Definition
Every business organization has the procedures that it follows when preparing financial statements. The procedures are distinct and designed to fit the general objectives of the company. The term accounting principles refer to the policies and procedures that guide a company in preparing its financial statements (Kieso, Weygandt, & Warfield 2010). They may include the procedures for disclosing various values, the methods applied the measurement methods, as well as the formats used, among others. Accounting policies are different from accounting principles; policies are only applicable to each company specifically while principles are general rules that have to be followed universally or across a large geographical area (Hightower 2008).
The accounting policies of a company can be used to determine the kind of management that runs the organization. For instance, certain policies are specific to conservative managers while other principles are specific to aggressive managers (Rajasekaran & Lalitha 2011). Companies are required by the General Accepted Accounting Principles (GAAP) to disclose the policies that it uses in preparing its financial statements (Bragg 2013). Two accounting policies will be discussed for this assignment. The policies are revenue recognition and leases.
Revenue Recognition
Revenue recognition is one of the major policies that are very essential to any business organization. One of the reasons as to why revenue recognition is important is because numbers can easily be manipulated and as a result, the financial statements might represent a figure that does not reflect the true value of the company (Beil 2013). For instance, if a certain company wants to appear like it is making profits to attract investors, they may adjust the figures such that they reflect a high profit (Krawez 2011). In doing so, the company may decide to recognize sales whose revenue has not been received. In doing so, the company will have boosted the sales for the specific period and as a result, the profits will appear to be higher than it should be. Over the past, there have been cases of companies implementing revenue recognition policies that are weak or fragile. In the bid to address this problem, there have been new regulations as well as tighter guidelines that have been aimed at addressing this issue. However, the new regulations have not been able to completely address the issue.
It is important to note that the revenue recognition policy may have some exemptions. For instance, if a company has a high rate of product returns, revenue should not be recognized until the return period has expired.
Definition of revenue recognition
The term revenue recognition refers to the process through which a company determines when and how revenue should be recognized or realized. Revenue recognition differs from one company to another. However, companies should use the IAS 18 Accounting Standard to determine when and how revenue should be realized (Krawez, 2011). Some companies realize sales immediately good or services are sold regardless of whether the sale is cash or credit. The recognition principle is the one that forms the basis of accrual accounting, as well as the matching principle. The principle defines the accounting period in which revenue and expenses in a business organization are recognized. As a general rule, revenue should be recognized at a time when they are realized or other they are realizable and earned. This is regardless of whether there has been any cash receipt or not. This is different from cash accounting when revenues are only realized when they have been received regardless of when the goods or the services were sold. Most companies and business organizations use the accrual accounting whereby they realize revenue when it is earned rather than when the money has been received.
Some guidelines are given by IAS 18 to help companies determine the period when revenue should be realized (American Institute of Certified Public Accountants 2014). Some of the guidelines are as follows:
- Revenue can be realized at the moment when the ownership of good, as well as any risks associated with the goods has been transferred from the seller to the buyer.
- The revenue that is gained by the seller once they sell the goods should be measurable or have a unit for measuring its amount.
- The costs that are incurred in supplying the goods, as well as other related costs, should be measurable.
- Revenue should be recognized when the probability of receiving cash is high in the case of the credit sale.
BT Company Revenue recognition
According to the company, revenue is defined as the amount received after discounts and VAT have been deducted. It is measured regarding the fair value that is receivable from the sale of services. Sales of services are realized when the customers buy the services either in cash or credit. Therefore, the sales of the company are recognized immediately the customers are offered the services. The customer may either pay in cash or may get the services on credit. Nevertheless, the sales are recognized in the accounting books of BT. The expenses of the company are recognized as they are incurred. In the case of rent, it is recognized on straight line basis. Other expenses such as royalties are recognized in the accosting period in which they are incurred.
There are no cases of returns in the service industry. Therefore, this is not a case that affects the company. Also, cases of credit sales are rare in the service industry. However, they are recognized as above in the case they occur. The financial statements for the current year do not indicate the amounts from the previous year that have been recognized.
Revenue for the year 2015. (Cable & Wireless Communications Plc, 2010).
Cable and Wireless Communication
Revenue recognition principle at Cable and Wireless Communication Company is as crucial as it is in other companies. The accruing accounting principles are applied. Revenue is recognized when earned as opposed to when it is received. Expenses, on the other hand, are recognized when incurred. Once the company delivers the goods to the customer, the sales are recorded in the financial statements, regardless of whether cash has been received or not. The financial statements are easy and can be easily understood. The returns are excluded from the sales when goods are received back.
(BT, 2016).
Definition of Consolidation and Goodwill
Consolidation is a term that refers to the unification of more than one corporation to form a single corporation. In accounting, consolidation may refer to the act of uniting the financial statements of a Group Company or other companies that are under one mother company. Each organization has its policies that govern consolidation (Flood, 2015). However, it is imperative to note that the company has to adhere to the general principles that are provided by the GAAP, among other principles provided by other accounting bodies.
Goodwill, on the other hand, is an asset that is not tangible. It is the value of difference between the real value of the business and the value at which it is sold. Goodwill arises when a business has been in operation for a particular period of time. Different business organizations account differently for goodwill (Flood, 2015). They have a way of assigning the value to the business, using given principles.
BT Company Consolidation and Goodwill Policy
BT Company has a number of branches that operate in different countries. Each company prepares its financial statements independently. However, there is another financial statement that is prepared at the headquarters, whereby all the statements of all the branches are consolidated into one. The preparation of the accounts for each branch enables each branch to assess its performance while the consolidated accounts enable the business to assess the performance of the whole organization. Goodwill is accounted for depending on the performance and location of the business. A branch that has good performance and is located at a strategic place is assigned a higher goodwill.
Cable and Wireless Communication
Just as in the case of BT, Cable and Wireless Communication prepares the consolidated accounts for its branches. Each branch prepares its financial accounts and then they are forwarded to the headquarters, where consolidated financial statements are made. Goodwill, on other hand, is estimated based on various factors, such as the business performance and location. Prospects of the business are also essential in estimating goodwill.
Conclusion
Accounting policies are applied in every business that prepares financial statements. Among the accounting principles that are common include revenue recognition and leases. The treatment of revenue recognition at BT is different from the treatment of the same at Cable and Wireless Communication. However, as it has been noted, the difference is not major because most companies use accruing accounting principle and as a result, their revenue recognition policies are similar. The same case applies to leases.
Reference List
American Institute of Certified Public Accountants 2014, Understanding revenue recognition: changes to U.S. GAAP, American Institute of Certified Public Accountants, Inc., New York.
Beil, FJ 2013, Revenue recognition: principles and practices, Business Expert Press, New York, NY.
BT, 2016, Current Cost Financial Statements 2015, Web.
Cable & Wireless Communications Plc. 2010, Financial Statements, Web.
Flood, J M 2015, Wiley GAAP 2015: Interpretation and application of generally accepted accounting principles, U.K: Wiley, Chichester.
Hightower, R 2008, Accounting and finance policies and procedures, J. Wiley, Hoboken, N.J.
Kieso, DE, Weygandt, JJ, & Warfield, TD 2010, Intermediate Accounting: IFRS Approach, Volume 2., Wiley, Hoboken, N.J.
Krawez, A 2011, Revenue recognition for multiple element arrangements: implications of the new IFRS revenue standard for recognition timing: an exploratory study of the telecommunications industry, M. Sc. International Management King’s College London.
Rajasekaran, V, & Lalitha, R 2011, Financial accounting, Dorling Kindersley, New Delhi.
Ruppel, W 2009, Wiley GAAP for governments 2009: interpretation and application of generally accepted accounting principles for state and local governments, Wiley Hoboken, N.J.
Sebik, JP, & Starczewski, LM 2015, Accounting for leases fundamental principles, John Wiley & Sons Inc., Hoboken, NJ.