Important Accounting Practices in The Chemical Industry
This paper seeks to compare and contrast the important accounting practices from there companies in the chemical industries. The companies whose accounting practices would be compared against each other within the industry include two US based companies Dow Chemical and DuPont, and a BASF, a German Company. 2. Analysis and Discussion 2. 1. Industry and individual company overview The chemical industry includes companies engaged in producing chemicals .
It converts raw materials like oil, natural gas, metals, minerals, water and air into a thousand of product that makes it very relevant to the world economy. Chemical produced are in turn used to manufacture different consumer goods as was as inputs of other industries like manufacturing, agriculture, construction and service industries. The companies in the industry can be considered as world largest producers because their products are further used by other industries. The major industry players are global companies and include BASF, Dow, Bayer, DuPont, SABIC and Mitsubishi.
There are also smaller companies numbering thousands around the world are part of this very big chemical industry. 2. 2 Key business and economic differences between the companies. The subject of this study are part of the major industry players and for appreciation of their sizes in relation to the trillion-dollar industry, their revenues and income for the year 2007 could at least show a glimpse of the picture. Dow and DuPont are both US company while BASF is German company. In terms of 2007 total revenues Dow appears to ranked first at $ 53.
5 billion, then followed by DuPont at 29. 4 billion and then by BASF at $ 26. 1 billion (or €16. 7 billion). In terms of 2007 profits, BASF appears to rank first at $3. 5 billion, then followed by DuPont at 2. 99 billion and then by Dow at 2. 89 billion. 2. 3. Key accounting issues and FASBs in the industry for example (not a comprehensive list). Revenue, Inventory, Leasing, Stock Options, Research and Development, Depreciation, Foreign exchange, Off balance sheet activity that has future accounting consequences.
To compare the accounting practices of the three companies along the accounting issues on Revenue, Inventory, leasing, Stock Options, Research and Development, Depreciation, Foreign exchange, Off balance sheet activity that has future accounting consequences, there is a need to look at first at what are the possible sub-issues for each of topical issues and then compare with the experience of these companies that are under study. After which similarities and difference of each companies could be pointed in relation to general rules for each accounting topic or issue.
2. 3. 1 Revenue The major issues in revenues upon which companies may be compared to each other is the manner of its recognition. The general principle is that revenue should be recognized when earned. The question however is when its income considered to be earned? The conceptual framework provides that income is recognized in the income statement (1) when it is probable that increase in future economic benefits related to an increase in an asset in an asset or decrease in liability has arisen and (2) that the economic benefits can be measured reliably.
These two conditions are present at the point of sale. Accordingly, the point of sale is the point of income recognition for the simple reason that it is at the point of sale that entity has transferred to the buyer the significant risks and rewards of ownership of the goods. The accounting policies of the three companies will now be evaluated on the bases of the two requirements for revenue recognition. Dow has declared in it policies that its Revenue Sales are recognized when realized or made realizable or and has been earned, in accordance with the Staff Accounting Bulletin (SAB) No.
104, of U. S. Securities and Exchange. It represents to have approximately 98 percent of its sales are related to sales of product while the remaining 2 percent is allotted service offerings, insurance operations, and licensing of patents and technology. It declares to recognize sales revenue when its risk and little to the product is transfer to the customer, which typically occurs at the time shipment is made. It would appear that company recognized its revenues generally at the point of sale since the company has admitted that 98% of its sales or revenues are related to sales of product.
The same may be deemed as far as its sale of services is concerned since revenues are recognized when services are rendered. DuPont claims to recognize its revenue when the earnings is complete, which is equivalent to having made its sale to its wide range of products to diversified base of customers around the globe. The point of sale is made upon delivery of the goods and risk of loss has been transferred, collectibility is assured and the price is fixed or determined.
BASF claims to recognize it revenues from sale of goods or the rendering of service upon transfer of ownership and risk to the buyer. It also claims that allowances for rebates and trade discounts are made as deduction from revenues and that provisions are made to cover return of products and estimated future warranty obligations and other claims under the principle of individual evaluation . It appears the BASF also recognized revenues using point of sale of product or service as the time to recognize revenue which in is accordance with the basic principle of revenue recognition.
It could be observed in summary that the three companies, two from US as governed by US GAAP and one from Germany as governed by the IFRS are substantially similar as far the way revenues are recognized in their books, that is upon transfer of risk of ownership to the buyer. 2. 3. 2. Inventory The major issues in inventory include what comprises the inventory of the companies (or what should be included and excluded) as well as valuation.
Inventories should include goods purchases and held for resale, finished goods produces and goods in process and materials and supplies awaiting use in the production process. Inventories are required to be stated at the lower of cost and net realizable value (NRV) as per and they include: (1) cost of purchase (including taxes, transport, and handling) net of trade discounts received; (2) costs of conversion (including fixed and variable manufacturing overheads) and; (3) other costs incurred in bringing the inventories to their present location and condition as define under IAS 2.
Dow claims its inventories to be stated at the lower of cost or market. The company also states that on January 1, 2006, it began using normal capacity of production facilities to calculate its per unit costs of inventories. Prior to 2006 the Company used what is called nameplate capacity. On per subsidiary basis, the method of determining cost by the company could either be last-in, first-out (LIFO), first-in, first-out (FIFO) or average cost, and each is used consistently from year to year by each respective subsidiary.
There seems to lack of consistency in inventory method, but it appears the subsidiary is dependent on the name of country which seems to adopt different accounting principles of the host country for the subsidiary. DuPont claims that majority of its inventories are valued at cost using LIFO or last-in-first out method while it seed inventories are valued at the lower of cost as determined by FIFO or first-in-first-out method. It further claims that it inventories include raw materials, direct labor and manufacturing overhead.
It also claims to have store and supplies that are valued at lower cost average cost or market. Compared with Dow Chemicals, it appear that company also values it inventory at lower of cost or market and that it has also a combination of the methods as in Dow Chemicals. BASF claims it inventories to be carried at cost or are valued at quoted or market values/fair value if these are lower than cost. Its inventories include the cost of its raw materials, work-in-process; finished goods and merchandise are determined by the LIFO method.
It appears that it is the same as Dow Chemical and DuPont in terms of valuing inventory at lower of cost or market. It is however different from the two in terms of methods since it only LIFO but not FIFO and average. It would seem it contradicts the requirement of IAS 2 since the company is governed by IFRS/IAS since Germany where the company belongs is member of EU. 2. 3. 3 Leasing The major issues on lease or leasing normally includes whether the company treat a lease entered into as capital lease an operating lease.
The first one is an asset which requires depreciation while the other is an out right expense Dow Chemical states that its and, buildings and equipment, including property under capital lease agreements, are carried at cost less accumulated depreciation. This means the company may in fact be using the concept of capital lease and operating lease by recognizing what is properly separately under the accounting principles of which the company is subject, the US GAAP. As proof its operating lease, the company recognized rental expense of $445 million in 2007 and $441 million in 2006.
Similarly, DuPont maintains both capital lease on some of its property plant and equipment and also some operating leases . As compared with BASF (2007), the latter company is silent on the use of the word “lease’, whether operating or capital lease for its 2007 financial statements. It appear that the two US companies have made use of both capital lease and operating lease but for the German company BASF the either of the terms are not mentioned in the its financial statements. As to whether BASF does own all its assets and therefore not resort to leasing needs still further proof.Sample Essay of AssignmentExpert.com