Letter of Transmittal
To the Modern Medical Ltd,
This report covers the historical events that led to the formation of accounting and financial reporting bodies in the United States of America. The report also discusses the political processes and cultural factors that that have influenced the formulation of accounting and financial reporting standards in U.S.A. Covidien Company financial and non-financial information is also analysed in the report.
Covidien is a public company incorporated in the United States of America. The company operates in a pharmaceutical medical business environment. The mission of Covidien Company is ‘‘to create and deliver innovative healthcare solutions, developed in ethical collaboration with medical professionals, which enhance the quality of life for patients and improve outcomes for our customers and our shareholders’’. This company is publicly listed in the American Stock Market (United States Securities and Exchange Commission 2011).
Letter of transmittal
Financial reporting environment in the United States of America
Description of financial and non-financial reporting of Covidien Company
Financial Reporting Environment
Financial reporting is a process of communicating financial information of public or private, government and non-profit organization to the public (Alexander & Britton 2004). Interest groups require financial information when making investment decisions. From these information interest groups are able to compare financial performance of different companies. Therefore, it is of importance that standard financial reporting is adopted and used by the private and public companies as well as not-for profit organizations. Standard financial reporting is important in providing this information to the interest groups (Alexander & Britton 2004). The Generally Accepted Accounting Principles (GAAP) is a body that is charged with the responsibility of facilitating the standardization of financial reporting rules. GAAP provides both specific and broad rules that companies should use when reporting financial information to the public in the United States of America (Kieso, Weygandt & Warfiled, 2012).
Financial reporting environment in the United States of America
The great depression era witnessed the crash of United States of America market stocks due to the inflated prices of stocks (Spiceland, 2009). This increased pressure on the establishment of standard accounting procedure to curb any future effects to the companies operating in the United States. This led to the formation of Securities and Exchange Commission (SEC) which was mandated to set accounting and reporting standards. All publicly trading companies were expected to comply with the set rules that were developed by SEC. SEC, however, delegated the responsibility to American Institute of Certified Accountants (AICPA), a private sector entity, but retained it authority in setting standards (Spiceland, 2009).
AICPA was the first body to start setting accounting standards in the United States. AICPA formed Committee on Accounting Procedure (CAP) that facilitated resolution of specific accounting and reporting problems. CAP developed no clear financial accounting framework for more than twenty years that it was in operation. CAP committee was later disbanded and replaced by Accounting Principles Board (APB) that drew members from AICPA (Spiceland, 2009). The committee issued various Interpretations, four statements and thirty-one Accounting Principles Board Opinions (APBOs). APBOs provided a theoretical framework that solved specific accounting and reporting problems. FASB is the body that is currently setting accounting standards in the United States (Spiceland, 2009).
The government and the industry never spared APB inability to work on financial accounting and reporting and its inability to solve the accounting issues within the required timeframe. The body was also criticized for not representing all groups and that all decisions were only made by the accounting professionals. This instigated the formation of the Financial Accounting standards Board (FASB) in 1973. The membership of the FASB to date is composed of seven permanent members and various interest group members that is professional accountants, accounting educators, companies and government.
FASB established an Emerging Issues Task Force (EIFT) in 1984 to spearhead timely responses to any new financial reporting issue (Gibson, 2012). EIFT has representation from FASB, public accounting bodies, private industry and SEC observers. FASB doesn’t directly engage in the activities of EIFT but only intervenes when a common consensus is not reached by EIFT. FASB is mainly concerned with the crafting on a conceptual framework that deals with provision of structures that determine current and future financial reporting standards. Additionally, the Government Accounting Standards Board (GASB) was created in 1984 to develop accounting standards for local and state government (Gibson, 2012).
The general objective of reporting financial statements is to provide information about the financial position of the company to the public. There exist differences in the way this reporting is done from one country to another. These differences are brought about by the varied national policies of the countries in which the organizations providing the financial report operate. One of the major causes of the differences is culture (Alexander, Britton & Jorissen, 2007).
Cultural influence has played a crucial role in the shaping of financial reporting policies and rules in the United States for a long period of time (Sharan, 2006). Culture is an important issue that needs to be considered because of its impact on the functioning of accounting systems. The degree of society conservatism and level of secrecy is among the major influences of culture on accounting practices in the United States. Furthermore, people’s attitude towards the company and the accounting profession has proved to have a profound impact on the formulation accounting standards in the U.S.A (Schiff, 2006).
The attitude that the accounting profession is a high status job in the United States of America has increased over the years (Schiff, 2006). People no longer view accounting profession as a low profession. People highly respect accounting profession all over the country in recent days. The increased college enrolment in this profession over the years has contributed positively to the development of accounting theory, procedures, and practices. The level of fraudulency in the accounting industry has greatly reduced over the years. The society hence accepts the accounting policies and procedures most easily than the past (Schiff, A 2006).
Political influence on the process of setting accounting and financial reporting is inevitable (Schroeder, Clark & Cathey 2010). The accounting standards usually have different effects on various groups in society. The setting up of new or review of accounting standards must consider the economic effect of the change and its impact on the external user of the information being reported. The standards set should have desirable economic impact on the interest groups in the society, government and investors. Examples of economic consequences that involved a political process to resolve are the proposed changes in accounting for the health care benefits for postretirement of employees and accounting for employee stock options (Spiceland, 2009). These two economic consequences elicited heated debates by various companies until FASB reacted by making adjustments to the framework.
To protect the interests of the managers, investors and the general public, the FASB from time to time engage in constituting accounting standards through a political process. According to Ingram and Albright (2007), the accounting standards need to be rationalized so as to be responsive to the interest groups. It is due to these reasons that political influence is inevitable in the setting of accounting standards in the United States of America.
FASB is required by law to follow specific steps when formulating accounting standards. For any existing standards to be reviewed or new standards to be formulated, the bodies must hold a public hearing after an evaluation of the accounting issues that need to be addressed (Ingram & Albright 2007). Responses are collected from the general public, managers and investor to determine their view regarding the accounting concept. The managers are usually big government and private corporations that have greater influence on this process. The responses are evaluated by the FASB which leads to the creation of accounting standards. The board is required to issue explanation on how it is going to treat any accounting transaction that can yield an economic consequence. This is a typical political lobbying process hence it evident that the political process plays a major role in shaping the accounting standards in the United States of America (Ingram & Albright 2007).
Harmonization of accounting standards is inevitable in the development of single globally accepted accounting standards. According to Fischer, Taylor and Cheng (2012), harmonization of accounting standards across the world is essential in improving the comparability of financial information among various multinational corporations in the world. The three are of the opinion that harmonization of accounting standards enable the multinational corporations to effectively check the efficiency of its subsidiaries in different parts of the world. Furthermore, it helps in the efficient allocation and regulation of capital by the international capital markets. The harmonization of the accounting principle is also critical in providing valuable financial information to customers and supplier or investors about business opportunities available on an international scale (Fischer, Taylor &Cheng 2012).
With the world becoming more economically integrated, many companies are operating in different countries across the world. Companies are, therefore, required to understand the different countries regulations on customs laws, and accounting and reporting standards of foreign nations they operate in. There exist differences in the way accounting and reporting of financial information among the countries is handled. In some countries, the accounting standards are undertaken by private bodies whereas the government exclusively determines the process in other nations. These differences have profound effects on companies operating in different since they have to comply with the accounting standards of the foreign countries they operate in (Spiceland, 2009).
To address this problem, the international Accounting Standards Committee (IASC) was established to develop global accounting standards in 1973. IASC was then reorganized to international Accounting Standards Board (IASB). The structure of accounting standards should in line with the FASB vision of providing optimal standard setting environment (Camfferman &Zeff 2007). IASB is obliged to streamline the United States accounting standards to the international accounting standards with a view of developing a single set of global accounting standards. The body has so far endorsed and revised forty-one international accounting standards known as the International Financial Reporting Standards (IFRSs) (Spiceland, 2009).
FASB and IASC ratified the Norwalk Agreement depicting the bodies’ commitment to streamlining U.S GAAP and IFRIS. Through this agreement, the boards agreed to eliminate differences in accounting and financial reporting in view of coming up with future standard setting of accounting and reporting between countries across the world. These bodies work on the similarities and differences towards narrowing the differences and set international standards to be used in the future (Camfferman & Zeff, 2007).
The outcomes of the convergence of the accounting standards may present advantages or disadvantages to the companies. The U.S.A corporations are likely to benefit by raising more capital from foreign subsidiaries. The move is also likely to stimulate more investment by local and foreign investors since the comparability of financial reporting standardized across the globe. The negative outcome could result from resistance of companies that do not have subsidiaries in foreign countries due to significant costs that are likely to be associated with the convergence and adoption of international financial accounting and reporting (Spiceland, 2009).
Description of financial and non-financial reporting of Covidien Company
Covidien is a medical company incorporated in the United States of America that is engaged in the development, manufacture and sale of healthcare products. The company manufactures products that are majorly used in hospitals, ambulatory centres, and alternate healthcare providers. Intensive research is carried out by the company to ensure production of effective and safe pharmaceutical products. The company owns various manufacturing centres across the handling the manufacturing process. Majority of these manufacturing centres are located in the United States and Europe plus others in Asia Latin America (United States Securities and Exchange Commission, 2011).
Under the Securities and Exchange Commission regulations, the company provides quarterly, annual, and special reports, proxy statements and other relevant information to the public and investors. The investors and other interest group can access the company financial information through SEC special office or through the SEC or Company official websites. Upon request by the shareholders, the company issues this documents to them. The information provided by the company also includes audit reports and reports and incorporation documents.
Various factors present risks to the Covidien Company in its business environment. Technological changes present a major risk to the operation of the company in the future. These changes may unable the company to effectively introduce and sale new healthcare products. The government reforms in the taxation systems of medical manufactures may also have a profound effect on the profitability of the company in the future. The uncertainty with regard to availability of raw material for the manufacture of the pharmaceutical company poses a greater challenge for the entire business in the future. The foreign exchange rates coupled with worsening economic conditions in the United States is also a point of concern for the company (United States Securities and Exchange Commission 2011).
In order to avert the risks, the company has a sustainability roadmap that ensures the company operations are maintained. The company has regularly been engaged in strategic acquisition of other companies in to consolidate its business base. Furthermore, the company has encouraged divestiture of non-performing business unit with a view of reducing the cost incurred by the company (United States Securities and Exchange Commission 2011).
The FASB GAAP regulations require that financial reporting should disclose relevant to the operation of the business to the general public and investors. Covidien Company has adequately complied with the requirements by disclosing information relating profitability of the company. The company has also disclosed share earnings the balance sheets and cash flow statements to the shareholders and other interest group. By presenting the end year annual reports and other information to SEC the company has adequately met the GAAP regulation on financial reporting.
Financial reporting is very essential in providing financial information regarding the performance of companies and organization to groups with a vested interest in them. Therefore, it is necessary that the information provided is consistent across different sectors and countries. This is important in providing reliable information on the viability of the company which is an attracting feature for investors and creditors. It will serve as an important point to have standardized accounting and financial reporting procedures globally.
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