Financial Statement Analysis Nike Inc and Adidas Group - Essay Example

INTRODUCTION The transparency and accountability of financial activities performed by an individual or business entity is vital to the structuring ofthe documentation that will hold the records to each transaction that forms part of the activity. Financial statements are tools that are used to collate information regarding these transactions in a manner that allows for investors and other stakeholders to understand the true business dynamics of the entity, and their positioning in the market in terms of various metrics utilised by accountants and analysts as critical to success in the business environment (Bernstein & Wild, 2000). The generic accounting principles include four types of financial statements: balance sheet, income statement, cash flow statement and retained earnings statement (Nikolai et al, 2009). The balance sheet is one of the core accounting documents produced for all business entities, which provide the financial position of a company, with details on its assets, liabilities and ownership equity, at any given point in time. The income statement is a reflection of the profit and loss details that the entity generated over a particular period of time. Reflecting the operation of the enterprise, profit and loss statements, a term commonly used to describe the income statement, include the revenue generated from sale and the expenses that are incurred over the reporting period used for the document. The cash flow statement is a report that details the various activities undertaken by an entity, linked to investing and financing. Lastly, the statement of retained earnings is a snapshot of the changes that have taken place in the earnings of the entity over the reporting period that is in place as part of the accounting policy. The objective of the financial statement is variable to the stakeholder utilising the information. Organizational owners and managers use financial statements as a resource to base strategic decisions on, by assessing the overall operational efficiency of the business. On the other hand, investors look into the reporting data as a way of judging the viability of the institution, especially in context of the security and benefit it would create for any investment. The government bodies would use institutional financial statements within their due diligence and auditing process, to ascertain the declarations made by the entity, especially in relation to taxes and duties (Ding et al, 2007). Furthermore, financial bodies use this form of organizational documentation to decide the security the entity holds in terms of future debt applications or requests for capital injection into the business operations. In order for financial statements to be reported, entities must have the figures independently audited from a third-party auditor, signifying the accuracy and clarity of the information being stated (Bernstein & Wild, 2000). The auditor is not usually answerable for the figures being reported falsely, as their primary role is to ascertain the applicability of recommended guidelines and check the reported figures against those recorded in the entity’s system. ACCOUTING PRINCIPLES Most countries created their own accounting principles over time, which resulted in several formats of financial statements being in use, and making a uniform comparison of various entities harder to enact. The Generally Accepted Accounting Principles (GAAP) was one of the first set of guidelines in relation to financial statement preparation, which was established as a way to bring uniformity and comparability between the documentation of various entities (Antill & Lee, 2005). More recently, the International Financial Reporting Standards (IFRS) was adopted by several nations as the standardized accounting rule for preparation and release of financial statements, and has become a popular format for numerous organizations, bringing more harmonization in relation to comparisons of business entities. The GAAP is an Americanized system of accounting standards, which includes a traditionalist approach for standards and rules that must be followed by business entities when recording transactions and preparing financial statements (Antill & Lee, 2005). Some of the principles that form part of the GAAP system include consistency, continuity and materiality. Consistency relates to the principle by which a business is required to follow a fixed method of accounting across all similar items, once it chooses a certain treatment method for one item. Continuity talks about the principle of uninterrupted business in reference to the statement of financial information. Lastly, the principle of materiality provides information and guidelines towards the full disclosure of data that is associated with the financial position of the entity and its business activities. The IFRS is popularly referred to by its former name of International Accounting Standards (IAS), and has in recent years become an accepted framework for adoption by various nations as the primary corporate accounting guideline (Wiecek & Young, 2009). It encompasses the assumptions of recognizing the effects of transactions and events as they happen, view an entity to continue, and creating a stable unit for measuring. The components of a financial statement based on the IFRS framework includes a statement of financial position, detailed income statement, statement detailing recognized income or change in equity, and cash flow. The introduction of the IFRS in 2001 was seen as a means of bringing efficiency to the global capital markets, especially in relation to harmony for financial reporting standards that are implemented in countries across the world. The underlying factor was the globalisation of the corporate world, with many large corporations becoming multinationals, but utilising the standards of their home nation (Ding et al, 2007). The confliction in a standard format for all entities of a particular sector meant that comparative analysis was hard to make. With IAS introduced and adopted by several nations, comparability for investors was enhanced, as was the credibility for the local market where the organization had operations. This credibility increase was due to the fact that investors and regulators could assess the organization using the same dynamics that would apply to organizations in other parts of the world. What it also allowed was a tried-and-tested framework to be completely adopted by various nations, without any need to either amalgamate with existing national standards, or create a separate national accounting system that would synchronise in some form with the IAS. NIKE INC v ADIDAS GROUP – FINANCIAL STATEMENTS Nike Inc., an American corporation, is the world’s largest sporting goods manufacturer by sales and revenue, and prepares its financial statements under the GAAP standards. It operates a different fiscal period to other American and international organizations, with the financial year declared as 01 June to 31 May. Its revenues for the fiscal year ended 31 May 2009 were $19.18 billion (Nike Inc, 2009). The Adidas Group, a German conglomerate, is the main competitor of Nike in sporting goods, but utilises the IFRS framework for its financial reporting. Its fiscal period is from 01 January to 31 December. The group reported net sales for the financial year 2009 as $10.38 billion (Adidas Group, 2010). This brings around the first point of comparative difficulties between the two corporations due to the usage of different accounting standards. The term ‘revenue’ signifies a source of income for the company, while ‘net sales’ in this case identifies the similar thing for Adidas. However, this term could have a different definition for another company in a different sector. For example, if the company utilising IFRS was a brokerage, the net sales would be a commission based income generated by the organization, and not a direct proportion of goods sold to generate a stream of income. Furthermore, the format of reporting has another distinctive difference. IFRS policy requires organizations to provide comparative financial information for one year. This means that in the 2009 report for Adidas, there are also the respective values for each metric for the previous year of 2008, when net sales were $10.79 billion. This reflects a drop of 3.9% in sales for the group (Adidas, 2010). On the other hand, GAAP reporting regulations defined by the United States (U.S.) Securities and Exchange Commission (SEC) generally place a requirement of three years of financial information in order to project a comparative study. For Nike Inc., this can be seen in the form of their report showing values for all metrics from 2005 to 2009. Revenues in 2007 were $16.33 billion and that in 2008 were $18.63 billion (Nike Inc, 2009). Another key difference between IFRS and GAAP in the financial reporting is the method of determining inventory cost. Under GAAP, LIFO is permitted; under IFRS, LIFO is prohibited. Also, interest received and paid must be classified as an operating, investing or financing activity under IFRS, while GAAP requires the classification to be as an operating activity. This is evident from the annual report for Adidas Group, where the cash flow statement is divided into three sections to identify the value for each of the activities undertaken. The balance sheet forms one of the financial records that provide stakeholders with the ability to understand the various capital dynamics of the organization, especially in terms of assets and liabilities held. IFRS permits revaluation of certain nonfinancial assets to fair market value, while GAAP does not. Nonfinancial assets include intangibles, property, plant and equipment, inventory and investment property. In the same context, there exist deviations when listing financial assets. IFRS has a single standard for the classification of financial assets, with one of four classification categories needing to be utilised: assets held for trading, held-to-maturity investments, -available-for-sale financial assets, and loans and receivables (Van der Meulen et al, 2007). From the financial statements, Adidas Group experience a drop in total assets for the fiscal period of 2009, with a final value of $8.88 billion, against a 2008 value of $9.53 billion. However, total liabilities for the group also declined with a final figure of $5.15 billion for 2009, as compared to $6.13 billion in 2008 (Adidas Group, 2010). On the other hand, Nike Inc reported a rise in total assets, with a final figure of $13.25 billion for fiscal period 2009, compared to $12.44 billion for 2008. Total liabilities dropped for Nike Inc, from $4.62 billion in 2008 to $4.56 billion in 2009 (Nike Inc, 2009). The component breakdown of the balance sheet for both organizations varies very little, despite the different accounting standards used by the institutions. Under GAAP, Nike Inc includes cash and equivalents, short-term investments, net account receivables, inventories, deferred income taxes, and other prepaid expenses and assets under the component of ‘Total current assets’. For the Adidas Group, the implementation of IFRS means that Total current assets include the following: cash and cash equivalent, short-term assets, accounts receivable, inventories, tax receivables, current assets and assets held for sale. Similarly, the breakout for non-current assets is similar, with both companies and accounting standards classifying property, plant and equipment and goodwill in this block. However, under GAAP, Nike Inc does not highlight these as non-current assets, while Adidas Group uses a specific classification to highlight each included option. The same holds true for the liabilities portion, where the IFRS requirement is for classification between current and non-current, while GAAP permits use of one; current liabilities. There are also differences in the calculations of assets and liabilities. Under GAAP, deferred tax assets and liabilities classified as either current or noncurrent depending on the relative item, with the net amounts displayed in the financial statements. However, IFRS treats all deferred tax assets and liabilities as noncurrent, with the net values reported in the financial statements (Van der Meulen et al, 2007). In order to analyse the financial standing of any organization, ratios are devised by specialists that undertake specific metric view of the results, in order to deduce the performance of the organization in that period. From the annual reports of Nike Inc. and Adidas Group, the one common ratio that both contain under their accounting standards for financial reporting is Return on Equity (ROE). The return on equity is the revenue or sale generated as a factor of the total equity that is held within the company of shareholders. For 2009, the Adidas Group reported an ROE value of 6.5% (Adidas Group, 2010), while Nike Inc. reported 18%, based on its fiscal period (Nike Inc, 2009). This shows the strong performance generated by the latter organization in terms of the equity it held and the result it generated from using that equity in its operations. Of course, the one thing to note was the shareholder equity held by Nike Inc. was $8.69 billion (Nike Inc, 2009), while the Adidas Group had shareholder equity of $3.77 billion (Adidas Group, 2010). The difference that applies to the reporting style and usage of various factors in IFRS and GAAP make it hard to reach a concrete comparison of Nike and Adidas. However, while some of the variances have been highlighted, certain metrics do allow for one to analyse the financial performance of both entities, and put together some ratios that can help determine the change in performance by the entities. One important metric that holds significance for investors, in terms of the company’s ability to generated income for them is the earnings per share (EPS), which is determined by divided the revenue or sales generated by the common shares that are outstanding in the market for the organization. For 2009, Adidas Group reported EPS of $1.25 for common stock, while Nike Inc had an EPS of $3.07. What needs to be considered here is that Adidas Group had just over 209 million shares outstanding, while Nike Inc. had almost 485 million (Adidas Group, 2010; Nike Inc, 2009). Hence, Nike showed more resilience and business power to generate stronger results for its shareholders and stakeholders. REFERENCES Adidas Group (2009) Annual Report 2008, Adidas Group Adidas Group (2010) Annual Report 2009, Adidas Group Antill, N. & Lee, K. (2005) Company Valuation under IFRS: Interpreting and Forecasting Accounts Using International Financial Reporting Standards, Harriman House Limited Bernstein, L. & Wild, J. (2000) Analysis of financial statements, McGraw-Hill Ding, Y., Hope, O., Jeanjean, T. & Stolowy, H. (2007) ‘Differences between domestic accounting standards and IAS: Measurements, determinants and implications’, Journal of Accounting and Public Policy, Volume 26, Issue 1, pp. 1 – 38 Nike Inc. (2007) Form 10-K, Securities and Exchange Commission Nike Inc. (2008) 2008 Annual Report, Nike Inc. Nike Inc. (2009) Form 10-K, Securities and Exchange Commission Nikolai, L., Bazley, J. & Jones, J. (2009) Intermediate Accounting, Cengage Learning United Nations Conference on Trade and Development (2007) International Accounting and Reporting Issues: 2006 Review, United Nations Publications Van der Meulen, S., Gaeremynck, A. & Wilekens, M. (2007) ‘Attribute differences between U.S. GAAP and IFRS earnings: An exploratory study’, The International Journal of Accounting, Volume 42, Issue 2, pp. 123 – 142 Wiecek, I. & Young, N. (2009) IFRS Primer International GAAP Basics, John Wiley & Sons Read More