Key Accounting Policies Adopted by IBM Incorporations - Research Paper Example

The paper "Key Accounting Policies Adopted by IBM Incorporations" is a great example of a term paper on finance and accounting. According to the Accounting Principles Board in its Opinion 22, ‘Disclosure of Acceding Policies’, April 1972, paragraph 6: “The accounting policies of a reporting entity are the specific accounting principles and the methods of applying those principles that are judged by the management of the entity to be the most appropriate in the circumstances to present fairly financial position, and results of operations in accordance with generally accepted accounting principles and that accordingly have been adopted for preparing the financial statements.

”  SUMMARY OF KEY ACCOUNTING POLICIES Following are the summaries of key accounting policies that have been consistently adopted by IBM Incorporations in its Financial Statements. Basis of Presentation The Consolidated Financial Statements of IBM are prepared in accordance with accounting principles generally accepted (GAAP) in the United States of America Revenue Revenues are recognized when they are either realized or earned with persuasive evidence of an arrangement, occurrence of delivery has been made, the selling price is known or and recovery is convincingly assured under IBM’s accounting policy.

Shipment of goods, transfer of risk to the client, provision of services, client’s acceptance and another satisfactorily suitable criteria have been met, are the pre-requisites of occurrence of delivery. Software Costs IBM’s research cost includes concept formulation design of licensed software program and these are expensed out. Costs that are capitalized over a period of up to 3 years on a straight-line basis include product finishing after meeting technological feasibility. Periodic reviews are performed to ensure the recoverability of unamortized program cost from future revenues.

Business Combinations and Intangible Assets Including Goodwill Acquisition method is followed in respect of Business Combinations by IBM which takes into account acquisition of identifiable assets, assumed liabilities and presence of non-controlling interest, if any, that are valued at fair values at the date of acquisition. Goodwill is the excess amount paid over the fair values of net assets but does not qualify as an intangible asset because of the inability to the assessment of useful life and hence cannot be amortized.

Other identifiable intangible assets with finite lives are qualified for amortization over their useful lives. Impairment Impairment tests based on undiscounted cash flows are conducted for long-lived assets except for the goodwill by IBM. In case of impairment, these assets are written down to fair values on the basis of either their appraised values or discounted cash flows. Annual test for impairment is conducted in the fourth quarter normally. If indications of impairment arise earlier, then a test is conducted immediately on the basis of the fair-values approach.

Depreciation and Amortization The straight-line method is adopted for depreciation over useful lives by IBM for their fixed assets which include plant, properties, lands and rental machines on historical costs basis. According to IBM’s depreciation policy, buildings are depreciated on 30 to 50 years, land improvements on 20 years, equipment on 10 to 20 years, plant, office equipment and laboratory apparatus on 2 to 20 years, and computers and allied items are depreciated on 1.5 years to 5 years.

Amortization of leasehold improvements are made, either on the shorter of the related lease term or their estimated useful lives but may hardly exceed 25 years of their lives. Income Taxes Income tax expense is estimated on reported earnings before income taxes. Deferred tax represents the tax effects due to temporary differences between assets and liabilities amounts that are reported according to accounting standards purposes (carrying amount) and that are reported according to tax purposes (tax base).

Currently enacted laws are used to measure the amount of deferred taxes pertaining to IBM. In order to reduce the amount of deferred taxes to the likely unrealized amounts, valuation allowances method is used. Translation of Non-U.S. Currency Amounts Non-US subsidiaries of IBM having currencies other than US dollars are used to translate the assets and liabilities at year-end US dollar exchange rate. Foreign exchange translation changes are booked in “accumulated other comprehensive income/(loss)” in the “Consolidated Statement of Changes in Equity”.

Weighted average exchange rates prevailing during the year are used to translate the income and expense items. FINANCIAL PERFORMANCE OF IBM Due to the recession, IBM’s performance in the year 2010 was a bit disappointing. Return on stockholders’ equity declined from 80.4% to 66.8%. Earnings per share, however, is slightly better from the last year with an increase of $1.57. The current ratio of IBM is also observed on a lower side, decreasing from 1.36 to 1.19. ACCOUNTING CHANGES New Standards to be Implemented In the light of amended guidance issued by Financial Accounting Standards Board (FASB) in December 2010, issues related to acquisition date used for “Pro-forma financial information” in respect of business combination has been clarified.

According to the guidance, “If comparative financial statements are presented, the Pro-forma revenue and earnings of the combined entity for the comparable prior reporting period should be reported as though the acquisition date for all business combinations that occurred during the current year had been completed as of the beginning of the comparable prior annual reporting period.” Prospective amendments will be effective from January 1, 2011. Since these are the additional disclosures, therefore there will be no major impact on the financial statements of these changes.