Financial Reporting Research Issues - Essay Example

Assignment No. Assignment Place of Study: Canterbury Christ Church – Business School Financial reporting standards provide a framework to monitor the actions of the management who are the agents of shareholders. Thus financial reporting framework helps to reduce the information asymmetry that exists between the management and the shareholders. It narrows down the financial knowledge to a level that the shareholders can interpret. Financial reporting is an interpretation which generally applies to transactions, management team uses its knowledge to develop and implement an accounting policy which results in information that is relevant and reliable to be used in making financial decisions by management themselves, shareholders and potential investors. When making this decision, IAS 8.11 requires the management to show the definitions, recognition procedures, and dimension concepts for assets, incomes, liabilities, expenses and liabilities in the accounting Framework. A good financial statement is one that is understandable to every stakeholder of the company with minimum difficulties, thus financial statements should be simple and easy to understand. Two it should be reliable in that potential investors can rely on it to make decisions. Three it should be easy to compare with other financial statements in the market. Last but not least financial statement should be relevant. The information used in the financial statement should be relevant and material for decision making. Therefore, ambiguous information should be avoided when preparing financial information. This will eliminate any essence of misguide to the stakeholders of the company. Financial reporting standards have been revised severally over years to capture the dynamics in accounting sector. They have reviewed severally to incorporate the emerging trends in global business such as mergers, foreign acquisition among others. Before 2001 the world used to prepare financial statements using international accounting standards (IAS) and any revision on international accounting standards after 2001 is referred to as international financial reporting standard. ( IFRS). According international accounting standard 10 financial statement includes a statement of financial position which shows the total assets of the company, long-term and short term liabilities and the companies equity. Second is the statement of comprehensive income which shows the total revenue and expenditures of the company. Third is the statement of changes in equity, statement of cash flow which shows the ability of the company to pay short term debts and notes to the financial position this provides explanations to the financial statement items. International Accounting Standards Board is charged with mandate of reviewing and revising accounting standards. It comprises of fifteen members drawn across the world. It was formed in 2001 as successor of International Accounting standard committee. It has the responsibility of developing international financial reporting standard and revision of international accounting standard to IFRS. (Wood & Sangster, 2005) According to international financial standards a statement of financial position should have a section of noncurrent assets at cost, their accumulated depreciation and the net book value all shown separately. A section of current asset and current liabilities on separate column and then the working capital of the company are calculated as the difference of current assets and current liabilities. Current assets are those assets that can be converted into cash easily while noncurrent assets are those that are expected to remain in the business for a long period. In this statement there is a section of financing activities which show how the company is financed. The total of noncurrent assets and working capital should always equal to finances of the company. This statement shows the total assets of the company, liabilities of the company both short term and long term and the financing structure of the company. Statement of comprehensive income is prepared to show the profit of the company and the appropriation account. It shows the gross revenue of the company from various business activities, expenses of the company incurred in that period, financing costs such as interest, other incomes such as from investing activities, tax expense of that year and the appropriation account which show how retained earnings and the profit for the year is apportioned among equity holders. Companies are also required by the standards to prepare cash flow statements to show the actual cash movement. This statement shows cash flow from operating activities, investing activities and cash flow from financing activities. The net cash flow from this activities are added together to show the actual cash holding of the company. In addition to this financial statements are the notes to explain these statements. Theses note includes, a statement of changes in plant property and equipments which shows the movement of company assets, the companies policy of charging depreciation, the policy used in valuation of stock and the correct classification of inventory, the amount of inventory used as collateral and any revaluation on asset and its recognition. The notes should also include any contingent event that the company is facing, its treatment in the financial statement and the possible implication to the company once the event crystallization. (A, 2001) Under IAS 27 a parent need not present consolidation financial statements if and only if, it is a wholly owned subsidiary, it is not listed in a stock exchange that is its present debts and equity are not traded in the stock exchange, where the parent is in a group in which it is a subsidiary and the ultimate parent in that group prepare consolidated financial statements that conform with IFRSs or that the parent has not filled nor is it on the process of filling its financial statements with a regulatory authority for the purposing of issuing any financial instrument to the public. Imply the company has no interest of being listed in the stock exchange. (Drury, 2007) The statement of financial position for Eagle Ltd is as follows; Eagle limited company balance sheet Noncurrent Assets millions plant, property and equipment (cost) 250000 Accumulated depreciation 16000 234000 Current assets Inventory 545 Account receivable 250 Cash 40 835 Current liabilities Account payable 324 bank overdraft 20 344 491 234491 financed by noncurrent liability bank loan 200 Revaluation reserve 20091 Retained earnings 64200 Share capital 150000 234491 The balance was prepared in accordance with the following standards; International financial reporting standard 3 (IFRS3) provides a framework for business combinations. In preparing statement of financial position the parent company takes the entire asset of the subsidiary as if it controls the entire company. The standard requires that all intercompany transactions to be eliminated and the necessary adjustment made in respective accounts. Intercompany sales should be eliminated in the gross sale, group stock and any element of unrealised profit should be eliminated against consolidated profit and loss account and the minority interest account. Under the financing section only the parent share capital is recognised, minority interest, revaluation reserves and the retained group profit or loss. Goodwill is treated as a non current asset of the group. In the previous year’s goodwill was amortised over its economic life, however, with the new revision of standards IFRS3 does not allow amortisation of goodwill instead goodwill should be tested for impairment. According IFRS 3, the following treatment should be adopted for goodwill; if goodwill is positive, then the amount should be shown in the balance sheet without amortization. Though if the management feels that there is loss of value then this loss known as impairment loss is charged to the profit and loss account and in consolidation the following entries should be made, credit goodwill account and debit goodwill impairment. When preparing consolidated income statement in case where the parent has acquired a subsidiary company for less than a year entries to the statement are apportioned proportionately. According to accounting standards notes must be prepared as footnote to the financial statement to enhance understanding of the financial statement. Pre acquisition profit is used to determine goodwill by crediting it in the cost of control account while post acquisition profit is credited in the consolidated profit and loss account. Intercompany dividends should be eliminated, before consolidation pre acquisition dividend should be determined and used to determine the amount of goodwill while post acquisition dividend is treated as an income. Financial statements can be analyzed and interpreted by use of financial ratios. Basically there are three ratios that are mostly used to interpret the performance of the company. They include liquidity ratio which shows the ability of the come to meet it short term financial obligations as they fall due. This can be done by computing acid test ratio and current ratio. The second ratio is the profitability ratios which includes margin ratio, earning per share return on assets among others. It shows the company’s ability and efficiency in utilizing financial resources. A company with high ratio implies high efficiency in operations and high profits. The third ratio is the gearing ratio which shows the liquidity position of the company. It also shows the going concern of a company over time. Ratios under gearing ratios include total debt equity ratio and debt ratio. Ratios can be used to make cross sectional comparison of companies within the same industry. In conclusion financial reporting standard and international accounting standard have provided an acceptable frame work in accounting. This has made it easy to compare performance of companies globally .it has also promoted economic integration of companies just like the case of multinational companies that they are able to prepare acceptable financial statements by use of international financial reporting standards. By the fact that businesses operate in a dynamic environment the international accounting standard board should review this standard regularly mostly to enhance acceptability and reliability. They should also ensure global marketing of the standards to create uniformity in the world thus making it easier to compare industrial performance among nations. Works Cited A, H. (2001). The nature of financial statements. New york: Contoso pres Drury, C. (2007). Management and Cost Accounting. London: Cengage Learning EMEA. Myddleton, D. R. (2004). Unshackling Accountants. London:: Institute of Economic Affairs. Wood, F., & Sangster, A. (2005). Frank Wood's Business Accounting 1. Upper Saddle River: Financial Times/Prentice Hall. Read More