MILESTONE ONE ACCOUNTING STANDARDS (SEARS) 1

Milestone one: Accounting Standards (Sears)

Prof Piper

Ismail Amar

Southern New Hampshire University

March 29, 2016

Accounting Standards: Sears

Stockholders’ Equity

  1. Initial financial start: :

At its inception, Sears had to seek for financial capital if it was to operate sustainably. The organization was started as a private company before it went public. Its initial capital was a contribution by its pioneers Warren Sears andAlvah Curtis in 1886. Through partnership, the pioneers contributed equity capital to the venture before it grew later and went public as a limited liability company (Shamrock, 2012).

  1. Balance sheet:

Since 2014, sears have been operating with equity deficit after eroding its entire equity contribution through losses. This is a very poor scenario and it indicates the exposure of the organization to the risk of insolvency. The equity deficits has increased from -$1.49 million in 2014 to $-4.141 million in 2016. This is in contrary to the performance of other key players in the industry. For instance, Wal-Mart stores have high level of equity indicating minimal exposure to the risk of insolvency. It had $ 55.846 million in equity in 2014 as compared to $63.292 million in 2016. Sears is thus performing poorly as compared to the industry where the average is positive (Shamrock, 2012).

  1. Dividends:

Different organizations adopt different dividend policies. Some firms have a no dividend policy, fixed dividend policy as well as constant dividend policies among others. Sears has an adopted a no dividend policy. Under this policy, the shareholders do not receive dividends and depends on capital gains for reward. It will be difficult for Sears’s shareholders to even gain from such capital gains considering the poor financial performance of the organization something that has led to capital loss.

Income Measurement/Revenue Recognition

  1. U.S. GAAP and IFRS:

Today, many countries have converged accounting standards with International Financial Reporting Standard. International Accounting Standards 18, as provided by IFRS provides guideline on how revenue is to be recognized from sale of goods and services. The revenue is usually measured as per the fair value of the services or the goods that are received. Revenue from sales should only be recognized if the following criteria have been met

  • Significant ownership of the good or service has been transferred to the buyer. For instance in sears, a customer must take the product and leave the premises before such revenue can be recognized under IFRS
  • The seller does not retain control over the goods that are sold.
  • The revenue presented can be reliably measured. For instance, it must be easy to tell the price of goods in sears before the revenue can be recognized.
  • Economic benefits of the product does flow to such a buyer.
  • The costs incurred are measured in a reliable manner (Shamrock, 2012).
  • Under IAS a number of requirements are needed before revenue is recognized. These requirements are as indicated below.
  • The revenue can be reliably measured.
  • There is high probability that economic benefits flows to the seller.
  • The stage of service completion by the balance sheet date can be easily measured.
  • Costs to be incurred can be reliably measured.

The above requirements differ slightly with requirements under US GAAP. Under US GAAP, revenue is recognized as per the delivery of goods. Under IFRS delivery is not sufficient determinant of recognition. The buyer must have gained control of the product. For instance in sears, shoppers must have control of items they buy from the retail store before revenue is recognized by the company. When it comes to services such as software services, US GAAP requires that revenue be spread across the service period while under IFRS accounting entities can recognize the full amount upfront.

  1. Revenue:

Accounting entities put a lot of efforts in boosting their revenue levels and profitability. Sears reported a decline in sales volume over the past three years. The past two years revenue level is as indicated in the diagram, below:

Source: Searrs (2016)

As indicated above, the organziation reported a decline in sales volume from $31.198 billion for the year ended january 2015 to $ 25146 million for the year ended January 2016. This indicates a 19.4% decline in sales volume. This is attributed to increased comeptition in the retail sector.

Unearned Revenue

Unearned revenue uis reported as a liability ot the organization. It refers to the revenues that are eaned in advance of execution of the project. When cash for the uneanred revenue is reduced. Entities are excpected to debit the unearned revenue account to reduce it. They are also expected to credit the revenue account to increase sales. In the balancesheet, sears discount report any unearned revenues. This is mainly because it makes most of its sales in cash hence reducing receivables significantly. At the same time, it does not offer services that customersneed to pay for in advance. It is ussuallusually a cash and carry business however custoemrs purchase the entity’s products on the store and carry home. From IFRS it is an evident recognition of unearned revenue that should be carefully handled to avoidconfusion in treatment of such transactions in the financial statements.

References

Searrs (2016). Investors. Retrieved from

Shamriock, S.E. (2012). IFRS and US GAAP.Hoboken, NJ: John Wiley & Sons.