FINANCIAL REPORTING

Financial Reporting

Financial Reporting

Question # 1

In November 2009, HP was forced to write down an amount of $8.8 billion related to the acquisition of its UK based software firm name Autonomy Corporation. HP accused that Autonomy inflated the value of the company before the takeover was completed. This resulted in serious share price loss for the company (KATSENELSON, 2011). This scandal forced the company to write down around 80% of the purchase price of company.

In this scandal, the autonomy made use of accounting improper ties to misrepresent and committed disclosure failures. Therefore, they were able to hide the real performance cost of the company and its true value. Autonomy was founded in 1991; the company grew by doing more and more acquisitions. They bought everything from storage companies to other firms like enterprise software. They would go to customers and offer them such a deal, which they were not able to deny. For e.g. a customer had 5 million dollar and was left with 4 years of data storage, thus through their trade Autonomy would sell the same storage for 4 million dollar and would restructure it as a $ 3 million purchase of IDOL software. This resulted in the drop of software sales for the company and increased the company reputation as a fast growing company. On the other hand, the revenue was same and came from the low margins of storage business.

This company would give the software free and make it look like as if they have made a sale of $ 3 million in software sales. HP also asserted that autonomy increased the revenue recognition and increased the hardware cost as marketing expense (Luo, 2008). This type of revenue recognition was small but mushroomed in the near future. The company also misinformed investors by labeling the cost of sales as an operating expense, although this did not have any impact on the earning of the company but it had serious impact on the valuation of company.

Many of the analysts consider that it would have been very hard for the Autonomy to make this type of mischaracterization of the revenue under the US GAAP. The sticking point between the IFRS and US GAAP is the issue of revenue recognition. The US GAAP has more specific rules regarding the treatment and timing of sales recognition (RAY, 2012,pp. 23-24,26). While on the other hand the IFRS is more concerned with the overall appearance. To conclude the accounting irregularities are a big fig leaf for the write off which is associated to the bad acquisition. This affair is bound to keep the US GAAP separate from the IFRS.

Question # 2

The calculation of depreciation requires the division of the difference between salvage value and original cost, by the original cost. It is therefore clear that depreciation relates directly to the book value and the singular purpose behind this entire exercise is to allocate the cost of property over a value that is essentially estimated to represent the useful ...