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#Written by David Tam, 1997. #
#davidkftam@netscape.net Copyright 1999#
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David Tam
Monday, January 13, 1997.
Business Press Review
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"Hummingbird to switch to U.S. accounting rules". The Globe and Mail.
Thursday, January 9, 1997. B16. ------------------
Hummingbird Communications Ltd., a small Toronto-based software company,
has decided to switch from Canadian to U.S. accounting rules. Hummingbird will
report financial results in U.S. dollars and follow the Generally Accepted
Accounting Principles in the United States.
A number of reasons for this action were mentioned. Because Hummingbird
plans to purchase an existing company in March, rules for distributing this
expense (the matching principle) are more advantageous under the U.S. system.
The company may charge most of this expense against its revenues within a year.
Under the Canadian system, this expense must be distributed over a number of
years. Although not explicitly mentioned, I believe these factors would allow
for Hummingbird to record a lower profit for the initial year (reducing taxes
owing to the government), and then showing a quick recovery the following
years. Under the Canadian system, the expense of the business acquisition
would dampen reported profits for several years. Hummingbird's portion of
revenues and assets derived from the United States have also increased,
providing more reason for the change of accounting systems.
This article deals with GAAPS, specifically on the issues of matching
principle and consistency as (supposedly) covered in the second lecture. As
mentioned under the consistency section of the course notes, "There are
occasions when a business entity can select a different method of accounting.
Once this method is selected then it should be retained from period to period
to ensure comparability." Hummingbird has decided to switch accounting methods
for many valid reasons. However, I believe they may have a few initial
difficulties because of the major changes needed. Also, the ease of
comparability between future and past financial records may pose problems.
(
geocities.com/siliconvalley/campus/9640/2ndYear) (
geocities.com/siliconvalley/campus/9640) (
geocities.com/siliconvalley/campus) (
geocities.com/siliconvalley)