International Accounting Reporting Standards - Assignment Example

? Advanced Financial Reporting and Regulation April 8, Advanced Financial Reporting and Regulation Introduction Companies are required to prepare true amount of expenditures and profits in the accounting reports. The research delves on management strategies to improve the financial picture of the companies. The research delves on stuffing the channels’ marketing strategies. The research focuses on the Vodafone and Peugeot asset impairment topics. All companies must present realistic financial reports. Question 1: a. Discussion of the incentives why managers would resort to extreme earnings management technique. Management would often resort to extreme earnings’ management techniques in order to inflate sales and earnings so that meet the analysts’ earnings forecasts (Kumar, 2008). One way of inflating sales and earnings is through the use of window dressing marketing strategy. Department stores normally resort to window dressing marketing strategies. Window dressing is placing top selling products on the store shelves. Consequently, customers would enter the store to buy the products displayed on the store shelves. Upon entering the store, the customers can observe and buy other not so popular products strategically located on certain store shelf locations. In accounting parlance, window dressing is presenting a more favorable financial report than the actual report of the business transactions. The aim of window dressing is to increase the revenues of the company. Another aim of window dressing is to show higher assets and lower liabilities than what is the actual assets amount or liabilities amount. To increase net profits, the company must show that sales increased. Stuffing the channels include delivering to goods to customers even though there is no sales order (Bejou, 2006). With the window dressing of the financial statements, the company presents a better or more favorable picture of the company (Bastos, 2010). With the better financial picture, the company will generate greater interests in the company. More suppliers will approve the credit term applications of the company. More investors will funnel their hard-earned cash into the company’s coffers. More customers will patronize the company’s products and services. More banks will appropriate the company’s long term bank loan applications. More board of directors will approve the salary increases of the managers and line and staff employees. More residents will apply for job vacancies in the company. On the other hand, financial statements that show the company generated a net loss financial output will drive away affected parties. The customers will shift to buying from the competitors. The suppliers will shift to selling their products and services to other current and future customers. The board of directors will terminate the ineffective business managers and employees for their lackluster financial performances. The banks will disapprove the financially distressed company’s bank loan applications. b. Critical evaluation of the effectiveness of ‘stuffing the channels’ and ‘cookie jar accounting’ as earnings management devices. Stuffing the channels management strategy is not effective earnings management devices. Engaging in illegal acts must never be considered as normal business strategies. All illegal activities suffer from the possibility of being discovered. Upon discovery, the repercussions are very damaging to the fraudulent company (Zack, 2012). The recording of business transactions require compliance with accounting, tax and law requirements. In terms of accounting requirements, the recording of financial instructions requires compliance with international accounting standards. International accounting standards prohibit ‘stuffing the channels’ as an alternative management device. The standards require that no sales shall be recorded unless a sale had actually cropped up. Sales can be recorded when the customers accepts the sale, not when the products are delivered. Acceptance may include the customers’ affirmation of the delivery. In the same manner, ‘cookie jar’ management strategy is not effective earnings management devices (Scott, 2010). Engaging in illegal acts must never be considered as normal business strategies. All illegal activities suffer from the possibility of being discovered. Upon discovery, the repercussions are very damaging to the fraudulent company. The Securities and Exchange Commission’s discovery of the company’s implementation of the fraudulent cookie jar accounting policy created a negative image of the company. By engaging in cookie jar accounting, fraudulently reduced its operating expenses during low profit quarters in order to improve lackluster accounting period projected performances. By reducing its operating expenses, the company fraudulently increased its net profits. With higher net profits, the company was able to fraudulently achieve its performance benchmarks. As proof, the Securities and Exchange Commission penalized the company with a USD 150million penalty for its fraudulent accounting report practices during 2004. The findings of the commission clearly show that the penalty was for the company’s fraudulent inflating of its sales figures. Consequently, the inflated sales figures fraudulently increased its net profits. Penalties are imposed on Bristol-Myers Squibb Co. (BMS), a multinational pharmaceutical company head-quartered in New York because it had violated established financial reporting standards. Fines and penalties are imposed on erring and fraudulent companies in order to prevent them from repeating the same fraudulent and erroneous accounting practices. The fines and penalties are issued on the erring companies in order to prevent other companies from imitating the fraudulent accounting practices of Bristol-Myers Squibb Co. (BMS). Frederick Choi emphasized that all 40 United Kingdom companies and 40 United States companies religiously implemented all requirements set forth in the United Kingdom international accounting standards (Choi, 2005). During a research conducted, all 40 United Kingdom companies did not deviate from the standards’ requirements as to how much sales should be reported. The same 40 United Kingdom companies and 40 United States companies complied with the United Kingdom international accounting standards on how the correct amount of profits should computed. The same companies also implemented the very tenets of the international accounting standards on how much should be reported as the correct operating expenses should be presented in the financial statements. The international accounting standards ensure the financial statement users receive true and correct financial reports (Alexander, 2008). The standards ensure that the United Kingdom public trusts the financial reports of the companies. Without the established standards, the companies have the huge leeway to present false or misleading financial reports. Consequently, the people will no longer trust the financial reports of the companies. When this happens, the United Kingdom financial statement users may no longer rely on the financial reports for their decision making activities. International Accounting Standard no. 8 focuses on correcting all erroneous accounting reports. The standards describe which financial reports are fraudulent or erroneous. The standard sets the steps to correct erroneous financial reports. The standard also sets the processes to present a truer picture of the company’s financial condition and results of operations. The standard sets the tone on a universal way of correcting errors and fraudulent entries in the companies’ financial reports. The adjustments must be implemented in order make the financial statements responsive to the decision making needs of the readers of the financial reports (IAS Board, 2009). Over several years, the cookie jar management strategy will even out. Expenses that are relegated to the next or another accounting period will overstate the current year’s net profits (Board, 2009). The postponement of the expenses to the next few years will increase the next few years’ expenses. Consequently, the next few years’ net profits are understated. Consequently, the overstatement of one year’s net profits will result to the overstatements’ reducing the future years’ net profit figures. In simple mathematical terms, +1 (overstatement) – 1(understatement) = 0 (no overstated net income or understatement of net income). Question 2: Question a, appraisal of circumstance where an impairment loss had been deemed to occur. There are circumstances when an impairment loss is deemed to have occurred. International accounting standard no. 36 focuses on this specific topic. The standard requires that the assets presented in the financial statements must exceed their recoverable amount. In order to meet the standard’s requirement, the companies must institute tests. The responsive tests should determine whether the asset amounts presented in the financial reports are within the scope for possible impairment when the telltale signs of impairment crop up. The tests should normally be implemented on a minimum of one year intervals, in terms of goodwill and intangible assets identified as having seemingly indefinite useful lives. One sign that there is an impairment cropping up is when the asset’s carrying value is more than the amount shown as the recoverable figure. The recoverable amount is computed as the higher of the fair market value deducted by the selling costs and the value in use. Additionally, the impairments loss is recorded in the accounting books as an expense amount. The specific expense amount reduces the net profit results. However, the impairment loss is recognized as loss for assets at cost. Additionally, any impairment loss is recorded as an initial deduction from the prior recorded revaluation gains with respect to the specified asset. After the impairment losses are recorded in the accounting books, the compulsory extensive disclosure of the impairment situation should be discussed the notes to financial statements or other related areas of the financial reports. In addition, the impairment loss recognized in the previous periods for an asset other than goodwill is needed to be reversed when the environment indicates that there was a prior change in accounting estimate incorporated to ascertain the impaired assets’ recoverable amount. When there is a sign indicating the there are circumstances when companies should perform an impairment review of assets. If there is an indication that an asset had been impaired, the company must immediately move to ascertain the recoverable amount of the affected assets. When the accounting and business environment permit, the company should compute the cash generating unit. http://www.iasplus.com/en/standards/standard35 Further, International accounting standards no. 36 does not automatically require all asset impairment losses be presented in the standard income statement. The same standard does not specifically require that any amount that is written off against a property, plant or equipment asset must be automatically deducted from the cost or valuation of the same property, plant or equipment asset (Ernst_&_Young, 2011). The impairment tests must be implemented when the criteria for the test crops up. The tests will ensure that the United Kingdom companies’ financial reports present the true picture of the company’s financial position and results of operations. b. PSA Peugeot Citroen and Vodafone, discussion of the effects of such decision on the firms’ financial position and performance. Asset Impairment decisions affect the companies’ financial position and performance. According to Chicago Tribunes’ London Reuters report, PSA Peugeot Citroen had significantly reduced the book value of the company’s major assets. The major assets included the plants and other large value automotive assets. The asset impairment reduction reached an estimated 30 percent during 2012. The write down generated an unfavorable financial picture of the company. The negative image can be quantitatively placed at $5.5 billion net loss figure. The asset write down can be classified as one of Europe’s worst financial market forecasts (Sassard, S., Frost, L., 2013). The asset impairment charge precipitated from the company’s required implementation of the new international accounting standards. Additionally, the impairment charge cropped up to incorporate the bleak European economic forecasts. Consequently, the company’s Chief Financial Officer Jean-Baptiste de Chatillon reiterated that the slow European Union economic debacle would continue for a much longer time period. The asset write down reduced the company’s previously generated € 243 million profits. However, Chatillon envisioned that the asset write down can easily be recovered. The envisioned recovery would crop up when the European Union economy will improve in the near future (Sassard, S., Frost, L., 2013). The Peugeot asset write down included job retrenchments. The retrenchments reached the removal of an estimated 7,900 employees. The retrenchment included a corresponding closing of some of the company’s European Union car manufacturing plants. The company projects to bounce back into its prior profitability levels during 2014. The Peugeot’s asset impairment charge was pegged at € 3 billion. The impairment charge on the automotive manufacturing company complies with United Kingdom companies’ international accounting standard no. 36. The impairment charge did not include any cash outflows. The impairment included depreciation charge on the company’s global automotive market segment assets. The amount of impairment included a depreciation amount of € 3,900 million (Sassard, S., Frost, L., 2013). Vodafone Vodafone insists that the woeful economic debacle due to the asset impairment situation preying on the hapless company (Spanier, 2012). The company was forced to write off an estimated ?6 billion of the company’s major assets. The company generated a six month loss during 2012. The six month period loss amounted to an estimated ?495 million. The company engaged in a very significant asset impairment activity. Initially, the company had previously implemented an asset impairment activity in 2006. The asset impairment activity amounted to write off amounting an estimated ?22 billion. The latest Vodafone asset impairment write off amounting to ?four billion six ago. In the same year, many of Vodafone’s clients may eject from the European Union scene. The scene is plagued by the recent economic depression. Consequently, many companies’ revenues dropped to unprecedented levels. With the ejection of many Vodafone clients, the Vodafone Company is expected to implement asset impairment loss transactions (Yahoo_finance, 2012). Further, the balance sheet of Vodafone indicated that the company has a large amount of intangible assets (Anthill, 2005). In order to understand the company’s asset portion of the balance sheet as well as understand Vodafone’s return on investment outcome, the financial statement analyst must understand how the assets affect the company’s financial picture. The Vodafone financial statement indicates that the company intended to confuse the financial statement readers, in terms of the true nature of the company’s intangible (“cannot be seen”) assets. Furthermore, the Vodafone financial statement’s tangible (“can be seen”) assets seem to be in true or straightforward. In 2004, the company’s intangible assets are shown to be four times bigger than the company’s tangible assets. In 2003, the company’s intangible assets are shown to be five times bigger than the company’s tangible assets. In 2002, the company’s intangible assets are shown to be five times bigger than the company’s tangible assets Under International Financial Reporting Standards, the company can revalue its property, plant and equipment amounts to the current accounting period’s market values. However, the company is not required to engage in the revaluation activity. The reason is based on time and energy conservation. It would take time and energy to revalue the company’s assets. In the United Kingdom environment, most companies prefer not to implement the revaluation activities. Engaging in revaluation accounting activities would entail implementing the related rigorous revaluation procedures. Likewise, the company must continually revise the market value of the revalued assets to the current year’s fair market values. Conclusion Companies are required to present true amounts in the financial statements. The ‘true amounts’ accounting standards requires companies to avoid presenting overstated profits. Consequently, the companies are required to comply with international accounting standards. Cookie Jar and stuffing the channels management policies must be eliminated from actual accounting practice because it would mislead the financial statement readers. Additionally, the companies should immediately implement the asset impairment accounting procedures. The procedures will ensure the companies’ financial reports are not overstated or understated. Evidently, all companies should present true financial reports to avoid misleading the financial statement users. References: Alexander, D. 2008, International Accounting Reporting Standards, CCH: London. Anthill, N. 2005, Company Valuation Under International Financial Reporting Standards , Harriman House: London. Bastos, A. 2010, Dressing: Practical Guide, Ideaspropias: London. Bejou, D. 2006, Customer Lifetime Value, We Manage to Maximize Profits, Routledge Press: London. Board of International Accounting Standards, 2009, IFRS. International Accounting Standards Board: London. Choi, F. 2005, International Finance and Accounting, J. Wiley & Sons: London. Ernst_&_Young. 2011, International GAAP 2012, J. Wiley & Sons: London. Kumar, V. 2008, Managing Customers for Profit, Pearson: London. Sassard, S., Frost, L. 2013, February 13,. Peugeot Loss Widened by 4.13 Billion Euro Charge . Chicago Tribune , p. 1. Scott, F. 2010, Perspectives on Corporate Governance, Cambridge University Press; : London. Spanier, G. 2012, November 12, Vodafone write offs in Southern Europe . The Independent , p. 1. Yahoo_finance. (2012, June 1). Retrieved April 7, 2013, from Zack, G. 2012, Financial Statement Fraud: Strategies for Detection and Investigatio, J. Wiley & Sons:London. Read More