Company have to choose which accounting polices to adopt for example:
- Methods of depreciation
- Conversion or translation of foreign currency items
- Valuation of inventories
- Treatment of goodwill
- Valuation of fixed assets Etc.
Consequently accounting polices should be able to show true and fair view of financial statements of the company. For instants Enron is a good example where company failed to present true and fair view of business reality ( ). Any change in accounting policy which is material ( that can affect decision making ) should be disclosed in financial statements (Melville A. 2009). As it shown in changes in accounting polices where “subscribed acquisition costs comprise the direct third-party costs of recruiting and retaining customers, net of incentives from network operators and provision in-contract crunch” this costs were capitalised in previous years due to expected future cash flows, but the group has changed its policy due to occurrence of costs. And as it stated by the The carphone warehouse group after reviewing accounting policies in telecommunication sector, they believe that change in policy will give better comparability and reliability (The carphone warehouse. 2009). This example clearly shows that enterprise can review competitors annual reports to get information, and using same standards for gaining comparability they can improve there reporting standards and sick for competitive advantage. Also that changes in polices are clearly defined and disclosed in appropriate section as it stated by IAS 8. Furthermore IAS 8 states that Accounting estimates are some items that cannot be measured but can only be reasonably estimated (e.g bad and doubtful receivables). Or as it was mentioned above that the group expected future cash flows, but due availability of new information and rules set by IAS 8 they have revised and restated their estimates (Melville A. 2009 p. 64).
As company operates in more than one country and different currencies subscribed acquisition costs comprise the direct third-party costs of recruiting and retaining customers, net of incentives from network operators and provision in-contract crunch are used, company uses Sterling for recording transactions and exchange rates are applied in an appropriate way. Goodwill is also measured in Sterling, which makes it comparable and understandable for the users of financial statements (The carphone warehouse. 2009).
The group applies financial policies for revenue generation and they are recognised when as they earned, for instance provision of fixed and mobile network services, revenue from sale of mobile and other products and services etc (The carphone warehouse. 2009 p.47). However VAT collection does not benefit entity, therefore it is not ranked as revenue (IAS 18). IAS 18 recognises revenue from the sales of goods, or services and the use by the entities assets, yield interest, royalties and dividends.
The pensions policy of the company are payable according to the rule of the scheme and mentioned in the statement of the comprehensive income. The dividend mentioned in the financial statement, when it is received and after appreciative by the shareholders is consider as a liability in the financial statement and in the year which it is paid (The carphone warehouse. 2009).
The company policy regarding to the taxation is that the deferred tax asset which is accumulate tax in the appropriate period with accordance to laws and mentioned in the statement of the comprehensive(The carphone warehouse, 2009).
As IAS 16 defines property, plant and equipment are those items that are expected to use for more than one period and held for use production supply of goods and services etc. (Melville A. 2009 p. 74). IAFB framework gives 4 different measurement bases, but do not prescribe uses of these bases. It only gives guidance. Financial item can be measured at historical cost, current cost, realisable value and present value (Melville A. 2009 p. 27).
The groups policy for property plant and equipment uses the current cost and depreciated in the straight line basis over the expected useful life (The carphone warehouse, 2009). In accounting main purpose of depreciation is to raise funds by deducting value of the item during its useful life, so the item can be replaced by saved up cash. However IAS 16 states that it does not guaranty that there will be funds available to replace that item (Melville A. 2009 p.80). So on one hand depreciation helps to raise some funds for replacement of item at the end of its useful life, and also reduces balance, but on the other hand it does not guaranty that after disposal the funds will be available and depending on method some items might be revaluated to extend life of item.
The company polices for the intangible asset is that undertaking of the subsidiary and business that goodwill is arises and they consider the fair value of the identified asset and liabilities. The impairment is determined by assessing the future cash flows which the goodwill related. When the carrying value of the goodwill is more than the future cash flow the impairment charges is acknowledge in the statement of the comprehensive income. While the disposal of the subsidiaries is undertaken is input in the profit and loss on disposal of the relevant goodwill. (Carphone warehouse, 2009 P. 48)
Stock items are valued at the lower of cost and net realisable value, so by doing this the group can reduce the risk of miss estimating profits and future cash flows because they keep the at lower cost(The carphone warehouse, 2009). On other hand if they used net present value to value inventories they could over estimate value of stock in the future.
As any standards of laws IFRS are also developed and changed, because they are aiming to get global recognition. Different markets and countries have their specific requirement and legislations and to be able to adopt new standards they have to flow in constantly and step by step. Discloser of financial statements provides us with this information in accounting policies section and material impact on the group is noted (The carphone warehouse, 2009 p.50). Some of dates are only effective in 2 years time. However other EU countries have adopted these standards.
From 2007 to 2009 there were some material changes in accounting polices that are disclosed in financial statements. Non material items are not mentioned because the do not affect economic decisions. Main changes were due to requirements of the IFRS and been treated as its required by IAS’s.
There are a lot of different arguments between IFRS and GAAP. These accounting standards have different ways of treating and interpretation financial items, which make them impossible to compare ( ). Therefore for international investor who are using IFRS it is difficult to make decision when they are wishing to invest. So it is difficult to compare performance between some companies that use different reporting standards. Main Issues that arise are comparability, reliability. GAAP have been used during long time and got more polices to comparison with IFRS that have been developed recently. But there is also cost of moving from one reporting system to another.
IFRS are still developing and changing from time to time and different companies apply them at different times, which lead to lack of comparability. Also for The carphone warehouse it is necessary to run both IFRS for reporting financial statement and GAAP for presentation of its individual financial statement. But this is one step for international financial convenience, so that they can compare their performance inside the UK and also compare it with its rivals in the EU.
To sum up accounting policies should represent what are rules used in running the company, how they treat financial items and how that items are calculated and interpreted. They should show true and fair view and underlying business reality on going concern basis, disclosed prepared and presented as it required by laws or IASB. The have to be consistent from one period to another and if any changes occurred due to requirements of IFRS or if more reliable principles are available. Comparability also should be taken into account and, if any changes I polices are occurred adjustments should be made. As any other standard IFRS’s are still developing and entity in some cases should refer to some other accounting literature, or makes estimates based on personal judgments.
As was mentioned above GAAP conflicts with IFRS due to lack of comparability, reliability, cost of switching. However as the carphone warehouse companies may apply both IFRS and GAAP for better performance, but it will be difficult for smaller companies to run both.
References
Accounting polices
[Online] available at
[Accessed 30.01.2010]
IFRS VS GAAP
[Online] available at
[Accessed 25.01.2010]
Melville. A. 2009 . International Financial Reporting a Practical Guide 2nd ed. England: Essex.
The Carphone warehouse PLC annual report 2009
[Online] available at
[Accessed 03.02.2010]
The Carphone warehouse PLC annual report 2008
[Online] available at
[Accessed 03.02.2010]
The Carphone warehouse PLC annual report 2007
[Online] available at
[Accessed 03.02.2010]
