A company has to be keen on what they report on their financial reports as it reflects their assets, liabilities and shareholders’ equity. The reports created by the company is a true reflection of the accounting principles and standards that the company will follow. It is, therefore, important that a company ensures that they apply and follow all the Generally Accepted Accounting Principles (GAAP) (Kaplan and Atkinson, 2015). In doing so, the following transactions can still be reported while still considering the historical cost concept (Horngren et al., 2012). In addition, guidelines like the matching, materiality, monetary, going concern and ensuring full disclosure will be observed when entering the following instructions.
When recording the transaction, it is quite important for the company to ensure that asset valuation should be carried out in consideration of the original cost (Kaplan and Atkinson, 2015). That way it will not be possible to overvalue assets that is caused by the turbulent forces of the market. When entering the values on the balance sheet, it is important to ensure that it shows the depreciated value of the asset over time (Collier, 2015). Therefore, the depreciated value should be recorded below the original asset value. When the depreciation is subtracted from the value it will ensure that it is not overvalued (Kaplan and Atkinson, 2015).
Breaking down the first transaction of Combo applications will be as in the explanation. In that, realize that the company bought the building on 1st February 2016, at 500,000 pounds. However, after an announcement that a rubbish dump will be adjacent to the building by December the value of the building drops to 200,000 pounds according to a real estate agent. Following the guidelines that have been provided above, the transaction should be recorded as follows in the balance sheet.
|Fixed assets||Original/initial cost||Accumulated /depreciation||Netbook value|
|Total fixed assets||500,000||(300,000)||200,000|
The balances sheet has been able to clearly show the current value of the asset and the historical value. The balance sheet has also shown the depreciation of the recorded time period which ensures that the company does not overvalue the assets after it has depreciated in value. The transaction will be recorded as an expense in the income statement and it has a negative impact on the overall profits of the company. As an expense, it will reduce the profits of the company (McLaney and Atrill, 2014).
According Collier (2015) failure to report any transaction, in this case the depreciation, by the manager of the company will have a negative impact on the company. First, the manager will have violated the full disclosure agreement among other principles that govern the company accounting principles. In case of any audit carried out by an external auditor, it will reveal the transaction through the unqualified report that shareholders and all stakeholders will be able to see (Horngren et al., 2012). The incident may cost him a job, reputation and will eventually ruin the reputation of the whole company. The company will be one of those companies that tries to hides losses as it was not transparent resulting in much greater damage (Kaplan and Atkinson, 2015).
Accounting is regulated and controlled by the Financial Accounting Standards Board (FASB) in the USA and The Financial Reporting Council (FRC) in the UK (Kaplan and Atkinson, 2015). The UK council makes use of the foundation of procedures, guidelines in accounting background and assumptions that help them formulate and create policies and principles that will govern and regulate accounting in the UK. GAAP, on the other hand, are the assumptions, guidelines and principles that were formulated by the Accounting Principle Board of America (APB) (Kaplan and Atkinson, 2015).
It is a legal requirement that all the companies follow the Generally Accepted Accounting Principles (GAAP) when reporting the specific financial statements to the public (Collier, 2015). Combo is no exception and that is a guideline that the company must take into consideration. The shares of the company are traded by the public therefore, there should be a standard way of reporting (Loft, 2016). Additionally, the company must be audited by an external CPA. In doing so, the management, finance and accounting personnel of the company must be available to explain the cash flow, equity, comprehensive income, position, and cash flow in accordance to the GAAP (Kaplan and Atkinson, 2015).
GAAP has been very useful in outlining formulas, principles, assumptions and meanings of accounting. Over the years the GAAP has been consistently growing in complexity due to the continuous variations and increasing complexity in today’s transactions. However, it has been important and helpful in allowing for comparative analysis over the years in terms of financial positions, profits and other financial data available (Horngren et al., 2012). It has been ideal in maintaining consistency over the years.
Critical comment on the Fair Value and Historical Value Reporting methods
As established earlier, the best approach of recording the transactions, in this case, the purchase of the building, is the use of Historical costs. According to the APB historical price can be defined as the price that was offered for the asset at the time of purchasing by the company. The approach is the one that is suggested by the GAAP when used in accounting in America. On the other hand, fair value can be defined as the amount of money that a buyer and seller have agreed upon as the sale price of a certain item. Additionally, it important to note that the fair value is the representation of the value of the company’s liabilities and assets (Kaplan and Atkinson, 2015).
When looking at the transaction both the fair value and historical value reporting methods come into play. Since they are two different methods, it is expected that they might clash and complicate the accounting approach (Loft, 2016). However, in this case, the two work in unison together, as if complementing each other to arrive at a solution that does not go against principles from either approach of accounting. While fair value has become dominant in the current world after adoption with the IFRS, the historical value can still be used (Kaplan and Atkinson, 2015).
According to McLaney and Atrill (2014) in accounting and writing the initial cost, the company must use the initial cost as the historical cost, in this case £ 500,000. However, we will also use fair value approach and take in consideration the depreciation that happened to account for it and write £ 5000,000- 300,000 and put £ 200,000. That is the amount that in case the building is sold by the Combo Applications., both the seller and the buyer will be able to agree on the price. Additionally, adhering to the historical and fair value accounting approaches ensures that the values are in accordance with the GAAP, UK- GAAP guidelines, FRC, Securities Exchange Commission (SEC) requirements, and FASB rule. It will also avoid over overestimating the building (Horngren et al., 2012).
On 25th September Combo Application purchased £2,000,000 worth of oil stocks. However, the prices of the oil dropped making the same amount of shares worth £780,000 in the London Stock in December. The approach to recording the transaction should also be similar to that of the depreciated asset. However, small variations will be made.
In the accounting books, the manager should ensure that they record £2,000,000 as the original value of the stocks so that it can be according to the historical value and honour the GAAP principles. In doing so, it will also have upheld the FASB and RFC guideline of the historical price principle that guides and mandates that business should ensure that they record values of their liabilities, equity investments asset in their original purchasing price (Horngren et al., 2012).
The company experienced a loss and should, therefore, disclose in order to abide by the guideline of full disclosure guideline. The full disclosure guidelines mandate that way information that will significantly affect a reader’s perceptions must at all times be included in the financial details of the company. The number in this transaction is significant and will, therefore, be recorded under two categories. The difference (£2,000,000-780,000), £ 1,220,000 can be treated as either a loss when entered in the balance sheet and will be referred to as an expense in the administrative operation statement.
|Asset||Initial cost in £||The loss incurred in £||Net Book Value in £|
|The total value of stocks||2,000,000||780,000|
One advantage of including the transaction in its reports is that it will show the Combo Applications manager as a trustworthy and honest manager when handling the accounting information. However, since the transaction resulted in a loss, it has an effect of reducing the net worth of the company. Luckily in the long term, it will play in the advantage of the company. When the auditors come knocking and carrying out the audit they will find all the transactions have been correctly recorded. They will then not have any issue with the law or their shareholders (Loft, 2016).
FRC considers any transactions that will result in a change of the net assets of a business in a certain period including events and circumstances of non-owner’s assets as a revenue statement. Due to that consideration, they have regulations and guidelines that govern the revenue statements. One statement is that a company has to periodically, either monthly, quarterly or yearly, release their financial reports (Horngren et al., 2012).
In addition to that rule, there is also the inclusion rule that makes sure that businesses and companies adhere to it. Business must include in their statements all the transactions that result in either losses or profits as part of their revenue transactions. The concept was first implemented by the American Institute of Certified Public Accountants (AICPA) and was incorporated in the GAAP. When a company takes into account all the transactions and reports them regardless of whether profit or losses it boosts the company’s image as trustworthy. AICPA started the inclusion concept in 1966 and has been even been adopted in the UK-GAAP (Kaplan and Atkinson, 2015).
Additionally, all the public companies operate under the jurisdiction of the Securities Exchange Commission (SEC). They, therefore have the mandatory obligation to operate under the guidelines, principles and rule of the SEC. The SEC requires that all of the public companies prepare the financial statement according to the specific guidelines. SEC uses the terms revenue statement, statement of earnings, statement of operations among other terms to refer to the income statement of the company (Kaplan and Atkinson, 2015).
Critical comment on the appropriateness of the fair value and historical value reporting
The transaction has made use of both accounting approaches. In the financial position, the initial cost of the stocks is recorded as 2,000,000 pounds. However, in December after valuation, that value of the stocks here adjusted as 780,000 pounds. The company had to take account of the 1.22 million pounds in losses they made.
The appropriateness of initial value shows how much money the company had to spend to acquire the stocks for the company in hope that they will make the profit. But now, fair value demands that they value them according to the market value of the shares (Horngren et al., 2012). Now they have to be valued using the valuation techniques available. In this case the selling price for the same stocks which has dropped to 0.78 million pounds. Therefore, they will be valued at that reduced rate after consideration of the market variabilities that caused the prices to drop. The approach will protect the company from overvaluation when estimating.
The two transactions are almost similar. They both have the effect of reducing the profits of the company. The two transactions can be accurately recorded while observing the GAAP guidelines and regulations. SEC and AICPA guidelines are also observed. The implications of not observing the guidelines are worse as they result in losing trust, breaking the law and losing the reputation of the company. The application of both the fair value and historical value in recording the transactions is ideal.
Collier, P. M. (2015). Accounting for managers: Interpreting accounting information for decision making. John Wiley & Sons.
Horngren, C. T., Sundem, G. L., Stratton, W. O., Burgstahler, D., & Schatzberg, J. (2012). Introduction to Management Accounting: Chapters 1-19. Prentice Hall.
Kaplan, R. S., & Atkinson, A. A. (2015). Advanced management accounting. PHI Learning.
Loft, A. (2016). Towards a critical understanding of accounting: the case of cost accounting in the UK, 1914–1925. Accounting, Organizations and Society, 11(2), 137-169.
McLaney, E. J., & Atrill, P. (2014). Accounting and finance: An introduction. Pearson.
Sikka, P., & Willmott, H. (2015). The power of independence: defending and extending the jurisdiction of accounting in the UK. Accounting, Organizations and Society, 20(6), 547-581.