Running Head: FINAL PROJECT 1
ACC690 : Final Project
SNHU
FINAL PROJECT 2
Milestone One
Incorporation
A diverse range of complex issues may arise for clients when they start a new business
in the form of a corporation. It is instrumental to take into account the accounting aspects of the
new entity along with the necessary ethical considerations. Some of the key areas that clients try
to focus on include:
• In case challenging situations arise for the business and it has no other choice but to file
for bankruptcy and the ethical dimensions that arise while deciding whether it must file
for bankruptcy or not.
• The chief aspects that have to be taken into account when a business entity faces a
challenging time and is forced by creditors to file for bankruptcy and the defense options
that are available to the business. f
• The amount of money that might be paid in case the business entity gets liquidated. f f
Voluntary Bankruptcy
Voluntary bankruptcy refers to the type of bankruptcy in which the proceedings are
commenced by the debtor. The bankruptcy is instituted by an adjudication upon the petition of a
debtor of a business (Legal Information Institute, n.d.). Two types of bankruptcy have been
identified in Chapter 7 and Chapter 11. As per Chapter 7 bankruptcy, a company terminates its
commercial activities and processes and starts to liquidate its assets. According to Chapter 11
bankruptcy, a business entity is allowed to reorganize and carry on with its business operations.
A diverse range of ethical implications come into the picture when a company goes
bankrupt or files for bankruptcy. Some of the major ethical aspects include the impact of
termination of business operations on the organizational personnel, the plan to make payment to
unsecured creditors of the business, and whether filing for bankruptcy is reasonable and
justified or not. The type of bankruptcy that takes place can influence the ethical consequences
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that arise from it. For example, in the case of Chapter 11 bankruptcy, a company is able to
continue with its operations, and as a result, it does not have to consider the effect on employees
since they can earn wages. For repaying the unsecured creditors of the business, it is imperative
to have in place a repayment plan, or the company can focus on selling its assets so that it can
have funds to pay back the creditors. As per Chapter 7 bankruptcy, a business entity has to make
payments to its creditors in order of priority. Before making payments to unsecured creditors,
the company has to pay its employees to which it owes wages.
Forced Bankruptcy
Forced bankruptcy is also known as involuntary bankruptcy. The creditors of a business
may force it to file for bankruptcy by making a complaint in the court of law (Hynes & Walt,
2019). Before such a bankruptcy takes place, it is instrumental to ensure that the necessary
requirements are fulfilled. As per U.S. Code § 303, a company must have at least 12 creditors,
and out of them, three need to take part in the involuntary petition (Legal Information Institute,
n.d.). A defense that can be used by a business is that it pays the creditors the debts when they
become due. It may also use another defense stating that the amount that is being claimed by the
creditors is inaccurate. In case the specific petition that has been filed is not controverted in a
timely manner, the court has the authority shall order relief against the involved debtor, in the
case of an involuntary bankruptcy case, under the specific chapter under which the petition has
been filed (Legal Information Institute, n.d.). f
The court has the power to reject the voluntary or forced bankruptcy petitions. In case a petition
is accepted, then an order of relief has to be introduced. Based on it, all the involved parties have
to work on a plan of action that has to be followed. Until the business entity has cleared off its
debts, the bankruptcy court will overlook it. f f f
Liquidation
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Liquidation is the process in which the existence of a business entity comes to an end.
When the liquidation of a firm takes place, it stops operating, and its property and assets are
converted into cash or equivalents to cash so that they can be distributed among the appropriate
claimants (Olujobi, 2021). When liquidation takes place, it is instrumental to determine the
liabilities so that the apportioned assets can be utilized for the purpose of clearing off the
liabilities and financial obligations. The spreadsheet that has been attached gives a glimpse of
the creditors into the amount of money that they will receive in case the business entity is
liquidated. The assets as well as the liabilities of the business have been taken into
consideration to arrive at the money that will be paid by the business on its liquidation.
Milestone Two
B. Interim Reporting Requirements under GAAP and IFRS
1. Interim reporting refers to the reporting of financial results for a period that is shorter than a
fiscal period. The interim reporting requirement has been introduced for publicly traded
companies by the U.S. Securities and Exchange Commission (SEC). The statements that have
to be reported by the entities include balance sheet, income statement or profit or loss account
and cash flow statement. In comparison to annual reports of businesses, interim reports give
more precise and timely financial information to key stakeholders such as creditors and
investors.
According to ASC Topic 270 of the Financial Accounting Standards Board (FASB),
some of the details that must be integrated into interim financial information include data on
financial position during the specific fiscal year, operation results, comprehensive income, as
well as cash flows. The details pertaining to interim financial reporting that is followed under
IFRS is contained in IAS 34 (Tokar & Kumar, 2020). The minimum elements that need to be
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incorporated in the interim financial statements include consolidated balance sheet,
comprehensive income statement and condensed cash flow statement.
2. The excel spreadsheet contains hypothetical financial statements for an organization.
3. There exist a number of differences in the guidelines that have been included in the Generally
Accepted Accounting Principles (GAAP) and the International Financial Reporting Standards
(IFRS), relating to interim reporting of financial statements (Ahmed et al., 2020).
The table gives an insight into some of the chief differences in the interim reporting context. f
GAAP
IFRS
Guidelines
ASC 270 of FASB
IAS 34
Cost allocation during the
interim period
Interim periods are
considered to be vital parts of
the annual reporting periods
Every single interim period
is considered to be a unique
and distinctive reporting
period for an organization.
Only taxes are regarded to be
an integral component of the
annual reporting period.
Specific costs that derive
higher benefits than a single
period may be assigned to
other periods.
In case a specific cost derives
more benefits than one
period, then the specific cost
has to meet the asset
definition at the end of the
interim period. After this
requirement has been met, it
can be deferred. f f
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Tax provision
In order to record the interim
tax provision of a business, it
is essential to adhere to an
annual worldwide tax rate.
In the case of IFRS, a
separate tax rate needs to be
used which must be
distinctive for every
jurisdiction and has to be
applied to the results for the
interim period.
C. Separate reporting of business segments
1. Publicly traded companies need to ensure that their financial reporting has been separated
into specific segments. According to ASC Topic 280 of the Financial Accounting Standards
Board, segment reporting provides an insight into diverse business activities and operations that
are undertaken by a company. A total of three tetes can be carried out for the purpose of
ascertaining operating segments and they are revenue test, asset test, and profit or loss test. Each
of these tests has distinctive purposes. The purpose of the revenue test is to ascertain whether a
specific segment generates over 10 % of the business revenue or not. For example, if the product
category of business helps to generate over 10 % revenue, a separate segment has to be
maintained for the same in financial reporting. The asset test is conducted to determine whether
a specific segment contributes to 10 % or more of the business assets. The profit or loss test
helps to ascertain whether a segment contributes to over 10 % of the profits or loss of the
business or not.
2. The practice of segment reporting is of paramount importance since it can support
transparency in financial reporting. When a business entity presents its financial reporting in
different segments, it is possible to get an in-depth ad detailed insight into the financial
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activities. The reporting can enable diverse business stakeholders such as creditors and
investors to understand how the business performs. Due to the narrow focus, a transparent
climate is created and it is possible to assess the financial aspects of the form minutely. For
example, the insight into incurred expenses relating to a specific business segment can help to
understand its cash flow.
3. A number of improvement can be made in the segment reporting practice to sustain, promote
and foster transparency. f One of the fundamental methods is to ensure that a maximum number
of segments are captured in segment reporting which give a detailed insight into how the
business generates its revenue in the market. It is essential to maintain consistency when it
comes to segment disclosure so that the level of transparency and understandability can be
improved for the stakeholders of the business. Innovative approaches that involve technology
can be integrated into segment reporting to boost the level of transparency (G Baldarelli &
Nicolo, 2019). f
Milestone Three
I. Impact of Foreign Exchange Rates
In the globalized times, many business organizations consider to expand their business
operations beyond their national boundaries. It creates an opportunity for them to generate
higher profits by catering to the needs of the customers at the global scale. However, it is
essential for business entities to take into consideration the effects of foreign exchange rates on
the financial statements of the company. Furthermore, it is essential to take into account the
risks that may arise owing to the foreign exchange rates. According to Robinson (2020), it is
necessary for businesses operating internationally to understand how foreign exchange rates
and currency fluctuations impact their financial position and standing.
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One of the main risks that arise due to the application of foreign exchange rates is known
as economic risk. Due to the fluctuating value of currency, the value of a business entity may be
affected. Such a risk arises for every organization that carries out its business operations in the
international business landscape. The risk can have a major impact on the financial standing of
a business and reshape its competitive position in the international market setting. Transaction
risk is another kind of risk that companies operating in the global market face due to the effect of
foreign exchange rates. This risk is encountered by companies when they engage in financial
transactions that take place between jurisdictions. It is related to the exchange rate change prior
to the settlement of the transaction. One of the main reasons for the risk to occur is the difference
between the transaction date and the date of settlement (Bogićević et al., 2016).
Another risk that is associated with foreign exchange rates is known as translation risk.
This risk is also known as translation exposure, and it can give rise to a significant impact for a
business entity. As a result of such a risk, the value of the assets, liabilities, equity as well as
income of a company may get altered. Such a risk is higher for business entities that hold a
substantial amount of their assets, equities, or liabilities in foreign currency. Such a risk has the
potential to bring about considerable change in the financial position of a business firm.
Translation of Financial Statements
The GAAP makes it mandatory for companies to translate the foreign currency that is
captured in their financial statements into the currency that is used for the financial recording
purpose of the parent company (Ugli, 2022). Foreign exchange rates can give rise to both
positive as well as negative implications on the financial statements of businesses. As there may
be significant fluctuations in these rates, it is imperative to ensure that the financial statements
are presented in a consistent manner and that they showcase authentic and accurate financial
results.
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For the purpose of translating the financial statements of a business entity, the two
different methods that can be adopted are the current rate method and the temporal rate method.
Before choosing the appropriate translation method, an entity has to take into account its
functional currency (Robinson, 2020). It refers to the main currency of the operating
environment of the business entity.
Current Rate Method
The current rate method of translation is used for the purpose of restating the currency in
which a business presents its financial statements, including elements such as assets, liabilities,
expenses, revenue, losses as well as gains that are denominated in a foreign currency. When this
technique is adopted, most of the financial statement items are converted at the current
exchange rate. This method is applicable when an organization’s functional currency is separate
from the presentation currency that is used by the parent company. This method is considered to
be an ideal translation method when the subsidiary of a business operates independently of the
parent business. f
Temporal Rate Method
The temporal rate method of transaction serves as a useful means of converting the
currency that is used by a subsidiary of a business entity into the currency that is used by the
parent company. A broad range of currencies might be used for the translation purposes in order
to arrive at the most accurate value of the assets and liabilities of the subsidiary company. When
this method is adopted, the assets and liabilities of a business may be categorized into monetary
or non-monetary elements. This translation method is applicable when the functional currency
of a subsidiary is the same as the currency that is used by the parent company. When the
temporal method is used for the purpose of translating the local currency into a foreign
currency, it is known as re-measurement. The translation method that is chosen by a company
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must be carefully considered so that a true picture of the financial performance can be reflected
in the financial statements.
II. Non-Proft and Governmental entities
Compliance
There exist a few differences between non-profit entities and governmental entities.
Non-profit entities do not have a profit-motive and as a result their revenue is realized
differently. It is essential to take into consideration Government Accounting Standards (GAS)
for both non-profit as well as governmental entities. Governmental entities have the
accountability to be transparent with their donors. They need to create a fund financial
statement that shed light on their financials and operations. Their statements need to reflect
how they make use of diverse funds that are available to them. f The information helps the public
to understand how a governmental organization is utilizing its funds. In the case of non-profit
entities, they need to show a statement of financial position. They need to show their net assets
and they need to be categorized as restricted and unrestricted. A statement of activities is
captured highlighting the revenue and expenses.
Analysis of non-profit and governmental financial statements
Business entities rely on financial ratios and gross profit margins while assessing their
financial performance. However, non-profit and governmental entities are expected to adhere
to Government Accounting Standards so that value can be created for diverse stakeholders at a
comprehensive level. The purpose of the creation and existence of non-profit and governmental
entities is to give rise to greater good at the societal level. While businesses try to present a
positive picture through their financial statements, the purpose of the financial statements of
non-profit and governmental entities is to present a true, accurate and clear picture of their
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financial position. The examples of non-profit and governmental financial statements are
presented in the attached excel file.
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Reference
Ahmed, E., Bradford, B., & Bloch, R. (2020). Market Reaction to ADRs Quarterly Earnings:
The GAAP Effect. Journal of Business and Economic Studies, 24(1), 85-103.
Bogićević, J., Dmitrović-Šaponja, L., & Pantelić, M. (2016). Foreign exchange transaction
exposure of enterprises in Serbia. Economic Annals, 61(209), 161-177.
G Baldarelli, M., & Nicolo, D. (2019). Toward an integrated segment reporting: between
tradition and innovation. International Journal of Advances in Management and
Economics, 8(06), 16-22.
Hynes, R. M., & Walt, S. D. (2019). Revitalizing involuntary bankruptcy. Iowa L. Rev., 105,
1127.
Legal Information Institute. (n.d.). Voluntary bankruptcy. Legal Information Institute.
https://www.law.cornell.edu/wex/voluntary_bankruptcy#:~:text=Voluntary%20bankr
uptcy%20is%20a%20bankruptcy,initiated%20by%20a%20debtor’s%20creditors.
Legal Information Institute. (n.d.-a). 11 U.S. Code § 303 - involuntary cases. Legal Information
Institute. https://www.law.cornell.edu/uscode/text/11/303
Olujobi, O. J. (2021). Combating insolvency and business recovery problems in the oil
industry: proposal for improvement in Nigeria's insolvency and bankruptcy legal
framework. Heliyon, 7(2).
Robinson, T. R. (2020). International financial statement analysis. John Wiley & Sons.
Tokar, M., & Kumar, S. (2020, October). Applying IFRS Standards in 2020—impact of
COVID-19. In VI. Internacional Symposium on Accounting and Finance ISAF (Vol.
2021, p. 95).
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Ugli, M. I. S. (2022). Formation and development of the convergence process of two types of
standards: IFRS and US GAAP. Thematics Journal of Business Management, 5(1).
