RUNNING HEAD: REPORT

Title: Report to the Board of Directors regarding Financial Reporting

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Executive Summary
December 03, 2014
Evaluation of Financial Reporting
This report discusses about financial reporting of HP. Two issues are discussed in this
report; first issue is related to revenue recognition criteria and second is related to property, plant
& equipment valuation and recognition.
Currently, HP is recognizing revenue as per requirements of US generally accepted
principles and IAS-18 Revenue. Most of the requirements of these two frameworks are satisfied.
Property, plant & equipment are also recognized and measured as per requirements of IAS-16.
Revenue is recognized by considering all conditions set by the standard. However, one condition
that is related to cost is not addressed fully as there are no details provided in financial
statements. Currently, property, plant & equipment are measured using cost model which takes
cost of the asset less accumulated depreciation.
There is no other option available for recognition and measurement of revenue as clear
guidance is provided in the standard. In the case of property, plant & equipment, two different
options are available which are; cost model and revaluation model. If we use revaluation model
instead of cost model, value of assets might increase because sometimes assets have higher fair
value than their cost. On the other hand, value of assets might decrease if there is recession
situation in the country (Mirza and Holt, 2011).
Evaluation
International financial reporting standards are adopted by most of the organizations for
preparation of financial statements. These are acceptable throughout the world. These standards
are based on generally accepted accounting principles of different countries. These principles

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also provide guidance for development of new accounting standards. Financial statements cannot
be prepared without proper conceptual framework. The lack of a conceptual framework also
means that fundamental principles are tacked more than once in different standards (Rodriguez,
Rapti and Groom, 2008).
IAS-18 Revenue provides guidance for recognition of revenue for goods provided or
service rendered. Goods include goods produced by the enterprise for the purpose of sale and
goods purchased for resale. Rendering of services typically involves the performance by the
enterprise of a contractually agreed task over an agreed period of time. The services may be
related to a single year or for more than one year.
There is a proper revenue recognition criterion which must be satisfied to record any
revenue. In case of goods, revenue will be recognized when following five conditions have been
satisfied:
1. All the significant risk and rewards of ownership of the goods have been transferred to
the buyer.
2. The entity does not retain continuing managerial involvement to the degree, usually
associated with ownership over the goods sold.
3. The amount of revenue can be measured easily.
4. It is probable that future economic benefits associated with the transaction will flow to
the entity
5. The cost incurred or to be incurred in respect of the transaction can be measured reliably.

In case of revenue recognition criteria for services, there are different conditions which
must be met to recognize revenue. These conditions are as follows:

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1. The amount of revenue can be measured reliably.

2. It is probable that the economic benefits associated with the transaction will flow to the
entity.
3. The stage of completion of the transaction at the reporting date can be measured reliably.
4. The cost incurred for the transaction and the cost to complete the transaction can be
measured reliably.

Revenue is to be measured at the fair value of the consideration received or receivables,

taking into account the amount of any trade discounts and volume rebates allowed by the entity.
There are no options available for measurement of revenue as it is recognized at the fair value
received. HP earns net revenue basically from the sale of services and products. The following
policies are used for revenue recognition in the financial statements.
HP recognizes revenue when there is clear evidence of sales arrangements have been made,
goods have supplied or services are rendered, the sale price fix in some cases and it is variable in
some other conditions, and it is reasonably assured that all revenues are recognized collectively.
Moreover, hardware revenue is recognized by HP when sales are made to channel partners,
including retailers, distributors or other solution providers who are separate from HP, revenue is
recognized at the time when delivery is made, and HP has fulfilled all obligations which directly
relates to sales. Revenue is recognized related to software when there is clear evidence that
software has been sold to specific end user by the channel partners.
IAS-16 Property, Plant & Equipment deals with recognition and measurement of
noncurrent assets which are used in business for long term. According to guidance of this
accounting standard, asset is something which is controlled by any entity and there will be inflow

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of economic benefits in future (Elms and Low, 2013). According to requirement of the standard,
asset will be recognized in financial statements, if it meets the criteria stated in standard which
is; probability of inflow of future economic benefits and, cost of the item of property can be
measured reliably. These are basic conditions which must be satisfied to recognize any asset
(Everett, 2008).
If we discuss about measurement, there are two kinds of measurement which are; initial
measurement and subsequent measurement. Initially, any asset should be measured at cost
whether it is purchased or built by the organization. There are two options available for
subsequent measurement. These options are; cost model and revaluation model. If we use cost
model, we should carry asset at its cost less any accumulated depreciation and any impairment
losses. In case of revaluation model, any asset should be carried as per fair value of asset on any
statement of financial position date. Fair value of assets is determined after some regular interval
and in case of increase, additional amount is added to the value of asset and a revaluation reserve
is created in statement of financial position (Pampel, 2001).
HP records property, plant & equipment using cost model which deducts depreciation
amount from the cost of software each and value of asset is decreased by this amount. Additions
and improvements and expenses are capitalized as and when they incur. Depreciation is
calculated using straight line method over the useful life of the assets. Useful lives are between
five and forty years for buildings and machinery and equipment have useful life of three to
fifteen years (Harrison and Harrison, 2014).
Influence of Institutional Context
The institutional Context refers to the character, programs, funding opportunities, and
informal/formal support for engagement activities that will undergird the ability to create a

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strong engagement program in the community. There is no much influence of institutional

context in case of revenue recognition, because there is only one option to measure the revenue
which states that revenue should be measured by the amount of fair value received or receivable.
It will have influence in case of measurement of property, plant and equipment. If we use
revaluation model, value of assets might increase and it will have great influence as amounts
might be changed materially. HP is a large company in the USA, so if there is any major change
in any measurement, institutional context will have higher influence. Currently, value of
property, plant and equipment is $11,463 million; it might increase to $15,000 while using
revaluation model.
Influence of Social Context
The word social is derived from society. The term society means the aggregate of people
living together. We all have some different societies in different parts of the world. A company
uses financial statements to communicate with the society. Any person can get knowledge of
policies of the company through its financial statements. (Porter and Norton, 1995)
There are two permitted choices for measurement of property, plant and equipment. According
to cost model, the asset has value of $11,463 million, which is a material amount in all aspects.
In case, if revaluation model is used, value of the assets might increase or decrease dramatically.
It may comes down to $7,000 or even less than this. On the other hand, it might also increase.
The company is based in US, so social values should be considered while making decision
regarding measurement choices as social context has much influence on financial statements
(French-Davis and Griffith-Jones, 1995).

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Recommendations to Board of Directors

In case of revenue, most of the conditions of IAS-18 are satisfied as revenue is
recognized in financial statements when there is no managerial involvement of the company
regarding the goods supplied to customers, there is probability of inflow of economic benefits,
revenue can be measured reliably and when all significant risks and rewards are transferred to
the buyer of goods. One condition which is not properly addressed in the financial statements is;
cost can be measured reliably. This issue should be considered properly and revenue should be
recorded only when cost of the goods supplied can be measured reliably (Carter, Ulrich and
Goldsmith, 2005).
Property, plant and equipment are measured using cost model and recorded in financial
statements at cost and depreciation is deducted every year accordingly. Depreciation is deducted
using straight-line basis as useful life of asset divided on cost of the asset. This method might be
useful for some class of assets but it is not applied properly to all kinds of assets. Class of assets
should be separated and some assets should be depreciated using reducing balance method as this
is useful for some kinds of assets (White, Sondhi and Fried, 1998).

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