Financial Requirements and Investment Opportunities of Northrop Grumman Corporation

Introduction

Northrop Grumman Corporation is an American company that deals in commercial and defense IT, electronics, and aerospace products and services. The Los Angeles based firm is seeking to increase its revenue from product sales and services by at least eight percent in this financial year. Therefore, it has embarked on an ambitious expansion journey to expand its international market. The expansion strategy targets to open a subsidiary of the organization in Poland. Although the company has been operating in a few European countries, it had never entered the Polish market. Therefore the company leadership ordered a study to familiarize with the new market and determine the available investment opportunities and the required financial investments. This study also explores some of the accounts reporting approaches that prospective competitors of Northrop use in Poland. The country is one of the regions where firms have adopted the use of International Financial Reporting Standards (IFRS) while Northrop comes from a background of is a collection of Generally Accepted Accounting Principles (GAAP) (Francis Huang & Khurana, 2016). It is thus evident that challenges lie ahead for the company

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Differences in Financial Statements

Northrop Grumman is an American, company, so it prepares its accounting reports according to the GAAP. On the other hand, most of the company's competitors in Poland now use the IFRS. The later was developed from international consensus to give organizations a universal accounting language. Therefore, there are many differences in the accounts reports of Northrop and Polish companies, starting from methodology to treatment of inventories and comprehensive incomes. Since Northrop uses GAAP, its financial statements are guided by rules, and it includes more details in the reports than its competitors. On inventories, both Northrop and its competitors in Poland use the first-in, first-out policy although the companies that do not use GAAP only allows last-in, first-out, which is still used in GAAP (Francis Huang, & Khurana, 2016). Thirdly, there are no requirements for comprehensive incomes in IFRS.

Apart from the accounting principle that applies, Northrop reports its finances in US Dollars while a vast majority of its competitors in European countries like Poland use Euros. The other difference with competitors would be in the language used in documenting the financial reports (Nobes & Parker, 2008). Northrop is an American company, so it prepares its documents in English because they need to be forwarded to the company headquarters. Other companies in Poland would be using Polish for all kinds of records because it is the official language. The two reporting principles also differ significantly in how they classify debts, fixed assets, intangible assets, and development cost.

Challenges from Accounting Standards

At the moment, Northrop uses the GAAP standards to prepare its financial reports, which incorporate account statements of all its subsidiaries. But to manage to compare itself better with its competitors in the new market, the company will have to be preparing IFRS reports too, not only for its subsidiary in Poland but also for its overall global accounts. That means the organization will be making two financial statements according to the two standards (Guggiola, 2010). Secondly, the firm will either have to invest in professional training for its accountants to enable them to operate efficiently in the new accounting environment or employ more accountants who are familiar with both accounting standards to be reconciling the reports.

Thirdly, the company will have difficulties with finding consistent audit reports when it begins to prepare financial statements in the two languages. It would be unnecessarily repetitive to audit the same report twice, but the audit of a financial statement done in one style will either emphasize or ignore some critical performance indicators in the American market and Poland. In IFRS, auditors focus on the details of transactions while in GAAP, the emphasis is always on the legality of the processes.

Required Investment to Relocate Value-Chain

Northrop needs to invest in some essential components of its value chain when relocating its activities from the United States to Poland. I recommend that the company uses the Porter (1985) value-chain model to identify the areas that it needs to direct its resources for the first three years of operation in the Polish market.

The model is good because differentiates primary component of the value chain from the secondary ones. As such, the company would be expected to make core investment in human resource management, and company infrastructure. The model further includes activities that revolve around the two core components of value chains. These activities interact with human resource management, and company infrastructure at two levels - primary and secondary. The primary level activities are those that have a direct effect on the quality of company products. Conversely, secondary activities are those whose impact on the quality of products is indirect. Thus, the primary activities that Northrop must invest in are: service, marketing, logistics, and operations. The only secondary activities that the firm could consider within the first three years are technology and procurement. All the activities are, however, of equal importance to the company (Porter, 1985). The primary activities would give Northrop cost advantage in the market while the secondary activities bring competitive advantage.

Estimates of Revenue Projections

This study projects that for the three year period, the company will require an investment of $6,765,000. The capital is high because manufacturing business involves the establishment of infrastructure, which will take the highest percentage of the investment. However, the investment that will go into infrastructure is a one-off cost that does not recur each financial year. Therefore the company would be able to break even in a few years. Similarly, the company will spend the highest proportion of the projected capital in the first year, when it will invest up to $ 4,202,000. Afterward, the money required for investment reduces each year.

Conclusion

Northrop will face many challenges as it enters the Polish market because it comes from the US where companies use a different model from the one used in Poland to report financial performance. The company will also have to find accountants who are familiar with both reporting methods. It will also have to deal with language difference since English is not popular in Poland. Nonetheless, there are opportunities for investment in the country because it does not have many aerospace manufacturers. Moreover, Poland is currently a growing market, so the purchasing and investment power of its population is now high. Also, since Northrop will have to establish a manufacturing plant, employ skilled workers and market its products, the company will invest enormous capital into this venture. But the required finances will keep declining as the firm gets established in the market.

References

Francis, J. R., Huang, S. X., & Khurana, I. K. (2016). The Role of Similar Accounting Standards in Cross-Border Mergers and Acquisitions. Contemporary Accounting Research, 33(3), 1298-1330. doi:10.1111/1911-3846.12176

Guggiola, G. (2010). IFRS adoption in the EU, accounting harmonization and markets efficiency: A review1. The international business & economics research journal, 9(12), 99.

Nobes, C., & Parker, R. H. (2008). Comparative international accounting. Pearson Education.Porter, M. E. (1985). Competitive advantage: creating and sustaining superior performance. 1985.