Amazon (GAPP) Vs Rakuten (IFRS)


            Globally, investors looks for the companies that reliabily discloses their accounting information accurately to invest in. Based on these developments, business communities increasingly transits from US GAAP to IFRS thus impacting the affiliated US investment companies. Other countries that have witnessed transitions include South Korea, Canada and Brazil which transition occurred in 2011, followed by India and Mexico in the year 2012(Barry, 2011). Although Japan has permitted the investor to use IFRS to invest in domestically listed companies since 2010, Ireland and UK have made statutory proposals to adopt the use of IFRS. Similarly, in the United States, US Security and Exchange commission implemented the transition from US GAAP to IFRS. Starting in November 2007, US security and exchange commission permitted the international companies domestically listed in United States to commence the use of IFRS without having to reconcile their financial statements to conform to US GAAP. In order to have clear understanding between the similarity and difference of US GAAP and IFRS, this paper uses Amazon and Rakuten both online retailers.


   was established in July in World Wide Web (WWW) with head office located in Seattle, Washington. The first share was listed for public in the year 1997 and since then Amazon stock has been listed on the NASDAQ. The company operate under four major principles: customer obsession rather than competitor focus, passion for invention, commitment to operational excellence, and long-term thinking(Dugdale, 2014). The company serves variety of customers ranging from content creators, enterprises, developers and sellers. Also, the company offers services such as co-branded credit card and advertising agreements. The first quarter of 2015 the company transformed how accounting information is disclosed to conform to North America, Amazon Web Services (AWS) and international. The disclosure segment included how the company manages it operations and evaluate its operations.


            The company provide comprehensive internet services which the Group Companies embrace in three reportable segments: Internet Services, Fin Tech and Others. The disclosure of the financial information is done each segment separately. For example, the segment of Internet services include the provision of different e-commerce services such as digital contents sites, portal sites, travel booking sites, online cash back sites and internet shopping mall RakutenIchiba. In addition, all the sites have advertising segment(United States Securities and Exchange Commission, 2016). FinTech segment involves the provision of services such as electronic money, life insurance, credit cards, bank and securities related services. Fin Tech is the incorporation of financial and internet technology a move the company began focusing in the year 2003. Other segment group companies involves the provision of communication and messaging services.


            Since inception, Amazon categorized leases as either capital or operating leases. When the Amazon is certain with lease agreement, the company may receive rent payment for holiday and other incentives. The company recognizes lease expenses using a straight-line basis without having to consider deferred payment terms which mostly affects rent holiday which defer the starting date for payment(United States Securities and Exchange Commission, 2016). In addition, the incentive that the company receives are accounted as a reduction of company’s expenses over the period of lease agreement. Leasehold improvement are capitalized at cost and amortized over the lesser of their expected useful life or the non-cancellable of the lease. In regards to build-to-suit lease arrangements, Amazon company determines the assets and liabilities for the projected construction expenses based on the levels at which the company participate in the construction of structural improvement.

Read also Development of Generally Accepted Accounting Principles (GAAP)

Alternatively, the company may decide to take construction risk before start of a lease. Once the facilities have been occupied, the company determines whether the lease arrangement qualify for sales recognition under the sale-leaseback accounting guidance if the occupied facility was falling under build-to-suit(Mikitani, 2015). That is if the company continued to be perceived as the owner the facility continues to be recognized as finance leases. In addition, the company determines assets and liabilities for the present value of the projected future expenses to conclude long-lived assets at the expiration or end of a lease. These assets are devalued over the lease period into operating expense, and the recorded liabilities are accreted to the future value of the estimated retirement costs.

Long-Term Liabilities


2015 2014
Long-term capital lease obligations 4,212 3,026
Long-term finance lease obligation 1,736 1,198
Construction Liabilities 378 467
Tax Contingencies 932 510
Long-term deferred tax liabilities 1,084 1,021
Other 1,584 1,188
Total Other Long-term Liabilities 9,926 7,410

Some of the equipment especially those related to buildings and technology infrastructure were acquired using capital leases. The long-term capital lease obligation for Amazon are shown in the table below.

Cross Capital lease obligations 7,452
Present imputed interest -213
Present value of net minimum lease payments 7,239
Less current portion of capital lease obligations -3,027
Total Long-term capital lease obligations 4,212

As explained in earlier paragraph facilities and buildings that continued to be deemed as owned by the company after occupancy since it was constructed through build-to-suit lease arrangement and formerly accounted as Construction liabilities are regarded as finance lease as shown in the table below.


Gross finance lease obligations 2,390
Less imputed interest -555
Present value of net minimum lease payment 1,835
Less current portion of finance lease obligations -99
Total Long-Term finance lease obligations 1,736

In the case of Rakuten, the determination whether a service is under lease arrangement at the date of inception. The company classifies the arrangement as lease transaction if the determination indicates that the company has a right to use the asset or the transaction demands for a specific use of the asset(U.S. SEC, 2011). In the other hand, the company classifies the lease as finance leases if the arrangement puts all the risks and benefits in terms of ownership to the company or lessee. Generally, finance leases requires huge capital at the start of the lease since it present lower of the value of the leased item or asset and the present value of the minimum lease payments. The accounting policy of the Group Companies requires that after the start of the lease each asset should be appropriated.

The group company uses implicit interest rate of the lease to calculate the present value of the minimum lease payment, which is determined practically. In a situation whereby the group companies are unable to determine rates, the lessee’s incremental borrowing rate shall be applied. In order to determine a constant rate of interest on the remaining balance of the liability, the company should apportion the minimum lease payment between the finance charge and reduction of the lease liability(United States Securities and Exchange Commission, 2016). In addition, the leased asset is devalued or depreciated over the shorter of the estimated useful life of the assets and the lease term. The company categorizes other lease arrangement which do not fall under finance lease that have been capitalized under consolidated statement of financial position as operating leases. Additionally, the company uses straight-line method to recognize lease payment as an expense which is under operating leases transaction which is a lease arrangement in the consolidated statement income.

Analysis on the two online retailers it is clear that they both use straight-line method to recognize their lease payment. However, in terms of disclosure of accounting information, Rakuten Group Companies follows disclosure guideline as outlined by PWC which is preferred by the most foreign investors(Mikitani, 2015). For example, regarding operating leases the Rakuten focused on disclosing income statement and the commitments to make future payments under the lease. This kind of disclosure relates to companies falling that have satisfied IFRS requirements.

Deferred income tax

            Amazon categorizes income tax expenses to include U.S. federal, state and foreign income taxes. The company does not provide for U.S. taxes on the undistributed earnings of foreign subsidiaries that were not formerly taxed since the beginning of the investment. According to the company report it is challenging to determine unrecognized deferred tax liability that would be incurred in the future when the amounts were repatriated(Carter, & Usry, 2002). Deferred income tax balances signifies the influence of temporary dissimilarity between conveying amounts of assets and liabilities as well as their tax bases. These taxes must be stated at enacted tax rates expected to be in effect when taxes are paid or recovered. The company assesses the deferred tax assets in order to be realized in the future and minimized by assessment allowance to the extent the company believe it will be realized.

Read also Publicly Traded Companies’ GAAS, PCAOB, COSO, and GAAP Audit Requirements

In order for the company to realize its deferred tax assets, the company must evaluate many factors which include carry-forward periods available for company in terms for tax reporting purposes, capital gains by taxing jurisdiction, expectations of future taxable income, the recent cumulative earnings experience of the company and other relevant factors(Dugdale, 2014). The company locate its valuation allowance to current and long-term deferred tax assets on a pro-rata basis. In addition, the company uses two-step strategy to determine and valuating uncertain income tax positions such as tax contingencies. The first approach involves the determination of the tax position for appreciation by determining if the weight of available evidence indicates it is more likely than not that the position shall be sustained on audit, which include litigation processes or resolution of related appeals.

The second approach is to determine the tax benefit as the largest amount which is more than 50 % likely of being realized upon ultimate settlement. The company evaluate several factors when considering its tax position and approximating its tax benefits(Mikitani, 2015). This is indicate that the company may require to engage in periodic adjustment and sometimes it may result to inaccurate prediction of actual outcome. These include the interest and penalties regarding to company’s tax contingencies in income tax expense.

In the case of Rakuten, the income tax expense are categorized into current and deferred taxes. These taxes are acknowledged in the consolidate statement of income, except for income taxes which resulted from business combination or which are recognized either in other comprehensive income or directly in equity(KPMG, 2008). Deferred income tax assets and liabilities on the hand are acknowledge on dissimilarities between the carrying amounts of assets and liabilities in the consolidated statement of financial position and  their corresponding tax base.

The analysis on the two companies indicated that Rakuten which uses IFRS disclosure approach is more suitable for the investors. For example, the company recognizes deferred income tax assets and liabilities are acknowledge for taxable temporary dissimilarities related to the investment in joint venture, subsidiaries and associated, something which is lacking in Amazon company(Haider, 2011). In addition, Rakuten has the capability of regulating the timing of reversal of the temporary dissimilarities and it is foreseeable that the temporary dissimilarities will not reverse in the predictable future, deferred tax liabilities are not recognized.

Dividends /stock dividends/property dividends/stock split

            According to Amazon report of 2015 the company has never declared or paid dividend on their common stock. For the investors who expects to earn dividend annually after investing in a profitable company domestically listed in stock exchange, Amazon would be appropriate company to invest(United States Securities and Exchange Commission, 2016). In the other hand, Rekuten dividend policy is to provide shareholder with optimal returns of excess capital expenses and at the same time maximizing the shareholders’ value. The management of the company while making decisions regarding the dividends, they put emphasis on medium to long-term enhancement and maintenance of consolidated return on equity (ROE)(Adam, 2002). In order for the company to maintain and increase dividend per share at a constant level, the company ensures that there is enough internal reverse for stabilizing financial base and investment funds.

The Rakuten operates in three key philosophy in relation to shareholders’ equity based on the medium- and long-term growth:

  • Prepare a financial basic sound enough for the company to capture growing business opportunities promptly and accurately.
  • Maintain the level of financial rating required for conducting financial business, while sustaining the level of shareholders equity in compliance with regulatory requirements.

This fiscal year the board of directors decided to that each shareholder was paid 4.5 Japanese Yen per share. The trend of dividend share is shown in the table below after adjustment for share split.

Fiscal Period






Year Ended Dec-11 Dec-12 Dec-13 Dec-14 Dec-15
Dividend per share (yen) 2.5 3 4 4.5 4.5

Based on this reports it is clear that Rakuten company is the appropriate for investing because of the annually dividends paid after share split.

Cash flow statement

            According to Amazon report, the primary sources of liquidity are the cash flows which include those that are generated from marketable securities balance, cash equivalent and operations. The fair value were $12.4 billion, $17.4 billion and $19.8 billion as at 31st December, 2013, 2014 and 2015 respectively(Mikitani, 2015). The cash that were held in foreign currencies were $5.6 billion, $5.4 billion and $7.3 billion as at 31st December, 2013, 2014 and 2015. The leading currencies were Japanese Yen, British Pound and Euros. In the operating activities the company generated a cash of $5.5 billion, &6.8 billion and $11.9 billion in the 2013, 2014 and 2015 respectively(Deegan, & Jeffrey, 2011). Analysis indicated that the operating cash flow of Amazon Company comes from interest payment from long-term obligation, operating lease, payment processing and connected transaction costs, employee compensation, offset by cash payment made for product and services, Amazons’ co-branded credit card agreement, advertising agreement, content creator customers, enterprises, developer and cash received from customer.

Cash flow generated through investing activities comes mostly from capital expenditure which include maturities of marketable securities, sales, purchases, intellectual property rights, investment in other companies, cash outlays for acquisitions, website development costs, internal-use software and leasehold improvement(U.S. SEC, 2011). The cash flow generated through investing activities were $4.3 billion, $5.1 billion and $6.5 billion in 2013, 2014 and 2015 respectively. In the other hand, the cash flow generated through financing activities resulted mostly from repayment of long-term debt, principal repayment on obligation connected to finance lease and capital lease and others.

In the case of Rakuten, the cash flow and cash equivalent were at 501,029 million Japanese Yen in 31st December, 2015, which is an increase of 72,394 million Japanese Yen from the previous fiscal year. The cash generated by the company through banking business was 348,074 million Japanese Yen majorly deposited in the Bank of Japan. This was an increase of 101,663 million Japanese Yen. The net cash flow generated through operating activities were 78,245 million Japanese Yen in 31st December, 2015 as compared to 111,860 million Japanese Yen generated in the previous year(Mikitani, 2015). The major contributing segments were increased cash flow on loan for credit card business which was 140,933 million Japanese Yen and 122,167 million Japanese Yen from increased loan for banking business. Other include the offset of 229,626 million Japanese Yen recorded from banking business and 91,987 million Japanese Yen before income tax.Based on this analysis it is clear that Amazon generated more cash flow as compared to Rakuten. However, investor would need to look at the environment and products that the two companies offer in the market.

Financial statements

            Amazon Company prepares its financial statements in accordance with U.S. GAAP, which requires the estimation and assumptions that influences the disclosure of the amount of assets and liabilities, revenues and expenses including the disclosures of accompanying notes and contingent assets and liabilities in the consolidated financial statement (United States Securities and Exchange Commission, 2016). In the preparation of financial statement the investment companies does not require the comparative financial statement.

The approach is totally different from IFRS approach which is used by Rakuten. It requires the comparative financial statement of two years’ cash flow statements, statements of changes in equity, income statement and balance sheet (Barry, 2011). In addition, an entity is required to present a statement of financial position for the beginning of the earlier comparative period when the entity utilizes an accounting policy retrospectively or makes a retrospective restatement or when it reclassifies items in its financial statement.

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