Financial Reporting Solution Assignment - Doc

FINANCIAL REPORTING

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
QUESTION 1...................................................................................................................................1
1.1 Accounting policies and structure followed by Nestle.........................................................1
1.2 Nestle consolidation with various entities.............................................................................2
1.3 Basic rules of consolidated financial statements...................................................................2
QUESTION 2...................................................................................................................................3
2.1 Comparison of requirements of IFRS 15 with current practices of IFRS 18 and IFRS 11. .3
2.2 Critical analysis of requirements of IFRS 15........................................................................6
CONCLUSION................................................................................................................................8
REFERENCES................................................................................................................................9
APPENDIX....................................................................................................................................11

INTRODUCTION
Financial reporting is considered as the most essential part of corporate governance and
last product of accounting. There is presence of most typical elements of financial reporting such
as income statement, balance sheet, statement of cash flow and change in equity. It gives
financial information to various external users which help in enabling and assessing risks and
returns of different opportunities of investment so that these can take part in taking useful
decisions about economy. The present report is giving brief understanding about accounting
treatment of economic transactions with respect to most specific international accounting
standards and to identify accounting treatment whichever is applied in Nestle Group. It has also
discussed about the implications of accounting of different issues of financial reporting along
with its demerits. Further, it has evaluated critically about consolidated financial statements of
Nestle Group under International GAAP from single statement which consist of different
accounting combination of business like associates, joint venture and subsidiaries. There is
representation of various approaches of non-financial reporting. There is presence of different
standards with their key variations and application of IFRS 11, IFRS 15 and IFRS 18.
QUESTION 1
1.1 Accounting policies and structure followed by Nestle
Nestle has prepared their financial statement complying with International Financial
Reporting Standards which are issued by International Accounting Standards Board and with law
of Swiss on accrual basis with respect to historical cost convention but not for some special cases
such as financial liabilities and assets, net liability for benefit plans which are measured and
payments on basis of shares in context of fair value. There are various revisions for estimating
accounts and it is recognised with the duration of outcomes which are referred as materialise.
The main principle followed by organization is revenue recognition in which revenue from sale
of goods is considered with respect to transferring rewards and risks of ownership and buyer's
effective control. For measuring revenue, price which is charged to every customer and they
have recorded net of return, rebates, trade discounts and other allowances of pricing to
consumers and most probably it is directly associated with economic benefits that will be
referred as flow to organization (Ball, Jayaraman and Shivakumar, 2012).
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The financial statement of organization is prepared by various accounting principles
which are mandatory by Swiss Law. The transaction of foreign currency are traced at appropriate
exchange rate of that specific date of transaction or else they are hedged forward on exchange
rate in context of forward contract. The profit and loss statement is prepared according to Swiss
law and company's article of association. The dividends are considered as proper margin of year
and they are rectified in annual general meeting instead of correcting in profit of year which is
related in this statement. In context of intangible assets, there presence of trademarks and other
rights of intellectual property which is directly written off for acquisition and in this context of
long period as it will not exceed their useful lives. Goodwill and intangible assets are not part of
invested capital as the recognised amount is not able to give comparison between various
segments because of variations in intensity of activity of acquisition and alterations in accounting
standards which are applied at different points of acquisition.
1.2 Nestle consolidation with various entities
Nestle is considered as one of the most known food brands across world. Its reach is in
whole world and so, according to this, it has been consolidated with various entities. Some major
entities are described below with proper variations like Nestle Germany, Nestle India and Nestle
Swiss. IFRS are followed by Nestle Germany and Swiss. Nestle India follows IAS 19 and 34.3%
capital shareholdings whose currency is of INR that is 96,41,57,160 and Nestle Germany has
100% ultimate capital shareholding of 214266628 Euro. Nestle India also complies with material
aspects which are notified under Section 133 of Companies Act, 2013. The operating income of
Nestle India is of 270.7 million which include incentives of export and scrap sales and of Nestle
Germany gives operating income of 1465700 CHF which has various subsets such as research
and development, selling general and administrative in huge proportion (Nestle India Annual
Report, 2017).
1.3 Basic rules of consolidated financial statements
The financial statements of Nestle Group are those in which all liabilities, income, asset,
equity, cash flows and expenses of parent and their subsidiaries (Nestle Germany, Nestle India,
etc.) are represented as a single economic entity. The consolidated financial statements are
prepared by Nestle S.A. with various applications of uniform policies of accounting for
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transactions and many more events of similar circumstance. There is presence of various
situations when parent company will not prepare consolidated financial statements such as:
 The equity and debt instruments in public market are not traded.
 If the subsidiary is wholly or partially owned of other company and owners must consider
that they are not allowed to vote, with proper information and with no objections.
 Absence of filing or is in process of filing then financial statements with appropriate
security commission or major regulatory organization with main objective of issuing
different class of instruments in specific public market (Nestle Global Annual Report,
2017).
Procedure for consolidation
 All the items of assets, equity, liabilities, cash flow and income are combined of Nestle
S.A. and its subsidiaries (Ikpefan and Akande, 2012).
 The carrying amount of investment of Nestle S.A. is eliminated in every subsidiary and
its major contribution in equity of subsidiary.
 There will be substitution of all intra group of liabilities and assets, cash flows, equity,
income and expenses in context of various transactions between different entities of
Nestle S.A. which can be derived from all losses and profits with outcome of transactions
of intra group which is directly recognised as in assets such as fixed assets and inventory
are substituted as whole.
QUESTION 2
2.1 Comparison of requirements of IFRS 15 with current practices of IFRS 18 and IFRS 11
IFRS 15 has established principles which are applied by organization for reporting
information in context of nature, timing, amount and uncertainty of cash flow and revenue from
contract with customers. The organization recognizes revenue for depicting transfer of promising
services and goods for customers in a specific amount which has reflected consideration by
which expectations of entity has entitled goods and service exchange. For recognizing revenue
according to IFRS 15, the organization follow these steps:
 Determining contract with customer
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 Determining performance obligations in context of contract. For transferring customer
services and goods which are distinct, there is presence of promising performance
obligations in a contract.
 The transaction price has been determined. It means consideration amount where
organization expects exchange for transferring services and goods to customers. The
contract of promised consideration consists of variable amount and consideration amount
should be estimated.
 There should be specification of proper allocation of price of transaction for every
obligation of performance in context of selling price for stand-alone of all goods and
services which are distinct and promised in contract.
 Whenever, performance obligation has been satisfied, revenue has to be recognised by
transferring goods or services to customers which are promised. It can be satisfied at
specific or over time. According to performance obligation amount of revenue has been
identified for measuring progress because of appropriate satisfaction. (Madawaki, 2012).
The principles of financial reporting has been established by IFRS 11 by various
organizations that have specific interest in arrangements which are controlled jointly. Here, two
or more parties have joint control as it is agreed contractually for sharing arrangement of control
which exists only in context of decision of activities which are relevant and there is requirement
of unanimous consent of parties that are sharing control. The joint arrangements are classified in
two types, that is, joint venture and joint operations. The parties which have right to net assets of
specific arrangement and have joint control of specific arrangement are termed as joint venture.
The parties which have right to some specific assets and obligations in context of specific
liabilities in context to arrangement are termed as joint operation. Usually, it has requirement for
joint operator for recognising and measuring share of assets and liabilities as per the standards of
IFRS which are directly applicable for specific revenues, expenses, assets and liabilities. The
account of joint venture has its interest in joint venture with application of equity method.
Revenue is considered as top line metric and one of the most important accounts for
budgeting, framing decisions about investment and for business planning. For many years,
organizations under IFRS and US GAAP recognized revenue in two various sets of standards. As
revenue recognition of US GAAP guidance is considered as industry specific and in detailed
manner, revenue is considered as a broad principle according to IFRS 18. In May 2014, FASB
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and IASB had issued convergence standard with reference to revenue recognition. It has been
aligned with revenue of organization with performance along with enhancing consistency for
organizations that are reporting under US GAAP and IFRS. This standard has replaced IAS 11
Construction contracts and IAS 18 Revenue. There is presence of applying new standards to all
contracts with customers but not leases, insurance contracts and financial instruments which are
undertaken in accounting standards. There are various entities that deal with contracts in some or
the other way as this change is going to affect organization (Jones and Finley, 2011).
While performing comparision, there are various existing practices that are affected as on
the basis of incidental obligations and sales incentives. Many organizations do not have
recognised revenue separately for the use of transferring goods and services in contract. The
main outcome of organization of price of every transaction is considered as revenue even
performance obligations are left for satisfying. The requirement of IFRS 15 says that
organization will be assessing goods and services which are promised and raised from
obligations of sales and its distinct incentives . If services and goods are distinct, revenue will be
recognised when every good and service is provided to customer. The practices for allocation of
transaction price limits consideration amount which is provided for performance obligation to
that specific amount which is not referred as contingent according to satisfaction in the future.
IFRS 15 does not consider price of transaction as it should be allocated according to performance
obligation in the context of consistency with revenue cap that is contingent. The guidance of
revenue recognition is very broad with license of accounting linked to intellectual property .
There is presence of different interpretations of specific guidelines which have led to give
significant diversity in terms of licenses for accounting. IFRS 15 gives applicability on the
guidance for methods of applying framework of revenue with various types of licenses in context
of intellectual property (Sunder, 2011).
The information in context of revenue has been disclosed in very inadequate manner and
cohesion is lacked along with disclosing more items in financial statements and on its contrary,
IFRS 15 consists of different comprehensive set of disclosure which has basic requirement of
disclosing quantitative and qualitative information related to customer contracts for helping
investors in understanding time, uncertainty and amount of revenue. On the basis of timing or
revenue recognition, there was lack of comprehensive and clear guidance as for identifying
diversity of organization who has ability to recognize revenue for specific services and goods at
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particular time or it might be over time and on its contrary IFRS 15 says that organization must
have ability to recognise revenue over time according to criteria which is mentioned in standards
which are met. The other concept organization will recognize revenue at specific point of time
when control has been obtained of goods and services which are promised.
2.2 Critical analysis of requirements of IFRS 15
According to Rajgopal and Venkatachalam, (2011), IFRS 15 consists of requirements of
disclosure in an extensive manner and it is intended for enabling various users of financial
statements for understanding judgements, amount and timing in context of revenue recognition
and correspondly cash flow which has been raised from different contracts with customers. There
are different requirements stated in a detailed aspect than current requirement according to IAS
18. There is presentation of major requirements of disclosure which consists of quantitative and
qualitative information related to agreements with customers, contract balance must be re
conciliated, significant judgement and alterations which are applied for guidance to those
specific contracts and recognition of assets from cost for obtaining of fulfilling agreement with
customers. There is mandatory requirement by IFRS 15 that each and every entity must disclose
amount whatever is left for obligations of performance and time expected for satisfaction of that
along with specified duration which is greater than one year. The amount of money will be
considered as revenue of both qualitative and quantitative explanations (Nobes, 2014).
Chen and et. al., (2011) stated that various organizations can apply the standard of
revenue retrospectively to every prior reporting period which is represented or it may give
cumulative effect for applying initial standard that is recognised at the beginning of year of prior
application, but comparative period is not restated. There are various additional disclosures when
there is application of modified retrospective method. Costello, (2011) argued that whichever
method is chosen, it is essential to note that an organization must be able to recognise the
cumulative effect for applying it on prior basis of revenue standard as retained earnings have
been adjusted at specified application date. The fees where alterations of IFRS 15 given profile
of revenue recognition which has impacted profit and loss statement and it will directly relate to
revenue which is earned in particular period.
According to Liao, Sellhorn and Skaife (2012), full retrospective method must be giving
full completion of financial performance and huge ability for comparison. There is presence of
different expedients which are practical and available for applicability and transition are eased
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under this method. On the contrary, application of expedients can decrease comparability and
there is requirement of attaining huge population of contracts for performing over the
assessment. It is very difficult for gaining historical information and it might raise the
preparation cost and time which is associated .
In the series of merit, modified retrospective method will be giving brief analysis and it
will assess small population of contracts. There is not any requirement of restating comparative
period numbers and it will decrease the volume of information which might be required. But it
will be limited for comparison of periods. There are various additional disclosure which are
essential for facilitating level of comparison among uses and these disclosures gives organization
for maintaining both set of records and could get outcome in important efforts. In the context of
organisations who has need for reconsidering the current terms of contract and practice of
business. Revenue might be speeded up or down for those entities that give license, bundle of
goods and service such as mobile phone providers and to whom where consideration receivable
is refereed as variable in nature, price concessions, rebates, performance bonus, incentives,
penalties and more similar aspects. The timing of recognising revenue might alter even there is
presence of performance obligations and for giving services which are involved in it. There is
requirement of organization for identifying that revenue and it should be recognised at specific
time or over time.
The amount of revenue recognition might alter if there is presence in context of
organisation which receives significant financing benefit. The accounting software whichever is
existing might be required for adapted or replaces for ensuring capability of extracting data and
ways to dealing with new requirements of accounting which is specifically applied for
estimating, framing the stand-alone selling prices or to support the requirements of extensive
disclosure. There are various estimates and judgements prepared for standards which are existing
they are revised for complying with guidance of IFRS 15.
For instance: there are various organisations which are impacted from new rules of
revenue recognition and are very minimal and they will be continuing for recognizing revenue as
it was before. There is presence of different industries such as telecommunication,
manufacturers, real estate and property development as well as software development
technology. In context of telecommunication, its main challenge is to separate bundled offers
from performance obligations and to allocate price of every transaction (IFRS 15, 2017). As per
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implication revenue can be recognised and it should not directly correspond with monthly billing
to various customers who are involved. As IFRS 15 has requirement of capitalizing and
recognizing them in form of profit or loss as per revenue recognition principle. In context of real
estate, main challenge is to take decision about the organization for recognizing revenue at
specific or over time. While considering technology sector, their specific challenge has been
identified in context of performance obligation of each individual and allocation of transactional
price, assessing progress in context of meeting contract and even assessing license for products
and services which are sold by software developers or vendors. Thus, IFRS 15 gives recognition
to 2 types of licenses as license for access and use (IFRS 11, 2017).
CONCLUSION
From the above report, it can be concluded that financial reporting plays an essential role
in every organization. The above report has described its various implications in Nestle Group
along with its subsidiaries. It has shown importance of accounting policies of Nestle Group such
as going concern and revenue recognition along with its basic structure of financial statements. It
has shown the importance of consolidated financial statements with its key differences from
reporting in single and entities which are consolidated as reporting date must be similar of both
parent company and its subsidiaries as well as if it is not same, it should be not be more than 3
months. It has given various aspects about IFRS 11, 15 and 18 which state about accounting for
construction contract, income from agreement with customer and revenue recognition
respectively.
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REFERENCES
Books and Journals
Ball, R., Jayaraman, S. and Shivakumar, L., 2012. Audited financial reporting and voluntary
disclosure as complements: A test of the confirmation hypothesis. Journal of Accounting
and Economics. 53(1-2). pp.136-166.
Chen, F. and et. al., 2011. Financial reporting quality and investment efficiency of private firms
in emerging markets. The accounting review. 86(4). pp.1255-1288.
Costello, A. M. and WITTENBERG‐MOERMAN*, R.E.G.I.N.A., 2011. The impact of financial
reporting quality on debt contracting: Evidence from internal control weakness
reports. Journal of Accounting Research. 49(1). pp.97-136.
Ikpefan, O. A. and Akande, A. O., 2012. International financial reporting standard (IFRS):
Benefits, obstacles and intrigues for implementation in Nigeria. Business Intelligence
Journal. 5(2). pp.299-307.
Jones, S. and Finley, A., 2011. Have IFRS made a difference to intra-country financial reporting
diversity?. The British Accounting Review. 43(1). pp.22-38.
Liao, Q., Sellhorn, T. and Skaife, H. A., 2012. The cross-country comparability of IFRS earnings
and book values: Evidence from France and Germany. Journal of International
Accounting Research. 11(1). pp.155-184.
Madawaki, A., 2012. Adoption of international financial reporting standards in developing
countries: The case of Nigeria. International Journal of Business and management. 7(3).
p.152.
Nobes, C., 2014. International Classification of Financial Reporting 3e. Routledge.
Rajgopal, S. and Venkatachalam, M., 2011. Financial reporting quality and idiosyncratic return
volatility. Journal of Accounting and Economics. 51(1-2). pp.1-20.
Sunder, S., 2011. IFRS monopoly: the Pied Piper of financial reporting. Accounting and Business
Research. 41(3). pp.291-306.
Online
IFRS 11. 2017. [Online]. Available through: <https://www.ifrs.org/issued-standards/list-of-
standards/ifrs-11-joint-arrangements/>.
IFRS 15. 2017. [Online]. Available through: <https://www.ifrs.org/issued-standards/list-of-
standards/ifrs-15-revenue-from-contracts-with-customers/>.
Nestle Global Annual Report. 2017. [Online]. Available through:
<https://www.nestle.com/media/mediaeventscalendar/allevents/2017-annual-report>.
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Nestle India Annual Report. 2017. [Online]. Available through:
<https://www.nestle.in/investors/stockandfinancials/documents/annual_report/nestle-
india-annual-report-2017.pdf>.
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APPENDIX
Consolidated Income statement
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Consolidated balance sheet
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13

Cash flow statement
14

Consolidated Statement of changes in equity
15