Report to the Board of Directors of 3M Company - Coursework Example

? Report to the Board of Directors - 3M Company Contents Executive summary to Board of Directors 3 Evaluation of selected measurement model PPE valuation and recognition 4 Evaluation of selected measurement model 2: Differences permitted in Asset Impairment methods and accounting treatment 5 Discussion of influence of institutional context on measurement choices 6 6 Discussion of influence of social context on measurement choices 7 Recommendations to Board of Directors 8 References 9 Executive summary to Board of Directors The financial reporting on PPE and asset impairment of 3M Company has been presented below. The non-current assets that are expected to produce benefits for more than one accounting period have been classified in the category of PPE. The use of historical information has been adopted by the company in valuing the property, plant and equipment. The risks and rewards of the PPE have been assumed to pass over to the company (Warren, 2010, p.34). In case of determination of impairment of assets, the management has adopted separate measurement techniques of evaluating the different units by categorizing them as profit making or loss making. The price-earnings ratio method has been used for profit-making units, the discounted cash flow method has been used for the loss-making units and the relative fair value method has been used for the changes in products offerings of the different units (Sofat and Hiro, 2008, p.84). The influence of the institutional context and the social context on the measurement choices for accounting treatment have been considered in the process of financial reporting. The necessary changes in the accounting treatment of the company to comply and align with the norms under IFRS have been suggested to improve the process of accounting and financial reporting. Evaluation of selected measurement model 1: PPE valuation and recognition The valuation of PPE are done and reported by 3M Company as per the prevailing accounting standards of the country. The non-current assets, i.e. the assets which could be converted to cash beyond a period of more than 1 year are recognized in the PPE category. This includes the equipments of the company, the plant and the property. The property, plant and equipment are considered to hold a physical substance and are used for more than one accounting period for the purpose of production of goods. The contingent assets are also considered for PPE valuation. The management takes into account the historical experiences in evaluating the property, plant and equipment of 3M Company (Khan, 2004, p.49). Based on the past experience and reasonable justification of the related factors, the PPE valuation is carried out by the management. The management, however, believes that the accounting of PPE and the reporting of PPE valuation may differ from the actual value of the total property, plant and equipment. The determination of the value of property, plant and equipment takes into account, the related losses and depreciation of the assets. The valuation of the asset includes the cost of purchase and the cost of installation and other expenses incurred in bring the fixed asset to the location of usage. The cost of maintenance and losses if incurred are also adjusted to determine the value of PPE (Baker and Powell, 2009, p.68). Apart from the cost or risks, the management also takes into consideration the expected flow of money from the use of fixed assets. The reward or the benefits of the assets are also taken into consideration for the purpose of PPE valuation. Evaluation of selected measurement model 2: Differences permitted in Asset Impairment methods and accounting treatment The asset impairment is recognized by the management of 3M Company when the reported value of the assets of the company is greater than the intrinsic values of the assets. The impairment method includes the determination of fair value of assets of the individual units of 3M Company and then comparing with the reported value of the assets of the individual units. The method applied for determining the fair value involves multiplying the earnings of each of the individual units of the company to the price to earnings ratio of those units in the industry in which 3M Company operates (Bhattacharyya, 2011, p.29). The price-to-earnings ratio method is adopted by 3M Company for those units which are profitable and growing in the market. For the loss making units as well as the newly start-up units, the company uses the discounted cash flow method to determine the intrinsic or fair value of the assets. The impairment of assets is recognized by comparing the fair value of the assets to that of the reported value of assets. 3M Company implements changes in the products manufactured by different units according to the business requirements. In such cases the company uses the relative fair value method in order to determine the impairment of assets (Warren, Reeve and Duchac, 2008, p.34). The accounting treatment requires the determination of the recoverable value of an asset in cases of impairment. The differences in the accounting treatment lie in the application of several methods as found suitable by the management in determining the recoverable value of the asset. The determination of the fair value as compared to the reported value of the asset provides the recoverable value to 3M Company. Discussion of influence of institutional context on measurement choices Management accounting is one of the ever changing concepts in the area of accounting treatment. The accounting treatment changes in line with the institutional perspective on the valuation of PPE and also in the determination of asset impairment. Although the consideration of non-current assets, which produce benefits for more than one accounting treatment, in the category of PPE is in line with the accounting standards, the influence of institutional context incorporates necessary modifications on the measurement choices (Jackson, Sawyers and Jenkins, 2008, p.99). The use of historical experience by the management differs in institutional context and is likely to produce different results for different institutions. Thus the institutional context strongly influences the measurement choices for recognizing and valuing PPE. The influence of the institutional context also affects the measurement choices for determining the impairment of assets. In case of shift of product portfolio and the changes in products manufactured by different units of 3M Company, the institutional context influences the approach for measurement of fair value of the tangible or intangible asset in order to determine the recoverable amount. In this case the relative fair value method adopted by 3M company is due to the influence of the institutional context (Crosson and Needles, 2010, p.48). The adoption of different approaches of Discounted Cash Flow Method for the loss making units of 3M Company and the approach of Price-to-Earnings ratio method for the growing and profitable units of the company is due to the influence of the institutional context on the measurement choices for the purpose of accounting and reporting. Discussion of influence of social context on measurement choices The social context influences the measurement choices adopted in the methods of accounting. The social beliefs, culture and habits of the people of a country influences the accounting treatment of the companies of different countries. The various cultures have an indirect influence on the judgments taken by the accountants in the process of accounting. The consideration or rejection of certain factors in the process of measurement decides the approach undertaken for the purpose of recognition and valuation of assets. The historical information used for valuation of PPE requires judgment on the part of the accountant which is influenced by the social context. The social context includes the beliefs and the values of accountant that guides the individual in evaluation of the accounting entities. The interpretation of the information on the contingent assets and liabilities are also guided by the social context. The social context influences the activities of compliance on the part of the accountant for adhering to the accounting standards. Due to the difference in values and culture, the accountants tend to engage into unfair accounting practices (Rezaee, 2007, p.68). The measurement choices are also utilized in an unfair manner for personalized gains and narrow interests which are against the interests of the public and user of financial statements. The difference in language of the societies also plays a vital role in measurement of financial parameters if the financial information is available in a different language other than that of the host country. The difference in interpretation of the financial information available in a different language is also due to the influence of social context on accounting treatment. The social context, therefore, decides the approach which is to be adopted for the valuation of financial parameters and hence influences the measurement approach for accounting purpose. Recommendations to Board of Directors The following changes have been recommended to the Board of Directors of 3M Company in order to comply with the IFRS norms of accounting practices. The valuation of PPE must be done in the same line of accounting procedure recommended by IFRS and the accounting ethics should be adopted for measuring the value of assets, liabilities, income and expenditure, contingent financial parameters of the company. This would ensure efficient use of financial information on the basis of a standard code of ethics. The information on the valuation of the assets would be reliable for the users of the financial reports. The areas of judgement in evaluation of intangible assets are also to be followed as per the code of ethics mentioned in the IFRS. The notes to the financial reports prepared by the company should contain detail of the accounting policies of the company and the method of accounting treatment adopted in different cases (Rao, 2000, p.28). The different methods of asset impairment adopted for different units of the company are to be mentioned in the notes for the information of users. These changes in financial reporting of the company are recommended which is line with the norms suggested by IFRS. References Baker, H. K. and Powell, G. 2009. Understanding Financial Management: A Practical Guide. Australia: John Wiley & Sons. Bhattacharyya, D. 2011. Management Accounting. New Delhi: Pearson Education India. Crosson, S. V. and Needles, B. E. 2010. Managerial Accounting. USA: Cengage Learning. Jackson, S. R., Sawyers, R. B. and Jenkins, J. G. 2008. Managerial Accounting: A Focus on Ethical Decision Making. USA: Cengage Learning. Khan, M. Y. 2004. Financial Management: Text, Problems and Cases,4e. Delhi: Tata McGraw-Hill Education. Rao, P. M. 2000. Financial Reporting and Disclosure Practices. India: Deep and Deep Publications. Rezaee, Z. 2007. Corporate Governance Post-Sarbanes-Oxley: Regulations, Requirements, and Integrated Processes. USA: John Wiley & Sons. Sofat and Hiro. 2008. Basic Accounting. New Delhi: PHI Learning Pvt. Ltd. Warren, C. S. 2010. Survey of Accounting. USA: Cengage Learning. Warren, C. S., Reeve, J. M. and Duchac, J. E. 2008. Financial & Managerial Accounting. USA: Cengage Learning. Read More