B291 Financial Accounting

Answers:

1. Stakeholder, in a corporate context, is any individual, social group, or any other entity who has an interest (directly or indirectly), a moral right, a legal obligation, or has some other type of association with or concern in the decisions or outcomes of any business entity. The various stakeholders of business entity are Employees, Customers, Government, Investors, Creditors, Community, trade union and suppliers etc. The relationship between business and stakeholders is two way: Business affects stakeholders and stakeholders affect business (Hill and Jones, 2008). The Government’s by making business laws and other type of laws affects the policy, decision and its action of Business. Similarly Business provides employment to people and0 in this way helps the Government in providing laws. So both business and stakeholders affects each other. Philips has provided valuable solutions, especially healthcare solutions and improved the life of more than billion people across the globe. In return Philips earned revenue of nearly 24,000 million Euros (Philips, 2016).

There are manifold reasons due to which stakeholders are interested in the Financial Statements of Philips or any other company. Creditors and Financial Institutions evaluate whether company has potential to pay back their money. Investors want to know how much they will earn. Government wants the Financial Statements of company for tax and other purposes. (Hill and Jones, 2008).

2. Frans Van Houten: Chief Executive Officer, Philips

Audit & Risk committee: Employees

Ernst & Young LLP: Independent Auditor, Philips

Apollo Global Management LLC: Asset Management Company

3. Political

Since Philips operates in more than 60 countries, International Political Environment is not same among all the countries across the globe. There are conflicts specifically in the Middle East and other regions which has restricted the business opportunities of Philips. (Murray-Webster, 2010). 

Economic

At present most of the economies in the world are facing recession. However there is increase in sales of Healthcare products of Philips by nearly 5 per cent. 

Social

It is mainly related to demographics. And demographics of most of the Developed Economies is same. Ten years back, Philips lost nearly EUR 59 million due to agreements made with L.G.

Technological

The Research and Development of Philips has always been at par with market trends. Philips spends big chunk of funds in research and is one of the fastest organisations in accumulating latest technology. 

4. There are mainly two different types of accounting systems prevalent in Corporate World. They are cash basis and Accrual basis of accounting. The basic difference between above-mentioned methods of accounting is with respect to timing when transaction is recorded.

Cash basis of Accounting

In this method of accounting, revenue and expenses are recorded in the books of accounts at the time when cash is paid or received.

Accrual basis of Accounting

Revenue is to be recorded at that point of time when it is earned (regardless of when it is received in cash) and expenses are recorded when they are incurred (regardless of when it is  paid)

Let us understand the above-mentioned concepts by Illustration Y.

X company sells diamond watch costing $10,000 to a local customer on June 1, 2017. However, he paid the due amount on July 1, 2017. As per Cash Basis of Accounting, above-mentioned transaction will be recorded on July 1, 2017, when the cash is received. However, under the accrual basis, the transaction of sale would be recorded on June 1, 2017 when the transaction occured (Philips, 2017). 

The Accrual Method is utilized by virtually all larger companies due to its advantages and fool proof approach. Reason being, financial statements are accurate when prepared as per Accrual Method. Moreover, they can be audited precisely.  The method of Accounting used at Philips Company is Accrual method. This can be strengthened by the fact that Accounts Receivables (4982 million Euros), Accounts Payables (2848 million Euros) as mentioned in the Balance Sheet of Philips as on December 31, 2016 (Philips, 2017).   

5. International Accounting Standard (IAS) 16 is related to the accounting treatment of property, plant, and equipment (Deliotte, 2017). IAS 16 encompasses two accounting models:

At Philips, the cost of Property, Plant and Equipment covers all directly attributable cost (including cost of direct labour & direct material) and straight line method of depreciation is implemented. Moreover, Gain/loss on sale of Property, Plant and Equipment comes under the heading “Other Business Income”. Repairs and Maintenance are charged to the year in which incurred until and unless leading to an increase in asset’s lifetime or capacity (Deloitte, 2017). 

6. At Philips, Consolidated Financial Statements (in Euros) are prepared as per convention of historical cost unless otherwise mentioned. While preparing financial statements that confirm with International Financial Reporting Standards, management has to take into account judgements, estimates and assumptions that finally affect the value of assets, liabilities along with income and expenses. However, the above-mentioned estimates are subject to uncertainty (Bragg, 2012).

Management at Philips makes estimates and assumptions related to future. These estimates and assumption are subject to uncertainity.

These estimates are based on past experience, current and future expected outcome and other assumptions that Philips makes. However, these estimates and assumption may go wrong due to factors out of the control of the company. So, they are revised. (Bragg, 2012). 

7. Capital Expenditure:

It includes that expenditure, the benefit of which is not completely utilised in a single accounting period. Rather its benefits   spread over several years

Examples of Capital Expenditure: plant and machinery, motor car etc.

Revenue Expenditure:

It is that expenditure whose benefit will be consumed in just one year. The objective of revenue expenditure is to carry on business and maintains assets in their existing conditions.

Examples: Administrative expenses like rent and salary and other expenses.

Revenue and Capital Expenditure of Philips in the year 2016

Capital Expenditure and Revenue Expenditure of Philips in the year 2016 (in millions of Euros) as per Annual Report

Intangible Assets   purchased in 2016                                                                       108

Expenditure incurred on Development Assets                                                               318

Capital Expenditure incurred on Property, Plant and Equipment                                  443

Total Capital Expenditure of Philips in the year 2016 was 831 million Euros

Revenue Expenditure of Philips   

It amounted to 22,661 million Euros (Philips, 2016). 

8. A contingent liability is a probable liability: it may or may not happen depending on the occurrence of main event.

For instance, if a father guarantees home loan taken by son, the father bears a contingent liability. If the son pays instalments on time, then father will not have the liability of son’s loan. However, if the son fails in paying installments, the father will bear a liability and would have to pay son’s loan. This is called contingent liability. In accounting, journal entry of a contingent liability is recorded only when both the conditions are satisfied: there is probability of contingency and further the amount of contingency could be estimated. At Philips, any contingent liability payable at first instance is recognized at fair value. When the timing and amount of uncertain liability becomes certain it is reclassified as Accrued Liability. (Philips, 2016). 

9. Going concern is a basic underlying assumption used in accounting. As per this concept it is assumed that the business entity shall continue its operations in the future and will not discontinue its operations.

An example of the going concern concept of accounting is the provision for prepayment and accrual of expenses. Companies prepay and also accrue expenses because they believe that they will continue their operations in future.

Board of Management of Philips Company, during preparation of accounts in the year 2016 and previous years, has assumed that the company is following going concern concept. 

10. According to this principle, revenues are recognized when they are earned, no matter whether cash for goods has been received or not. For Instance Mr A sales electronics to B on January1, 2017 and the terms of contract requires that there is provision for credit till March 31, 2017. Sale would be recognised on January 1, 2017 in the books of Mr A not when cash for sale is received on March 31, 2017

In case of Philips, Revenue from sale of goods is recognized at the time when both ownership and risk has been transferred to the buyer and recovery of sales consideration is possible.

However, in case of Installation, revenue is not recognized under installation of goods has been completed and the product is available for buyer in the way mentioned in the contract   

References

Philips. (2016). Annual Report of Philips for 2016. [Online]. Available at: https://www.philips.com/a-w/about/investor/financial-reporting/annual-reports.html [Accessed on: 11 December 2017].

Hill, C.W.L and Jones, G.R. 2008. Essentials of Strategic management. Cengage Learning.

Murray-Webster, R. 2010. Management of risk: guidance for practitioners. The Stationery Office.

Larkin, R.F., DiTommaso, M., and Ruppel, W. 2015. Wiley Not-for-Profit GAAP 2014: Interpretation and Application of Generally Accepted Accounting Principles. John Wiley & Sons.

Deliotte. 2017. IAS 16 — Property, Plant and Equipment. [Online]. Available at: https://www.iasplus.com/en/standards/ias/ias16 [Accessed on: 11 December 2017].

Bragg, S.M. 2012. Accounting Policies and Procedures Manual: A Blueprint for Running an Effective and Efficient Department. John Wiley & Sons.