By: Sandra Minaburo Villar Director of Center of Accounting Studies spmina@itam.mx
As most of us know, since 2012, publicly-traded companies in Mexico have been required to present their financial information in accordance with International Financial Reporting Standards (IFRS). This obligation was imposed by the National Banking and Securities Commission (CNBV) in its Press Bulletin number 56/2008, issued and published on November 11, 2008.
Because these were the first financial statements presented under these international standards, publicly traded Mexican companies had to incorporate the effects of the application of the exceptions imposed and the exemptions permitted under IFRS 1, First-time Adoption of International Financial Reporting Standards.
Companies that correctly applied IFRS 1 were to use January 1, 2011 as their transition date, and therefore, had to present their opening statement of financial position as of that date and as of the adoption date on January 1, 2012, in addition to presenting those financial statements as the first prepared under IFRS.
Accordingly, in the 2012 annual report they had to present the following information: I) three statements of financial position (one of them the opening statement); II) two statements of comprehensive income; III) two statements of cash flows; andIV) two statements of changes in equity.
Following the rules established by IFRS 1, companies that adopted IFRS for the first time had to do so as if these standards were always applied; in other words, the general rule obliged them to restate their accounting from their origin or founding under international standards rather than Mexican financial reporting standards (MFRS). Obviously, tracing the history of a company can be complicated and costly , so the IFRS 1 allows for certain exceptions and exemptions from this general rule. Thus, each company had to apply the exceptions corresponding to it and choose the exemptions most appropriate for it.
The exceptions and exemptions had to be applied to both the opening balance as well as the statement of financial position as of December 31, 2011, so the financial information for these years could be compared against the information presented in the statement of financial position as of December 31, 2012, under IFRS. This meant that the effects produced in the 2011 financial statements were not shown again in subsequent years, so it is important to understand what choices each company made for the opening balance financial statements, in order to understand the starting point for the year 2012.
There has been a great deal of speculation about the effects and impact of the transition to IFRS on publicly traded companies in Mexico, so the purpose of this article is to conduct a detailed analysis of one specific case: the effects of transition to international standards on the financial information reported by Grupo Modelo. By analyzing the numbers for 2010 and 2011, users of financial information can understand the impact of the initial transition to IFRS, since we can take the 2011 figures calculated based on MFRS and compare them with the figures presented for the same year, but prepared under IFRS and presented in the 2012 annual report. We will complement our analysis with information from the Reconciliation Note that IFRS 1 requires companies to include with their first financial statements prepared under IFRS.
All the financial information used here was obtained from the annual reports for the years 2011 and 2012 that Grupo Modelo published on its webpage; in other words, this is public information, validated by both the company and the independent auditing firm, in this case, PriceWaterhouseCoopers, S.C.
First, we will analyze the opening statement of financial position, which was presented on January 1, 2011 and corresponds to the fiscal year ended December 31, 2010, prepared under IFRS, and compared with the statement of financial position as of December 31, 2010 prepared under MFRS. Since the basis for presentation differs, in order to make the two statements of financial position comparable, we made the following modifications in the presentation of the balances for both years (see Table 1 and Table 2):
In the “Accounts and notes receivable” account, we subtracted income tax credits and presented these on a separate line under current assets.
In the “Property, Plant and Equipment” account, we broke out the amount corresponding to assets available for sale on a separate line under current assets.
In the “Other assets” accounts, we broke out the employee benefit asset and left the name of the account as “Intangible assets, net.”
The “Suppliers” and “Accounts payable and other accumulated expenses” accounts were combined into a single account under current liabilities.
The “Excise Tax, Employee Profit Sharing and Income Tax payable” accounts were combined into a single account under current liabilities.
In the “Deferred taxes and employee profit sharing” account, we broke out the liabilities for parent company tax credits and presented it on a separate line under current liabilities.
In the “Retained earnings” accounts, we broke out the amount of reserves and presented them on a separate line under stockholders’ equity.
Below we present both statements of financial position (SFP), having explained the changes in presentation, as well as the calculation of differences (increases or decreases) in each of the accounts (figures are stated in thousands of Mexican pesos) and our interpretation of the effects of the corresponding transition:
Table 1. Analysis of the effects of transition on the opening SFP
From this comparison, we can conclude that the effects of transition on the opening balance was a net reduction of $814,265 thousand pesos in assets, but comparing the information presented by Grupo Modelo in its Note 29, we find that the effects of transition amounted to an increase of $370,766. To what can we attribute this difference? The explanation is as follows:
a) Note 29 states that the transition resulted in a reduction of $3,279,787 pesos in “Current assets”, and that this reduction was due solely to inventories. In our comparison, we obtained this reduction by adding the $2,683,357 reduction in “Inventories” and the $596,429 reduction in “Advanced payments for advertising.” Grupo Modelo reclassified returnable bottles and upfront payments to suppliers, which under IFRS should be entered under property, plant and equipment, in the case of the former, and advanced payments, in the case of the latter.
b) The second significant impact on assets was in the “Properties, plant and equipment” account, which, according to Note 29, amounted to an increase of $4,594,622 pesos. According to our analysis, this amount corresponds to an increase of $5,134,892 in “Properties, plant and equipment” and a reduction of $540,270 in “Advanced payments for long-term advertising.” The increase was due primarily to Grupo Modelo’s decision to apply a combined valuation policy on this line, determining the value of land and buildings on the basis of a reasonable value obtained through an appraisal, and the rest of the property, plant and equipment according to its inflation-adjusted value as of December 31, 2007. The reduction results from the group’s reclassification of advances paid to acquire these assets, which must be entered on this line and not under advanced payments.
c) The last significant impact in the asset accounts explained in Note 29 refers to “Intangible assets,” which declined by $944,069. In our analysis, we found that this difference was the net result of a $370,292 peso increase in “Intangible assets” and a $1,314,362 reduction in “Employee benefit assets.” The increase was due primarily to a reversal of the effects of inflationary restatements of licenses and the fact that under IFRS, licenses are an asset with an indefinite useful life and should not be amortized, so the amortization that had been recognized under MFRS was canceled. The reduction in “Employee benefit assets” was due to the elimination of transition assets/liabilities, as well as the effects of eliminating the corridor approach and termination benefits liabilities.
d) To conclude our study of the asset side of the statement, Note 29 offers no clarification on the fact that the asset that had been presented under “Tax credit from controlled companies” was reclassified to current liabilities and was shown net of the effect of “deferred income taxes” and of the “Parent company liability in tax consolidation.” In our analysis, this amount represented a reduction of $1,185,031 in assets.
e) On the liability side, the first effect discussed in Note 29 is the reduction in “Deferred income taxes” of $68,743. This reduction is due, according to the note, solely to the elimination of deferred employee profit sharing, since for the group there were no differences in the way deferred taxes are determined. In our analysis, what we found was a reduction in “Assets” (increase in liabilities) of $1,185,031 (see point d), a reduction in “Deferred income taxes” amounting to $1,382,082, and a $128,309 increase in “Parent company liability in tax consolidation,” which effectively represents a net reduction of $68,742.
f) The next effect on liabilities mentioned in Note 29 has to do with “Employee benefits,” which coincides perfectly with our analysis and represents an increase of $473,713 in this liability.
g) Under IFRS, the financial liability with the non-controlling interest should be presented in the non-controlling interest account, so it was reclassified to stockholders equity. This effect corresponds to Constellation Beers Ltd.’s option to purchase Crown Imports LLC, resulting in an effect of $1,524,906 that is presented net of the other effects of transition ($1,516,953 corresponding to the non-controlling interest); an amount that coincides with our comparative analysis
h) Note 29 specifies that the effects of inflation on “Capital stock” totaling $6,439,292 were eliminated, an amount that coincides perfectly with our analysis.
i) All the effects of adoption, except for the entries that were reclassified, were recognized in the retained earnings account. The effects discussed in Note 29 coincide with our analysis, in which the transition adjustments resulted in a net increase of $6,413,038 in “Retained earnings”.
Now we will perform the same analysis with the balances from the statement of financial position as of December 31, 2011, since once again Note 29 states that for the purposes of transition, assets were increased by $197,793. In the analysis shown below, the effects of transition resulted in a reduction of $1,296,672.
Table 2. Analysis of the effects of transition on SFP for 2011.
The balance sheet as of December 31, 2011 shows practically the same effects and reclassifications as the opening balance sheet. These are:
a) Note 29 states that the transition resulted in a reduction of $2,890,405 in “Current assets”, and that this reduction was due solely to inventories. In our comparison, we obtained this reduction by adding the $2,743,197 reduction in “Inventories” and the $147,208 reduction in “Advanced payments for advertising.” Grupo Modelo reclassified returnable bottles and upfront payments to suppliers, which under IFRS should be entered under property, plant and equipment, in the case of the former, and advanced payments, in the case of the latter.
b) The second significant impact on assets was in the “Properties, plant and equipment” account, which, according to Note 29, amounted to an increase of $3,845,972. According to our analysis, this amount corresponds to an increase of $4,590,398 in “Properties, plant and equipment” and a reduction of $744,425 in “Advanced payments for long-term advertising.” The increase was due primarily to Grupo Modelo’s decision to apply a combined valuation policy on this line, determining the value of land and buildings on the basis of a reasonable value obtained through an appraisal, and the rest of the property, plant and equipment according to its inflation-adjusted value as of December 31, 2007. The reduction results from the group’s reclassification of advances paid to acquire these assets, which must be entered on this line and not under advanced payments.
c) The last significant impact in the asset accounts explained in Note 29 refers to “Intangible assets,” which declined by $757,774. In our analysis, we found that this difference was the net result of a $373,991 increase in “Intangible assets” and a $1,233,473 reduction in “Employee benefit assets.” The increase was due primarily to a reversal of the effects of inflationary restatements of licenses and the fact that under IFRS, licenses are an asset with an indefinite useful life and should not be amortized, so the amortization that had been recognized under MFRS was canceled. The reduction in “Employee benefit assets” was due to the elimination of transition assets/liabilities, as well as the effects of eliminating the corridor approach and termination benefits liabilities.
d) To conclude our study of the asset side of the statement, Note 29 offers no clarification on the fact that the asset that had been presented under “Tax credit from controlled companies” was reclassified to current liabilities and was shown net of the effect of “deferred income taxes” and of the “Parent company liability in tax consolidation.” In our analysis, this amount represented a reduction of $1,296,672 in assets.
e) On the liability side, the first effect discussed in Note 29 is the reduction in “Deferred income taxes” of $143,004. This reduction is due, according to the note, solely to the elimination of deferred employee profit sharing, since for the group there were no differences in the way deferred taxes are determined. In our analysis, what we found was a reduction in “Assets” (increase in liabilities) of $1,494,465 (see point d), a reduction in “Deferred income taxes” amounting to $1,300,458, and a $337,011 increase in “Parent company liability in tax consolidation,” which effectively represents a net reduction of $143,004.
f) The next effect on liabilities mentioned in Note 29 has to do with “Employee benefits,” which coincides perfectly with our analysis and represents an increase of $686,258 in this liability.
g) Under IFRS, the financial liability with the non-controlling interest should be presented in the non-controlling interest account, so it was reclassified to stockholders equity. This effect corresponds to Constellation Beers Ltd.’s option to purchase Crown Imports LLC, resulting in an effect of $1,706,832 that is presented net of the other effects of transition ($1,626,512 corresponding to the non-controlling interest); an amount that coincides with our comparative analysis.
h) Note 29 specifies that the effects of inflation on “Capital stock” totaling $6,439,292 were eliminated, an amount that coincides perfectly with our analysis.
i) All the effects of adoption , except for the entries that were reclassified, were recognized in the retained earnings account. The effects discussed in Note 29 coincide with our analysis, in which the transition adjustments resulted in a net increase of $6,293,457 in “Retained earnings” and a $119,306 reduction in “Fiscal-year earnings,” as explained below in our analysis of the comprehensive income statement for 2011.
In our comparative analysis of the two reports, there are differences that do not require an explanation since they are obviously reclassifications that have no effect on the data in the SFP. They are, however, effects of the transition to IFRS. For example, the increase in “Accounts and notes receivable, net” and the reduction in “Income tax credit,” or the reduction in “Suppliers and provisions” and the increase in “Excise tax, employee profit-sharing and income tax payable.”
We will apply the same procedure for analyzing the comprehensive income statement (CIS), but only for the year 2011, since IFRS 1 does not require companies to present comprehensive income statements for three years as a comparison. We compared the 2011 CIS prepared under IFRS with the same CIS prepared under MFRS. Table 3 shows the results of this comparison:
Table 3. Analysis of the effects of transition on CIS for 2011
The only effects of transition on the CIS mentioned in Note 29 were the following:
a) Effect on OCI (other comprehensive income) from adjustments in reduction of consolidated net profits due to “Employee Benefits” and “Cash flow hedges” totaling $119,584 and $31,964 respectively. This results in a net reduction of $151,548, a difference of $3,900 against our analysis. This difference is not specified in Note 29, but Note 17 refers to a stock repurchase reserve in the same amount, and because these amounts coincide, we can assume that the increase in this reserve came from consolidated net profits rather than retained earnings.
b) Parent company net profit was increased by $41,084in “Deferred taxes”, $39,899 in “Inflation effects” and $24,192 in “Employee benefits. Parent company net profit was diminished by $10,348 in “Deferred employee profit-sharing” and $214,133 in “Net depreciation and others.” These differences yield a net reduction of 119,306, which coincides with the amount presented in Note 29.
In the CIS, the effects of transition resulted in a reduction of 155,448 in consolidated net profit. The only amount that is not reconciled in Note 29 is the authorization to create a stock repurchase reserve of 3,900 pesos, as we mentioned, although this difference is not necessarily the result of the transition to IFRS.
The conclusion is that, broadly speaking, Grupo Modelo’s financial statements were not significantly affected by the transition to IFRS, but if we carefully analyzed the following financial ratios, perhaps we will have a different perspective on the effects of adoption:
Table 4. Comparison of Financial Ratios (in-house calculations)
The financial ratios we used are those that are generally used to conduct a basic fundamental analysis of financial information. As Table 4 shows, for the year 2010 we were unable to compare some of the ratios calculated under IFRS with their calculation under MFRS, because we do not have the CIS under IFRS for that year.
Obviously, some effects are more relevant than others when comparing financial ratios calculated under IFRS and MFRS. For example, the number of days Grupo Modelo took to move its inventory in 2011 was 27.02% lower (approximately 26 days less) under IFRS than under MFRS. The difference in the number of days affects both the operating cycle and the cash cycle ratio, so comparing the historical performance of both cycles with their levels in the year 2011, we become more aware of the reclassifications and effects of the transition on inventories.
Other change we noticed had to do with leverage and debt to equity ratios. For both 2010 and 2011, both of these were lower under MFRS than under IFRS. The reason for the reduction is primarily (but not exclusively) the elimination of employee benefit liabilities, the elimination of deferred profit-sharing and the reclassification of the liability with investors with non-controlling shares.
As regards the financial ratios that tell us about the group’s profitability, all of them weaken under the effects of IFRS. The most heavily affected of these was ROE, which was reduced by 3.12%.
Finally, the ratio that changed the most, as could be expected, was the capital growth ratio, which was increased by 67.37% in 2010 and 66.97% in 2011, because the net effect of all the transition adjustments was entered against retained earnings. In Grupo Modelo’s case, this adjustment resulted in an increase in profits (TablEs 1 and 2) of $6,413,040 and $6,297,457 , respectively.
For Grupo Modelo, the transition to IFRS for presentation of its financial statements, and its effect on performance indicators, do not imply a significant change in its financial information or its analysis. This situation may be different for other companies, so we suggest information users conduct a detailed analysis of the transition based on the effects explained in the reconciliation note.
Note:All the differences and interpretations were made considering the numbers in thousands of pesos.
References
Bolsa Mexicana de Valores. 2013. Sección: Empresas emisoras. Subsección: Grupo Modelo. Apartado: Reportes Anuales. Informe Anual en formato pdf del año 2012. Consultado en junio 2013. Disponible en http://www.bmv.com.mx/infoanua/infoanua_450914_2012_1.pdf.
Grupo Modelo: Analysis of the effects of transition to IFRS in 2012
Director of Center of Accounting Studies
spmina@itam.mx
As most of us know, since 2012, publicly-traded companies in Mexico have been required to present their financial information in accordance with International Financial Reporting Standards (IFRS). This obligation was imposed by the National Banking and Securities Commission (CNBV) in its Press Bulletin number 56/2008, issued and published on November 11, 2008.
Because these were the first financial statements presented under these international standards, publicly traded Mexican companies had to incorporate the effects of the application of the exceptions imposed and the exemptions permitted under IFRS 1, First-time Adoption of International Financial Reporting Standards.
Companies that correctly applied IFRS 1 were to use January 1, 2011 as their transition date, and therefore, had to present their opening statement of financial position as of that date and as of the adoption date on January 1, 2012, in addition to presenting those financial statements as the first prepared under IFRS.
Accordingly, in the 2012 annual report they had to present the following information: I) three statements of financial position (one of them the opening statement); II) two statements of comprehensive income; III) two statements of cash flows; andIV) two statements of changes in equity.
Following the rules established by IFRS 1, companies that adopted IFRS for the first time had to do so as if these standards were always applied; in other words, the general rule obliged them to restate their accounting from their origin or founding under international standards rather than Mexican financial reporting standards (MFRS). Obviously, tracing the history of a company can be complicated and costly , so the IFRS 1 allows for certain exceptions and exemptions from this general rule. Thus, each company had to apply the exceptions corresponding to it and choose the exemptions most appropriate for it.
The exceptions and exemptions had to be applied to both the opening balance as well as the statement of financial position as of December 31, 2011, so the financial information for these years could be compared against the information presented in the statement of financial position as of December 31, 2012, under IFRS. This meant that the effects produced in the 2011 financial statements were not shown again in subsequent years, so it is important to understand what choices each company made for the opening balance financial statements, in order to understand the starting point for the year 2012.
There has been a great deal of speculation about the effects and impact of the transition to IFRS on publicly traded companies in Mexico, so the purpose of this article is to conduct a detailed analysis of one specific case: the effects of transition to international standards on the financial information reported by Grupo Modelo. By analyzing the numbers for 2010 and 2011, users of financial information can understand the impact of the initial transition to IFRS, since we can take the 2011 figures calculated based on MFRS and compare them with the figures presented for the same year, but prepared under IFRS and presented in the 2012 annual report. We will complement our analysis with information from the Reconciliation Note that IFRS 1 requires companies to include with their first financial statements prepared under IFRS.
All the financial information used here was obtained from the annual reports for the years 2011 and 2012 that Grupo Modelo published on its webpage; in other words, this is public information, validated by both the company and the independent auditing firm, in this case, PriceWaterhouseCoopers, S.C.
First, we will analyze the opening statement of financial position, which was presented on January 1, 2011 and corresponds to the fiscal year ended December 31, 2010, prepared under IFRS, and compared with the statement of financial position as of December 31, 2010 prepared under MFRS. Since the basis for presentation differs, in order to make the two statements of financial position comparable, we made the following modifications in the presentation of the balances for both years (see Table 1 and Table 2):
Below we present both statements of financial position (SFP), having explained the changes in presentation, as well as the calculation of differences (increases or decreases) in each of the accounts (figures are stated in thousands of Mexican pesos) and our interpretation of the effects of the corresponding transition:
Table 1. Analysis of the effects of transition on the opening SFP
From this comparison, we can conclude that the effects of transition on the opening balance was a net reduction of $814,265 thousand pesos in assets, but comparing the information presented by Grupo Modelo in its Note 29, we find that the effects of transition amounted to an increase of $370,766. To what can we attribute this difference? The explanation is as follows:
a) Note 29 states that the transition resulted in a reduction of $3,279,787 pesos in “Current assets”, and that this reduction was due solely to inventories. In our comparison, we obtained this reduction by adding the $2,683,357 reduction in “Inventories” and the $596,429 reduction in “Advanced payments for advertising.” Grupo Modelo reclassified returnable bottles and upfront payments to suppliers, which under IFRS should be entered under property, plant and equipment, in the case of the former, and advanced payments, in the case of the latter.
b) The second significant impact on assets was in the “Properties, plant and equipment” account, which, according to Note 29, amounted to an increase of $4,594,622 pesos. According to our analysis, this amount corresponds to an increase of $5,134,892 in “Properties, plant and equipment” and a reduction of $540,270 in “Advanced payments for long-term advertising.” The increase was due primarily to Grupo Modelo’s decision to apply a combined valuation policy on this line, determining the value of land and buildings on the basis of a reasonable value obtained through an appraisal, and the rest of the property, plant and equipment according to its inflation-adjusted value as of December 31, 2007. The reduction results from the group’s reclassification of advances paid to acquire these assets, which must be entered on this line and not under advanced payments.
c) The last significant impact in the asset accounts explained in Note 29 refers to “Intangible assets,” which declined by $944,069. In our analysis, we found that this difference was the net result of a $370,292 peso increase in “Intangible assets” and a $1,314,362 reduction in “Employee benefit assets.” The increase was due primarily to a reversal of the effects of inflationary restatements of licenses and the fact that under IFRS, licenses are an asset with an indefinite useful life and should not be amortized, so the amortization that had been recognized under MFRS was canceled. The reduction in “Employee benefit assets” was due to the elimination of transition assets/liabilities, as well as the effects of eliminating the corridor approach and termination benefits liabilities.
d) To conclude our study of the asset side of the statement, Note 29 offers no clarification on the fact that the asset that had been presented under “Tax credit from controlled companies” was reclassified to current liabilities and was shown net of the effect of “deferred income taxes” and of the “Parent company liability in tax consolidation.” In our analysis, this amount represented a reduction of $1,185,031 in assets.
e) On the liability side, the first effect discussed in Note 29 is the reduction in “Deferred income taxes” of $68,743. This reduction is due, according to the note, solely to the elimination of deferred employee profit sharing, since for the group there were no differences in the way deferred taxes are determined. In our analysis, what we found was a reduction in “Assets” (increase in liabilities) of $1,185,031 (see point d), a reduction in “Deferred income taxes” amounting to $1,382,082, and a $128,309 increase in “Parent company liability in tax consolidation,” which effectively represents a net reduction of $68,742.
f) The next effect on liabilities mentioned in Note 29 has to do with “Employee benefits,” which coincides perfectly with our analysis and represents an increase of $473,713 in this liability.
g) Under IFRS, the financial liability with the non-controlling interest should be presented in the non-controlling interest account, so it was reclassified to stockholders equity. This effect corresponds to Constellation Beers Ltd.’s option to purchase Crown Imports LLC, resulting in an effect of $1,524,906 that is presented net of the other effects of transition ($1,516,953 corresponding to the non-controlling interest); an amount that coincides with our comparative analysis
h) Note 29 specifies that the effects of inflation on “Capital stock” totaling $6,439,292 were eliminated, an amount that coincides perfectly with our analysis.
i) All the effects of adoption, except for the entries that were reclassified, were recognized in the retained earnings account. The effects discussed in Note 29 coincide with our analysis, in which the transition adjustments resulted in a net increase of $6,413,038 in “Retained earnings”.
Now we will perform the same analysis with the balances from the statement of financial position as of December 31, 2011, since once again Note 29 states that for the purposes of transition, assets were increased by $197,793. In the analysis shown below, the effects of transition resulted in a reduction of $1,296,672.
Table 2. Analysis of the effects of transition on SFP for 2011.
The balance sheet as of December 31, 2011 shows practically the same effects and reclassifications as the opening balance sheet. These are:
a) Note 29 states that the transition resulted in a reduction of $2,890,405 in “Current assets”, and that this reduction was due solely to inventories. In our comparison, we obtained this reduction by adding the $2,743,197 reduction in “Inventories” and the $147,208 reduction in “Advanced payments for advertising.” Grupo Modelo reclassified returnable bottles and upfront payments to suppliers, which under IFRS should be entered under property, plant and equipment, in the case of the former, and advanced payments, in the case of the latter.
b) The second significant impact on assets was in the “Properties, plant and equipment” account, which, according to Note 29, amounted to an increase of $3,845,972. According to our analysis, this amount corresponds to an increase of $4,590,398 in “Properties, plant and equipment” and a reduction of $744,425 in “Advanced payments for long-term advertising.” The increase was due primarily to Grupo Modelo’s decision to apply a combined valuation policy on this line, determining the value of land and buildings on the basis of a reasonable value obtained through an appraisal, and the rest of the property, plant and equipment according to its inflation-adjusted value as of December 31, 2007. The reduction results from the group’s reclassification of advances paid to acquire these assets, which must be entered on this line and not under advanced payments.
c) The last significant impact in the asset accounts explained in Note 29 refers to “Intangible assets,” which declined by $757,774. In our analysis, we found that this difference was the net result of a $373,991 increase in “Intangible assets” and a $1,233,473 reduction in “Employee benefit assets.” The increase was due primarily to a reversal of the effects of inflationary restatements of licenses and the fact that under IFRS, licenses are an asset with an indefinite useful life and should not be amortized, so the amortization that had been recognized under MFRS was canceled. The reduction in “Employee benefit assets” was due to the elimination of transition assets/liabilities, as well as the effects of eliminating the corridor approach and termination benefits liabilities.
d) To conclude our study of the asset side of the statement, Note 29 offers no clarification on the fact that the asset that had been presented under “Tax credit from controlled companies” was reclassified to current liabilities and was shown net of the effect of “deferred income taxes” and of the “Parent company liability in tax consolidation.” In our analysis, this amount represented a reduction of $1,296,672 in assets.
e) On the liability side, the first effect discussed in Note 29 is the reduction in “Deferred income taxes” of $143,004. This reduction is due, according to the note, solely to the elimination of deferred employee profit sharing, since for the group there were no differences in the way deferred taxes are determined. In our analysis, what we found was a reduction in “Assets” (increase in liabilities) of $1,494,465 (see point d), a reduction in “Deferred income taxes” amounting to $1,300,458, and a $337,011 increase in “Parent company liability in tax consolidation,” which effectively represents a net reduction of $143,004.
f) The next effect on liabilities mentioned in Note 29 has to do with “Employee benefits,” which coincides perfectly with our analysis and represents an increase of $686,258 in this liability.
g) Under IFRS, the financial liability with the non-controlling interest should be presented in the non-controlling interest account, so it was reclassified to stockholders equity. This effect corresponds to Constellation Beers Ltd.’s option to purchase Crown Imports LLC, resulting in an effect of $1,706,832 that is presented net of the other effects of transition ($1,626,512 corresponding to the non-controlling interest); an amount that coincides with our comparative analysis.
h) Note 29 specifies that the effects of inflation on “Capital stock” totaling $6,439,292 were eliminated, an amount that coincides perfectly with our analysis.
i) All the effects of adoption , except for the entries that were reclassified, were recognized in the retained earnings account. The effects discussed in Note 29 coincide with our analysis, in which the transition adjustments resulted in a net increase of $6,293,457 in “Retained earnings” and a $119,306 reduction in “Fiscal-year earnings,” as explained below in our analysis of the comprehensive income statement for 2011.
In our comparative analysis of the two reports, there are differences that do not require an explanation since they are obviously reclassifications that have no effect on the data in the SFP. They are, however, effects of the transition to IFRS. For example, the increase in “Accounts and notes receivable, net” and the reduction in “Income tax credit,” or the reduction in “Suppliers and provisions” and the increase in “Excise tax, employee profit-sharing and income tax payable.”
We will apply the same procedure for analyzing the comprehensive income statement (CIS), but only for the year 2011, since IFRS 1 does not require companies to present comprehensive income statements for three years as a comparison. We compared the 2011 CIS prepared under IFRS with the same CIS prepared under MFRS. Table 3 shows the results of this comparison:
Table 3. Analysis of the effects of transition on CIS for 2011
The only effects of transition on the CIS mentioned in Note 29 were the following:
a) Effect on OCI (other comprehensive income) from adjustments in reduction of consolidated net profits due to “Employee Benefits” and “Cash flow hedges” totaling $119,584 and $31,964 respectively. This results in a net reduction of $151,548, a difference of $3,900 against our analysis. This difference is not specified in Note 29, but Note 17 refers to a stock repurchase reserve in the same amount, and because these amounts coincide, we can assume that the increase in this reserve came from consolidated net profits rather than retained earnings.
b) Parent company net profit was increased by $41,084in “Deferred taxes”, $39,899 in “Inflation effects” and $24,192 in “Employee benefits. Parent company net profit was diminished by $10,348 in “Deferred employee profit-sharing” and $214,133 in “Net depreciation and others.” These differences yield a net reduction of 119,306, which coincides with the amount presented in Note 29.
In the CIS, the effects of transition resulted in a reduction of 155,448 in consolidated net profit. The only amount that is not reconciled in Note 29 is the authorization to create a stock repurchase reserve of 3,900 pesos, as we mentioned, although this difference is not necessarily the result of the transition to IFRS.
The conclusion is that, broadly speaking, Grupo Modelo’s financial statements were not significantly affected by the transition to IFRS, but if we carefully analyzed the following financial ratios, perhaps we will have a different perspective on the effects of adoption:
Table 4. Comparison of Financial Ratios (in-house calculations)
The financial ratios we used are those that are generally used to conduct a basic fundamental analysis of financial information. As Table 4 shows, for the year 2010 we were unable to compare some of the ratios calculated under IFRS with their calculation under MFRS, because we do not have the CIS under IFRS for that year.
Obviously, some effects are more relevant than others when comparing financial ratios calculated under IFRS and MFRS. For example, the number of days Grupo Modelo took to move its inventory in 2011 was 27.02% lower (approximately 26 days less) under IFRS than under MFRS. The difference in the number of days affects both the operating cycle and the cash cycle ratio, so comparing the historical performance of both cycles with their levels in the year 2011, we become more aware of the reclassifications and effects of the transition on inventories.
Other change we noticed had to do with leverage and debt to equity ratios. For both 2010 and 2011, both of these were lower under MFRS than under IFRS. The reason for the reduction is primarily (but not exclusively) the elimination of employee benefit liabilities, the elimination of deferred profit-sharing and the reclassification of the liability with investors with non-controlling shares.
As regards the financial ratios that tell us about the group’s profitability, all of them weaken under the effects of IFRS. The most heavily affected of these was ROE, which was reduced by 3.12%.
Finally, the ratio that changed the most, as could be expected, was the capital growth ratio, which was increased by 67.37% in 2010 and 66.97% in 2011, because the net effect of all the transition adjustments was entered against retained earnings. In Grupo Modelo’s case, this adjustment resulted in an increase in profits (TablEs 1 and 2) of $6,413,040 and $6,297,457 , respectively.
For Grupo Modelo, the transition to IFRS for presentation of its financial statements, and its effect on performance indicators, do not imply a significant change in its financial information or its analysis. This situation may be different for other companies, so we suggest information users conduct a detailed analysis of the transition based on the effects explained in the reconciliation note.
Note:All the differences and interpretations were made considering the numbers in thousands of pesos.
References