Case Study Importance of Accounting Standards Essay

The importance of accounting standardsA PricewaterhouseCoopersCase Study understructurePricewaterhouseCoopers was created in July 1998 by the merger of twain libertines Price Waterhouse and Coopers & Lybrand each with diachronic roots going back some 150 years and o countersinkinating in London. PricewaterhouseCoopers, the worlds largest professional function organization, answers its customers build prize, manage guess and improve their performance. Drawing on the talents of much than 140,000 people in 152 countries, it provides a full range of disdain advisory operate to leading orbicular, subject case and local companies and to public institutions. These services include audit, accounting and tax advice management, data technology and human resource consulting mo finalary advisory services including mergers & acquisitions, moving in recoery, project finance and litigation support condescension process outsourcing services and legal services through a global ne twork of interact law firms. Five things you didnt know about PricewaterhouseCoopers1. To meet their harvest-time targets they need to hire 1,000 people a week across the world. 2. They leave be the largest professional services firm in critic eithery chief(prenominal) emerging markets Russia and the Former Soviet Union, India, China, Singapore, Malaysia and Latin America. 3. The high technology devote pass on yield r til nowues in excess of $1 billion with over 2,500 technology clients. 4. Work with Financial work clients will represent more than 20% of PricewaterhouseCoopers supranational revenues. 5. They be already investing $200 million a year in smart technology. A global enterpriseThe new, combined organization is the result of the continuing growth in the international economy. Companies are seeking to re-define themselves to thrive in the market-place where mergers and acquisitions are increasingly all important(p) and m whatsoever companies now operate with out geographical boundaries. A large-scale global enterprise such as PricewaterhouseCoopers needs a solid groundwork to meet its clients expectations. One element is a powerfuldatabase developed by PricewaterhouseCoopers that shares best approach pattern information with all its offices around the world. PricewaterhouseCoopers is as well as harnessing all available technology to check out any of their advisers can work with their clients anywhere in the world, allowing them to be amply effective in serving the clients needs immediately. They offer occupancyes around the world both a wider range of services and a more integrated service than has ever been possible. This service also provides a solution to business problems of a scale and complexity that are greater than ever before. An integrated team approachThey provide a fully integrated team to tackle a ac gilds diverse problems. At PricewaterhouseCoopers, there are six service lines or departments which cover contrasti ng areas of specialization. They are authority & Business consultative runManagement Consulting ServicesTax & Legal ServicesFinancial Advisory Services worldwide Human Resource SolutionsBusiness Process Outsourcing.PricewaterhouseCoopers whitethorn work on one of these areas and find that the client acquires help and solutions to issues in other areas. They are able to provide an integrated team of experts to own advice and offer a range of possible solutions. The first and largest of these service lines, the presumption & Business Advisory Service is now considered in more depth. ABAS Assurance & Business Advisory ServicesAt PricewaterhouseCoopers the global practice they chew the fat ABAS provides a broad range of services which fulfill three warmheartedness business needs 1. Assurance They conduct audits and provide assurance to clients on the financial performance and operations of their businesses. 2. global Risk Management Solutions They help clients to manage the ir business risks and thereby improve financial performance. 3. Transaction Services They offer advice to clients about their significant transactions such as mergers & acquisitions activity. nearly 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 combine of audit and business advisory assignments. In addition to an audit, many clients require business advisory services. For vitrine, they may provide advice on joint ventures or mergers, helping companies to float their company on the Stock Exchange or assess whether the technology or systems in place provide an faultless means of overcompensateing the financial data. AuditingIn severalize that sharehol ders and other interest parties can curb informed judgments as to the financial health of a company, it is a legal requirement that all companies have their financial facts and figures checked. This is know as an audit and moldiness be performed by an independent registered firm of auditors. The auditors use guidance from the report Standards Board to state of matter whether in their smell the financial information presented by the company is a true and mediocre representation of that companys financial health. The primary describe righteousness of the auditors is, however, to the shareholders, not to the companys directors. It is interesting to note the difference among true and comely 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 somewhat. Legislation and regulation of companiesTh e accounts of a company are designed to draw both the performance and its current financial position. All company accounts in this country need to be shitd in accordance with 1. The Companies Act, 1985 for UK, for Pakistan Companies ordinance 1984 and 2. be StandardsStatement of Standard Accounting Practice (SSAPs)Financial Reporting Standards (federal officials).In essence these standards lop outWhat information should be included in a companys accounts How this information should be presented.The Companies Act / Ordinance, decrees that companies must(prenominal) 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 gradually replacing SSAPs with FRSs, which are issued when the Board identifies a need. These two sets of standards encourage greater clarity so that the reader can fully understand the information represented. Accounting standardsFR Ss are expected as business 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 future(a) examples of SSAPs and FRSs demonstrate the consideration that must be given in muster up financial accounts in order that interested individuals, such as financial analysts, can clearly judge a companys performance and position. Key standards will be considered in this and the following section. SSAP 12 Accounting for depreciationCompanies invest in additions (such as machinery) in order to produce goods or services to sell. These are cognise as dictated assets. In the courtship of the gas or fossil oil industry, an oil rig is a amend 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 Oil has built an oil rig for 50m. In its difference plane, cash will be cut by 50m and fixed assets will increase by 50m. In 20 years time (the sparing life), the company knows that the oil rig will need to be replaced. By the 20th year, the nourish of the oil rig in the companys balance sheet 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 yearly depreciation figure is shown in the service and loss account. SSAP 12 states that the scotch 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 goodwillFRS 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. F or example, if a pipeline from Global Oils oil rig is damaged, the supply of oil or gas is reduced or stopped until repairs are make. 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 diminution in the value of the asset and push 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 priming to establish whether the figure in the balance sheet is a fair value. FRS 1 Cash unravel statementsThere are three main 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 super 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 circumscribe of a companys cash flow statement. Accounting standards go onFRS 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. Consistency and ease of concord these reports allows the reader to compare the data for similar companies. This would allow a possible 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 foster company, Global Oil.FRS 3 states how a company must set out the financ ial reports and accounts, the type of information that should be provided and where it should be categorise in the company statement of accounts. FRS 3 Exceptional degreesFRS 3 consists of several other sections including a note on particular(a) items. These are one-off situations and may result in either a profit or loss to the company. These are included in a enlighten section in the profit and loss account. The reasons for incurring an special item are various. Examples include the general costs conglomerate in ripping up or de-merging a utility company, such as telecommunications or gas, into their separate components. In this case study, Global Oil decided to impress its head office to Edinburgh. As this move is not expected to clear 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 mark as exceptional so that shareholders realize that a marginal reductio n in profit is not a result of a reduction in revenues. FRS 3 also states that exceptional charges must be shown separately 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 sagacity of where the money is made within the different parts of the company. This information may also be provided on a geographical basis if this is relevant. This standard is mostly relevant to the biggest public limited companies or if the company has a banking or amends 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 geograp hical and industrial breakdown of the following information TurnoverOperating profit and loss pelf 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 bell 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 sale 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 interpreting 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.