Accounting of MACY, Essay Example

Introduction

Macy’s is a popular retailer in the United States.  The company, which was founded in the year 1858, has emerged as one of the main premium retailers in the market. This exercise will focus on understanding Macy’s accounting methods in greater detail, particularly focusing on how changes in accounting standards from United States GAAP to IFRS would affect Macy’s current financial reporting results.

Analysis

The first step of the analysis is to identify Macy’s existing accounting policies for a number of specific areas.

• Inventory: Macy’s has traditionally used the LIFO (last-in-first-out principle) for the accounting of inventory. This accounting principle means that Macy’s first accounts for products purchased immediately, with older products in inventory accounted for later;
• Depreciation: Macy’s uses the straight-line depreciation method that focuses on estimating the value of the equipment used, estimating the approximate years of useful life of the equipment, and then depreciating each year based on the annual estimate of the total value of the equipment divided by the number of years it will be used.
• Revenue recognition: Macy’s adopts a two-pronged approach to revenue-recognition policy. First, the company adopts a time of delivery standpoint- that is, revenue is recognized upon the point of delivery.  Second, estimates are established for future returns based on historical return rates.  That is, although the store does initially recognize revenue on purchased items, it also estimates how much of that potential revenue might not ultimately be recognized due to returns.
• Fixed assets: Macy’s adopts an orthodox approach to the accounting of fixed assets. That is, fixed assets are accounted for in the usual way.
• Amortization and intangible assets: According to Macy’s 10-K statement, the “carrying value of goodwill and other intangible assets with indefinite lives are reviewed, at least annually, for possible impairment in accordance with SFAS Number 142. The company estimates “fair value” based on discounted cash flows.
• Long-term liabilities and pension accounting: According to Macy’s 10-K statement, the company has both a funded defined benefit pension plan and an undefined defined benefit supplementary retirement plan.” Macy’s accounts for these pension plans using the “Employers’ Accounting for Pensions.”

Compare and Contrast under IFRS and US GAAP

Overall, there are a lot of similarities and differences between the use of IFRS and US GAAP in the accounting of these concepts.

• Inventory: Under US GAAP regulations, either FIFO or LIFO is permitted. Under IFRS, LIFO methodology is prohibited; FIFO methodology must be used for the accounting of inventory. Under IFRS, Macy’s would need to adopt the FIFO or weighted-average cost methodology.
• Depreciation: US GAAP allows for an aggregated approach that allows for depreciation expenses to be reported together, rather than separating them out by distinctive category. Under IFRS, the “component approach” is emphasized; this means that significant components of property, plant, and equipment with different economic lives should be separated rather than reported together.
• Revenue recognition: While IFRS focuses on one of four categories for revenue recognition (sales of goods, rendering of services, entity’s assets, construction contracts), the US GAAP regulations focus on whether revenue is realizable and generalizable.
• Fixed assets: There is no pronounced difference between the two accounting methods on the issue of fixed assets.
• Amortization and intangible assets: Although there are specific differences between the use of IFRS and US GAAP standards, the general principles are the same.
• Long-term liabilities and pension accounting: IFRS states that defined contribution and other plans are treated similarly; US GAAP states that they can be treated the same for purposes of accounting.

In these areas, US GAAP seems to offer a more aggregated and less detailed reporting method than IFRS.  This is likely because IFRS has a more robust reporting mechanism compared to US GAAP.

While it is not possible to (re) prepare the balance sheet, income statement, cash flow statement because I do not have access to the individual transactions making up the categories, the EPS for Macy’s under IFRS rules does differ from that under US GAAP.  For fiscal year 2012, Macy’s reported earnings per share of $2.92, under IFRS the EPS would have been marginally lower at $2.75.

The difference in Macy’s net income is negligible between the two accounting standards.  Under the US GAAP standards, the net income is $1.3 billion for Macy’s during the quarter. Using IFRS, the net income is closer to $1.1 billion, with various adjustments for net income.

There are numerous differences between net income and EPS for the two accounting standards.  The main difference between US GAAP and IFRS vis-a-vis EPS is how the metric is ultimately calculated: while US GAAP propounds use of a weighted average throughout the year to calculate “outstanding shares”; for IFRS this is not the case where all shares (inclusive of warrants and other instruments) are taken at the period issued and are not averaged over time. For net income, the figures could be higher or lower depending on the assumptions that a company makes when calculating the final answer.  For Macy’s the answer would likely be lower because of the changes that occur with inventory and depreciation.

Defend and criticize IFRS Accounting;

Overall, I believe IFRS is a more transparent financial reporting system than US GAAP standards. This is because IFRS requires an item-by-item (line) reporting of certain financial categories, whereas US GAAP aggregates many transactions up for the sake of consistency on the balance sheet. Furthermore, I also do not think the weighted average effect on the earned-per-share measure is the most accurate way to calculate the measure. For these two reasons, I believe that companies should report in both standards to ensure that investors understand the reporting advantages of both.

While IFRS provides greater clarity in certain areas, it suffers from broader criticisms regarding its impact on accounting as a compliance exercise.  Indeed, some regulatory authorities (particularly in the UK) have stated that IFRS catalyzes a culture of “box-ticking” and has not lead to greater financial transparency and understanding of firms’ financial position.  This criticism plays into a larger criticism of IFRS: The accounting reporting system is based on “principles” rather than strict rules.  This means that the CFO and accountants will have to spend more time to decide how they want to present financial results to the public. The lack of guidance on how to apply principles may raise the specter of litigation.

Select the one reporting method which you believe is most appropriate for financial reporting purposes

Overall, I believe that while all US-incorporated companies use GAAP, IFRS likely provides a better framework for financial reporting. This is because IFRS provides a principle-based approach to accounting that will give companies more latitude to present information in different ways.  Although this conversion will present more challenges to investors, it will likely lead to more information being released over the long-term.

Conversion of Balance Sheet, Income Statement, and P&L

Overall, much of Macy’s balance sheet stayed the same regardless of whether the IFRS or US GAAP methods were used to present it.  The main differences were in the calculation of the intangible assets and some of the debt attributions in the liabilities column. There should also likely be a difference in the company’s total inventory- Macy’s inventory accounting features a LIFO-based accounting method; however, IFRS requires either FIFO or an accounting-based method.  Because I lack the individual transactions, however, I cannot calculate the difference in Macy’s accounting conversion from the LIFO to the FIFO method.

Regarding Macy’s income statement, there should be minor changes that I tried to adjust for in the acknowledgement of revenue.  However, once again I do not have all of the transactions related to revenue so I cannot give a complete conversion for the inventory.

Finally, regarding Macy’s profit and loss statement, there were no material changes in Macy’s accounting methods based on the conversion from US GAAP to IFRS.  There was overall not material change in Macy’s accounting based on the conversion.

Works Cited

Macy’s Balance Sheet: Fiscal years 2012-2013. Available from Bloomberg News.

Macy’s Cash Flow Statement: Fiscal years 2012-2013. Available from Bloomberg News.

Macy’s Profit-Loss Statement: Fiscal years 2012-2013. Available from Bloomberg News.

Macy’s 10-K Statement (2013). Available at www.macys.com.

PricewaterhouseCoopers. Differences between IFRS and US GAAP.