An Overview Of The Financial Position Accounting Essay


A business model explains the logic of how a company creates, delivers, and captures value. Along with the globalization and the development of the Internet, as a telecom company, Huawei facing both challenges and opportunities. Huawei's business strategy can easily describe as innovation and expansion. Huawei has over 140,000 employees that around 46% of them works in the research and development sector. It also has 20 researches and development institutes in countries including China, Germany and the United State. Huawei is also good at capturing profit from its innovation, by finding investment and partnerships all over the world, it provides services to 90% of the world's 50 leading telecoms company.

According to the IASB, 'Asset is a resource controlled by the entity as a result of past events and from which future economic benefits are expected to flow to the entity' There are two types of assets recorded on the balance sheet, current asset and non current asset. Current assets are short-term assets that are expected to be transformed into cash within a year. In the huawei's annual report, current asset includes inventories, trade and other receivables, financial assets held for trading, loans receivable and cash & cash equivalent. Inventories are merchandise held for resale or for use within a business. Huawei's inventories consist of raw material, work in progress, finished goods and goods delivered but not completely installed. Also, huawei's inventories are measured by using the smaller value between cost and net realisable value which is a consequence of the prudence convention. Next is Cash & cash equivalent. Cash equivalents are defined as assets that are readily convertible into cash. Huawei's Cash and cash equivalents include cash, cash at bank and deposits with banks. Cash plays an important role in a business because its provides a company with solvency and liquidity, helping a company to survive in bad economic condition. Financial assets held for trading were purchased for the purpose of short-term profit making which is measured at its fair value through profit and loss account. In huawei's annual report, financial assets held for trading mainly comprise investments in wealth management products issued by banks. Account receivable is an amount due from a customer, in huawei's annual report, account receivable are divided into loan receivables and trade and other receivables. Account receivable within a year is counted as a current asset and it over a year as a non-current asset. The provision for doubtful debt is reported as a deduction from trade receivables.

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Non-current asset is long-term assets which are expected to be used for more than a year. Non-current assets of huawei consist of property, plant and equipment, intangible assets and goodwill, trade and other receivables, loan receivables and so on. An intangible asset is defined as a non-monetaery asset without physical substance. An intangible asset can only be recognised if cost of the asset can be measured numerically and the future benefits it creates would attributes to the asset of the company. (IAS38 ) Huawei's intangible assets include goodwill, software, patents and trademark. While goodwill is often considered as an unidentifiable asset, it is listed as an asset on huawei's balance sheet because this goodwill is acquired from the purchase of Symantec stake in the joint venture for $530 million. Goodwill also provides a company with potential business opportunities and assistance from banks and government. In addition, amortisation of intangible assets are charged to profit and loss account on a straight-line basis over the assets' useful lives. Investments in associates and jointly controlled entities are one of huawei's core strategy. There entities has its autonomous right in deciding financial and operating policies, but it receives significant influence from its holding company. Huawei has focused on enlarging market share and developing its mobile technology for a number of partnerships and purchases. Eg. In 2008, Huawei constituted a joint venture with a UK submarine telecommunication company, Global Marine Systems, for developing undersea network equipment. Property, plant and equipment are fixed asset which is used in production, lending and administration. Huawei's property, plant and equipment mainly include land and buildings, machinery and electronic equipment, construction in progress and leasehold improvement. In regards to these assets, the property, plant and equipment have depreciation. Depreciation is the allocation of amount of cost of assets over its useful life. In Huawei's annual report, depreciation is calculated by using the straight line method (the cost of property, plant and equipment less its estimated residual value over estimated useful lives). Eg. Buildings are estimated to have 20 years of lives and estimated rate of residual value is 5%. Although Huawei and most of the big companies are using the straight-line method of depreciation, the straight-line method is not suitable for some fast growing industries eg.Telecommunication. Withing the development of technology, straight line method becomes less efficient and realistic.There are definite reasons to support this idea. First, considering the change in inflation and interest rate and increase in maintenance costs, straight line method is not scientific in theory. Actually, profit is being moved factitiously in advance. Secondly, within the upgrading of machine, even if the machine does not reach its useful life, it also needs to be eliminated. If the straight line cannot show the realistic image of the decider, they would make wrong decisions such as keeping the old products, rather than updating it. Eventually they will miss the business opportunities and let the profit down. However, if we calculated the depreciation of something with relatively equal value of depreciation eg building. Straight line method works.

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In 2011, Huawei's annual sales revenue amounted to CNY203,927 million(USD32,396million), an 11.7% increase over the previous year. Among them, approximately 32% of the Chinese market and 68% from the overseas markets. Huawei's business is to provide products, solutions and services. Revenues are principally generated from its three business segments. Telecom Networks, building telecommunications networks; Global Services, consulting services for enterprise; and devices, manufacturing electronic communications devices. In addition to these, Huawei actively participate in emerging disruptions such as cloud computing solutions. As of the start of 2010, Huawei's customers include BT, Vodafone, Motorola and T-Mobile.

Considering the resource of finance, it can be clearly classified as internal and external sources. In terms of internal resource, retained earnings are an important source of finance for the company but the reinforcement of profits may disagree by shareholders who're willing to receive dividend. However, most shares are believed to be owned by the founder, run and his managers. So decision making does not need to require the compliance of other parties. If profits of Huawei can retain within the company, rather than being distributed to share holders as dividends, the funds of Huawei are flexible and abundant.In terms of external resource, considering Huawei is not a listed company. Its main external resources are from bank borrowing including unsecured bank loans and intra-group guaranteed bank loans. Moreover, Huawei is criticized for trying with the Chinese authorities which the state owned banks provided 'unlimited' loans to Huawei in last 24 years. Another way of Huawei's external resource is to issue shares to its employees. In its annual report, Huawei claims itself as a private enterprise which the shares are owned by more than 65,000 employees inside the company. In fact, issuing shares to its own employees is very efficient which Huawei has raised its finance by RMB27 billion in the last 7 years. Finally, in Oct 2012, Huawei is considering going public. The purpose is to reduce the risk of internal shares and improve its transparency in order to get contracts in the USA market. Also, this will be the new financial resource in the future.

In conclusion, this essay clearly introduced and evaluated main assets that Huawei needs to persue its business model, explore the technology it used to deliver the good and service, and analyse Huawei's resource of finance. Huawei's annual report provides useful information to whom may be interested in it, and it strictly obey the accounting conventions. Plus I researched evaluations from other parties in order to give an objective view on Huawei. Overall, Huawei is an ambitious company with outstanding advantages and disadvantages.