Exxon Can Study
Exxon Can Study
Exxon and PB two of the worlds three largest oil companies in many common financial measures.
Exxon
U.S. oil company, required to prepare its financial statement under G.A.A.P.
As a U.S. company issuing securities in the U.S. requires filing financial statements with SEC ( form 10-K ).
Employs LIFO as an acceptable cost flow assumption for inventory.
Experiencing Record levels of profits.
European oil company, required to prepare its financial statement under I.F.R.S. issued by I.A.S.B. and adopted by EU beginning of 2005.
Issuing securities in the U. S. requires Filing financial statements with the U.S. SEC ( form 20 – F ) .
Acceptable cost flow assumption for inventory (specific identification, FIFO, and weighted average cost) BP employs FIFO.
BP failed to invest in maintenance of its oil producing infrastructure, causing environmental damage , reducing availability of oil for US consumption .
PB was experiencing record levels of profits.
Are oil company profits driven by the volume of oil produced & sold ?
Are oil companies adjust prices at the pump to increase profits?
BP reconciliation for GAAB page 555
The effects of deferred taxes on business combinations, pension reporting and impairment accounting caused U.S. GAAP reported income to be less than IFRS income.
The difference accounting methods cause U.S GAAB shareholders equity to be greater than IFRS shareholders equity .
The difference in inventory valuation is not LIFO – FIFO related, its due to valuing inventory at market price under IFRS and at cost under GAAB.
BP uses FIFO which is an acceptable method under GAAB, so there is no LIFO – FIFO difference that requires reconciliation .
In February 2006, the FASB and IASB issued a “Roadmap MOU”, the primary objectives of this agenda of items are:
Convergence to one set of high-quality common standards.
Eliminate the need for IFRS-U.S. GAAP reconciliations in financial statements of foreign issuers filed with U.S. SEC on form 20-F.
Success was achieved in convergence for two specific issues:
Accounting for discontinued operation (GAAP approach preferable).
Reporting accounting changes (IASB approach preferable).
Process of convergence is challenging and time-consuming, in part because of the more litigious U.S. environment and “legacy” standards that are difficult to change.
Cost flow assumptions one of the more difficult issues on which to converge:.
Companies subject to U.S.GAAP are permitted to use the LIFO cost flow assumption, many employ this method and derive significant tax benefits. It is difficult for these companies to accept a prohibition on the use of LIFO. In the same time LIFO is proscribed under IFRS.
Cost flow assumptions/ inventory valuation currently is not listed on the FASB-IASB convergence work program.
Some cost flow assumptions/inventory valuation methods are acceptable under both U.S. GAAP and IFRS (FIFO and average cost).
It is unlikely that convergence on the acceptability of LIFO will occur in the near future.
Excerpts from financial statement footnotes page 553.
Two methods:
1) Exxon is using LIFO method for inventory.
2) Replacement cost of inventory.
This footnote entitled miscellaneous financial information rather how a footnote entitled inventory a cost of production to de-emphasis the profit decreasing effect of LIFO.
Exxon doesnt report the difference between