Managing International Standards Final Project Wal-Mart Corporation I. Company Introduction Wal-Mart Stores, Inc. was founded in 1945 and operates retail stores in various formats worldwide. It operates retail stores, discount stores, supermarkets, supercenters, warehouse clubs, apparel stores, Sam’s Clubs, and neighborhood markets, as well as walmart.com and samsclub.com. The company’s stores offer electronics and office; music, movies, and books; home, furniture, and patio; apparel, shoes, and jewelry; baby and kids items; toys and video games; sports, fitness and outdoors; auto and home improvement; photo; gift, crafts, and party supplies; pharmacy, health, and beauty; and groceries and pets. They offer many more detailed items within these categories that can be found on walmart.com. Wal-Mart Stores, Inc. has one of the largest private distribution networks in the world. The first thing people notice about their Regional Distribution Centers (DCs) is the size. Each of the 42 Regional U.S. Distribution Centers is over 1 million square feet. The next thing people notice is the constant movement. Many of their centers feature a Transportation Office, some of which operate 24/7 to keep fleet of 6,500 tractors and 55,000 trailers rolling around the clock and across the country. Inside each center, more than 12 miles of conveyor belts move over 5.5 billion cases of merchandise ("Walmart.com: Save Money. Live Better.") II. Balance Sheet On the balance sheet under U.S. GAAP, we usually list current assets first, and then go down the asset side in the order of liquidity. Unlike GAAP, IFRS' current assets are usually listed in the reverse order of liquidity. For instance, under IFRS, cash is listed last. Receivables are reported fairly similarly under U.S. GAAP compared to IFRS. However, there are no standards under IFRS for pledging, assigning, or factoring receivables. This gives the financial statement issuer a great deal of leeway in how this information is presented. For inventory purposes, the average method and FIFO method are both allowed for U.S. GAAP. Both methods are required under IFRS. However, LIFO, which is used extensively in the United States, is not allowed under IFRS. This is a significant difference between the two methods. The lower of cost or market rules differ between U.S. GAAP and IFRS. Inventory can be written down under U.S. GAAP to market value, but not revalued upward. Under IFRS, inventory can be written down, but also written up (but only to cost). For purposes of property, plant, and equipment, interest expense is capitalized under both methods. Nonmonetary asset exchanges are accounted for in a similar fashion as well. The same methods of depreciation are allowed for both. Impairment rules are different. Property, plant, and equipment can be written up under the "Revaluation" to fair value method under IFRS. The U.S. uses historical cost, which does not allow write-ups. For IFRS, noncurrent assets are typically listed first, and often at fair value. The term net assets which are total assets - total liabilities, may be placed on the financials as well. Under both methods, the treatment for intangibles and goodwill on a purchase between two parties are similar in nature. Intangibles assets are separated from goodwill. In addition, in-process research and development are recorded as a separate asset. For liabilities, both U.S. GAAP and IFRS require that they be classified as current and noncurrent. The definitions of liabilities and debts are closely related as well under both methods. IFRS requires a detailed disclosure of the nature of each accrued expense and the nature of the changes to those accrued expenses. Under GAAP, accrued expenses are not required to be individually disclosed in the financial statements – increasing the transparency of financial statements. Contingencies under IFRS require a "midpoint" for recognizing a loss, where under U.S. GAAP, the minimum amount of the possible range of outcomes is used. Stockholder’s Equity differs because convertible debt is different. Under U.S. GAAP, all proceeds of convertible debt are recorded as a long-term debt. Under IFRS, convertible debt is classified as partially debt and equity. The conversion option is recorded as an equity amount. Under IFRS the non-controlling interest is reported in the Equity section of the consolidated balance sheet. Under US GAAP, non-controlling interest can be reported in the liabilities section, the equity section, or the mezzanine section of the balance sheet. The Mezzanine section is located between liabilities and equity. (Weil, Roman L., Katherine Schipper, and Jennifer Francis.) III. Income Statement Revenue recognition under both U.S. GAAP and IFRS is tied to the completion of the earnings process and the realization of assets from such completion. Under both GAAP and IFRS, revenue is not recognized until it is both realized (or realizable) and earned. Ultimately, both IFRS and GAAP base revenue recognition on the transfer of risks and both attempt to determine when the earnings process is complete. Under GAAP, users are required to present expenses based on function (ex: cost of sales, administrative). Entities using IFRS may present expenses based on either function or nature (ex: salaries, depreciation). However, if function is selected, certain disclosures about the nature of expenses must be included in the notes. There is a broader definition of discontinued operations under GAAP than under IFRS that can be either a reportable business or geographical segment, or reporting unit, subsidy, or asset group; while under IFRS discontinued operations can be a reportable business or geographical segment or major component. (Weil, Roman L., Katherine Schipper, and Jennifer Francis.) IV. The future of IFRS When asked about a transition from GAAP to IFRS, Wal-Mart’s response was as follows, “For a global company like ours, [the benefits of IFRS adoption] include standardized reporting systems, efficiency in accounting training, and efficiency of financial statement review. However, these benefits are limited to the extent that various government and regulatory bodies in countries we operate in adopt IFRS as issued by the IASB for all of their reporting requirements. Failure to achieve this consistency in reporting standards minimizes or eliminates any benefits. At the present time, we do not see any other significant benefits to offset the expected costs in adopting IFRS ("The Accounting Onion.") V. CFO Preparations What the CFO needs to understand is that Wal-Mart will benefit from adapting IFRS due to the simplicity of financial records reported using the standard. A simple report is understandable and enables the investors to make informed decisions when investing in the company. The company needs to attract investors to fund its expansion process. The use of simple financial reports will help the investors to make quick decisions. Wal-Mart should adopt IFRS, as it is a clear and productive financial standard adopted by many nations. Adopting IFRS enables the US based company to compete adequately with other players in the market. Wal-Mart faces the challenge of reporting using multiple standards. What the CFO needs to realize is that they will save on time and cost required to prepare financial statements if they make the switch. IFRS gives accurate information thus Wal-Mart management can make correct decisions. The titles of the financial statements allow investors who lack training in the field of accounting to understand the purpose of the statement making the company more profitable by attracting more investors. The CFO should look at their own financial and accounting department and determine what level of knowledge and skill they have internally – and what level of training they need to effectively position their company in regard to convergence. After they get through the training needs analysis, another consideration management really needs to look at is their management information systems (Dohrer, Bob). Current systems may not be set up to deliver the data that will be necessary to support adopting IFRS. At a minimum, systems might have to be modified to deliver the right data. In some cases, systems may need to be upgraded or replaced. After they get through the training, the analysis and determine the impact on management information systems, the last piece is determining what the impact on the business is going to be. Financial statement outputs serve as performance metrics used by stock analysts and lenders, and those metrics also can affect things like incentive compensation, employee benefit plans, and loan agreements. For example, if they have key performers with incentives tied to operating income numbers, they won’t want them to suffer simply due to an accounting change (Dohrer, Bob). Businesses need to understand what financial statement output changes are likely, and then work with all affected parties to minimize the impact of those changes. Appendix Consolidated Balance Sheets As of January 31, (Amounts in millions except per share data) 2012 2011 $ 6,550 $ 7,395 5,937 5,089 40,714 36,437 1,685 2,960 89 131 54,975 52,012 Property and equipment 155,002 148,584 Less accumulated depreciation (45,399) (43,486) 109,603 105,098 5,936 5,905 (3,215) (3,125) 2,721 2,780 20,651 16,763 5,456 4,129 ASSETS Current assets: Cash and cash equivalents Receivables, net Inventories Prepaid expenses and other Current assets of discontinued operations Total current assets Property and equipment: Property and equipment, net Property under capital lease: Property under capital lease Less accumulated amortization Property under capital lease, net Goodwill Other assets and deferred charges Total assets $193,406 $180,782 LIABILITIES AND EQUITY Current liabilities: Short-term borrowings $ 4,047 $ 1,031 Accounts payable 36,608 33,676 Accrued liabilities 18,154 18,701 Accrued income taxes 1,164 157 Long-term debt due within one year 1,975 4,655 Obligations under capital leases due within one year 326 336 26 47 62,300 58,603 44,070 40,692 Long-term obligations under capital leases 3,009 3,150 Deferred income taxes and other 7,862 6,682 404 408 — — 342 352 3,692 3,577 Retained earnings 68,691 63,967 Accumulated other comprehensive income (loss) (1,410) 646 71,315 68,542 4,446 2,705 75,761 71,247 Current liabilities of discontinued operations Total current liabilities Long-term debt Redeemable non-controlling interest Commitments and contingencies Equity: Preferred stock ($0.10 par value; 100 shares authorized, none issued) Common stock ($0.10 par value; 11,000 shares authorized, 3,418 and 3,516 issued and outstanding at January 31, 2012 and 2011, respectively) Capital in excess of par value Total Walmart shareholders’ equity Noncontrolling interest Total equity Total liabilities and equity $193,406 $180,782 Consolidated Statements of Income Fiscal Years Ended January 31, (Amounts in millions except per share data) 2012 2011 2010 Revenues: Net sales Membership and other income $443,854 $418,952 $405,132 3,096 2,897 2,953 446,950 421,849 408,085 335,127 314,946 304,106 85,265 81,361 79,977 26,558 25,542 24,002 2,034 1,928 1,787 288 277 278 Interest income (162) (201) (181) Interest, net 2,160 2,004 1,884 24,398 23,538 22,118 Current 6,742 6,703 7,643 Deferred 1,202 876 (487) 7,944 7,579 7,156 16,454 15,959 14,962 (67) 1,034 (79) 16,387 16,993 14,883 (688) (604) (513) Costs and expenses: Cost of sales Operating, selling, general & administrative expenses Operating income Interest: Debt Capital leases Income from continuing operations before income taxes Provision for income taxes: Income from continuing operations Income (loss) from discontinued operations, net of tax Consolidated net income Less consolidated net income attributable to noncontrolling interest Consolidated net income attributable to Wal-Mart $ 15,699 $ 16,389 $ 14,370 Basic net income per common share: Basic income per common share from continuing operations attributable to Walmart $ 4.56 $ 4.20 $ 3.74 (0.02) 0.28 (0.02) $ 4.54 $ 4.48 $ 3.72 $ 4.54 $ 4.18 $ 3.73 (0.02) 0.29 (0.02) $ 4.52 $ 4.47 $ 3.71 Basic 3,460 3,656 3,866 Diluted 3,474 3,670 3,877 $ 1.46 $ 1.21 $ 1.09 Basic income (loss) per common share from discontinued operations attributable to Walmart Basic net income per common share attributable to Walmart Diluted net income per common share: Diluted income per common share from continuing operations attributable to Walmart Diluted income (loss) per common share from discontinued operations attributable to Walmart Diluted net income per common share attributable to Walmart Weighted-average common shares outstanding: Dividends declared per common share References Dohrer, Bob. "Preparing for IFRS." McGladrey & Pullen LLP, n.d. Web. 12 Feb. 2013. <http://contractualcfo.com/documents/McGladrey.Pullen_Preparing.for.IFRS.whitepaper. pdf>. "The Accounting Onion." 'The Accounting Onion' N.p., n.d. Web. 12 Feb. 2013. <http://accountingonion.typepad.com/theaccountingonion/2009/07/which-sec-roadmapcomments-matter-and-what-they-are-saying.html>. "Walmart.com: Save Money. Live Better." Walmart.com: Save Money. Live Better. N.p., n.d. Web. 12 Feb. 2013. <http://www.walmart.com/>. Weil, Roman L., Katherine Schipper, and Jennifer Francis. Financial Accounting: An Introduction to Concepts, Methods, and Uses. 14th ed. Mason, OH: South-Western Cengage Learning, 2014.