rb-01_-_accounting_requirement_.docx

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RUNNING HEAD: REPORT 1

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Title: Report to the Board of Directors regarding Financial Reporting


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Executive Summary

December 03, 2014

Evaluation of Financial Reporting

This report discusses about financial reporting of HP. Two issues are discussed in this

report; first issue is related to revenue recognition criteria and second is related to property, plant

& equipment valuation and recognition.

Currently, HP is recognizing revenue as per requirements of US generally accepted

principles and IAS-18 Revenue. Most of the requirements of these two frameworks are satisfied.

Property, plant & equipment are also recognized and measured as per requirements of IAS-16.

Revenue is recognized by considering all conditions set by the standard. However, one condition

that is related to cost is not addressed fully as there are no details provided in financial

statements. Currently, property, plant & equipment are measured using cost model which takes

cost of the asset less accumulated depreciation.

There is no other option available for recognition and measurement of revenue as clear

guidance is provided in the standard. In the case of property, plant & equipment, two different

options are available which are; cost model and revaluation model. If we use revaluation model

instead of cost model, value of assets might increase because sometimes assets have higher fair

value than their cost. On the other hand, value of assets might decrease if there is recession

situation in the country (Mirza and Holt, 2011).

Evaluation

International financial reporting standards are adopted by most of the organizations for

preparation of financial statements. These are acceptable throughout the world. These standards

are based on generally accepted accounting principles of different countries. These principles


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also provide guidance for development of new accounting standards. Financial statements cannot

be prepared without proper conceptual framework. The lack of a conceptual framework also

means that fundamental principles are tacked more than once in different standards (Rodriguez,

Rapti and Groom, 2008).

IAS-18 Revenue provides guidance for recognition of revenue for goods provided or

service rendered. Goods include goods produced by the enterprise for the purpose of sale and

goods purchased for resale. Rendering of services typically involves the performance by the

enterprise of a contractually agreed task over an agreed period of time. The services may be

related to a single year or for more than one year.

There is a proper revenue recognition criterion which must be satisfied to record any

revenue. In case of goods, revenue will be recognized when following five conditions have been

satisfied:

1. All the significant risk and rewards of ownership of the goods have been transferred to

the buyer.

2.

The entity does not retain continuing managerial involvement to the degree, usually

associated with ownership over the goods sold.

3. The amount of revenue can be measured easily.

4. It is probable that future economic benefits associated with the transaction will flow to

the entity

5. The cost incurred or to be incurred in respect of the transaction can be measured reliably.

In case of revenue recognition criteria for services, there are different conditions which

must be met to recognize revenue. These conditions are as follows:


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1. The amount of revenue can be measured reliably.

2. It is probable that the economic benefits associated with the transaction will flow to the

entity.

3. The stage of completion of the transaction at the reporting date can be measured reliably.

4. The cost incurred for the transaction and the cost to complete the transaction can be

measured reliably.

Revenue is to be measured at the fair value of the consideration received or receivables,

taking into account the amount of any trade discounts and volume rebates allowed by the entity.

There are no options available for measurement of revenue as it is recognized at the fair value

received. HP earns net revenue basically from the sale of services and products. The following

policies are used for revenue recognition in the financial statements.

HP recognizes revenue when there is clear evidence of sales arrangements have been made,

goods have supplied or services are rendered, the sale price fix in some cases and it is variable in

some other conditions, and it is reasonably assured that all revenues are recognized collectively.

Moreover, hardware revenue is recognized by HP when sales are made to channel partners,

including retailers, distributors or other solution providers who are separate from HP, revenue is

recognized at the time when delivery is made, and HP has fulfilled all obligations which directly

relates to sales. Revenue is recognized related to software when there is clear evidence that

software has been sold to specific end user by the channel partners.

IAS-16 Property, Plant & Equipment deals with recognition and measurement of

noncurrent assets which are used in business for long term. According to guidance of this

accounting standard, asset is something which is controlled by any entity and there will be inflow


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of economic benefits in future (Elms and Low, 2013). According to requirement of the standard,

asset will be recognized in financial statements, if it meets the criteria stated in standard which

is; probability of inflow of future economic benefits and, cost of the item of property can be

measured reliably. These are basic conditions which must be satisfied to recognize any asset

(Everett, 2008).

If we discuss about measurement, there are two kinds of measurement which are; initial

measurement and subsequent measurement. Initially, any asset should be measured at cost

whether it is purchased or built by the organization. There are two options available for

subsequent measurement. These options are; cost model and revaluation model. If we use cost

model, we should carry asset at its cost less any accumulated depreciation and any impairment

losses. In case of revaluation model, any asset should be carried as per fair value of asset on any

statement of financial position date. Fair value of assets is determined after some regular interval

and in case of increase, additional amount is added to the value of asset and a revaluation reserve

is created in statement of financial position (Pampel, 2001).

HP records property, plant & equipment using cost model which deducts depreciation

amount from the cost of software each and value of asset is decreased by this amount. Additions

and improvements and expenses are capitalized as and when they incur. Depreciation is

calculated using straight line method over the useful life of the assets. Useful lives are between

five and forty years for buildings and machinery and equipment have useful life of three to

fifteen years (Harrison and Harrison, 2014).

Influence of Institutional Context

The institutional Context refers to the character, programs, funding opportunities, and

informal/formal support for engagement activities that will undergird the ability to create a


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strong engagement program in the community. There is no much influence of institutional

context in case of revenue recognition, because there is only one option to measure the revenue

which states that revenue should be measured by the amount of fair value received or receivable.

It will have influence in case of measurement of property, plant and equipment. If we use

revaluation model, value of assets might increase and it will have great influence as amounts

might be changed materially. HP is a large company in the USA, so if there is any major change

in any measurement, institutional context will have higher influence. Currently, value of

property, plant and equipment is $11,463 million; it might increase to $15,000 while using

revaluation model.

Influence of Social Context

The word social is derived from society. The term society means the aggregate of people

living together. We all have some different societies in different parts of the world. A company

uses financial statements to communicate with the society. Any person can get knowledge of

policies of the company through its financial statements. (Porter and Norton, 1995)

There are two permitted choices for measurement of property, plant and equipment. According

to cost model, the asset has value of $11,463 million, which is a material amount in all aspects.

In case, if revaluation model is used, value of the assets might increase or decrease dramatically.

It may comes down to $7,000 or even less than this. On the other hand, it might also increase.

The company is based in US, so social values should be considered while making decision

regarding measurement choices as social context has much influence on financial statements

(French-Davis and Griffith-Jones, 1995).


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Recommendations to Board of Directors

In case of revenue, most of the conditions of IAS-18 are satisfied as revenue is

recognized in financial statements when there is no managerial involvement of the company

regarding the goods supplied to customers, there is probability of inflow of economic benefits,

revenue can be measured reliably and when all significant risks and rewards are transferred to

the buyer of goods. One condition which is not properly addressed in the financial statements is;

cost can be measured reliably. This issue should be considered properly and revenue should be

recorded only when cost of the goods supplied can be measured reliably (Carter, Ulrich and

Goldsmith, 2005).

Property, plant and equipment are measured using cost model and recorded in financial

statements at cost and depreciation is deducted every year accordingly. Depreciation is deducted

using straight-line basis as useful life of asset divided on cost of the asset. This method might be

useful for some class of assets but it is not applied properly to all kinds of assets. Class of assets

should be separated and some assets should be depreciated using reducing balance method as this

is useful for some kinds of assets (White, Sondhi and Fried, 1998).


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References

CARTER, L., ULRICH, D., & GOLDSMITH, M. (2005).Best practices in leadership

development and organization change how the best companies ensure meaningful change

and sustainable leadership. San Francisco, Pfeiffer.

http://search.ebscohost.com/login.aspx?direct=true&scope=site&db=nlebk&db=nlabk&A

N=125294.

ELMS, D. K., & LOW, P. (2013). Global value chains in a changing world.

EVERETT, A. (2008).Learning race and ethnicity: youth and digital media. Cambridge, Mass,

MIT Press.

FFRENCH-DAVIS, R., & GRIFFITH-JONES, S. (1995). Coping with capital surges: the return

of finance to Latin America. Boulder, L. Rienner Publishers.

HARRISON, W. T., & HARRISON, W. T. (2014).Financial accounting international financial

reporting standards. Harlow, Pearson Education.

MIRZA, A. A., & HOLT, G. J. (2011). Wiley IFRS practical implementation guide and

workbook. Hoboken, N.J., John Wiley & Sons.

http://www.123library.org/book_details/?id=16301.

PAMPEL, F. C. (2001). The institutional context of population change patterns of fertility and

mortality across high-income nations. Chicago, University of Chicago Press.

http://site.ebrary.com/id/10389576.

PORTER, G. A., & NORTON, C. L. (1995).Financial accounting: the impact on decision

makers. Fort Worth, Tex, Dryden Press.


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RODRIGUEZ PARDINA, M., RAPTI, R. S., & GROOM, E. (2008).Accounting for

infrastructure regulation an introduction. Washington, DC, World Bank.

http://public.eblib.com/choice/publicfullrecord.aspx?p=459490.

WHITE, G. I., SONDHI, A. C., & FRIED, D. (1998). The analysis and use of financial

statements. New York, Wiley.

rb-01_-_accounting_requirement_.docx

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