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Purpose of Financial Reporting & Conceptual Framework

University: London School of Business and Finance

  • Unit No: 13
  • Level: Undergraduate/College
  • Pages: 18 / Words 4386
  • Paper Type: Assignment
  • Course Code: MBA503
  • Downloads: 664
Organization Selected : Hilton Hotel


Financial reporting is the process by which company analysed their financial situations and interpret that business information by preparing financial reporting. This financial information of the company will release to public and the users of the company. This present report will cover purpose of financial reporting and conceptual and regulatory framework of financial reporting. Further, an explanation is provided of the stakeholders of the business and their benefits from financial information. Values of financial reporting for meeting goals of the organisation is also discussed. Explanation of main financial statements as per IAS 1 and difference between international accounting standards and international accounting standards is provided in this report. Further, in this report benefits of IFRS with compliance of degrees with IFRS by organisations is to be discusses in this report.

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1.Purpose of financial reporting

Main purpose of financial reporting is to provide company's overall decision (Bushee, Goodman, Sunder, 2018). It also provides two primary decisions which includes decision- making process to managers and second it provides information about the financial health of company to its stakeholders. It helps to develop effective decision making by concerning company's objectives and overall strategies. There are mainly five types of financial statements which prepared by companies and that include-

  • Income statement
  • Balance sheet
  • Statements of cash flow
  • Statements of change in equity
  • Noted to financial statements

Main essentials of financial statements includes- assets, liabilities, equity, revenues, and expenses. Each individual statement of financial reporting provides a different information to user of the company. Main purpose of financial reporting are as follows-

  • It provides an overall financial position of the company- main purpose of financial reporting is to provide an accurate financial information of the entity. Mainly guidance is provided by accounting boards to make financial statements which is IAS ans IFRS. These financial statements help managers of the company to develop an effective decision by concerning reports. These mainly also helps users of the company by which they will able to judge overall financial position of the company.
  • It assists existing and potential investors- it helps investors in taking decision to their target companies about whether to increase investment, or to withdraw that investment in the company (Naranjo, Saavedra and Verdi, 2018). For investors financial statements are the main source to decide the investment objectives in the company. It provides them information regarding financial stability of the company therefore both existing and potential investors of the company will analyse financial statements regarding their investment decision.
  • Provides prospects for future net cash inflows- financial reporting of the organisation not only provide financial stability information of the company but it also predicts future prospects of the company.

2.conceptual and regulatory framework of financial reporting and importance of qualitative characteristics for financial reporting

Conceptual framework to prepare financial reporting is the most important process for an organisation which underlines a particular concept for the preparation and presentation of financial statements. Framework of the financial reporting will address the objectives of financial reporting, provides a qualitative characteristic which is useful financial information of the company, it also covers financial statements of the reporting entity, elements of financial statements, recognition and measurement also addressed in framework of financial reporting. Regulatory framework of financial statements provides an effective procedure to prepare financial reporting.

Relevance- information which is relevant must be capable of developing decisions which is helpful for users of the company (Conceptual Framework for Financial Reporting, 2018) Financial information is predictive when it provides information which is confirmatory and valuable for company as well as for users.

By regulatory framework company will able to provide faithful presentation to their investors and public of business market. Preparation of financial statements are developed in accordance with regulatory frame work provided by accounting standards boards so that it develop a faithful information on which it users can relay

Qualitative characteristic for useful financial information

Qualitative information in financial reporting helps to identify the types of information which is useful in developing decisions for the company. Qualitative characteristic is provided an equal information of financial reports of the organisation. Financial reporting will only be effective when they represent faithful information in their statements. Therefore, there are mainly four fundamentals of qualitative characteristic which are as follows-

  • Comparability- information which is provided by entity in their financial report will only be useful when it compared to other entities with similar information. By developing comparability it enables users to develop understanding of similarity and make differences of items.
  • Verifiability- financial report which is verifiable provides an information to users that statements presents a faithful information in the financial report (Qualitative Characteristics of Financial Information, 2013). Information which is provided in financial information must be free from material errors and it will not mislead the financial statements is the qualitative characteristic. These characteristic particularly provides relevant information which does not influence economic decisions of the users of the organisation.
  • Timeliness- it means that information which is provided in financial statements are available in time and is capable to develop any decision in the company. Financial reporting must have to prepare in upgraded time because late submission of report will consider as less useful by the users of the organisation.
  • Understandability- according to this point financial report will provide effective classification, present report which is clearly understandable. This understandability means that information provided in financial reporting is clearly presenting accurate information and also providing accurate supplied information which needed to assist in clarification.

3.main stakeholders of organisation and their benefits form financial information

There are many users of financial statements which is produced by organisation. Objective of providing information is to provide financial stability of the organisation among its users and also among public of business market. The list of financial information are as follows-

  • company management-Management team needs information to understand profitability, liquidity and also cash flow of the organisation. So that they will able to develop decision regarding operational and financial of business.
  • Competitors-By analysing financial statements of competitors, company will able to attempt gain which according to financial statements to evaluate financial condition (Chychyla and et.al., 2018).
  • Customers-To measure which supplier is selected for major contract, financial statements of the company's are review by the customers which will provide financial ability of supplier in providing goods and services for long term relations.
  • Employees-To develop employee involvement, organisation has to provide financial statements with detail explanation of document. It helps employees to develop an understanding regarding business policies.
  • Government-Government also provide financial statements just to analyse that whether company has paid appropriate amount of tax or not. Juri diction in which company is located are always required financial statements of the company by which helps them to measure amount to tax paid by company is correct or not.
  • Investors-Investors also provide financial statements because they are the owners of the business and it is their right to measure that the amount which they have invested is used properly in business or not. Mainly investors are the owners of the company therefore, it is necessary for company to provide their financial reports to the investors of the organisation.
  • Lenders-Entities which provides loan to organisation will also require financial statements by which they will able to understand ability of the company to pay back the loans (Cheng and et.al., 2014). These entities will make sure about the overall financial stability of the organisation in business market. This analysis helps them to measure capability of company in repaying their loans.
  • Unions-Members of union also require financial statements of company just to analyse that company has that ability or not to pay their compensation and benefits. Union always expect compensation for business organisation therefore they always demand financial reports of the organisation. This helps them to ensure financial capabilities of the organisation.

4.value of financial reporting for meeting organisational objectives

Company's financial statements provide story which is about value of business. To analyse the impact of financial statements on the value of business three statements are judged which are as follows-

  • Income Statement Analysis-These statements provide an information regarding overall net profit and net loss achieved by company in a financial year. This income statements matches total revenues and total indirect expenses of the company. This statement also provides an overview regarding usage of resources by company to generate profit of the company. To evaluate efficiency and management operations of the company this income statement is prepared by company which compare result with previous year results which company achieved in previous year. It also develops an evaluation regarding sales generation of the company.
  • Balance Sheet Analysis-Balance sheets of company provides overall financial picture over a period of time. To generate sales and revenues of the company, balance sheet represents resources which is in the form of assets, liabilities and owner's equity (Spiceland and et.al., 2018). It also provides an overview which is about future sustainability of the company. Three major categories are analysed in Balance sheet that is assets, liabilities and also owner's equity. Assets of the company will represent gross book value of business. Liabilities will represent claims which is against assets and owner's equity will show difference between book value and liabilities.
  • Ratio Analysis-Ratio analysis used to analyse the data of financial statements. It is the widely used tool which is known as comparative tool to measure overall performance of the company as compared to other companies of business market. It also provides information about riskiness and solvency of company in caparison to other businesses of the market. Mainly five major ratios are grouped to calculate financial statements that is Liquidity, Leverage, Coverage, Profitability and also Activity of the business which provides overall performance of the organisation.

5.financial statements as per IAS-1

a.) statement of profit and loss and other comprehensive income

Company's performance is reported on statements of profit and loss and other comprehensive income. Statement of profit and loss measure total of income less expenses. Other comprehensive income report items which are not included in statements of profit and loss (Zhang and Andrew, 2014). Profit and loss account report indirect expenses for specific period of time which is to measure net profit and net loss of the company. Other comprehensive income statements will include those revenues, expenses, gains and losses which executed from income statement.

b.) statement of change in equity

Company generally prepares statement of change in equity to observe change in share capital of the business, accumulated reserves and retained earning over a specific period of time. It calculates net profit and losses which are attributed to shareholders, measure increase and decrease of share capital, and amount of dividend paid to shareholders. Change in equity statement also measure effect of change of accounting policies and gains and losses of capital.

c.)statement of financial position

It is also known as balance sheet. Balance sheet is financial statement which helps to provide a picture of financial performance of company in certain time period. Resources which used to prepare balance sheet are assets, liabilities and owner's equity. It provides information about company's overall sales and revenues. Amount which shown on statement of financial position are the amounts which represent final moment of an accounting period. Financial position will reflect basic accounting principles and guidelines which includes cost, matching, and full disclosure principles (Gigler and et.al., 2014).

d.)comparison of cash flow from above financial statements

cash flow statement provide details about the amount of cash in and out from organisation. Cash flow statements provides an information for majorly three types of activities which include operating activity, investing activity and financing activity. Under operating activities regular operations of the company is recorded which includes receipts for sale of loan, debt and equity instruments, interest received on loan, payment to suppliers, employee, interest etc. investing activities will include sales and purchase of assets, loan made to suppliers or receives from customers, payment related to merger and acquisition. Financing activity will include inflow of cash which is from investors.

Major difference between cash flow and statement of profit and loss is that cash flow will not record every detail of financial activities of business (Ball, Li and Shivakumar, 2015). Comparison between cash flow and statements of financial position that is balance sheet is that income statement will also consider some non cash accounting items transactions(Christensen and et.al., 2015). Comparison of cash flow and statement of change is equity is that change in equity will only consider the amount of equity share capital of business.

6. Interpreting financial performance for Marks and Spencer (2017 and 2018)

Ratio analysis used to analyse the data of financial statements. It is the widely used tool which is known as comparative tool to measure overall performance of the company as compared to other companies of business market. Here is the interpretation of ratio analysis.

Liquidity Ratio

Particulars Formula 2017 2018
Current assets 1723 1318
Current Liability 2368 1826
Current Ratio current asset/ current liability 0.73 0.72
Inventory 759 781
Quick assets 964 537
Quick ratio Quick asset/ Current liability 0.41 0.29

According to above calculation company's liquidity position was not good because liquidity ration of the company consider good when they have ration in proportion of 1:2 and as per above calculation it is not proper.

Profitability ratio

Particulars Formula 2017 2018
Gross profit 4088 4047
operating profit 691 671
Total sales revenue 10622 10698
Gross profit margin ratio gross profit/ total sales revenue 38.49% 37.83%
Operating profit margin ratio Operating profit/ total sales revenue 6.51% 6.27%

As per above calculation company's profitability position was not good because as compared to previous year its profitability percentage go reduced which is not a good impact for company.

Solvency ratio

Particulars Formula 2017 2018
Long term debt 1663 1623
Shareholder's equity 3156 2957
Debt equity ratio long term debt/ shareholder's equity .53 .55

Company also does not have good solvency ration because it is said that lower the solvency ration larger the company profit and as compared to previous year solvency ratio gets increased which does not have good impact.

Efficiency Ratio

Particulars Formula 2017 2018
Total sales revenue 10622 10698
Average assets 8384.5 7921.5
Cost of Goods sold 6534 6651
Average Inventory 779.5 770
Inventory turnover (in times) Cost of good sold/ Average inventory 8.382 8.638
Total assets turnover Total sales revenue/ Average assets 1.267 1.351

Company's efficiency ratio is increasing as compared to previous year which means that company's bank expenses are increasing and revenues are deceasing.

7.difference between International Accounting Standards and International Financial Reporting Standards

International accounting standards(IAS) was the first accounting standards which are issued by International Accounting Standards Committee. Aim to develop this accounting standards is to make it easier for organisation to compare their business across the world. Another aim to develop this accounting standards is to increase transparency and to build trust in preparing financial reporting of the organisation. These standards also promote transparency, accountability and efficiency while preparing financial statements.

Concept to develop international financial accounting standards is to develop set of accounting standards which is for particular types of organisation to record transactions. These standards are issued to provide common global language for the businesses across the nation in preparing their financial statements. These standards are developed particularly for businesses that runs across several nations (Cascino and Gassen, 2015). Main aim to provide IFRS is to eliminate extra cost, complexity and risk which have to bear by the companies whose businesses are globally diversified. Therefore, IFRS is a set statements which brings transparency, accountability, and also efficiency for preparing financial statements around the world. It helps to bring transparency by providing effective quality of financial information, to also helps investors and public of business market in taking economic decisions. It also strengthens accountability just by reducing communication and information gap between capital market provider and also to people who have invested their money in organisation. IFRS also brings efficiency in preparing financial reporting by providing effective information to investors which helps them to identify market opportunities and risks of nations.

Difference between them are as follows-

It helps to include basis of decision within each standards- this is the decision of international accounting standard boards to develop principle- based approach to standard setting. They are also developing changes in international accounting standards because organisations in preparing financial statements mainly prefer IAS standards. Therefore, some companies are preparing financial statements through IFRS or others are preparing through IAS. Hence, both running parallel across the world

Bold text in IFRS means to guide principles of standards- in preparing financial reporting, bold text in international accounting standard will refer to compulsory elements of the standards and bold text in IFRS refers to guide principles of the standards.

8.benefits of IFRS

To simplified financial statements of the company, IFRS is important concern for the companies. It provides a global language so that accounting gets simplified and it will provide easy understandability of financial reports from one to other company. Mainly IFRS is important for multinational companies who carry their businesses across the globe. Therefore, to maintain transparency, accountability, and efficiency in financial reports multinational companies adopted these IFRS standards (Barth and et.al., 2018).

By adopting IFRS standards, globally business companies have to developed an effective frame work in maintaining their financial report. It also helps to save money because when companies are doing businesses globally they do not have much time in preparing financial statements in two sets of books of accounts therefore IFRS develops basic standard in preparing statements. They also provide principle based philosophy which means that goal arrive at reasonable valuation of the standards. Some benefits of adopting IFRS are as follows-

  • Comparability: by developing IFRS standards company will able to improve their comparability of financial information across the globe which also helps company in improving overall performance of the organisation. When financial statements are made with comparability then investors will also able to develop an effective decision. Comparability in financial reporting also helps users of the company in analysing overall financial stability of the company.
  • Better quality of financial reporting: IFRS adoption helps organisation in improving their quality of financial reporting. Quality gets improved because of consistent application of accounting principles. Adoption of IFRS also result in developing reliability of financial statements (Juhmani, 2017). This reliability and better quality of report will lead company in building effective trust with investors, and other stakeholder of the company.
  • Access and reduce cost of capital: IFRS is accepted as financial reporting frame work and adoption of this IFRS will raise to better access of information and will reduce cost of capital. Adoption of IFRS helps organisation in preparing their financial report with proper guidelines and framework which overall helps company in improving performance at global level.
  • Saving in financial and cost of the company: decision id provided by SEBI for foreign companies in preparing their financial statements which is in accordance with IFRS (Wycherley, 2017). Impact of this decision on company is that, company will not have to made two separate books of accounts with generally accepted accounting principles. This overall leads in saving financial cost of the company. It also helps to save time in preparing two sets of books of accounts.
  • Single reporting: adopting IFRS helps organisation to eliminate multiple sets of reporting which overall helps in reducing cost of capital and time of the organisation.
  • Understandability: IFRS has been provided to develop easy understanding of financial reports to internation investors. Therefore, IFRS adoption has provided an easy understanding of statements across the globe for international investors of the company. It also helps company to attract new international investors in their company which helps them to increase profitability.

These are some benefits which shows importance of the IFRS. Adopting these standards develop transparency, comparability and accurate information in financial statements of the organisation (Bonsall IV and et.al., 2017).

9. Degree of compliance with IFRS across the world and factors which impact its compliance

Companies in different countries are adopting diver account practises which developing significant economic consequences at international level which is for interpretation of financial reporting of global business of the companies. The result of complying with IFRS is that company will able to attract more international investors in their organisation which helps in building strong goodwill of the company. International accounting and securities organisation has taken a step which is to reduce harmonization of accounting which helps company to improve transparency and comparability in financial reporting. International financial reporting standards will able to increase investor cost and it will also reduce reporting cost of the accounting preparation for different organisation (Johnston and Petacchi, 2017). Compliance of IRS also helps organisation in developing competitive advantage in business market and the overall impact is that company's cost of capital gets increased and it will decrease liquidity of the company. IFRS adoption in companies helps them to develop effective communication linkage through their global partners. It also develops greater international capability of firm to invest in other countries.

Factors which impact degree of compliance

IFRS are not accepted globally by many business organisations. Different countries has their different set of accounting policies which company's followed to prepare accounting statements. These IFRS standards are not accepted by all nations as well because it hides those underlying difference in business environment. Many nations have opposed adoption for adoption of IFRS. Opposition done by different companies by saying that after adopting IFRS in preparing financial statements, results which appeared are totally different from original one. Firstly opposition is done by Australia. According to them after adopting IFRS in preparing financial statements they also have to change standard name, some textual changes by which documents appeared are clearly different from original one which issued by International accounting standard board.

Adoption of IFRS in EU is taken as relevant event. Decision of adopting IFRS played a key role for the acceptance at international level. Therefore, they have already adopted IFRS in preparing financial statements of the company. Another factor of not adopting IFRS is that it does not provide guarantee of information regarding quality and comparability which improves financial resources worldwide. Major factor in not adopting IFRS is that company have to develop training and development sessions for the employees to prepare their financial accounts in accordance with international financial reporting standards.

Read Also: Managing Operational Department in Hilton Hotel

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From the above study it can be concluded that financial reporting helps to analyse overall financial position with financial stability of the organisation in business market. In this report details are provided regarding importance of financial reporting for an organisation. Conceptual framework also provided to analyse factors which needs to be develop while preparing financial reporting. This report also cover importance of adopting IFRS while preparing financial report. Therefore, it can be concluded that financial reporting is the necessary elements for organisation in reflecting their financial position in business market and also to attract international investors in the organisation by adopting IFRS standards.

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