Reconciliation of Income and Shareholders’ Equity:
The United States and the United Kingdom
Foreign companies whose shares are registered on U.S. security exchanges must file a description of significant differences between U.S. and domestic accounting principles with the SEC, as well as a reconciliation of net income and shareholders’ equity under domestic and U.S.GAAP. Antic Knights, plc, a British firm, included the following information in its SEC filings for 2000:
1. Summary of Differences
Between United Kingdom and United States Generally Accepted Accounting Principles:
(a) Acquisition Cost
Under United Kingdom GAAP, certain acquisition-related costs can be immediately charged to retained earnings. Under United States GAAP, these costs are charged to the statement of earnings as incurred. Examples of such items include certain costs related to the closure of facilities and severances of terminated employees.
(b) Deferred Taxation
United Kingdom GAAP allows for no provision for deferred taxation to be made if there is reasonable evidence that such taxation will not be payable in the foreseeable future. United States GAAP requires provisions for deferred taxation be made for all differences between the tax basis and book basis of assets and liabilities.
(c) Goodwill and Other Intangibles
The Company writes off certain intangible assets, including goodwill, covenants not to compete, and favorable lease rights, directly to retained earnings in the year of acquisition. Under U.S. GAAP these intangible assets would be capitalized as assets and amortized over their estimated useful lives.
2. Reconciliations of Net Income and Shareholders’ Equity:
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Net Income Reconciliation |
Shareholders’ Equity Reconciliation |
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|
For the year ended |
For the year ended |
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|
March 31, 2000 |
March 31, 2000 |
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(Pounds in Thousands) |
(Pounds in Thousands) |
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Net Income Reconciliation |
Shareholders’ Equity Reconciliation |
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|
Net earnings before |
|
|
|
|
extraordinary items |
£ 19,726 |
Shareholders’ equity |
£ 8,652 |
|
Amortization of goodwill |
(10,292) |
Goodwill |
13,312 |
|
Acquisition costs |
(3,012) |
Deferred taxes |
(509) |
|
Deferred income taxes |
(333) |
Other |
1,172 |
|
Other |
(1,895) |
|
|
|
Estimated earnings, |
|
Shareholders’ equity, |
|
|
U.S. GAAP |
£ 4,194 |
U.S. GAAP |
£22,627 |
Required
a. For each of the indicated differences between U.S. and U.K. GAAP, indicate which method of accounting you consider to be more suitable to the needs of investor analysts. Explain your reasoning.
b. Based on the information provided, do you consider U.K. or U.S.GAAP to be more conservative? Explain.
c. Based on the explanations of differences between U.K. and U.S. GAAP, explain why each of the individual reconciling items is added (or subtracted) to convert to U.S.GAAP. (For example, why is goodwill subtracted in the income reconciliation and added in the shareholders’ equity reconciliation?)