Comparing Walmart Financial Statements under IFRS and GAAP

Question
Prior to beginning work on this discussion forum, read Topic 6 International Accounting Standards in Appendix A in the course textbook, Using Financial Accounting. Next, review the Walmart Case Study.
Compare and contrast the differences in the Walmart financial statements if the company were to use International Financial Reporting Standards (IFRS) rather than Generally Accepted Accounting Principles (GAAP). Be sure to discuss specific accounting differences between the two.
Debate the pros and cons this would create for Walmart. Be sure to be specific and support any opinions.
Describe any legal or ethical challenges this convergence may create using the country you selected in prior courses.

Answer
1. Introduction
Globalisation is happening in the world, and the movement toward IFRS might seem like a natural evolution of U.S. accounting standards. However, IFRS is more principle-based while U.S. GAAP and has developed rules over time. IFRS is also more detailed and precise than IAS. The movement of IFRS might sound good for the global economy, but people do not like changes. It is evident that the U.S. will resist IFRS convergence until it has seen that the development of IFRS is successful and will benefit the U.S. economy. Until full convergence, there will be a long period where both standards are used domestically and internationally (Mala, 2010). This issue is important because Walmart operates globally, and will also affect accounting students, since most accounting students study U.S. GAAP and IFRS is not a main course yet.
Walmart is a US public multinational corporation, which operates a chain of discount department stores and warehouse stores. Walmart was incorporated in 1969 and trades publicly on the New York Stock Exchange. Walmart is the second largest public corporation according to the Fortune Global 500 list in 2013, the world’s largest give store retailer with over 2 million employees worldwide, and is the biggest private employer in the world. Walmart is a family-owned business and is the biggest grocery retailer in the United States. It has stores in more than 50 countries under 69 different banner names (Farfan, 2012).
1.1. Background information
After the accounting scandals in the early 2000s, the International Accounting Standards Board and the Financial Accounting Standards Board have attempted to work towards a unified set of accounting standards between the IAS/IFRS and the US GAAP. It is believed that one set of accounting standards will provide a greater degree of transparency of a company’s position. Throughout this paper, the accounting policies of Walmart are reviewed and the effects of the IFRS convergence on these are highlighted. I’ll also take a look at their financial statements taking note of any defined effects through changes in accounting policy or errors with relation to the Restatements provided. Walmart has faced continual issues over the years in regards to producing reliable financial statements. Between misrepresented amounts to errors in classes of inventory, Walmart has undergone several restatements of their financial statements communicated the need for a change in accounting policies to better represent them accurately. It has taken Walmart several restatements to understand the effect of changes in inventory levels. With the mistakes made it is clear that another guideline and/or standard would have helped Walmart in understanding and representing the effects of changes in inventory with relation to LIFO liquidations. This can be clearly seen with the changes in inventory levels from 2009 to 2010. By moving their operation towards Canada from the US, Walmart showed a drastic reduction in levels of inventory by over $1 billion. This had no effect on cost of sales when represented, when in actuality it must have been assumed that all inventory under previous acquisition cost was sold in Canada.
1.2. Purpose of the comparison
The purpose of this comparison is to assess the financial statements under IFRS and U.S. GAAP to determine whether there are economic consequences from reporting to investors, creditors, or other stakeholders. A high quality financial reporting system can build a basis for a capital market in a country and attract international capital to flow into that country, which in turn has a significant impact on the economic growth in that country. A major development in the world of financial reporting is the convergence of IFRS and U.S. GAAP. In 2001, the IASB and FASB agreed to work together, in mutual respect and in the best interest of investors and others, as a way to bring the two sets of standards closer. In February 2006, the IASB and FASB set forth a plan for convergence where projects would be undertaken but a revised standard in order for IFRS and U.S. GAAP to align, and potentially result in elimination of difference between the two standards for particular issues. This plan included many phases and continual assessment and monitoring from both boards. Although this was the case, in 2012, the SEC made an announcement that it would no longer provide a statement that indicates whether or not IFRS would be incorporated into U.S. capital markets. This was due to a number of reasons that include separate discussions on future reporting standards for US domestic issuers and the oversight and infrastructure funding of IFRS. A decision has yet to be made, however, the standard setting environment continues to evolve along with potential global acceptance of IFRS. For these reasons, Walmart was chosen as a company to compare financial statements. With many countries still having their own, in some cases unique set of accounting standards, companies engaging in international business or investments are faced with having to convert their financial statements into various standards. This can be an extremely complex process, inhibiting comparison of financial statements and in some cases misinterpretation due to language barriers and lack of understanding of a particular standard. As of the company’s 2011 annual report, Walmart has retail outlets in 15 different countries, each faced with a separate local standard and the potential for varying global acceptance of IFRS. It would be in these companies’ best interests to follow the developments in the standards environment and prepare for the potential adoption of IFRS. For this reason, these comparisons may, in fact, provide an understanding of what future changes may affect the way in which Walmart reports its financial position and performance.
2. Overview of International Financial Reporting Standards (IFRS)
2.1. Explanation of IFRS
2.2. Key principles of IFRS
3. Overview of Generally Accepted Accounting Principles (GAAP)
3.1. Explanation of GAAP
3.2. Key principles of GAAP
4. Comparison of Walmart Financial Statements under IFRS and GAAP
4.1. Income statement differences
4.1.1. Revenue recognition
4.1.2. Expense recognition
4.2. Balance sheet differences
4.2.1. Valuation of assets and liabilities
4.2.2. Treatment of intangible assets
4.3. Cash flow statement differences
4.3.1. Classification of cash flows
4.3.2. Treatment of interest and dividends
5. Pros of Walmart adopting IFRS
5.1. Enhanced comparability with global companies
5.2. Simplified financial reporting for multinational operations
5.3. Access to international capital markets
6. Cons of Walmart adopting IFRS
6.1. Costs of transitioning to IFRS
6.2. Potential loss of industry-specific guidance
6.3. Increased complexity in financial reporting
7. Legal challenges of convergence in the selected country
7.1. Impact on local laws and regulations
7.2. Compliance with international standards
7.3. Potential conflicts between IFRS and local laws