The following is an executive summary and is not intended to be all inclusive. Generally, Mexican GAAP is more flexible than US GAAP. As a result, often companies that report under both will minimize differences between the two by utilizing US GAAP accounting policies for Mexican GAAP reporting when possible.
Effects of Inflation
Mexican GAAPrequires that effects of inflation be recorded in the financial statements. All financial statements are presented in constant pesos as of the latest balance sheet date. Inventories are restated using the specific cost method based on independent appraisals. Fixed assets may either be restated by independent appraisals or by applying the Mexican National Consumer Price Index (“NCPI”). All othernonmonetary accounts, primarily stockholders’ equity, are restated using NCPI. The excess (insufficiency) in restated stockholders’ equity, included in stockholders’ equity, reflects the difference between the increase (decrease) in the specific values of nonmonetary assets and the increase attributable to general inflation.
Included in the results of operations is a gain or loss from monetaryposition that represents the inflation gain or loss from maintaining net monetary liabilities or assets, respectively.
Recognition of the effects of inflation is considered a more meaningful presentation than historical cost-based financial reporting because it represents a comprehensive measure of the effects of price level changes in the inflationary Mexican economy.
The historicalcost basis is required to be maintained in the financial statements under U.S. GAAP. No gain or loss on monetary position is recognized.
Deferred Taxes and Employee Profit Sharing
Through December 31, 1999, Mexican GAAP required that deferred taxes be recorded for those significant timing differences whose turnaround was reasonably assured within a defined period of time. However, thestandard provided that deferred taxes should not be recorded for those timing differences whose origin was not specifically identifiable or whose realization was not presently determinable because upon turnaround they would be replaced by other timing differences of a similar nature and amount. Deferred taxes were determined using the enacted income tax rates for the years in which such taxeswould be payable or refundable. The recognition of net deferred tax assets was subject to almost certain assurance that they would be realized in future operations; such assurance was presumed not to exist in a loss period.
Effective January 1, 2000, Mexican GAAP rules changed to an asset and liability approach for recognizing income tax, tax on assets and employee statutory profit sharing. The newrules require recognizing the deferred tax effects for all transactions that are affected in different periods for financial statements than for tax returns. Deferred income tax assets and liabilities are
MEXICAN GAAP/US GAAP DIFFERENCES (continued)
determined by comparing the financial statement and tax basis of assets and liabilities and multiplying the difference by the enacted tax rate.Deferred tax assets are recognized to the extent there is a high probability of recovery.
Deferred statutory profit sharing is recognized by comparing the financial statement and profit sharing income for the period and multiplying the difference by the profit sharing rate of 10%. Current and deferred employee profit sharing expense is included in provisions under Mexican GAAP.
United StatesU.S. GAAP requires an asset and liability approach for financial accounting and reporting for income taxes. U.S. GAAP is much more detailed in its interpretations of this approach. Deferred tax assets are reduced by a valuation allowance when it is more likely that some or all of the deferred tax assets will not be realized.
Deferred employee statutory profit sharing is determined using the...