0A- Comparing Accounting Reporting Practices of Nestle in Panama and Hershey in America

0a- Comparing Accounting Reporting Practices of Nestle in Panama and Hershey in America Aaron Thomas [email protected]

Abstract 0b- (1) The business environment is as such: Panama has historically served as the crossroads of trade for the Americas. Its strategic location as a bridge between two oceans and the meeting of two continents has made Panama not only a maritime and air transport hub, but also an international trading, banking, and services center. Panama’s global and regional prominence is being enhanced by recent trade liberalization and privatization, and it is participating actively in the hemispheric movement toward free trade agreements. (2) This paper will look at the accounting practices in Panama and compare them to the Generally Accepted Accounting Principles in America. (3) I will conduct internet searches using google search engine. These searches will use keywords such as “financial statements” and “business environment in Panama.” I will then interview a worker from the Nestle Latin America Headquarters in Panama. (4) The goal with IFRS is to make international comparisons as easy as possible. This is difficult because, to a large extent, each country has its own set of rules. For example, U.S. GAAP are different from Canadian GAAP. Synchronizing accounting standards across the globe is an ongoing process in the international accounting community. (5) In specific, the paper will focus on the different reporting practices of Nestlé in Panamá and Hershey in America. (6) The finding will show that while there are differences in accounting reporting, the end user of the statements can obtain the same information from each of the country’s financial statements. These difference while numerous, if know should still allow the user to rest assured in what the documents say. (7) This is a huge benefit for the people from each country who want to invest in companies abroad. With comparable information between the two countries, international investors will be more likely to invest across international borders.

1-Introduction (1)-Investopedia defines financial statements as: “Records that outline the financial activities of a business, an individual or any other entity. Financial statements are meant to present the financial information of the entity in question as clearly and concisely as possible for both the entity and for readers. Financial statements for businesses usually include: income statements, balance sheet, statements of retained earnings and cash flows, as well as other possible statements.” (2) The world’s third largest country both in size and population, the United States is a nation moving forward rapidly and successfully with its unique cultural diversity. Throughout the years, America has experienced waves of immigration from virtually every corner of the world molding the country into what it is today. After establishing its independence in 1776, the United States has endured civil war, the Great Depression, and two World Wars to become the richest and most powerful nation state in the world. Today, the US is considered to have the strongest and most technologically powerful economy. For those wishing to conduct business in the US, gaining a professional insight into the cultural design of this distinctive country is essential to your success. United States (3)- Currently, the United States requires companies to meet the accounting principle requirements for reporting under Generally Accepted Accounting Principles (GAAP). These are used to prepare, present and report financial statements for a wide variety of entities, including publicly traded and privately held companies, non-profit organizations, and government authorities, with the Financial Accounting Standards Board (FASB) establishing rules for public and private companies, and non-profit organizations; the Governmental Accounting Standards Board (GASB) determining a different set of assumptions, principles for local and state governments - and the Federal Accounting Standards Advisory Board (FASAB) performing a similar role for federal government entities. Although the SEC has a stated goal of moving from US GAAP to the International Financial Reporting Standards (IFRS), the provisions of which differ considerably from GAAP - progress has been slow and uncertain. Panama (4) Panama is ranked 61st out of 183 economies in Doing Business 2012, recording an increase of 2 points compared to last year. According to the latest Enterprise Surveys (2010), the top 3 obstacles to running a business in Panama include Corruption, Practices of the Informal Sector, and an Inadequately Educated Workforce. With regard to Corruption, 30.5% of Panamanian firms report having to give gifts to "get things done", more than the regional average of 10.9%. In the World Bank’s Worldwide Governance Indicators (2010), Panama is between the 40th and 60th percentiles for nearly all of the indicators. Panama’s economic freedom score is 65.2, making its economy the 55th freest in the 2012 Index. Its score is 0.3 point better than last year due to improvements in freedom from corruption, monetary freedom, and fiscal freedom. Panama is ranked 11th out of 29 countries in the South and Central America/Caribbean region, and its overall score is above the world and regional averages. One of the reasons for Panama’s growth is the free trade zones there. The Free Trade Zone is a large entity at the Atlantic gateway to the Panama Canal, dedicated to re-exporting a wide variety of merchandise to Latin America and the Caribbean. It is a free port, the largest such port in the Americas and second largest in the world. Today, the Colón Free Zone receives over 250,000 visitors a year and is home to 1,751 companies. It generated exports and re-exports valued at over US$6.5 billion in 2005, which are able to harness the services and facilities offered by the free zone for importing, storing, assembling, repacking and re-exporting products from all over the world—from electrical appliances to pharmaceutical products, liquor, cigarettes, office and home furniture, clothing, shoes, jewelry, and toys. It is considered the "trading showcase" of Central and South America, as well as for the Caribbean region. Figure 1: Constraints to business in Panama (5)- Many countries use or are converging on the International Financial Reporting Standards (IFRS), established and maintained by the International Accounting Standards Board. In some countries, local accounting principles are applied for regular companies but listed or large companies must conform to IFRS, so statutory reporting is comparable internationally, across jurisdictions.In 2009, Panama converted to using International Financial Reporting Standards (IFRS) utilizing accounting principles that complied with the International Accounting Standards Committee (IASC). IFRS is a set of international accounting standards stating how particular types of transactions and other events should be reported in financial statements. (6)- The focus of this report is Comparing Accounting Reporting Practices of Hershey in America to Nestlé in Panama. In specific, the paper will focus on the different reporting practices of one company, Nestle, in both of the countries. Here is a table summarizing the main differences. US GAAP IFRS Financial periods required Generally, comparative Comparative information must financial statements are be disclosed with respect to presented; however, a single the previous period for all year may be presented in amounts reported in the certain circumstances. Public current period’s financial companies must follow SEC statements. rules, which typically require balance sheets for the two most recent years, while all other statements must cover the three-year period ended on the balance sheet date. Layout of balance sheet and No general requirement within IFRS does not prescribe a income statement US GAAP to prepare the standard layout, but includes a balance sheet and income list of minimum line items. statement in accordance with a These minimum line items are specific layout; however, less prescriptive than the public companies must follow requirements in Regulation S- the detailed requirements in X. Regulation S-X.

Balance sheet — presentation Debt for which there has been Debt associated with a of debt as current versus non- a covenant violation may be covenant violation must be current presented as non-current if a presented as current unless the lender agreement to waive the lender agreement was reached right to demand repayment for prior to the balance sheet date. more than one year exists before the financial statements are issued or available to be issued. Table 1: Main differences in GAAP and IFRS

2- Information/Data Collection Approach 1- My information gathering was split into two parts. The first was internet searches. The second was interviews in Panama. Information and data was gathered to gain a better understanding of the accounting differences utilizing the internet and interviewing a representative from the Nestlé in Panama. It is a standard practice for businesses to present financial statements that adhere to generally accepted accounting principles (GAAP), to maintain continuity of information and presentation across international borders. As well, financial statements are often audited by government agencies, accountants, firms, etc. to ensure accuracy and for tax, financing or investing purposes. Financial statements are integral to ensuring accurate and honest accounting for businesses and individuals alike.

2- First, I gathered information from the internet with a search. I used Google search engine and it came back with many reputable websites from the search. I searched with the words of "accounting reporting" and “differences in IFRS” to find the main how each country reports its financials and the main differences between IFRS and GAAP. I also searched for “Panama Business Environment” to find out about general business in Panama.

Table 2: Keywords and phrases searched for To gather information about the specific financial statements, I used WRDS to gather financial information. Wharton Research Data Services (WRDS) is the leading data research platform and business intelligence tool for over 30,000 corporate, academic, government and nonprofit clients in 30 countries. We provide single-point access to over 200 terabytes of data across multiple disciplines, including Finance, Marketing, and Economics. WRDS offers flexible data delivery options, from Web interface and PC SAS Connect to the powerful WRDS Cloud. No other data management system offers so many options. Our state-of-the-art infrastructure gives users the power to analyze complex information at speeds of up to 400MB per second. From client- centered research support to analytics and consulting services, WRDS is the global gold standard in data management and research, all backed by the credibility and leadership of Wharton Business School.

3- The second step in the information gathering process was the interview with the representative from Nestle in Panama. The goal of this interview was to get the Panamanian perspective on IFRS and find the main differences in their accounting reporting and the way the U.S. reports. We traveled to Panama in May of 2013. While there, I had the pleasure of attending an interview session at Nestlé’s Latin America Headquarters in Panama. At this session I was able to ask questions about Panama, Nestle, and accounting. 4- I asked the presenters at Nestle questions from a prepared set of questions. The questions can be found in the table below. By asking these questions, I primarily obtained the opinion of IFRS held by the presenters. Additional information obtained included the differences between IFRS and GAAP and the difficulties of swapping to IFRS in 2009. Why do you think Panama went to IFRS instead of staying with the local principles? What have you done at Nestle to embrace these changes? What were some of the changes you faced when switching to IFRS? What were some benefits? Do you have a copy of your financial statements we could see?

Table 3: Questions asked in Panama interview with Nestle 5- While at Nestle in Panama, I interviewed Gloria Reyes. She is one of the Plant Bosses for Nestlé in Panamá. She has worked for Nestlé for many years and was happy to help us with our project when the original meeting was canceled. Figure 2: Gloria Reyes Figure 3: 75th anniversary sign

3- Case Study Panama 1-The Nestle headquarters in Panama are located at Av 4ta C Norte, Panamá, Panama. The phone number is 800-0000 or +507-229 13 33. Their website is http://www.nestle- centroamerica.com/Pages/bienvenida_ini.html.

Figure 4: Nestle Headquarters in Panama Figure 5: Map of Nestlé in Panama

Nestlé’s headquarters is located in Costa del Este, which is a newer area of Panama, located just east of the center of Panama City. A lot of multinational companies, such as Proctor & Gamble and Johnson & Johnson, have located to this area. This area use to be the city’s garbage dump. This dump was since moved beneath a park. It is now a popular residential and commercial area. 2- Nestle strategy can be found on their website, it reas” Nestlé’s objectives are to be recognized as the world leader in Nutrition, Health and Wellness, trusted by all its stakeholders, and to be the reference for financial performance in its industry. We believe that leadership is not just about size; it is also about behavior. Trust, too, is about behavior; and we recognize that trust is earned only over a long period of time by consistently delivering on our promises. These objectives and behaviors are encapsulated in the simple phrase, “Good Food, Good Life”, a phrase that sums up our corporate ambition. The Nestlé Roadmap is intended to create alignment for our people behind a cohesive set of strategic priorities that will accelerate the achievement of our objectives. These objectives demand from our people a blend of long-term inspiration needed to build for the future and short-term entrepreneurial actions, delivering the necessary level of performance.” The Nestlé Road map is shown below. Figure 6: Strategy - Nestlé Roadmap to Good Food, Good Life

3 - With instant coffee, baby food, and bottled water in the mix, Nestlé crunches more than just chocolate. The world's #1 food company in terms of sales, Nestle is also the world leader in coffee (Nescafe). It also makes coffee for the home-brewing system, Nespresso. Nestlé is one of the world's top bottled water makers (Nestlé Waters), one of the biggest frozen pizza makers (DiGiorno), and a big player in the pet food business (Friskies, Purina). Its most well-known global food brands include Buitoni, Dreyer's, Maggi, Milkmaid, Carnation, and Kit Kat. The company owns Gerber Products and Jenny Craig. In addition to its own products, Nestlé also owns approximately 30% of cosmetics giant L'Oreal. United States

- Figure 7: Map of Hershey in U.S. 4- Hershey’s address in the U.S. is 100 Crystal A Dr.HersheyPA17033. Their phone number is 717-534-4200. Their web address is www.hershey.com

Figure 8: Hershey Headquarters

5- The Hershey mission statement can be found on their website. It reads, “Bringing sweet moments of Hershey happiness to the world every day.

To our stakeholders, this means:

Consumers – Delivering quality consumer-driven confectionery experiences for all occasions

Employees – Winning with an aligned and empowered organization … while having fun

Business Partners – Building collaborative relationships for profitable growth with our customers, suppliers and partners

Shareholders – Creating sustainable value

Communities – Honoring our heritage through continued commitment to making a positive difference” 6- The Hershey Company, together with its subsidiaries, engages in manufacturing, marketing, selling, and distributing various chocolate and confectionery products, pantry items, and gum and mint refreshment products worldwide. It offers candy bars, candies, chocolates, toffee bars, sugar free candies, wafer bars, macadamia snack nuts, peanut caramel bars, minis, milk chocolate bars, malted milk balls, peppermint pattie, sugar free peppermint pattie, and chocolate covered fruit juice pieces. The company also provides high-cacao dark chocolate products, such as chocolate bars, tasting squares, and home baking products; and natural and organic chocolate products consisting of chocolate bars, drinking chocolates, and baking products. In addition, it offers a line of refreshment products, such as mints, chewing gum, and bubble gum, as well as pantry items consisting of baking products, toppings, sundae syrups, and hot cocoa mix. Further, the company provides chocolate-covered raisins, peanuts, and almonds; chocolate chips; beverage products; and cooking oil products. The Hershey Company sells its products through sales representatives and food brokers, primarily to wholesale distributors, chain grocery stores, mass merchandisers, chain drug stores, vending companies, wholesale clubs, convenience stores, dollar stores, concessionaires, and department stores. The company was founded in 1894 and is headquartered in Hershey, Pennsylvania.

4- Results and Results Impact 1- The preparation and presentation of financial statements was compared in Panama and the United States. This includes a look at the Income Statement, Statement of Cash Flows, Balance Sheet, and Statement of Retained Earnings. 2- The major similarity is the focus of the financial statements. Both IFRS and GAAP prepare financial statements to focus on the end user and their needs. This means that they prepare them with a mix of relevance and reliability so that investors can rely on them to make decisions. They use the same measurement attributes such as historical cost and fair market value. They both require the same components to be in the financial statements, including notes to the financial statements. And they both require you to record and impair goodwill.

Table 4: Similarities 3-One of the major differences lies in the conceptual approach: U.S. GAAP is rule-based, whereas IFRS is principle-based. The inherent characteristic of a principles-based framework is the potential of different interpretations for similar transactions. This situation implies second- guessing and creates uncertainty and requires extensive disclosures in the financial statements. In a principle-based accounting system, the areas of interpretation or discussion can be clarified by the standards-setting board, and provide fewer exceptions than a rules-based system. IFRS does not permit Last In, First Out (LIFO). IFRS uses a single-step method for impairment write- downs rather than the two-step method used in U.S. GAAP, making write-downs more likely. IFRS requires capitalization of development costs once certain qualifying criteria are met. U.S. GAAP generally requires development costs to be expensed as incurred, except for costs related to the development of computer software, for which capitalization is required once certain criteria are met. Consolidation — IFRS favors a control model whereas U.S. GAAP prefers a risks-and-rewards model. Some entities consolidated in accordance with FIN 46(R) may have to be shown separately under IFRS. Statement of Income — Under IFRS, extraordinary items are not segregated in the income statement, while, under US GAAP, they are shown below the net income. Inventory — Under IFRS, LIFO (a historical method of recording the value of inventory, a firm records the last units purchased as the first units sold) cannot be used while under U.S. GAAP, companies have the choice between LIFO and FIFO (is a common method for recording the value of inventory). Earning-per-Share — Under IFRS, the earning-per-share calculation does not average the individual interim period calculations, whereas under U.S. GAAP the computation averages the individual interim period incremental shares. Development costs — These costs can be capitalized under IFRS if certain criteria are met, while it is considered as “expenses” under U.S. GAAP.

Table 5: Differences

5- Summary 1- Panama switched to the International Financial Reporting Standards in 2009. This caused them to change the way they prepared their end of period financial statements. This study looks at those changes and compared them to the way financial statements are presented here. 2- To do this, I used WRDS on the internet to view the financial statements of Nestle in each country. I also searched on Google to find out information about the company and how it was run. I then interviewed a representative from Nestle in Panama. 3- I focused on Nestle in Panama and Hershey in the United States. Nestlé’s headquarters is located in Costa del Este, which is a newer area of Panama, located just east of the center of Panama City. In Panama they use IFRS as their accounting principles. The Hershey Company, based out of Pennsylvania, together with its subsidiaries, engages in manufacturing, marketing, selling, and distributing various chocolate and confectionery products, pantry items, and gum and mint refreshment products worldwide. In the United States they use GAAP. Next, I discussed the differences and similarities. 4- I found that the main difference is in the conceptual approach of each country’s accounting principles. The Generally Accepted Accounting Principles used in the United States are rule-based and IFRS leans more towards being principle- based. Other major differences are impairments, inventory cost flow assumptions, and extraordinary items. Major similarities include most importantly components and focus of the financial statements. 5- This study could help with educating Americans who will soon have to switch to IFRS about any pitfalls faced when Panama switched. 6- Possible extensions of this project are very possible and could be helpful with the United States’ switch to IFRS in the near future. Some additional work that could be done includes: how much switching from GAAP to IFRS would affect a company’s earnings per share or how much it would cost a company to switch all of their accounting over to the new system. 6- References Figure 1. Retrieved from http://rru.worldbank.org/BESnapshots/Panama/default.aspx Figure 6. Retrieved from www.nestle.com Figure 8. Retrieved from www.dreamstime.com usagaapvsifrs.pdf. Retrieved from www.cpa.com IFRS and US GAAP: similarities and differences. Retrieved from www.pwc.com US GAAP versus IFRS.pdf Retrieved from www.ey.com Nestle Annual Report: Nutrition to enhance the quality of life Retrived from www.nestle.com http://www.ifrs.com/ifrs_faqs.html#q10 http://www.ifrs.com/overview/General/differences.html http://www.investopedia.com/ http://www.nestle-centroamerica.com/Pages/bienvenida_ini.html. www.hershey.com http://www.globaltrade.net/f/business/text/Panama/Business-Environment-Doing- Business-in-Panama-2012.html