Interpreting Financial Statements: Effects of U.S. GAAP
Polygram’s financial statements included the following additional disclosure:
The calculation of Net income substantially in accordance with U.S.GAAP is as follows (in millions of Netherlands guilders):
| 1994 | 1993 | |
| Net income per PolyGram’s Consolidated | ||
| Statements of Income | 738 | 614 |
| Adjustments to reported income: | ||
| a. Amortization of goodwill | (27) | (26) |
| b. Amortization of intangible assets | (57) | (64) |
| c. Remeasurement of financial statements | ||
| of entities in hyper-inflated countries | (13) | 5 |
| d. Other | 5 | 5 |
| Approximate net income in accordance | ||
| with U.S. GAAP | 646 | 534 |
Required
a. Discuss any unfamiliar terms used by PolyGram in this note.
b. How have the applications of U.S. GAAP affected PolyGram’s reported net income? Do these differences seem significant? Why?
c. Reevaluate PolyGram’s profitability. Does this new information change your assessment of PolyGram’s profitability? How?
d. Why do you think PolyGram reports net income at higher levels in its primary financial statements and then at lower levels after applying U.S.GAAP?
e. Which of PolyGram’s disclosures of net income is more conservative? Which is more comparable to other U.S. companies? Which would you prefer as a manager? As an investor? As a financial analyst? Discuss these differences.
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