“Weak Signal: Evidence of IFRS and US GAAP Convergence from Nokia’s 20-F Reconciliations”
Nokia was created in 1967 through a merger and has become one of the world’s leaders in mobile communications and electronics. The Finland based company gained a lot of power through acquisitions within the telecommunication and electronic market, made around the 1980’s. The company is now specializing in four segments, mobile phones, multimedia, enterprise solutions, and networks. Nokia has ADRs (American Depository Receipts), which allow investors in the US to trade securities without having to trade in foreign capital, that are currently traded in the New York Stock Exchange as “NOK”. Company ...view middle of the document...
However, the SEC wants to eliminate that reconciliation. The convergence of the two standards would be a great benefit because the integration of financial reporting around the world would translate into lower cost of capital because of higher investor confidence. As it stands, the SEC reconciliation between the two standards represents an additional cost to non-US firms. The convergence and generating a single set of standards sounds like a perfect idea for all firms, but may not be entirely easy to do. In the following pages we will analyze the accounting differences of IFRS and GAAP for Nokia and for the past 13 years. Nokia, the Finland based company, is listed in the New York Stock Exchange which means they are to abide by the SECs requirements when reporting.
DEVELOPMENT COSTS
1. In accounting for development costs under U.S GAAP, the costs are recorded as they are being incurred, and under IFRS, these costs are capitalized once technical and economic feasibility can be proven. Using US GAAP, these expenses are recorded as incurred unless specified by guidance in a different Accounting Standard Code. The codes that relate to software development and that are meant to be for external use, can be capitalized “once technological feasibility is established in accordance with specific criteria (ASC 985-20) (Ernst & Young).” If the software development cost are meant to be used for internal use only, then those cost incurred may be capitalized. On the other hand, when using IFRS, the development costs can be capitalized when both technical and economic feasibility can be proven accordance with criteria such as: demonstrating the technical feasibility as well as the intent to complete the asset, and the ability to be able to sell the asset in the future. It is important to note that there is “no separate guidance addressing computer software development costs (Ernst & Young).”
2. The difference in Nokia’s net income and shareholders’ equity under IFRS versus U.S. GAAP for the years 1994-2006 pertains to development costs. During these years the development costs were very important in explaining the difference for the adjustment made to shareholder’s equity. The adjustments made to convert net income calculated under IFRS, to be in compliance with GAAP resulted in a 37.8% decrease to net income in 1995 and a 9.1% increase to net income in 2003. Generally speaking, developments cost would cause net income to be higher using IFRS during the year that these cost are capitalized and lower in subsequent years. The adjustment to reconcile US GAAP will result in a negative adjustment to net income during that year and a positive adjustment in subsequent periods.
3. As explained above, under US GAAP a company is required to expense research and development costs because the future economic benefit cannot be determined, while IFRS allows companies to capitalized development costs when technical and economic feasibility are demonstrated. At the...
