Whirlpool Corporation: Analysis of Accounting Principles

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About the company

Whirlpool Corporation is a multinational corporation that is based in the United States. The Company’s headquarters is located in Michigan, United States. Whirlpool Corporation is a public company that trades on the New York Stock Exchange with the ticker symbol WHR. Further, it is a component of S&P 500 index and a Fortune 500 company (Whirlpool Corporation, 2014). The Corporation operates in the household appliance industry and it focuses on the production of home appliances (Whirlpool Corporation, 2014). As at the end of 2013, the company had 69,000 employees with the total revenue amounting to $19 billion. The total assets as at the end of 2013 amounted to $15.544 billion, while the net income totalled to $849 million. Some of the key brand names of the company are Maytag, Jenn-Air, Bauknecht, Brastemp, and Whilrpool among others. The main strategies that are being used by the company are Product & Brand Leadership, and Operating & People Excellence. The manufacturing plants of the company are located in eight regions. Further, the Corporation has a presence in one hundred and seventy countries (Whirlpool Corporation, 2014). Some of the regions are North America, Asia, Latin America, and EMEA (Whirlpool Corporation, 2014). The table presented below shows the proportion of revenue generated from these regions in the year 2013.

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Region Proportion
North America 54%
Latin America 26%
EMEA 16%
Asia 4%

The diagram shown below is a graphical depiction of the proportions.

Proportion of revenue generated

The three main competitors of the Corporation are BSH Bosch und Siemens Hausgerate GmbH, Electrolux AB, and GE Appliances & Lighting. Electrolux AB is publicly held while the other two are private companies. Whirlpool Corporation is the leader in the industry. The success of the company can be attributed to the strategies employed and several business combinations that have taken place since it was established in 1911 (Whirlpool Corporation, 2014).

General information on IFRS and GAAP

Financial Accounting Standard Board (FASB) was founded in 1973. The main role of the board is to develop standards. The operations of the board are independent of businesses or other organizations. The standards set up by the board guide in the preparation of the financial reports for both public and nongovernmental companies. The board develops and maintains GAAP and carries out other duties such as maintaining the Accounting Standards Codification. Basically, GAAP is used in the United States.

On the other hand, the International Accounting Standards Board that is charged with the responsibility of setting accounting standards. The board was set up in 2001. The board is mandated to prepare and publishes the IFRS. It also develops IFRS for SMEs and approves the interpretations that are developed by the IFRS interpretation committee. It uses a participatory approach in developing the standards. It engages various stakeholders globally when coming up with the standards. It follows an open and clear approach in setting the standards. Besides, it publishes all the documentation that relates to the process followed in setting up the standards. IASB belongs to the IFRS Foundation (Financial Accounting Standards Board, 2013). The IFRS is widely used in other parts of the world. Over 110 countries uses this standard.

The IFRS is principles-based while the US GAAP is rule-based. The difference in the two models can be supported by some examples. For instance, “when carrying out consolidation, IFRS favors a control model while GAAP prefers the risks-reward model” (Forgeas, 2008). Secondly, “when presenting the statement of income, IFRS outlines that the extraordinary items should not be segregated in the income statement while under GAAP; the extraordinary items are presented below net income” (Forgeas, 2008). Finally, “in the valuation of inventory, LIFO is used under IFRS while LIFO and FIFO are used under GAAP” (Forgeas, 2008).

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Accounting methods

Inventory

The company uses different approaches to value inventories in different regions. For instance, in the United States, inventories are valued using LIFO. Inventories in Latin America and Asia are valued using weighted average approach. Further, inventories for all the other regions are valued using FIFO. The reported inventory balance rose from $2,354 million in 2012 to 2,408 million in 2013. The total proportion of inventory valued using LIFO approach was 40% in 2012 and 39% in 2013. The LIFO reserve amounted to $190million in 2012 and $164million in 2013 (Whirlpool Corporation, 2014).

Depreciation

The notes to the financial statement shows that the company uses a straight line approach to estimate the depreciation expense for the nonproductive assets. However, for the machinery and equipments that are used in the production process, the depreciation expense is estimated using units produced. If the units produced falls below the minimum threshold, then the company reverts to the straight line approach. According to the disclosures, land owned by the company does not have a useful life. The useful life of machinery and equipment is 3 to 25 years while the useful life for buildings is 25 to 50 years. On the income statement, the company reports gains and losses arising from the disposal of assets in the same line with the depreciation of the disposed asset. The accumulated depreciation dropped from $6,070 million in 2012 to $6,278 million in 2013 (Whirlpool Corporation, 2014).

Revenue recognition

Under this, Whirlpool Corporation records sales when the ownership is transferred to the clients. The transfer of ownership is evaluated using the shipping terms. This implies that sales are recognized after the commodities have been shipped. However, for some commodities sales are recognized after the customers have confirmed receipt of the commodities. Further, the company makes allowance for return based on historical trends of the commodity involved (Whirlpool Corporation, 2014).

Fixed asset

New fixed assets that are acquired by the company are reported at cost less accumulated depreciation. The net value of property, plant and equipment rose from $3,034 million in 2012 to $3,041 million in 2013 (Whirlpool Corporation, 2014).

Intangible assets

Some of the other intangible assets held by the company are customer relationships, patents, and trademarks. The net value of intangible assets dropped from $1,722million in 2012 to $1,702million in 2013 (Whirlpool Corporation, 2014). The annual report shows that there were no impairment losses during the two years. The company evaluates the fair value of intangible assets on an annual basis to determine if the carrying amount is less than the fair value. The loss on impairment is tested by the difference between the running balance in the balance sheet and the fair value. Once the company has established that that impairment loss exists, then quantitative test is carried out using the single relief-from royalty method to ascertain the carrying amount of the intangible asset.

Amortization

Amortization of the intangible assets and goodwill is carried out over the projected useful life of the assets. The value of accumulated amortization rose from $211 million in 2012 to $237 million in 2013 (Whirlpool Corporation, 2014).

Long term liabilities

The company uses discounted cash flow analysis to estimate the fair value of long term debt. The calculations are based on incremental borrowings and it is applied to the same category of borrowing plans. The balance of long term debt declined from $1,944million in 2012 to 1,846million in 2013. The interest rates for the long term debt ranged between 3.70% and 8.6%, while the maturity period ranged between 2014 and 2043. Further, the total amount of long term debt that will mature in the next five years is $2,453 million (Whirlpool Corporation, 2014).

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Pension

Whirlpool Corporation has different pension plans for the various regions they operate in. For all employees in the United States, the company provides a defined contribution plan. For salaried employees in the united states in the plan, the calculations are based on the years of service and terminal average salary. However, for employees who are paid on an hourly basis, the calculations are based on the amount earned during each year of employment. However, for employees in other regions, the company operates both financed and unfunded benefit plans. Another method that is used by the company is a cash balance formula. Further, the company has a defined benefit plan. At the end of the year 2013, the balance of the plan asset amounted to $2,835 million, while the amount of the benefit obligation amounted to $3,546million. This shows that the plan was underfunded by $711 million. The company reports the plan under non-current liabilities using the title pension benefits. The total pension expense made by the company in 2012 amounted to $64 million in 2012 and $68 million in 2013. Finally, in the next five years, the company expected to pay a total of $1,640 million for the pension benefit.

Comparison of US GAAP and IFRS

There are a number of similarities and differences between the US GAAP and IFRS. The performance components that GAAP focuses on are items such as revenue, comprehensive income, losses, assets, liabilities, gains and losses, while IFRS concentrates on liabilities, expenses, revenue and assets. Further, the two accounting systems differs in the components of financial statements. The documents required by GAAP are five in number, these are, balance sheet, income statement, statement of changes in comprehensive income, changes in equity, cash flow statement, and footnotes, while IFRS requires five documents, these are footnotes, income statements, balance sheet, changes in equity, and cash flow statement. Further, in inventory valuations, the two accounting standards allows for the use of first-in first-out, and weighted average method. However, GAAP permits the use of last-in, first-out while IFRS does not. Further, still under inventory, GAAP does not allow reversal of inventory while IFRS allows it under certain conditions. Further, the two accounting standards differ on the meaning of an asset. The US GAAP explains an asset as an impending economic gain. However, IFRS defines an asset as an item, whether tangible or intangible, that is capable of producing streams of economic gains. The US GAAP and IFRS have some similar qualitative features. However, the two standards differ in raking of these characteristics. The US GAAP gives priority to relevance and reliability. These two are followed by comparability. The final quality, comparability, does not have a ranking and it depends particular situations of the user. However, in the case IFRS, all the qualities are important and cannot be based upon the specific situations of the users.

The two accounting standards also differ in their basic assumptions. For instance, in GAAP, the going concern principle is not well-built. The main underlying principles in the case of IFRS is going concern and accrual. Another area in which the two standards differ is the purposes of the financial statements. In the case of GAAP, the financial statements seeks to give information to the users of the financial statement. Further, the goals for business entities differs from those of non-business companies such as public schools among others. On the other hand, the IFRS provides a similar objective to both companies. Finally, the two accounting systems differ in the discretion that the management have. The US GAAP does not expressly require the financial management to follow the standards in case of a vacuum such as nonexistence of a standard. On the other hand, IFRS requires management to use the framework in case of a vacuum. Thus, it can be noted that the two accounting standards have a number of similarities and differences.

US GAAP accounting

Arguments that support GAAP

As mentioned in the section above, the US GAAP is widely used in the United States only and not other parts of the world. There are several arguments in favor of the accounting standard. First, GAAP framework enables businesses to uphold uniformity in the presentation of financial results and other related information. This reduces the possibility of falsification and fraud. The standard was created to safeguard the interest of various stakeholders by holding accountable the concerned employees in an organization. Further, the standard contributes to the preparation of financial statements which gives the true and fair view of the results (Donelson, McInnis & Mergenthaler, 2013). The second argument in favour of GAAP is that it promotes consistency in the accounting standards used by a company. This helps in improving the internal control environment in an organization. Consistency enhances better presentation of the financial statements and it also aids in the comparison of the financial results from one period to another. Thirdly, the use of GAAP assists inculcating trust in the stakeholders of a company. This is based on the fact that a simple alteration of items in the financial statements can be easily be noticed. Finally, the use of GAAP enables users such as investors to compare the financial results of various companies. This function is based on the fact that the financial statements are prepared based on a specific set of standards. This allows the stakeholders to draw accurate deductions on the financial performance of various companies. Without the use of GAAP, then comparing the financial results will be impossible because companies will be using different accounting principles when preparing their financial statements. It is worth noting that comparability is only possible when similar sets of rules are used by companies that are supposed to be compared (Donelson, McInnis & Mergenthaler, 2013).

Criticisms

Despite been widely used in the US, GAAP has received a number of criticisms. First, private companies in the unites states are not mandated to use GAAP. They have the freedom to choice the accounting principle to use in preparing their books of accounts. This makes it difficult for users to use these principles for private companies. Besides, it reduces comparability and reliability among the private companies. Thus, it can be observed that the US GAAP is inadequate. Secondly, since GAAP is rule based, companies are required to follow these rules regardless of whether the rules are misrepresentative or not. Such results may mislead the users of the financial statements and increases risks. This limits the accountants and other professionals from using their specialized judgement. Another criticism is that the US GAAP is quite complex and time consuming. This complicates the processes of preparing the financial statements. Finally, GAAP cannot allow comparison of results of various companies across the world because it is only used in the US. Other countries use other financial standards such as IFRS (Donelson, McInnis & Mergenthaler, 2013).

Financial statements under IFRS

This section will show the financial statements of Whirlpool Corporation when prepared using IFRS.

  • Whirlpool Corporation
  • Balance sheet
  • For the year ended 31 December 2013
2013
USD in millions
Assets
Current assets
Cash
Cash and cash equivalents 1380
Total cash 1380
Receivables 2005
Inventories 2572
Deferred income taxes 549
Prepaid expenses 680
Total current assets 7186
Non-current assets
Property, plant and equipment
Gross property, plant and equipment 9319
Accumulated Depreciation -6278
Net property, plant and equipment 3041
Intangible assets
Customer relationship 164
Patents and others 16
Trademarks 1522
Goodwill 1724
Deferred income taxes 1764
Other long-term assets 291
Total non-current assets 8522
Total assets 15708
Liabilities and stockholders’ equity
Liabilities
Current liabilities
Short-term debt 617
Accounts payable 3865
Accrued liabilities 1607
Other current liabilities 705
Total current liabilities 6794
Non-current liabilities
Long-term debt 1846
Pensions and other benefits 1388
Minority interest 88
Other long-term liabilities 482
Total non-current liabilities 3804
Total liabilities 10598
Stockholders’ equity
Common stock 109
Additional paid-in capital 2453
Retained earnings 5806
Treasury stock -2124
Accumulated other comprehensive income -1298
Revaluation surplus 164
Total stockholders’ equity 5110
Total liabilities and stockholders’ equity 15708
  • Whirlpool Corporation
  • Income statement
  • For the year ended 31 December 2013
2013
USD in millions, except per share data
Revenue 18769
Cost of revenue 15471
Gross profit 3298
Operating expenses
Sales, General and administrative 1828
Restructuring, merger and acquisition 196
Other operating expenses 25
Total operating expenses 2049
Operating income 1249
Interest Expense 177
Other income (expense) -155
Income before taxes 917
Provision for income taxes 68
Net income 849
Other comprehensive income
Revaluation surplus 164
Total comprehensive income 1013
Earnings per share
Basic 10.75
Diluted 10.48
Weighted average shares outstanding
Basic 79
Diluted 81
  • Whirlpool Corporation
  • Cash flow statement
  • For the year ended 31 December 2013
2013
USD in millions
Cash Flows From Operating Activities
Net income 849
Depreciation & amortization 540
Accounts receivable -65
Inventory -86
Accounts payable 275
Accrued liabilities -156
Income taxes payable -105
Other working capital 36
Other non-cash items -26
Dividend paid -187
Net cash provided by operating activities 1075
Cash Flows From Investing Activities
Investments in property, plant, and equipment -578
Purchases of investments -6
Other investing activities 2
Net cash used for investing activities -582
Cash Flows From Financing Activities
Debt issued 518
Debt repayment -513
Common stock issued 95
Common stock repurchased -350
Dividend paid
Other financing activities 3
Net cash provided by (used for) financing activities -247
Effect of exchange rate changes -34
Net change in cash 212
Cash at beginning of period 1168
Cash at end of period 1380
Free Cash Flow
Operating cash flow 1262
Capital expenditure -578
Free cash flow 684

Estimation of net income and earnings per share

The table presented below shows the values of net income and earnings per share under the US GAAP and IFRS.

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GAAP IFRS
Net income $827 million $849 million
Weighted average shares outstanding in (million)
Basic 79.3 79.3
Diluted 80.8 80.8
Earnings per share
Basic 10.42 10.75
Diluted 10.24 10.48

Under GAAP, the net income is $827million, while the basic earnings per share is $10.42 and the diluted earnings per share is $10.24. When the income statement is prepared using IFRS, the resulting net income is $849 million, while the basic earnings per share is $10.75 and the diluted earnings per share is $10.48. Thus, in the case of Whirlpool Corporation, it can be noted that changing from the US GAAP to IFRS results in an increase in net income and earnings per share.

IFRS accounting

Arguments that support IFRS

In the recent year, a significant number of companies are adopting IFRS when preparing the financial statements. This can be attributed to a number of reasons. One major argument in favour of IFRS is globalization. Several countries across the globe use IFRS when preparing their financial statements. Besides, several other countries are switching to IFRS. This makes dealing, interactions, and transactions with companies that have adopted IFRS easier. Besides, stakeholders have a better economic understanding of the performance of various companies across the globe. This reduces international differences in accounting. This improves access to overseas capital markets and investment. Secondly, IFRS provides lucidity and efficiency in reporting the financial results. This can be attributed to the fact that the standard allows accountants to use their professional judgements on how to treat a particular transaction when preparing their financial statements. Thus, it saves time that would have been used to follow the rules. Thirdly, the financial statements prepared using IFRS are simple and easy to understand. Thus, investors would find it easy to analyze the financial statements that are prepared using IFRS. Another significance of IFRS is relevance. Based on this, IFRS focuses on the economic form more than legal. This assists users to have a better economic view of the financial statements of a company. Further, IFRS reveals looses and gains in a timely manner. This makes it more reliable and trustworthy.

Criticisms

One major criticism of this accounting system is the cost implication, especially for multinationals who adopts these standards. Such multinationals find it costly to align all their accounting functions according to IFRS standards. Such costs include staff training and aligning internal systems, according to IFRS. The second criticism is that function of controlling IFRS in all countries across the world is impossible. The IASB cannot enforce the use of IFRS across the world. Thirdly, the extensive use of IFRS across the world is likely to monopolize IASB. This will result in efficiency because of lack of competition.

Research on IFRS

Introduction

In the discussion above, it can be established that IFRS is extensively used across the world. Besides, there are several arguments in favour of IFRS. This has motivated a number of scholars to carry out research on the adoption of IFR across the world. This section seeks to carry out a review of IFRS based on accounting theories, literature review and research data (IFRS, 2013).

Discussion

Accounting theory

The accounting theory was developed between 1960s and 1970s. The theory seeks to offer a broad model that will be a rational structure for obtaining the accounting principles and practices. These theories are categorized into three. First is the descriptive theory. This category is based on the generalization that is arrived at by noting how accounting is done in run-through. The second group is the decision-usefulness. This group focuses on the needs of the stakeholders. Thus, the theories were built based on the needs of the stakeholder and how they use the accounting information. The group also focuses on the financial needs of private users, that is, how the financial decisions affect them. Thus, accounting theory incorporates the social effect on an entity. Studies that have been carried out indicates that the International Accounting Standards Board, the board that develops IFRS, is working towards coming up with a principle based standards that uses the accounting theory. Therefore, it is an ongoing process of which a significant proportion has been achieved.

Literature review

As mentioned in the earlier section, it was established that a significant number of countries across the world have adopted IFRS. Also, the United States is contemplating allowing companies to IFRS. The international accounting works give evidence of the effect of using IFRS. The effects involve three elements. These elements are the synchronization of accounting procedures, market efficiency, and information presented in the financial statements (Rusu, 2013). The literature shows that the use of IFRS enhances efficiency in the global capital market and comparability of financial results of various companies across the world. Besides, the studies show that IFRS improves the accuracy, timeliness, and completeness of information provided in the financial statements. Studies also show that some companies have adopted IFRS willingly, even before it became compulsory (Rusu, 2013). These companies were driven by the need to attract foreign capital, improve the presence of the company and to minimize political costs. The studies that have established that companies that adopted IFRS voluntarily have positive effects on companies. Further, the studies do not seem to establish if the use of IFRS leads to lower cost of capital. Further, there is adequate evidence that shows that ownership of mutual funds is higher for companies that voluntarily adopted IFRS than companies that use other accounting standards (Rusu, 2013). Studies also show that there is no positive relationship between voluntary adoption of IFRS and gains from the capital market. Finally, the study showed that adoption of IFRS leads to a reduction in management of earnings, early recognition of losses and gains, and high quality accounts. In instances, where the adoption of IFRS was mandatory, studies showed that there was a positive effect on equity, total assets, and total liabilities. Adoption of IFRS also resulted in a statistically significant positive association between market returns and accounting data. Thus, there are several benefits that arise from the use of IFRS across the world (Rusu, 2013).

Despite the numerous benefits that have been achieved through the use IFRS, there are a number of problems that have been encountered and in some instances, the companies have reported total failure in the implementation process. One of the problems is lack of support from the political class, financial system, the legal framework, and taxation systems of a country also plays a role in the failure of IFRS.

Research data

This section will be based on research data for work that were conducted by previous scholars. The data will focus on ascertaining the impact of adoption of IFRS on comparability. The research was conducted for firms that were based in the United Kingdom. The first analysis established that adoption of IFRS resulted in improved performance of the FTSE 100 index. The research used data for the FTSE 100 index that was collected between 2002 and 2007 (Brochet, Jagolinzer & Riedl, 2011). The data show that the market index improved after the adoption of IFRS. However, the improvement cannot be exclusively attributed to use of IFRS. A further analysis was conducted using a sample of 2,616 firms in the United Kingdom to ascertain the impact of adopting IFRS on the financial statements. The results are presented below.

Variable UK Firms (N = 8,949) Sample Firms (N = 2,616) Difference
Mean Median Mean Median Mean Median
Sales 1,068.380 18.705 2,744.870 249.046 < 0.001 < 0.001
Net income 47.565 0.487 130.895 8.171 < 0.001 < 0.001
ROE –1.644 0.012 –0.022 0.029 0.030 < 0.001
Total Assets 3,952.810 53.620 11,721.460 335.803 < 0.001
% firms with year-end of December 39.6 % 44.7 < 0.001
Non-December 60.4 % 55.3 < 0.001

The information in the table shows that there is a general improvement in financial results as a result of the use of IFRS.

References

Brochet, F., Jagolinzer, A., & Riedl, E. (2011). Mandatory IFRS adoption and financial statement comparability. Web.

Donelson, D., McInnis, J., & Mergenthaler, R. (2013). Explaining rules-based characteristics in U.S. GAAP: Theories and evidence. Web.

Financial Accounting Standards Board. (2013). International convergence of accounting standards – overview. Web.

Forgeas, R. (2008). Is IFRS that different from U.S. GAAP? Web.

IFRS. (2013). Convergence between IFRSs and US GAAP. Web.

Rusu, A. (2013). IFRS adoption around the world – a brief literature review. Web.

Whirlpool Corporation. (2014). Financial information. Web.

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