Financial Reporting under US GAAP: Dell Incorporation - Essay Example

Financial Reporting under U.S. GAAP: A Case Study of Dell Incorporation Financial Reporting under U.S. GAAP: A Case Study of Dell Incorporation Introduction Corporate entities are required to report their financial information pertaining to the business operations carried out by them in accordance with accounting framework, which is formulated by relevant accounting and standard setting bodies. In the United States, business entities, which include public, private and other not for profit entities are required to report their financial information in accordance with the U.S. GAAP (Generally Accepted Accounting Principles). The accounting standards and related pronouncements are issued and revised from time to time by the Financial Accounting Standards Board (FASB) in the United States. This report aims at discussing the accounting principles related to cost, revenue recognition and matching principles which are presented under GAAP (Epstein, Nach, & Bragg, 2009). Apart from this, the report also includes how Dell Incorporation, a public company in the US, applies these accounting principles in the preparation and presentation of its financial statements and how recent changes in the accounting principles have affected company’s financial reporting. Moreover, a brief review of assertions related to internal controls of Dell Incorporation has also been provided in the report. Cost, Revenue Recognition and Matching Principle under GAAP Cost Under U.S. GAAP, accounting principles related to cost, or more specifically “historical cost”, include requirements for business entities for accounting for and reporting their assets on the basis of costs for acquiring them. In other words, cost recognition and reporting on fair market value is not allowed for majority of assets and liabilities under US GAAP. In this way, the information provided by such accounting treatment is more reliable due to its objective nature. This condition for reporting assets in the balance sheet on historical costs is also applicable even if there are major changes in the value of an asset with the passage of time. However, making use of historical cost is not appropriate in every case and therefore use of fair value is permitted in certain cases. As for instance, corporate entities are allowed to use fair values of marketable securities while reporting their values in their respective balance sheets (Epstein, Nach, & Bragg, 2009). Revenue Recognition Revenue recognition is an accounting principle, which determines the requirements which are to be fulfilled before any amount in lieu of revenue can be recognized by a business concern (Epstein, Nach, & Bragg, 2009). As far as revenue recognition under U.S. GAAP is concerned, corporate entities are required to recognize revenues in their financial statements, when the following conditions have been fulfilled: Revenue is realized or realizable, and Revenue has been earned (It does not refer to receiving cash) When both these conditions are met, an entity can recognize its revenue from operations in its income statement (Epstein, Nach, & Bragg, 2009). Matching Principle According to matching principle, expenses incurred by an entity during the course of its business operations in an accounting period shall be matched against the revenues earned in that period. However, this requirement comes along with a statement that matching shall be done as far as it is reasonable. The idea behind this principle is that expenses which are incurred by a company in the ordinary course of its business shall only be recognized when the item of expense has made its contribution to the amounts of revenues earned. In other words, the recognition of expenses is not allowed when business operations are being or have been performed. However, there are exceptions for this accounting principle too; that is, if expenses cannot be easily traceable to have a relation with revenue, then such expenses may be expensed out in the period in which they incur. In this way, it becomes possible to determine more accurate profits of the company (Epstein, Nach, & Bragg, 2009). Dell Incorporation’s Application of GAAP in Accounting for Cost, Revenue Recognition and Matching Principle As far as reporting of assets of different classes in financial statements is concerned, Dell Incorporation records and reports its inventory balances on the basis of lower of inventories’ cost and fair market value. This cost is determined on the basis of FIFO (First In First Out) method. Items which are included under property, plant and equipment are recorded at their cost in the balance sheet. However, at each balance sheet date, the company reassesses their realizable value and makes adjustments accordingly. Moreover, when acquisitions are made by the company, the acquired assets and liabilities are stated in the balance sheet of the company at their market values (Dell Incorporation, 2012). As per the information presented in the notes to financial statements in Form 10 K, Dell Incorporation recognizes for its items sold in the ordinary course of business when the conditions presented under GAAP framework for revenue recognition have been fulfilled. That is, when revenue has been realized or is realizable and also it has been earned, the company recognizes it in its financial statements (Dell Incorporation, 2012). Dell Incorporation follows matching principle while accounting for the expenses incurred during a financial year. As for instance, all costs which are associated with the manufacturing of products being sold by the company are matched against revenues earned by them and are included in the costs of sales, which is shown in the income statement of the company. In addition to this, other expenses which are not dependent on revenues to be recognized are stated as expenses in the period in which they incur. As for instance, depreciation, impairment, amortization, selling, general and administrative expenses are all examples of such expense items (Dell Incorporation, 2012). Impact of Recent Changes in Accounting Standards and Pronouncements on Dell Incorporation’s Financial Statements There are five recent issued accounting pronouncements which are being mentioned in the notes to consolidated financial statement of the company (Dell Incorporation, 2012). July 2010 The accounting pronouncement issued required companies to disclose the type of credit risk faced by them. According to management’s explanation, this change does not influence the financial reporting, but only disclosure requirements for the company (Dell Incorporation, 2012). May 2011 The accounting pronouncement issued for new guidelines related to fair value measurement is an explanation for determining principal market. According to management’s explanation, this change does not influence the financial reporting and disclosure requirements for the company (Dell Incorporation, 2012). June 2011 Thirdly, new guidance was issued pertaining to simplification of testing for changes in goodwill of company. According to management’s explanation, this change does not influence the financial reporting, but only disclosure requirements for the company (Dell Incorporation, 2012). September 2011 New guidance was issued which required companies eliminated the choice of presenting comprehensive income as part of the statement of changes in equity. The guidance relates to change in presentation of financial information. As per management of the company, a distinct statement of comprehensive income has been presented in February 2013 (Dell Incorporation, 2012). December 2011 The new guidance issued required additional disclosure regarding rights associated with financial instruments. According to management’s explanation, this change does not influence the financial reporting, but only disclosure requirements for the company (Dell Incorporation, 2012). Dell Incorporation’s Assertions related to Internal Control According to the management report accompanying the financial statements of the company, the management of the company expressly states that it is their responsibility to establish and maintain an internal control system which is adequate and effective with respect to financial reporting. Internal control comprises of those set of policies and procedures which are related to maintaining financial and non-financial information as per the requirements laid down under relevant regulations. The management of the company, under the oversight of CEO and CFO of the company, evaluates internal control’s effectiveness in relation to financial reporting of the company’s operations every year. Based on this evaluation and review of existing set of controls, changes or improvements are made if required in the internal control system (Dell Incorporation, 2012). According to the management of the company, there are some inherent limitations associated with the internal control system of the company, and it is on these grounds that only a reasonable assurance is provided in relation to truthfulness and reliability of financial reporting system. Due to the inherent limitations associated with internal controls, the management of the company believes that it is not possible to prevent or detect all misstatements and frauds (Dell Incorporation, 2012). Following are the inherent limitations, which are listed by the management of company in management report: Since the decisions made during the course of business are based on judgment, therefore controls and associated systems may be prone to errors; Due to inherent limitations of internal control they can be overridden by employees; The internal control is established on contingent basis, and it is not possible to state or predict that the internal control of the company will be effective in every contingency; and Due to variations in circumstances, internal controls may become inefficient or ineffective (Dell Incorporation, 2012). Conclusion This report has reviewed basic accounting principles as presented under the U.S. GAAP. The three accounting principles discussed are historical costs, revenue recognition and matching concepts. While reviewing these principles for Dell Incorporation, it has been concluded that the company makes use of these accounting principles in its financial reporting. Apart from this, the impact of changes in accounting standards issued from time to time and internal control of Dell Incorporation has also been discussed in this report. Reference List Dell Incorporation. (2012). Form 10-K. Delaware: Dell. Epstein, B. J., Nach, R., & Bragg, S. M. (2009). Wiley GAAP 2010: Interpretation and Application of Generally Accepted Principles. Hoboken: NJ: John Wiley & Sons. Read More