The 8 Key Accounting Concepts You Need to Know

Introduction 

Accounting concepts and conventions are considered to be guidelines that every accountant is expected to know and follow as they record their daily transactions and when preparing the financial accounts. The International Accounting Standards or the IASs are rules, principles, or guidelines that aim at directing organizations on the way they can prepare financial statements and record transactions. The IASs are often issued by the International Accounting Standards Board which is also responsible for issuing the International Financial Reporting Standards or the IFRS. 

IFRS 

The IFRS is a set of international accounting standards that indicate the way certain types of transactions and other events need to be reported in a company’s financial statements according to Graham (2013 ). As indicated above, IFRS are often issued by the International Accounting Standards Board and indicate the exact way in which accountants need to report and maintain their accounts. The aim of developing the IFRS was to have an accounting language that is common so that accounts and businesses can be able to be understood in all companies and in every country. In other words, it aims at maintaining transparency and stability in the financial world. It helps investors and businesses make educated financial decisions. These standards are used in many parts of the world including many countries in South America and Asia, and in the European Union. However, it is not fully adopted by companies in the United States. However, it has had a real impact on companies in the United States that are ever growing, both in the private and public sector. Some companies have to report according to IFRS to meet the requirements of investor companies or international parents. In addition, companies in the country often have foreign subsidiaries that need to report according to IFRS. Finally, companies in the United States may see the need to supplement on a voluntary basis the U.S GAAP with the IFRS to ensure that there is an accurate comparison of the companies with foreign firms. One company that often uses the IFRS is Coca-Cola Company. 

Research Question 

What are the similarities and differences in the accounting concepts used in Coca-Cola Company and British Airways? 

Target Audience 

The target audience includes managers, financial institutions, and other stakeholders who are interested in the financial statements of the companies. 

Coca-Cola Company Information 

Formed in the year 1886, Coca-Cola Company is one of the largest manufacturer, distributor, and marketer of non-alcoholic beverages including tea, coffee, water, juices, and energy drinks. Its head office is located in Atlanta, Georgia in the United States and often it is known as coke. The company claims that its products is sold and consumed in more than two hundred countries around the world. Coca-Cola Company is one of the companies in the United States that prepares its financial results according to the International Finance Reporting Standards or the IFRS (Coca-Cola Hellenic Bottling Company, 2017) . The accounting principles that are adapted by the company are those that are generally accepted in the United States that require judgments, assumptions, and estimates. The generally accepted principles in the country provide the option of firms to measure using their own financial instruments at a fair value when determining the net income. However, the company has chosen not to apply the option and thus, only the assets and liabilities of the company are measured at fair value when other accounting guidance need too. 

The company’s consolidated financial statements often include the accounts of the parent company and its majority-owned subsidiaries. As indicated above, the consolidated financial statements are in line with the accounting principles that are generally accepted in the country that needs the management to make assumptions and estimates that have an effect on the amount of assets and liabilities that have been reported, and the disclosure of contingent liabilities and assets at the date of the financial statements. It also includes the amounts of expenses and revenues that have been reported during the reporting period. The estimates can be different from the actual results. 

Generally, the company provides its financial reports according to the generally accepted accounting principal or the GAAP of the US. However, the management also recognizes and believes that some non-GAAP financial measures give the users more meaningful financial information that needs to be taken into consideration when assessing the ongoing performance of the company. In addition, management also applies the non-GAAP financial measures when making operating, planning, and financial decisions, and when evaluating the performance of the company. However, the non-GAAP financial measures in the company need to be viewed in addition to, and should not be taken as an alternative when reporting the results of the company in line with the GAAP. The main reason why the company also reports in non-GAAP is to make a comparison with its competitors who can also be outside the USA as the company operates on a worldwide basis. It is worth noting that companies that are outside the USA such as British Airways perform their financial records using the IFRS. 

British Airways Company Information 

British Airways is one of the biggest international Airlines that mainly operated from the Gatwick and Heathrow. Based in London, it is also considered to be the largest airline in the United Kingdom that gives daily flights to more than four hundred cities around the world. The company’s financial statements are in accordance with the IFRS which it started to adopt in the year 2005. Before adopting the IFRS, British Airways PLC prepared its consolidated financial statements using the UK Generally Accepted Accounting Practice or the UK GAAP. After a regulation was passed in the year 2002 by the European Parliament, the airline started consolidating the financial statements according to the IFRS like all the other listed EU companies. It is worth noting that the adoption of the IFRS gives a representation of an accounting change and does not affect the operations that are ongoing or the group’s cash flows. The financial information that is currently presented by the company is often in IFRS format and is a reflection of differences in presentation between the IFRS and the UK GAAP. The differences are in the disclosure of the differences in realized currency that are separate in the income statement and the disclosure of some liabilities and assets on the gross as opposed to the net basis. The most significant changes that was seen by the company after transitioning to the IFRS was in its Employee Benefits (IAS 9) where under the UK GAAP it applied the recognition and measurement requirements of the SSAP 24 in accounting for the post-retirement and pension benefit in the financial statements, while providing disclosure under the FRS 17. IAS 19 that takes the balance sheet approach in accounting for the benefit schemes just like in FRS 17. Thus, on transition, the deficit which is similar to the disclosure that was previously under the FRS 17 that is recognized in the balance sheet. 

Similarities and Differences of the Accounting Concepts used by both Companies 

The main accounting concept that is discussed in the report while comparing the two companies include the accounting standards of the IFRS, the audit requirements, the reporting requirements, and pricing issues. 

Accounting Standards of the IFRS 

According to the accounting standards of both companies, there is the same expectation with regards to the kind of information that is presented on the statement of the financial position. Even though Coca-Cola also applied the US GAAP, both the GAAP and the IFRS associate the liabilities of the companies with past events that are often recorded when the obligations are probable and in cases where the amount of obligation are able to be estimated reliably. However, the IFRS offers a superior idea of probability that then gives a lower threshold than what is applied under the US GAAP. It means that both companies are in a better position to recognize liability under the IFRS. In addition, a company like British Airways is able to discount its liability under the IFRS than it would if it used the U.S GAAP. 

Both companies use the IFRS when accounting their inventory levels. As opposed to the U.S GAAP that allows the application of both the Last in , first-out (LIFO) and the First-in , first-out (FIFO) method of accounting for inventory, the IFRS only allows for the First in , first-out (FIFO). According to the financial reports of Coca-Cola Company, the inventory mainly consists of the raw materials, packaging which includes supplies and ingredients, and the finished goods. The company’s inventories are often valued on the basis of the First in , first out basis or the average cost. The application of the FIFO is mainly to help in improving the levels of comparison between the countries that the company operates in and removes the need to make adjustments of the LIFO inventories in the comparison analysis. Just in the same way, British Airways uses the FIFO as a method of valuing inventory. 

The Audit Requirement 

The main objective of an audit is to allow the auditors to come up with an opinion on the company’s financial statements. It is vital to note that the audit does not relieve the directors their responsibilities because they still have the responsibility of preparing and presenting the financial statements. It is not the responsibility of the auditor to prevent error and fraud but, is the responsibility of the directors. To be able to make an opinion, auditors need to carry out procedures that aim at getting evidence that would give them the reasonable assurance that the company’s financial statements do not have material misstatement. In addition, they make sure that the financial statements are in line with the relevant accounting and legislation standards. 

The audit requirement at Coca-Cola Company and British Airways both requirements include having an audit committee that represents and also assists the Board in meeting the oversight responsibility to the shareholders that relates to the integrity of the financial statements of the company and the reporting process. It also provides an oversight of the systems of financial controls and internal accounting, the annual independent audit, and the function of the internal audit. In addition, the committee often provides an oversight to the qualification of independent auditors and their independence. The committee often evaluates the functions of the external independent auditors and the internal audit function, including evaluation and reviewing the coordinating partner and the engagement partner. In doing so, the committees in both companies are expected to act independently while maintaining open and free communication between the independent auditors, the company’s management team, and the internal auditors. The audit committee also has the responsibility of producing the annual report to be included in the proxy statement of the company. 

More specifically, the audit committee at Coca-Cola is to ensure that the internal auditors are accountable to it and the Board (Coca-Cola Company, 2017) . It also has the authority and the responsibility to evaluate, hire, and replace the independent auditors. Just like in Coca-Cola Company, the Committee in British Airways surveys the work embraced by the external auditors and every year evaluates its autonomy, objectivity, and execution. In doing as such, it considers applicable regulatory and professional requirements and the association with the external auditors as a whole, including the provision of services that are not related to the audit. The Committee screens the compliance of the auditor with the relevant regulatory, professional, and ethical guidance. 

Reporting Requirements 

The reporting requirement at Coca-Cola Company requires it to file the financial reports with the Securities and Exchange Commission. It is also expected to publish on its website the annual report on Form 10-K that discloses the annual financial performance of the company. To ensure the trust of stakeholders has been maintained, the company publishes various reports that relate to the performance of the company in the various aspects of the business, not only the financial performance. The reports reflect the company’s accomplishments and performance in the areas of integrity, safety, quality, community support, environmental support, innovation, marketing, and workplace rights. The reporting requirement at BA is in accordance with the IFRS which advocates for the financial statements to be prepared information in a more innovating and meaningful manner so as to improve their communication. 

Pricing Issues 

Pricing issues have become crucial aspects in both companies considering the fact that they are operating in very competitive environments. Coca-Cola’s main competitor in the US market is PepsiCo even though PepsiCo is more segmented while the Coca-Cola Company is mainly active in beverages. The company does not only face competition in the United States because Kola real gives the company competition in Mexico. In France, the major competitor is Corsica Cola while in Sweden, Julmust is considered to be the biggest competitor. Finally, the France brand called Mecca Cola and the British Qibla Cola are famous in the Middle East. Apart from these competitors, many customers become conscience about their health and thus the company also faces increased competition from other products that include sports drinks and water which have low levels of calories. However, the company has tried to reduce the competition by introducing the Coca-Cola Zero products. In addition, it enjoys brand equity, meaning that the company has brand equity meaning that it is considered to be a favorable brand. It has a competitive advantage that makes it have bigger in terms of the market share and the sales. Finally, it has a reputation that gives it an advantage over its competitors. Just in the same way, pricing issues is vital for British Airways which faces stiff competition from low-cost airlines. The pricing issues for both companies are a little different because, in the case of Coca-Cola, the company enjoys a high market share and loyal customers. For this reason, its price is mainly not affected by the competition, but it tries to maintain quality in its products. On the other hand, British Airways faces a high level of competition from low-cost airlines, which in turn, affects the pricing strategy that it applies ( Bloomberg Businessweek, 2014). Considering that the company’s greatest challenge is the competitors, it concentrates on differentiating itself from the competitors so that it maintains its pricing levels. According to GröNroos (2000) it focuses on premium and high-yielding passengers who mainly expect quality services from the company. However, maintaining the quality is also a challenge because it is hard to meet the expectations of all of its customers because their expectations keep changing. 

Conclusion 

From the analysis, it is evident that there are similarities and differences in the accounting systems of foreign and the home country. The similarities include the fact that the liabilities of the companies include past events that are often recorded when the obligations are probable and in cases where the amount of obligation are able to be estimated reliably. Another similarity is in the audit requirements where both countries require companies to have an audit committee that represents and also assists the Board in meeting the oversight responsibility to the shareholders that relates to the integrity of the financial statements of the company and the reporting process. The committee also provides an oversight of the systems of financial controls and internal accounting, the annual independent audit, and the function of the internal audit. In addition, it usually provides an oversight to the qualification of independent auditors and their independence and often evaluates the functions of the external independent auditors and the internal audit function, including evaluation and reviewing the coordinating partner and the engagement partner. In doing so, the committees in both companies are expected to act independently while maintaining open and free communication between the independent auditors, the company’s management team, and the internal auditors. The audit committee also has the responsibility of producing the annual report to be included in the proxy statement of the company. The differences are mainly seen in the pricing strategies. It is vital for Companies to understand the differences in the accounting systems to ensure that they comply with the rules and regulations of the countries that they operate in. 

Overall, the research clearly shows the importance of understanding the reporting and accounting measures to ensure compliance. 

References 

Bloomberg Businessweek, (2014). Company Overview of British Airways Plc (UK). [Online] Available at: http://investing.businessweek.com/research/stocks/private/snapshot.asp?privcapId=256565 [Accessed 12 06 2019]. 

Coca-Cola Company. (2017, 06 12). Audit Committee Charter . Retrieved from Coca-Cola: http://www.coca-colacompany.com/investors/audit-committee-charter 

Coca-Cola Hellenic Bottling Company. (2017, 06 12). Financial results and presentations . Retrieved from Coca-Cola: http://coca-colahellenic.com/en/investors/financial-results-and-presentations/ 

Graham, A., 2013. Managing Airports 4th Edition. S.l.: Routledge. 

GröNroos, C., (2000). Service management and marketing: a customer relationship management approach. Chichester : Wiley.