IFRS Project Part 1 PPT

Royal Dutch Shell Company

Royal Dutch Shell Company

Royal Dutch Shell is a multinational oil and gas company, which is more commonly known as Shell. The creation of RDS is due to a merger between UK-based Shell Transport and Royal Dutch Petroleum. Shell was founded in February of 1907 and its headquarters are located in Hague, Netherlands. Royal Dutch Shell is known to be one of the most valuable companies in the world and is among the seven largest with highest revenues. Shell is very much integrated in the oil and gas industry because it is very active in terms of oil refining, marketing, production, distribution, and exploration as well as trading and power generation (Van Zanden, Jonker, Howarth, & Sluyterman, 2007). More so, in 2013, the Shell revenue was 84% of Netherland’s GDP ($555.8 billion).

Netherland is a member of the European Union and most of the financial and accounting procedures are dictated by the rules and regulations of the IAS, which was adapted in 2002. The adaption required companies, banks, and insurance firms in the member countries to prepare consolidated financial or accounting reports under IFRS and IAS regulations. Therefore, Royal Dutch Shell was expected to adhere to the regulations of the European Union and IAS (Chen, Tang, Jiang, & Lin, 2010).

However, the Dutch civil code has other regulations for the companies in her territory. The management of those companies were required to prepare list of shareholders, cash flow statements, profit and loss accounts, balance sheet and many other accounting documents. According to other Dutch accounting principles, the state government demands the organizations to prepare annual financial statements, annual reports, and other supplementary information. For ease of access, the Dutch civil code part 9-book 2 includes the guidelines on how the companies are supposed to prepare their annual reports, which falls under the council of Annual Reporting. Overall, the Dutch code helps regulate and supervise business organizations in terms of proper accounting and financial reporting.

Furthermore, business companies are allowed by the Dutch government to use or apply other principles. Companies thus apply for International Financial Reporting Standards (IFRS), which is widely accepted by the European Commission (Chen, Tang, Jiang, & Lin, 2010). The companies, which are accepted by IFRS, are usually obligated or expected to prepare annual financial reports according to the rules and regulations of the IFRS. In addition, every company is also required to publish its financial or annual reports within eight days from the date of adoption, depending on the size of the organization. Ultimately, a qualified and registered auditor audits both large and medium sized businesses, following the aforementioned Dutch laws.

Royal Dutch Shell deals with various products and some of the main products include; fuel oils, petroleum, lubricants, aviation fuel, diesel, bottled gas for domestic consumers and gas for industrial consumers. The company operates in around 130 countries, where they sell products to consumers on a daily basis (Hensler, 2016). The prices of these products fluctuate depending on the scarcity of the raw materials, but having access to global oil fields allows the flow of production to be continuous and profitable.

An Accounting career in the Netherlands usually starts immediately after high school graduation, or a tertiary institution such as a college or university. In addition to a BSc, the individual usually required to pursue an MSc in accounting. Furthermore, there is additional training most companies require in order to acquires a RA certificate. The newly trained accountant or auditor may only work for clients that follow the Dutch and NIVRA professional organization rules. However, since Netherlands is one of the members of European Union, the accounting profession is also subjected to EU laws which are used to regulate accounting professionals alongside other Dutch laws (Carmona & Trombetta, 2008). In order to maintain all regulations and mandates, the accountancy profession is regulated by two Dutch laws, which are The Auditors Profession Act and The Audit Firms Supervision Act, which are responsible for overseeing the auditing profession.

Unfortunately, even with all required education and training, the accounting profession in the Netherlands is frowned upon, mainly due to the lack of trust between the society and accountants that work for public institutions. Shockingly, only about 55% of auditors can be considered as trustworthy, thus labeling the accounting profession as corrupt and unfair.

Shell has proved to be very efficient in capital spending and global operations, propelling above its competition. Some of Shells major competitors include; Exxon Mobil, Chevron and ConocoPhillips. Shell has been performing much better than any competitors and is far ahead of the industry (Hensler, 2016). One prediction to why these other competitors have been performing poorly is due to the continuing decline in oil prices and all oil related stocks. The other companies stocks face serious headwinds with rapid drops just as low oil prices lead to a decline in both earnings per share and revenue among its major competitors.

Over the past years, there has been an important shift in the oil fields. The industry is now forecasting figures that are very different from previous forecasts. The systematic imbalance has replaced the traditional structural discipline. This has been a big indicator of increased supply that exceeds demand growth. The increasing shift in demand for oil is partially due to harsher economic regulations and global economic weaknesses. For example, China’s efficient engines coupled with a slower growth and unending financial problems demands a way higher need for oil. Energy Information Administration estimates that in 2014 the increase in consumption was almost half the supply of petroleum and other liquid fuels. This would obviously lead to lower prices and reduced profits, which is a big problem for the oil and gas companies in the industry. The companies have resorted to cutting off unprofitable units and cutting back on investments all together.

With an increased number of countries employing IFRS in their capital markets, the oil and gas industry has been actively involved in following IFRS for reporting their financial reports. Over 100 countries either have or are in the process of adapting to the IFRS. The firms that have already adapted to the IFRS are facing their own obstacles, as the pace of setting standards from the IASB (International Accounting Standards Board) recently has been intensified. IFRS are standards that outline guidelines that industry should adhere to. One of the primary obstacles of any oil company is how to implement it so that it can fit in the context of a particular firm or industry (Hensler, 2016). When PwC carries out an audit, they usually study how oil and gas firms apply the IFRS. Therefore, it is safe to say that the industry uses IFRS as opposed to the U.S GAAP. It would be most ideal for any USA company in the oil and gas industry to switch to IFRS standards.

This is because the IFRS is particularly tailored to fit special features of the industry concerning the vital uncertainties involving exploration activity. More significantly, the lead times between the first production and the initial investment is well outlined (Hensler, 2016). The capital spending that is necessary for exploration to develop and evaluate a gas or oil value and its fields has provisions in the IFRS. There are various of other methods that each country applies to take their “portion” of the economic profit such as; taxes, risk sharing contracts and production or royalties.

As previously mentioned, the International Financial Reporting Standards are a set of accounting standards developed by an independent, non-profit organization called the International Accounting Standards Board. Prior to the implementation of IFRS, Generally Accepted Accounting Principles were used to prepare financial statements and annual reports. The GAAP Principles were established by the American Institutes of Certified Public Accountants, which complied with regulations imposed by the Securities Exchange Commission. The IFRS was established in the early 2000s to help the global economy by finding a way to integrate various languages that are used in accounting procedures. The overall theory of this process is to unify all the different languages into one global language that enables simpler accounting practices that all countries can follow.

In 2002, The European Union declared that all publicly traded companies must be required to prepare their financial statements in accordance to the IFRS standards. The European Union, which is comprised of 28 member countries, decided in the early 2000s that the IFRS would be implemented. A slightly lengthy process must be done in order to make sure that this change is completed correctly and effectively. In 2004, Shell began to apply the new IFRS standards on their financial statements. Their official day that Shell transitioned from UK GAAP to IFRS was on February 29, 2004. In establishing this transition, the dates for the fiscal year had to also be amended to incorporate the adjustment of the dates. This had an effect on the comparative period that was given in the Statement of Income, Statement of changes in Equity, and statement of cash flows. Since this affected all of the said forms, they are only available for an information period of one month. When a company is switching from GAAP to IFRS this is considered to be the transitional period where both GAAP and IFRS principles are used side by side. The final implementation date was scheduled to begin on the first day of 2005 (January 1, 2005).

Shell, when preparing their financial statements adjusting to IFRS, provided a balance sheet and income statement for the initial implementation year, 2005, as well and the previous year in 2004. Many companies simultaneously provide the balance sheet and income statement under both of the accounting principles to show investors the differences between the standards. This transition can cause different opinions about the outcome of the financial reports, but as for Shell, the transition did not have much impact. Of the few things that were impacted, net income and pension cost were among them.

One of the largest differences between US GAAP and IFRS is the verbiage that is used. After switching to IFRS, some of the US GAAP principles were discontinued. When making the change, the definitions of the words used had to have a less vague meaning. When using IFRS, the activity has to be a separate major line of business of geographical area of operations. Also, within this classification, equity accounted and other investments are included. Under the UK GAAP principles, the definition of activity is extended to encompass a component of an entity instead of a separate major line of business or geographic area of operation. Under this principle, equity accounted and other investments are not included as they are under IFRS. This causes a discrepancy when comparing GAAP and IFRS because the items that are discontinued in GAAP are considered continued under IFRS.

The Company has taken the exemption available under IFRS 1 First-time Adoption of International Financial Reporting Standards to only apply IAS 32 and IAS 39 from January 1, 2005 and the impact on transition is described in Note 5.

After calculating the net profit margin, we concluded that Royal Dutch Shell’s profit margin in 2006 was about 8.39%, an increase of 1.1% from the previous year, which was one of their bigger jumps in the last 10 years (97,357.52 / 1,160,160.69= 8.39%). One potential reason for this increase in profit was the increase in price per barrel of oil. In January 2005, the price per barrel of oil was roughly $46.8 (up nearly 70% from the previous year at $34.3), and in just 12 months, the price of oil increased again to about $65.5 per barrel. The return on equity for Shell was 27.83% at the end of 2005, another increase from the previous year of about 3.65% (97,357.52 / [(355,709.34 + 344,071)] / 2). The leverage ratio for Royal Dutch Shell in 2011 was a positive one at .5047 (Total liability 121,592 (in millions) /Total asset 219,516 = .5539).

Segment earnings in 2005 of $25,311 million included a net gain of $6,771 million mainly related to gains on divestments, mark-to-market valuation of certain gas and derivative contracts, and exceptional tax items. These were partly offset by asset impairments and the cost impact of the US offshore drilling moratorium. Segment earnings in 2004 of $18,540 million included a net gain of $1,256 million, mainly related to gains on divestments, partly offset by asset impairments, mark-to-market valuation of certain gas contracts and the cost impact of the US offshore drilling moratorium. All gains and losses identified above relate to items that individually exceed $50 million. Under U.S. GAAP, asset impairment is a two-step process as apposed to IFRS which is a single-stem impairment and therefore more likely to be recorded under IFRS due to the least amount of restrictions. For inventory valuation, U.S. GAAP permits LIFO, FIFO and weighted average, cost or specific identification. This allows inventory to be carried at a lower cost of market. Under IFRS, permits for FIFO are only offered. LIFO is not permitted which means inventory can be carried at a lower of cost or net realizable value. Shell uses FIFO to avoid major tax liabilities that occur when using LIFO since inventory must be revalued. When it comes to revenue recognition, Shell recognized revenue from chemicals and all other products are recognized at the fair value of consideration received, after subtracting sales taxes. Revenue resulting from the production of oil and natural gas from properties in which Shell has an interest with partners in joint operations is recognized in the consolidated statement of income. U.S GAAP provides very specific general industry guidelines about what constitutes revenue, which is the main reason why many companies including Shell go with IFRS for revenue recognition. Under IFRS, revenues are most likely to increase with less detailed guidance. Although this may be the case, this can also lead to unethical accounting practices, which has been the downfall of many corporations.

Works Cited

Carmona, S., & Trombetta, M. (2008). On the global acceptance of IAS/IFRS accounting standards: The logic and implications of the principles-based system. Journal of Accounting and Public Policy, 27, 455–461. http://doi.org/10.1016/j.jaccpubpol.2008.09.003

Chen, H., Tang, Q., Jiang, Y., & Lin, Z. (2010). The role of international financial reporting standards in accounting quality: Evidence from the European Union. Journal of International Financial Management & Accounting, 21(3), 220-278.

Hensler, D. R. (2016). 8. A class action ‘mash-up’: In Re Royal Dutch/Shell Transport Securities Litigation1. Class Actions in Context: How Culture, Economics and Politics Shape Collective Litigation, 170.

Van Zanden, J. L., Jonker, J., Howarth, S., & Sluyterman, K. (2007). A History of Royal Dutch Shell. OUP Catalogue.