BMW Group: A Critical Analysis of Conceptual Framework Obligations

This report provides a critical analysis of BMW Group's adherence to the conceptual framework obligations for financial reporting. It includes a discussion on recognition criteria, fundamental and enhancing guidelines, and recommendations for improvement.

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CONTEMPORARY ISSUES IN ACCOUNTING

BMW Group
Executive Summary
It is the conceptual that binds the organization and provides meaningful information to the
end users. The financial reporting users are able to get a clear view of the organization. In this
report, BMW is selected for the purpose of study and a critical analysis has been done to
ensure that the corporation has met the conceptual framework obligations. The report
initiates with a strong emphasis on BMW followed by the consideration of conceptual
framework objective. Further, the recognition criteria are discussed together with the
fundamental enhancing guidelines. From the overall report, it can be commented that the
company has adhered to the CF of financial reporting. Overall, it can be said that the
company has effectively portrayed the recognition criteria and can be known through the
intangibles, financial instruments, etc.
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BMW Group
Contents
Introduction...........................................................................................................................................3
Consideration of conceptual framework objective................................................................................4
Recognition criteria...............................................................................................................................5
 Risks, rewards, and opportunities.................................................................................................5
 Revenue recognition......................................................................................................................5
 Public sector grants.......................................................................................................................6
 Intangibles.....................................................................................................................................6
 Impairment of intangible assets....................................................................................................6
 Leased items..................................................................................................................................6
 Financial instruments....................................................................................................................6
 Deferred taxes...............................................................................................................................7
Fundamental and enhancing guidelines................................................................................................7
Recommendation..................................................................................................................................9
Conclusion...........................................................................................................................................10
References...........................................................................................................................................11
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BMW Group
Introduction
The conceptual framework of accounting is crucial for every company in the modern scenario
to comply with because it facilitates in enhancing the meaningfulness of financial information
present in the statements. Besides, the users of financial reporting can easily interpret the
financial information for the purpose of making effective decisions (Petersen & Plenborg,
2012). Meanwhile, in the absence of such conceptual framework, understandability,
relevance, reliability, and many more qualitative characteristics of financial reporting cannot
be obtained, thereby degrading the process of corporate reporting as a whole. Moreover,
based on the complications in the current working environment, the prevalence of conceptual
framework is vital for all stakeholders in their decision-making process (Peirson et. al, 2015).
With the help of this report, an evaluation of BMW Group’s attempt will be made in order to
ensure whether the organization has met the obligations of the conceptual framework for
reporting.
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BMW Group
Consideration of conceptual framework objective
BMW Group emphasizes the requirement of the conceptual framework of financial reporting
within its affairs because it believes that satisfaction of customers is very necessary for such
complicated and competitive working environment. The company has guaranteed user access
to necessary data in order to make them understand the quality and characteristics of financial
reporting and making available procedures and policies to facilitate accurate interpretation on
the part of users, thereby enhancing the objectives of corporate reporting (Cooper et. al,
2011). For instance, in order to compute the benefits and costs of an actual item, the Group
differentiates betwixt financial and non-financial value (BMW, 2016). Such financial value is
computed through utilization of methods for computing the capital value, the effectiveness of
costs, etc. Besides, the comparison of what is intended to be invested and what is required to
be obtained from such investment results in a financial viewpoint. Furthermore, the non-
financial value is computed using a scoring model of the Group. Overall, both these values
are taken into account by BMW when a negative or positive decision is required to be
undertaken for an action item (Conceptual Framework, 2016). This consideration sheds light
on the fact that conceptual framework of accounting is being taken into account by BMW in
order to ensure that the users can use both financial and non-financial value in order to make
decisions about its action items. Furthermore, the Group has disclosed proper information
regarding how efficiently it has discharged its responsibilities in utilizing its current resources
(BMW, 2016). Moreover, prospective for future cash inflows have also been disclosed by the
Group that can allow stakeholders in making significant decisions. The link betwixt value-
added and key value drivers have also been considered by the Group that allows it to attain
the objectives of the conceptual framework of accounting (Lapsley, 2012). Overall, the
business model of the Group aligns with a value-based approach that is intended towards
attaining consistent growth, profitability, enhancing the business value of safeguarding jobs
and capital providers. Lastly, in order to consider the objectives of conceptual framework of
accounting, the Group has provided detailed information about its financial performance
tenure by reflecting variations in its financial claims and funds other than those attained from
creditors and investors so that they can evaluate the future and past capability of the Group to
generate inflows of net cash (Baluch et. al, 2011). These factors clearly highlight that the
Group has considered the objective of the conceptual framework for the object of its
reporting.
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BMW Group
Recognition criteria
The accounting policies of BMW Group are prepared by fulfilling the German Commercial
Code and the financial statements are prepared by complying with the IFRS requirements.
The difference betwixt these policies emerges in connection with intangible assets’
capitalization, the establishment of valuation units, measurement and recognition of financial
instruments, and recognition and provision of deferred tax assets.
 Risks, rewards, and opportunities
In relation to opportunities and risks associated with raw materials, a detailed method for
hedging and risk measurement is applied by the Group in conjunction with commodity and
currency risks. If the Group fulfils its recognition criteria, derivatives that are used as hedges
will then be accounted for the purpose of hedging relationships (BMW, 2016). In relation to
foreign currency translation, the financial statements drawn up in foreign currencies are
translated by utilizing the modified method of closing rate. The liabilities and assets are
transformed at their exchange rate (closing) whereas the expenses and incomes are also
transformed at their aggregate rate of exchange. Further, variances betwixt such translation
are reflected in accumulated other equity section of the Group (Davies & Crawford, 2012).
Moreover, foreign currency payables and receivables are accounted for through initial
recognition basis by considering the rate present at the first-time recognition date.
 Revenue recognition
In relation to the Group’s revenue, the same is recognized when rewards and risks of goods’
ownership are being offered to the customer taking into account that such revenue amount
can be reliably measured. Moreover, the Group’s revenues are reflected net of bonuses,
discount, and rebates. Furthermore, profits arising on sale of vehicles (that contains a
repurchase commitment) are not immediately recognized (BMW, 2016). The distinction
betwixt buyback and sales price is presented as deferred income and recognized in
instalments as revenues over the tenure of the contract. In addition, revenues associated with
arrangements of operating lease are recognized on a straight-line way over the tenure of lease
(Deegan, 2011).
 Public sector grants
These are not recognized until there is surety that the situations annexed have been adhered to
and the grants have been obtained. Further, the resulting outcome is recognized in sales costs
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BMW Group
over the necessary tenures to align them with associated costs that are intended to be
compensated (BMW, 2016).
 Intangibles
Internally-generated and purchased intangible assets are recognized as assets when it is
assured that the utilization of such asset can generate future financial effectiveness and where
the assets’ cost can be ascertained properly (Choi & Meek, 2011). These assets are measured
at their manufacturing and/or acquisition cost excluding borrowing expenses, and to the
extent that they possess a useful finite life that is amortized on a straight-line manner over
their expected useful lives.
 Impairment of intangible assets
In order to facilitate impairment tests, carrying value of an asset is compared with that of its
recoverable value. If the fair value of such asset is lesser than its carrying value, an
impairment loss is recognized by decreasing its carrying amount to the asset’s higher value in
use or fair value minus selling costs (BMW, 2016). If the reason for a past recognized
impairment loss does not prevail, the impairment loss is then altered to the level of
recoverable value.
 Leased items
The leased items of BMW Group are taken into account on initial recognition at their
respective fair values or at their net current amount of the minimum lease payments (if
lower). Moreover, the liabilities for such future lease installments are also recognized as
financial liabilities that are considered at their net current value. The impairment of such
items is recognized in the same way as in the case of intangible assets (Gibson, 2010).
 Financial instruments
On initial recognition, such Group’s financial assets are considered at their fair amounts and
transaction expenses are also included in such fair value unless they are assigned to ‘fair
value measurement of financial assets through loss or profit’ segment. Further, such financial
instruments that are present for trading or held for sale for which application of fair value is
done, are also taken into account at their respective fair values (BMW, 2016).
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BMW Group
 Deferred taxes
The Group’s deferred taxes are recognized on all temporary distinctions betwixt accounting
and tax bases of liabilities and assets, and on consolidation processes.
Fundamental and enhancing guidelines
BMW Group is committed to sustainability reporting within its framework and for such
purpose, it has drawn its sustainable value report based on GRI (Global Reporting Initiative)
G4. Such report aligns with the comprehensive option wherein all indicators and significant
information of essential aspects are reported by the Group (BMW, 2016). Moreover, this also
proves adherence to the relevance fundamental characteristic of corporate reporting. Another
fundamental guideline implemented within the Group is its risk management strategy that
allows every manager and employee to report any type of recognized risk through the
effective reporting channels.
With the help of such enhancing guideline, the Group can easily manage external and internal
risks that can pose a threat to its intended purposes or goals. Another fundamental guideline
adopted by the Group is its strategy of information and communication. Such guideline is a
significant part of its internal control system that ensures information to be readily available
to those who are liable for a proper functioning of the Group’s procedures (BMW, 2016).
With the help of such guideline, the Group ensures that information is provided to the
stakeholders in a timely and appropriate manner. This ensures the compliance of reliability
and timeliness qualitative characteristic of financial reporting (Horngren, 2013). The Group
also pursues an extensive control function in its framework that plays a key role in
compliance with internal guidelines and legal requirements. With the prevalence of such
fundamental guideline of extensive control, BMW gains the opportunity to minimize the
feasibilities of risks and additional monitoring of overall organizational processes
(Carmichael & Graham , 2012). The Group also has a Business Relations Compliance
Program that is aimed at assuring the reliability of its business interconnections. Besides,
such program also assists in communication measures that in turn plays a key role in
enhancing the qualitative reliability characteristic of financial reporting (Kaplan, 2011).
These fundamental and enhancing guidelines undertaken by BMW allows it to sustain a
competitive advantage in the market and this cannot be feasible if it does not prioritize
effectiveness of conceptual framework for accounting.
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BMW Group
Recommendation
Even though BMW has reported relevant and reliable information about its financial and non-
financial measures of performance, yet the information that is not vital for the users in
making decisions is also reflected in its financial statements. In other words, financial
statements must accommodate only meaningful information and add irrelevant information
can enhance the complication level in the minds of users (Kruger, 2015). Therefore, in order
to enhance the effectiveness of general purpose financial reporting and conceptual framework
of corporate reporting, information that are essential must only form part of the financial
statements (Brigham & Daves, 2012). This means that key indicators of both financial and
non-financial performance are sufficient for stakeholders to make decisions. Moreover,
taking into account the level of complications in the present corporate environment, creating
complications in the financial statements can result in various issues for the company in
future.
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BMW Group
Conclusion
BMW Group has efficiently adhered to the objective of the conceptual framework of
financial reporting by reporting meaningful, relevant, and reliable information to its users that
can allow them in making proper decisions. Besides, such information includes
understandable details regarding its recognition criteria that can allow stakeholders in
ascertaining meaningful information related to its accounting policies and estimates.
Furthermore, the fundamental and enhancing guidelines of the Group also allows it to adhere
to the obligations of the conceptual framework of accounting through adequate and timely
disclosure of relevant information and mitigating risks that may emerge in the way of
effective financial reporting. These factors highlight the fact that BMW has given due
importance to the usefulness of conceptual framework by fulfilling all its obligations.
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BMW Group
References
BMW 2016. BMW Annual report and accounts 2016. [online] Available at:
<https://www.bmwgroup.com/content/dam/bmw-group-websites/bmwgroup_com/ir/
downloads/en/2016/BMW_GB16_en_Finanzbericht.pdf> [Accessed 12 April 2018]
Baluch, C., Cohen, R., Soto, H., Tucker, P., Volkan, A and Wright, G 2011. Fair Value
Accounting: Current Status and A Proposal For Convergence. The International Business &
Economics Research Journal, 10(4), 17-29.
Brigham, E. & Daves, P., 2012. Intermediate Financial Management. USA: Cengage
Learning.
Carmichael, D.R. & Graham, L., 2012. Accountants Handbook. Financial Accounting and
General Topics. John Wiley & Sons.
Choi, R.D. & Meek, G.K., 2011. International accounting. Pearson .
Conceptual Framework 2016, Conceptual Framework Pronouncements. [online] Available
at: <http://www.aasb.gov.au/Pronouncements/Conceptual-framework.aspx> [Accessed 12
April 2018]
Cooper, C, Coulson, A & Taylor, P. (2011). Accounting for human rights: Doxic health and
safety practices – The accounting lesson from ICL. Critical Perspectives on Accounting,
22(8), 738-758. Retrieved from
https://pdfs.semanticscholar.org/29fe/f2147778ed83c4ee682b6e457a70b344a28a.pdf
Davies, T & Crawford, I., 2012. Financial accounting. Harlow, England: Pearson.
Deegan, C. M., 2011. In Financial accounting theory. North Ryde, N.S.W: McGraw-Hill
Gibson, C., 2010. Financial Reporting and Analysis: Using Financial Accounting
Information. Cengage Learning.
Horngren, C., 2013. Financial accounting. Frenchs Forest, N.S.W, Pearson Australia Group.
Kaplan, R.S., 2011. Accounting scholarship that advances professional knowledge and
practice. The Accounting Review, 86(2), pp. 367–383.
Kruger, P., 2015. Corporate goodness and shareholder wealth. Journal of Financial
economics, pp. 304-329
Lapsley, I., 2012. Commentary: Financial Accountability & Management. Qualitative
Research in Accounting & Management, 9(3), pp. 291-292.
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Peirson, G, Brown, R., Easton, S, Howard, P. and Pinder, S. (2015) Business Finance, 12th
ed. North Ryde: McGraw-Hill Australia.
Petersen, C. & Plenborg, T. (2012) Financial statement analysis. Harlow, England: Financial
Times/Prentice Hall.
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