There are slight differences between GAAP and IFRS and therefore affect the way financial statements of Netflix are prepared including the way it conducts its business. The statement of income, for example, does not segregate extraordinary items under IFRS but the US GAAP shows them after the net income. The consolidated statement of comprehensive income for Netflix shows other comprehensive loses below the net income. Under the earning per share, IFRS does not average the calculations for the interim period whereas the US GAAP computes the incremental shares for the individual interim period. Development cost is another area where differences can be identified between the two accounting systems. The IFRS capitalizes there costs if they meet certain criteria but the GAAP considers them as an expense. The research and development, for example, are treated as expenses under GAAP but IFRS to some extent capitalizes such expenditures. Such investments enhance the future operations of the company. It is therefore inappropriate to expense research and development costs as it violates the matching rule where expenses and revenues should be recognized in the same period they are incurred. The use of either IFRS or GAAP affects the financial statements of the company (Lin, Riccardi & Wang, 2013). Expensing some of the development costs can increase the volatility of the company’s earnings as the timing of such multiyear projects can lead to lumpy earnings volatility.
Netflix depreciates its property plant and equipment using the straight-line method using the estimated useful life of the asset. The company generally has a maximum period of 30 years. The leasehold improvements use the lease term as the estimated useful time. Leased buildings are capitalized by the company and added to property and equipment when it was involved in the construction and failed to meet the leaseback criteria (Harris, Stahlin, Arnold & Kinkela, 2013).
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Some of the adjusting entries include DVD content which is considered productive assets if they are directly purchased. They are recognized in noncurrent content assets on the statement of financial position. Acquisition of the same, net of changes in related liabilities is reported within the net cash provided by investing activities. Netflix amortizes the direct purchase DVDs over their estimated useful life on an accelerated basis. Revenue sharing obligations with studios for DVD content are also recognized as incurred based on the shipment. Such transactions are listed in the balance sheet as a requirement to show the financial position of the company on the reporting date.
Memo on the Advantages and Disadvantages of Transitioning from GAAP to IFRS
As the subject above indicates, it is a high time that the company consider transitioning from GAAP to IFRS. It is a known fact that GAAP applies to U.S. public, and small to medium-sized companies including none profit organizations. The company international market requires that the financial reporting system be adjusted from the current GAAP to IFRS. It will be easier to report the operations of the company from the international perspective and apply the standards and principles used by foreign countries (Choi & Meek, 2008). The IFRS is global standards allows for simplicity due to the few rules and revenue recognition. It will be possible to capitalize the research and development costs for the company strengthening the financial statement. It will therefore be possible to report the fair market value of the assets less its accumulated depreciation which is different from GAAP where the same are recorded at cost less accumulated depreciation. The financial statements for the company can also be compared with similar companies around the world if the same system is used by all. The same system can also be applied to the small companies held by Netflix in the global market. Adopting IFRS will be beneficial to the company as it will provide more accurate and comprehensive financial statements and also reduces the differences in the reporting standards. Any losses by the company can also be recognized immediately and also contributes to increased transparency and consistency (Lin, Riccardi & Wang, 2013). Some of the disadvantages of IFRS are the cost related to its use by multinational companies where the internal systems have to be changed to make them compatible with the reporting standards. The IASB will also be a monopolist in setting standards which can lead to laxity and less reliable and useful information. The adoption of IFRS is also costly and complex especially for small companies.
Memo on the Status of Accounts Receivables
The company has received credible information that of the largest customer has been declared bankrupt. According to our records, the buyers provided a market for about 18% of our sales and their current status is likely to affect the company negatively. Currently, the accounts receivables for Netflix stand at $100,000 where 21% is from the customer. An assessment of the situation shows that the customer can only manage to pay $6,800 and the remaining amount is likely to be bad debt. It is therefore critical to bring to the attention of the company such issues so that an appropriate decision can be made. The accounts receivables from the customer are substantial and writing them off will affect the financial position of the company (Choi & Meek, 2008). Similarly, the provisions for bad and doubtful debts cannot cater to the entire amount held by the customer. It is also critical to bring to the attention of the company that sales for the company are expected to decline once any business transactions with the client are terminated. The company should, therefore, look for an alternative market or cost reduction strategies that will cater to the decline in the current revenues of the company.
References
Choi, F., & Meek, G. (2008). International accounting . Upper Saddle River, NJ: Pearson Education/Prentice Hall.
Harris, P., Stahlin, W., Arnold, L., & Kinkela, K. (2013). GAAP vs. IFRS Treatment of Leases and the Impact on Financial Ratios. SSRN Electronic Journal . doi: 10.2139/ssrn.2248140
Lin, S., Riccardi, W., & Wang, C. (2013). Relative Benefits of Adoption of IFRS and Convergence between IFRS and U.S. GAAP: Evidence from Germany. SSRN Electronic Journal . doi: 10.2139/ssrn.2200992
" Netflix Inc (NFLX) 10K Annual Reports & 10Q SEC Filings. (2018). Retrieved from https://www.last10k.com/sec-filings/nflx
Netflix Inc. (2018). Retrieved from https://www.marketwatch.com/investing/stock/nflx/financials
