Daniel J.

Ruether
ACCT 701
Case Analysis
May 2, 2011

Xerox Corp the second largest player in the S&P Office Electronics Sub Industry, behind

Canon, Inc. Xerox was founded in 1906 and is focused on providing document equipment such

as printing and publishing systems, digital copiers, laser and solid ink printers, fax machines, and

digital multifunctional devices. Xerox is headquartered in Norwalk, Connecticut. In February

2010, Xerox completed its’ acquisition of Affiliated Computer Services for nearly $6.4 billion.

The ACS deal substantially added to Xerox’s service capabilities and grew the company from

57,000 to 136,500 employees. Xerox, a publicly traded corporation, is required to prepare its

financial statements by following the rules and procedures for reporting under the Generally

Accepted Accounting Principles (GAAP). GAAP provided by the FASB is a codification of

how corporations prepare and present their business income and expense, assets and liabilities on

their financial statements. The case analysis set forth will be on some of the technical

accounting concepts and practices used by Xerox Corp and the subsequent impact to the public.

In preparing their consolidated financial statements and accounting for the underlying

transactions and balances, Xerox applies various accounting policies. Some of the technical

practices that I will touch on are Revenue Recognition for Leases, Revenue Recognition for

Services – Percent of Completion, Allowance for Doubtful Accounts, Legal Contingencies and

Goodwill.

For the 2010 fiscal year end, Xerox, reported $3.857 billion in equipment sales revenue.

Approximately 40% of their equipment sales revenue is related to sales made under bundled

lease arrangements. Xerox’s accounting for leases involves specific determination following the
lease accounting standards put forth by the FASB. If a lease qualifies as a sales type capital

lease, equipment revenue is recognized as sale revenue upon delivery or installation of the

equipment as opposed to pro-rated over the lease term. This allows Xerox to report realized

revenue on their income statement before the lease contract has been fully satisfied. If not taken

into consideration potential investors and lenders may have an inaccurate depiction of the current

revenue stream of Xerox.

For the 2010 fiscal year end, Xerox recognized $270 million of revenue using the

percentage of completion accounting method. The percentage-of-completion accounting practice

involves recognizing revenue on a current cumulative cost to estimate total cost basis, while also

incorporating a consistent profit margin over the period. Revenues on certain fixed-price

contracts where Xerox provide information technology system development and implementation

services are recognized using the percentage-of-completion approach. These type of products

and services require a significant amount of time to complete, as a result it is management’s duty

to reasonably estimate the cost and revenue. If changes occur during the delivery, revisions need

to be made to accurately reflect the income and expenses for the period. A risk to potential

investors and lenders are inadequate estimates of cost and revenue reported under the percent of

completion accounting method.

With any corporation that provides products on credit, they must record allowances for

doubtful accounts. Xerox recorded $188 million in bad debt provisions for the 2010 fiscal year

end. Measurement and determination of allowances for bad debts are based on historical loss

experience, as well as, current market conditions and individual customer collection issues. At

any time, the market or the credit strength of Xerox’s customers can change. One risk to the
investors and lenders is whether Xerox has allocated a reasonable amount to account for

potential bad debts.

For the 2010 fiscal year end, Xerox reported $1.274 billion for tax and labor

contingencies. Currently, Xerox is involved in various litigations with the Brazilian government

and disputes with former employees. The current reserves for contingency loss are determined

by legal counsel based on probable loss. Xerox, determines whether an estimated loss from a

contingency should be accrued by assessing whether a loss is deemed probable and can be

reasonably estimated. A risk to investors and lenders is whether Xerox’s legal counsel has

adequately estimated the probable loss.

During the 2010 fiscal year, Xerox acquired ACS, through this acquisition Xerox also

purchased a significant amount of goodwill. Goodwill is the difference between the purchase

price of the acquired company and the fair value of the reported identifiable net assets. A risk to

Xerox, investors and lenders is whether the fair value of the acquired company is valued

accurately. Xerox, reviews its goodwill for impairment annually and is based on discounted cash

flow models derived from internal forecasts and assumptions. The estimated fair values are

believed to be reasonable; however, if it is determined that the estimated goodwill is overstated

then Xerox must report an impairment loss on goodwill. Therefore, if the estimated goodwill

that was acquired through the ACS transaction was not estimated correctly Xerox, the investors

and lenders could experience significant losses.

The technical accounting practices and principles discussed above are relevant to the way

Xerox prepares their financial statements, and their subsequent financial stability and future

outlook. The FASB Codification is the single source of authoritative nongovernmental U.S.

generally accepted accounting principles. These principles are the outline for corporations on
how to develop their financial statements and the specific elements (i.e. Revenue Recognition,

Allowance for Doubtful Accounts, Legal Contingencies and Goodwill.) Within the codification

there are many different principles that allow corporations to prepare their financial statements.

It is the responsibility of the investor and lender to interpret the information provided. The

general objective of the FASB was to create financial reporting that could be useful to present

and potential investors and lenders. The FASB Codification established consistent accounting

standards for financial reporting. This increases investor and lender confidence in the financial

reporting of companies and allows for comparability. The FASB Codification allows for a more

accurate depiction of the future cash flows, the economic resources and income of the company.

Consequently, the risks mentioned above are lessened by the FASB Codification concepts and

principals. This allows potential investors and lenders to make better decisions in regards to the

financial stability and strength of the company.

 Works Cited

"FASB: Financial Accounting Standards Board." FASB: Financial Accounting Standards Board.

N.p., n.d. Web. 23 Apr. 2011. <http://asc.fasb.org/>.

Nikolai, Loren, John Bazley, and Jefferson Jones. Intermediate Accounting. 1967. Reprint.

Norwalk: South-Western, 2010. Print.

"Xerox - Wikipedia, the free encyclopedia." Wikipedia, the free encyclopedia. N.p., n.d. Web. 23

Apr. 2011. <http://en.wikipedia.org/wiki/Xerox>.

"Xerox Application of Critical Accounting Policies 2010." Xerox Document Management,

Digital Printing Equipment, Business Process Outsourcing. N.p., n.d. Web. 23 Apr.

2011. <http://www.xerox.com/annual-report-2010/financial-analysis/accounting-

policies.html>.

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