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the rules have been designed largely with the shareholder in mind. By contrast, in Germany
the focus of accounting standards is to verify that the creditors are properly protected.
Another difference is the way that taxes are shown in the income statement. For example,
in Germany taxes are paid on the published profits, and the depreciation method must there-
fore be approved by the revenue service. That is not the case in Anglo-Saxon countries, where
the numbers shown in the published accounts are generally not the basis for calculating the
company’s tax payments. For instance, the depreciation method used to calculate the pub-
lished profits usually differs from the depreciation method used by the tax authorities.
For investors and multinational companies these variations in accounting rules can be irk-
some. Accounting bodies have therefore been getting together to see whether they can iron out
some of the differences. It is not a simple task, as the nearby box illustrates.● ● ● ● ●
FINANCE IN PRACTICE
❱ Companies in the United States may shortly face the
biggest change to their accounting methods since Gen-
erally Accepted Accounting Principles (GAAP) were
introduced in the 1930s. The SEC is soon to decide
whether U.S. companies should be obliged to follow
International Financial Reporting Standards (IFRS)
rather than GAAP that companies currently use.
The International Financial Reporting Standards,
which are set by the London-based International
Accounting Standards Board (IASB), aim to harmonize
financial reporting around the world. They are the basis
for reporting throughout the European Union. Some
100 other countries, such as Australia, Canada, Brazil,
India, and China, have adopted them or plan to do so.
A shift from GAAP to IFRS would involve a major
change in the way that accountants in the United States
approach their task. IFRS tend to be “principles based,”
which means that there are no hard-and-fast codes to
follow. By contrast, in the United States GAAP are
accompanied by thousands of pages of prescriptive regu-
latory guidance and interpretations from auditors and
accounting groups. For example, more than 160 pieces of
authoritative literature relate to how and when companies
record revenue. This leaves less room for judgment, but
detailed rules rapidly become out of date and unscrupu-
lous companies have been able to structure transactions
so that they keep to the letter but not the spirit of the rules.
For some years the SEC has been working to bring
the country’s standards more in line with interna-
tional rules. To encourage foreign companies to list
in the United States, it has allowed foreign issuers to
use international standards. But a move to oblige U.S.
companies to adopt IFRS would be a more costly and
longer-term project. It is, however, supported by many
large U.S. multinationals, which already use IFRS for
their overseas subsidiaries.Farewell to GAAP?
28-3 Home Depot’s Financial Statements
Your task is to assess the financial standing of Home Depot, the home improvement company.
Perhaps you are a mutual fund manager trying to decide whether to allocate $25 million of
new money to Home Depot stock. You could be an investment banker seeking business from
the company or a bondholder concerned with its credit standing. You could be the financial
manager of Home Depot or of one of its competitors.
In each case, your first step is to assess the company’s current condition. You have before
you the latest balance sheet and income statement.The Balance Sheet
Table 28.1 sets out a simplified balance sheet for Home Depot for fiscal years 2013 and 2012.
It provides a snapshot of the company’s assets at the end of the year and the sources of the
money that was used to buy those assets.BEYOND THE PAGE
mhhe.com/brealey12eAccounting
acronyms