. My advice would be to put in retailing concern, exactly in Tesco or Wal-Mart. I base my recommendation on the undermentioned grounds.

Unlike other industries, particularly IT and import-export industries, Tesco and Wal-Mart did non see sudden and monolithic swing in net incomes or stock monetary value in the economic crisis. As a affair of fact, both companies maintained steady addition in group gross revenues from 2007 to 2009. For investors who are looking for long-run investing, companies with steady public presentation would be a good pick.

Tesco is the figure one retail merchant in the UK and one of the top 3 retail merchants in the universe. Wal-Mart has been the figure one retail merchant in the universe for a long clip. The long-established repute of both companies provides investors confidence that their investing will be in good manus, therefore the lower bureau costs.

In the worst yearss of the recession, both Tesco and Wal-Mart maintained a steady growing.

Based on the above grounds, I recommend the investing in Tesco and Wal-Mart. The following are analysis of the two companies.

Current place and state of affairs of the companies

Before we enter into more specific fiscal figure analysis, I would wish to pull your attending to the overall place of the two companies. The information is abstracted from the 2009 one-year studies of Tesco and Wal-Mart.


Current Position and Corporate Strategy

Tesco plc is a UK-based international food market and general selling retail concatenation. It is the largest British retail merchant by both globalsales and domestic market portion, with net incomes transcending ?3A billion in 2009. It is presently the 3rd largest planetary retail merchant based on gross, behind Wal-Mart and France ‘s Carrefour, but second largest based on net income, in front of Carrefour. Originally specialising in nutrient and drink, it has diversified into countries such as vesture, consumer electronics, fiscal services, telecoms, place, wellness and auto insurance, dental programs, retailing and leasing DVDs, CDs, music downloads, Internet services and package. Harmonizing to Citigroup retail analyst David McCarthy, “ Tesco has pulled off a fast one that I ‘m non cognizant of any other retail merchant accomplishing. That is to appeal to all sections of the market ” . One board of this scheme has been Tesco ‘s usage of its own-brand merchandises, including the up-market “ Finest ” , mid-range Tesco trade name and low-price “ Value ” embracing several merchandise classs such as nutrient, drink, place, vesture, Tesco Mobile and fiscal services.

Operationss: International Dimension

Besides its ruling operations in the UK, Tesco expand its concern to an international dimension. Tesco ‘s international enlargement scheme has responded to the demand to be sensitive to local outlooks in other states by come ining into joint ventures with local spouses, such as Samsung Group in South Korea ( Samsung-Tesco Home asset ) , and Charoen Pokphand in Thailand ( Tesco Lotus ) , naming a really high proportion of local forces to direction places. It besides makes little acquisitions as portion of its scheme.

Domestic Market Share ( Since both companies are listed on several domestic exchange, here we focus on domestic market portion )

Harmonizing to TNS Worldpanel, Tesco ‘s portion of the UK food market market in the 12 hebdomads to 30 November 2008 was 30.9 % , up 4.3 % on 12 hebdomads to 2 December 2007. Across all classs, over ?1 in every ?7 ( 14.3 % ) of UK retail gross revenues is spent at Tesco. Tesco besides operates abroad, and non-UK gross for the twelvemonth to 24 February 2007 was up 18 % on 25 February 2006.


Current Position and Corporate Strategy

Wal-Mart Stores, Inc. is an American public corporation that runs a concatenation of big, price reduction section shops. It is the universe ‘s largest public corporation by gross, harmonizing to the 2008 Fortune Global 500. Wal-Mart is the largest private employer and the largest food market retail merchant in the United States. Wal-Mart ‘s concern theoretical account is based on selling a broad assortment of general ware at “ ever low monetary values ” . Unlike many other retail merchants, Wal-Mart does non bear down a slotting fee to providers for their merchandises to look in the shop. Alternatively, it focuses on selling more popular merchandises and frequently pressures shop directors to drop unpopular merchandises, every bit good as inquiring makers to provide more popular merchandises.


Wal-Mart ‘s operations are organized into three divisions: Wal-Mart Stores U.S. , Sam ‘s Club, and Wal-Mart International. Wal-Mart ‘s international operations presently comprise 2,980 shops in 14 states outside the United States. Harmonizing to Wal-Mart ‘s 2006 Annual Report, the International division accounted for about 20.1 % of gross revenues.

Domestic Market Share

Harmonizing to Craig Johnson, president of the confer withing house Customer Growth Partners, appraisal is that since January 2009, Wal-Mart ‘s portion of the $ 3 trillion U.S. retail market has edged up to 11.3 % , compared with 10.5 % during the same period in 2008.

Fiscal Analysis on Strengths and Weaknesses

Fiscal Statement Analysis

Using information available from the one-year studies of the two companies from 2007 to 2009, I conducted fiscal statement analysis. The analysis chiefly focuses on the fiscal strengths and failings of the two companies, and on the comparing of public presentation.


Profitableness: 2007 2008 2009

Gross Profit Margin 8.1 % 7.7 % 7.8 %

Operating Net income Margin 6.2 % 5.9 % 5.9 %

Net Net income Margin 4.5 % 4.5 % 4.0 %

Asset Turnover 171.9 times 156.8 times 118.0 times

ROCE 11.6 % 10.1 % 7.5 %

ROE 24.1 % 23.9 % 24.1 %


Current Ratio 56.1 % 61.4 % 77.9 %

Quick Ratio 32.4 % 37.7 % 63.1 %

Inventory Turnover Days 17.9 yearss 20.3 yearss 19.4 yearss

Gearing Ratio 36.5 % 40.2 % 53.6 %

Interest Cover 13.3 times 12.2 times 7.2 times


EPS 23.31p 26.61p 27.31p

Dividend Cover 5.45 times 3.58 times 3.53 times

Note: Gearing is calculated utilizing long-run debt/shareholders ‘ financess + long-run debt

From the tabular array, we can see that profitableness has experienced little reverse, though non serious plenty to endanger Tesco ‘s traveling concern. As a affair of fact, due to the economic crisis, all industries experienced dropping of net income. Although there is reverse, Tesco managed to keep the graduated table of the reverse in the minimal degree. Comparing to the mean informations, Tesco has outperformed bulk of retailing industry. Tesco operates with quite an efficiency using the assets. The current ratio and speedy ratio increased during the last three old ages. Inventory might non be a major driver of the addition. The lessening of histories collectible is the chief ground behind it. A sensible account is that providers were seeking to better their ain hard currency flow against the economic crisis, Tesco was forced to pay the providers sooner than it used to. Gearing ratio has increased materially. As this would take to alterations in the capital construction, higher geartrain could intend higher hazards ( it is non needfully bad ) . We should reexamine this ratio subsequently with more item. Regardless of the little dropping of the public presentation ratios, Tesco maintained a steady increasing EPS. It is a mark of a healthy company.


Profitableness: 2007 2008 2009

Gross Profit Margin 5.9 % 5.8 % 5.6 %

Net Net income Margin 3.2 % 3.4 % 3.3 %

Asset Turnover 230.6 times 231.7 times 248.2 times

ROCE 13.6 % 13.5 % 13.9 %

ROE 20.5 % 20.6 % 21.1 %


Current Ratio 90.1 % 82.1 % 88.4 %

Quick Ratio 25.5 % 21.2 % 26.1 %

Inventory Turnover Days 46.5 yearss 44.8 yearss 41.1 yearss

Gearing Ratio 38.1 % 38.5 % 39.6 %

Interest Cover 11.3 times 10.5 times 10.4 times


EPS $ 2.71 $ 3.13 $ 3.39

Dividend Cover 4.0 times 3.6 times 3.6 times

Wal-Mart has a comparatively lower gross net income border and net net income border comparing to Tesco. This might due to the graduated table of international operation. Wal-Mart is exposed more than Tesco, therefore the larger volatility. However, Wal-Mart is more efficient in making value utilizing assets. This is due to the same ground ; bigger graduated table means non merely larger volatility, but besides efficiency, every bit known as economic system of graduated table. Comparing to Tesco, Wal-Mart has a much longer stock list turnover yearss, and Wal-Mart has an obvious difference between current ratio and speedy ratio. It suggests that Wal-Mart has comparatively larger stock list in stock. Give the size of Wal-Mart and its “ ever low monetary values ” and “ salvage money, live better ” scheme, a larger stock list can be anticipated. However, using engineering in stock list direction can assist cut down stock cost. There is grounds demoing that both Tesco and Wal-Mart have dedicated to heighten supply-chain direction as it will take to better efficiency and lower costs. Wal-Mart besides maintains a steady addition in EPS. We can anticipate that such companies will hold a uninterrupted public presentation in the stock market.

Market perceptual experience


Harmonizing to the Guardian, “ Tesco has defied the economic somberness and beaten City prognosiss by posting record net incomes of more than ?3bn in the last fiscal twelvemonth. ” The analysts from Reuters suggest that keeping Tesco ‘s portions is a good thought. The undermentioned chart is the monetary value fluctuation in the last three months.

As Tesco had a gross revenues growing of 8 % during the Christmas in 2009, there is a encouragement to the monetary value. And the significance does non halt here. The large sale of Christmas has injected abundant hard currency resources for Tesco to mobilise in 2010. It can be anticipated that Tesco will go on to hold a steady public presentation in the stock market.


Wal-Mart has a long-established repute in the good public presentation in stock market. Even though the economic recession has caused terrible jobs to private and public companies, Wal-Mart did non look to be affected every bit much as other companies were. The monetary value of Wal-Mart portions was about changeless in the worst yearss of the crisis. The stock monetary value public presentation suggests that Wal-Mart is a good stock for trading.

Differences of IFRS between US GAAP and their impact on fiscal studies

Tesco studies under International Financial Reporting Standards ( IFRS ) , while Wal-Mart studies under US General Accepted Accounting Principles ( GAAP ) . The two sets of fiscal coverage criterions have similarities every bit good as differences. Application of different accounting criterions would decidedly impact the accounting figures looking on the one-year studies. I will place several major differences that have material impact on the accounting consequences for retailing concern.


Inventory is an of import facet in the fiscal studies of retailing concerns. It will hold a direct impact on cost of gross revenues, shuting stock list balance, operating net income, etc. In the 2009 one-year studies, Tesco stated that leaden mean cost footing was used, and Wal-Mart stated that last-in, first-out ( LIFO ) was used for well all Wal-Mart US section ‘s ware stock lists. In IFRS, LIFO is prohibited. But in US GAAP, it is permitted.

Using LIFO or non could do material difference. In an economic system where trade good monetary value supports lifting, utilizing LIFO would increase cost of gross revenues because last-in stock list which has a higher purchase monetary value is first used. Besides, runing net income will increase because the forms of purchase and sale monetary values are non matched.

Research & A ; Development Costss

Both Tesco and Wal-Mart operate on a scheme ; besides merchandises of providers ‘ , they both have own-label trade names for sale. Own-label trade names would affect research & A ; development costs. IFRS regulations that research costs are expensed as incurred while development costs can be capitalized if certain standards are met. GAAP, nevertheless, has a more prudent intervention under which research costs and development costs are expensed as incurred. To Tesco, capitalized development costs are amortized every accounting period alternatively of traveling done disbursal as a whole. And to Wal-Mart, research and development costs are expensed as incurred. This difference in intervention could impact the operating net income. Because amortising the intangible plus sporadically alternatively of write offing the costs at one time could smooth the net income figure without doing large fluctuations.


Based on my analysis, I recommend Tesco and Wal-Mart as they will be a good pick for those of you who are looking for long-run investing.

Please do n’t waver to reach me if you have farther inquiries.

Presented by,

Meng Li

Convergence between US GAAP and IFRS

IFRS has been adopted and used by more and more states and corporations straight and indirectly. Since 2005, the European Union required the listed companies of its member provinces to follow IFRS in fixing fiscal studies. The large-scale acceptance of IFRS comes along with a great sum of chances for research and argument. While IFRS has been seting into consequence in a batch of states, the attempts of bridging the spread between US GAAP and IFRS are underway. The IASB and FASB have jointly undertaken a short-run undertaking to extinguish a assortment of differences between IFRS and US GAAP. This “ convergence undertaking ” grew out of an understanding reached by the two boards in September 2002. In November 2007, SEC abandoned a regulation that non-US companies listed in the US must fix rapprochement to set for the differences between IFRS and US GAAP. These attempts were welcomed by investors and professional service suppliers as the convergence between IFRS and US GAAP would heighten the comparison of difference companies ‘ public presentation and cut down the cost to oversee and scrutinize one-year studies. However, a batch of American listed companies do non react really positively towards the convergence. For a long clip, they have taken it for granted that IFRS is merely another version of US GAAP. Harmonizing to Frank Brod in 2004, the frailty president/CFO of Dow Chemical, “ the alleged retrospective application really is seting fiscal studies which would do investors cautious about the unity of fiscal statements ” .

It besides ignited intense arguments on the virtues and failings of convergence between IFRS and US GAAP in academe circles.

Expectations and Pressures

Lin & A ; Paananen ( 2008 ) compared the quality of fiscal information of German companies in three periods after acceptance of IAS ( 2000-2002 ) , IFRS ( 2003-2004 ) and IFRS ( 2005-2006 ) . In their findings, the value correlativity in the IFRS period between net incomes and book value of equity was non every bit singular as it in the IAS period, which indicated that in the IFRS period, net incomes direction was used more frequently and that companies were less likely to acknowledge losingss. These findings were used to dispute the feasibleness of IFRS. However, in the findings of Byard, Li, Y. , and Yu, Y. ( 2008 ) , it showed that finance analysts made fewer errors in their net incomes prognosiss and the truth was enhanced after the acceptance of IFRS by the European Union ( EU ) . Promisingly, the findings besides revealed that in a state where the original accounting criterions were diverse from IFRS and where the jurisprudence enforcement was strong, the errors made by finance analysts would be markedly lessened. In America, after the several ill-famed accounting dirts, Securities and Exchange Commission ( SEC ) and other regulators have worked towards more rigorous disposal of stock exchange. Besides, the US GAAP is rather different from IFRS in specific criterions as shown above in the study. For case, the method permitted for finding stock list cost is different. While the IFRS prohibits the usage of last-in first-out ( LIFO ) method, the US GAAP permits. Harmonizing to the findings of Byard, Li, Y. , and Yu, Y. ( 2008 ) , acceptance of IFRS in the US would be an betterment to the exchange market status. Before 2007, foreign companies that were listed in the US were required to fix a study to accommodate the difference between IFRS and US GAAP. On history of this background, Hughes, S.B. and Sander, J.F. ( 2008 ) , in their research, found that after the acceptance of IFRS by the EU, the difference of net net income between IFRS and GAAP and the difference of net net income between the original criterions and GAAP were non so different to the companies of EU ‘s member states which were listed in the US. This means that in the EU, to knowledgeable information users, the replacing of original accounting criterions by IFRS really works every bit good as earlier. These findings inject assurance into the convergence between IFRS and US GAAP.

Summary and Conclusion

Though the argument on the convergence will travel on, one thing is certain ; the tendency of universe economic system is towards the execution of unvarying fiscal coverage criterions. The convergence depends on a batch of factors including Torahs which can merely be adapted to by regulators. Therefore, the extent to which the convergence can be successful will be someway limited. Particularly after several accounting dirts, the IFRS which is a principles-based system might be excessively broad for the US which presently operates a rules-based system, e.g. the GAAP. Nevertheless, in order to bask the benefits of uniformity, it will be sensible to state that the US would utilize IFRS as a model and do specific accommodation to suit its current system. Under this circumstance, I believe that the convergence between IFRS and US GAAP will be successful in a foreseeable hereafter.