FINANCIAL REPORTING

Financial Reporting



Financial Reporting

Answer 1) Hewlett Packard Autonomy scandal

Hewlett Packard Autonomy scandal has shocked accountants with respect of new and global standards. The reason for this is the recognition of revenue.

Autonomy - British software developer has recent acquired by Computer giant Hewlett Packard worth of $11.3 billion last year. HP state that this overstated amount was due to the serious accounting improprieties. In reply, Mike Lynch a former CEO of Autonomy stated that Hewlett-Packard has problem with their math.

Revenue recognition has been the most ordinary kind of corporate book keeping. The scandal of Autonomy although yet dark, supposedly comprises of a huge deal of over-stated revenues or how they generate money from the customers.

Revenue Recognition - GAAP are much simpler and straight-forward. In GAAP, revenue is recognized when transaction take place i.e. when income is transfers into company accounts. In order words, realized and then earned. In case of Autonomy, they have recognized the revenue though they were not earned by the Autonomy. Whereas in IFRS rule IAS 18 state any future benefit linked with the revenue should be recognized in the company's income statement.

The claim made by HP is that they have overpaid Autonomy and charged for serious accounting improprieties. But this statement has been rejected by the Autonomy. The main argument arrives due to the Accounting-Standard setters as they have grapple with the new accounting standards in order to recognize revenues. Accounting Standards that are followed in UK are IFRS while in US GAAP are followed (Kugel, 2012, p. n.d).

Revenue Recognition in US was squeeze soon after the software companies' scandals in 1990. Accounting of Software has always been violence since revenue booking comprise of mixture of products, training, maintenance and up-dates. As far as Case of Autonomy is concern, they were blamed for mixing hard-ware with greater sales search software margin without appropriately disclosing the hard-ware sales amount. They were also blamed for inappropriately booking revenue to re-sellers as well as middlemen having no end users.

But as Autonomy is UK based company, their revenue has been complied in accordance with the IFRS standards. At one place Autonomy has sell their software via 400 middleman companies where Value Added Resellers (VAR) comprises of IBM and India's Wipro. Considering the IFRS rules, selling to a VAR could be booked as revenue prior to reselling take place. Whereas under GAAP, it is not consider as revenue until resale has been made (Deloitte).

The Hewlett Packard Autonomy scandal was mainly due to the lack of accounting harmonization between US GAAP and International Financial Reporting Standard. The rules for revenue recognition with respect to Hardware licensing and Resellers licensing. The difference in the two accounting has made this difference. But what Autonomy did was taking an advantage of IFRS rules, stating that GAAP accounting standards related to licensing revenue are much stricter than IFRS, which is not. In some places they have recognized revenue much higher than their original ...