Case Study Importance of Accounting Standards Essay

The brilliance of be standardsA strictwaterho phthisisCoopersCase StudyIntroductionPricewaterhouseCoopers was created in July 1998 by the merger of two pla light upary houses Price Waterhouse and Coopers & Lybrand each with historical roots going back some 150 years and o cheatinginating in London. PricewaterhouseCoopers, the worldly concerns largest professional services organization, helps its knobs build value, discern risk and improve their performance. Drawing on the talents of much(prenominal)(prenominal) than 140,000 people in 152 countries, it suffers a full image of business advisory services to leading global, interior(a) and local companies and to public institutions. These services include audit, accounting and tax advice management, information technology and human imaginativeness consulting pecuniary advisory services including mergers & acquisitions, business recovery, project finance and litigation support business act upon bulgesourcing services a nd legal services through a global network of affiliated law firms. flipper things you didnt k instantly about PricewaterhouseCoopers1. To meet their growth targets they need to hire 1,000 people a calendar week across the world. 2. They will be the largest professional services firm in critic solelyy important emerging markets Russia and the Former Soviet Union, India, China, Singapore, Malaysia and Latin America. 3. The high technology practice will yield revenues in plain of $1 billion with over 2,500 technology clients. 4. Work with Financial Services clients will represent more(prenominal) than 20% of PricewaterhouseCoopers international revenues. 5. They are already investing $200 million a year in new technology. A global enterpriseThe new, combined organization is the leave behind of the continuing growth in the international economy. Companies are seeking to re-define themselves to thrive in the market- stead where mergers and acquisitions are increasingly important a nd m all companies now operate without geographical boundaries. A large-scale global enterprise such as PricewaterhouseCoopers need a solid infrastructure to meet its clients expectations. One element is a powerfuldatabase developed by PricewaterhouseCoopers that shares beaver practice information with all its offices around the world. PricewaterhouseCoopers is also harnessing all available technology to envision any of their advisers tolerate work with their clients anywhere in the world, allowing them to be fully effective in serving the clients needs immediately. They offer businesses around the world both a wider range of services and a more unified service than has ever been possible. This service also tolerates a solution to business problems of a scale and complexity that are greater than ever before. An incorporated team approachThey provide a fully integrated team to tackle a political partys diverse problems. At PricewaterhouseCoopers, there are half-dozen service lines or departments which cover different areas of specialization. They are assumption & Business Advisory Services heed Consulting ServicesTax & Legal ServicesFinancial Advisory Services globular Human vision SolutionsBusiness Process Outsourcing.PricewaterhouseCoopers may work on one of these areas and find that the client requires help and solutions to issues in other areas. They are able to provide an integrated team of experts to give advice and offer a range of possible solutions. The first and largest of these service lines, the Assurance & Business Advisory Service is now considered in more depth. ABAS Assurance & Business Advisory ServicesAt PricewaterhouseCoopers the global practice they call ABAS provides a full(a) range of services which fulfill three core business needs 1. Assurance They conduct audits and provide assurance to clients on the financial performance and operations of their businesses. 2. globose Risk Management Solutions They help clients to manag e their business risks and thereby improve financial performance. 3. Transaction Services They offer advice to clients about their significant minutes such as mergers & acquisitions activity. Some of the most exciting organizations from theworld of banking, commerce and government come to them for advice. The client list is dominated by household names, with particular strengths in communications, financial services, retail, energy and manufacturing sectors. AssuranceAssurance is the largest part of the UK practice for PricewaterhouseCoopers and generates income from a combination of audit and business advisory assignments. In addition to an audit, legion(predicate) clients require business advisory services. For example, they may provide advice on joint ventures or mergers, helping companies to blow out their go with on the Stock Exchange or assess whether the technology or systems in place provide an accurate means of report the financial data. AuditingIn order that sharehol ders and other interested parties can make informed judgments as to the financial health of a society, it is a legal requirement that all companies suck up their financial facts and figures checked. This is known as an audit and must be performed by an independent registered firm of auditors. The auditors use guidance from the history Standards Board to state whether in their opinion the financial information presented by the company is a true and circus representation of that companys financial health. The primary report responsibility of the auditors is, however, to the shareholders, not to the companys directors. It is interesting to note the difference amongst true and fair and 100% accurate. It is not the role of the auditors to check every individual transaction performed by a company and therefore the auditors cannot state that the figures are 100% correct, merely that, in their opinion, they are true and fair. enactment and regulation of companiesThe accounts of a com pany are designed to show both the performance and its current financial position. All company accounts in this country need to be produced in accordance with 1. The Companies symbolise, 1985 for UK, for Pakistan Companies ordinance 1984 and 2. Accounting StandardsStatement of Standard Accounting Practice (SSAPs)Financial Reporting Standards (FRSs).In essence these standards set outWhat information should be included in a companys accounts How this information should be presented.The Companies Act / Ordinance, decrees that companies must produce accounts for publication. The Accounting Standards Committee devised SSAPs. In 1991 the Committee was replaced by the Accounting Standards Board, which develops FRSs. The Board is step by step replacing SSAPs with FRSs, which are issued when the Board identifies a need. These two sets of standards encourage greater clarity so that the lecturer can fully understand the information represented. Accounting standardsFRSs are expected as busine ss becomes more complex. How these different standards are applied varies with the type of business conducted by a company. As for any company the shareholders interests must be protected. The hobby examples of SSAPs and FRSs demonstrate the consideration that must be given in force up financial accounts in order that interested individuals, such as financial analysts, can intelligibly judge a companys performance and position. Key standards will be considered in this and the following constituent. SSAP 12 Accounting for depreciationCompanies invest in assets (such as machinery) in order to produce goods or services to sell. These are known as doctor assets. In the case of the gunman or inunct industry, an crude rock oil rig is a fixed asset the company must own an oil rig to supply oil or gas. All companies have some form of fixed assets although the dependence on these assets varies with the type of business. Another example could be machinery for manufacturing a car, or a building in which employees work. In this example, Global anele has built an oil rig for 50m. In its balance tacking, bills will be reduced by 50m and fixed assets will increase by 50m. In 20 years snip (the economic life), the company knows that the oil rig will need to be replaced. By the twentieth year, the value of the oil rig in the companys balance ragtime will be zero. Thus, the value of the oil rig will reduce each year by a set amount (2.5m in this example). This is known as depreciation and the annual depreciation figure is shown in the expediency and loss account. SSAP 12 states that the economic life of afixed asset should be reviewed regularly and should be stated in the notes to the accounts, together with how the rate of depreciation was determined. FRS 11 Impairment of fixed assets and thanksgivingFRS 11 is a new standard and deals with any loss in value to a fixed asset, for example through damage or downturn in the economy. This is known as impairment. Fo r example, if a pipeline from Global Oils oil rig is damaged, the supply of oil or gas is reduced or stopped until repairs are made. Thus the ability of the oil rig to produce oil or gas is less than expected and the fixed assets value is reduced. Global Oil must therefore make a general reduction in the value of the asset and ailment the loss to the profit and loss account. FRS 11 states that all companies must reassess the value of their fixed assets on a regular basis to establish whether the figure in the balance opinion poll is a fair value. FRS 1 Cash flow statementsThere are three briny statements in a companys annual report and accounts the profit and loss account, the balance sheet and the cash flow statement. For example, while Global Oil may be highly profitable, without any cash it will be unable to pay its employees or suppliers. Clearly, when Global Oil sells oil to its customers, it needs to ensure it receives prompt payment. Cash is the lifeblood of a business and it is therefore important for a company to issue a cash flow statement. FRS 1 sets out the format and contents of a companys cash flow statement. Accounting standards continuedFRS 3 Reporting financial performanceThis is a highly complicated standard. Essentially FRS 3 serves to make sure the information presented in a set of accounts is clear. Companies must issue a report stating the financial performance for review by its shareholders. trunk and ease of understanding these reports allows the reader to equalise the data for similar companies. This would allow a potential investor to compare competing oil or gas companies before deciding which companys shares to buy. In this example of Global Oil, there are three subsidiaries International Gas, International Oil and International Petrochemicals. Each of these different companies or subsidiaries must also produce their own set of accounts as should the parent company, Global Oil.FRS 3 states how a company must set out the financi al reports and accounts, the type of information that should be provided and where it should be categorized in the company statement of accounts. FRS 3 Exceptional itemsFRS 3 consists of several(prenominal) other sections including a note on colossal items. These are one-off situations and may result in both a profit or loss to the company. These are included in a separate section in the profit and loss account. The reasons for incurring an exceptional item are various. Examples include the general cost gnarly in splitting up or de-merging a utility company, such as telecommunications or gas, into their separate components. In this case study, Global Oil decided to move its head office to Edinburgh. As this move is not expected to happen regularly in the normal course of business, the cost is regarded as an exceptional cost. Although this cost is included in the profit and loss account, it is clearly marked as exceptional so that shareholders realize that a marginal reduction in profit is not a result of a reduction in revenues. FRS 3 also states that exceptional charges must be shown apiece in the profit and loss account and detailed in the notes to financial statements. SSAP 25 Segmental reportingSegmental information gives a breakdown of the different industrial sectors in which a company is involved and allows the reader of the accounts a much better understanding of where the money is made within the different split of the company. This information may also be provided on a geographical basis if this is relevant. This standard is generally applicable to the biggest public limited companies or if the company has a banking or insurance division. So for Global Oil, the financial information should detail the amount of business generated in oil refining, gas and petrochemicals. It should also provide information on the different geographic areas in which it operates. SSAP 25 states that the annual report and accounts for a company needs to provide a geo graphical and industrial breakdown of the following information Turnover direct profit and lossNet assets.SSAP 9 Stocks and long-term contractsStock is an asset on the balance sheet and is essentially the product that a company will sell. In the case of Global Oil, its stock is oil and gas. SSAP 9 deals with how to value this stock on the balance sheet. Typically the value on the balance sheet would be the cost to produce and refine the oil into a marketable state. However, if the price of oil drops to a value below these production costs, then Global Oil cannot sell the oil at a profit. In these circumstances, the value of the oil stocks on the balance sheet must be reduced to the exchange price minus all transaction costs. This is known as the net realizable value. SSAP 9 states that a company must value its stock at whichever is the lower value the cost to produce versus the net realizable value. ConclusionThe example of Global Oil demonstrates the financial reporting standards that must be considered when preparing a companys accounts. More standards are expected as the complexities of business transactions grow and accounting practice adapts to keep up with these changes. Such changes already observed in business are the use of derivatives and financial instruments. At PricewaterhouseCoopers, the ABAS teams are experts in their field of knowledge and exercise their judgment in understand how these standards apply to different companies. The implementation of the standards can vary according to the type of industry and even between companies in the same industrial sector. In order to ensure the best possible interpretation, the ABAS teams need to have a good understanding of the clients business and industry sector.