Financial reporting is the process that relates with the preparation of the financial statements for the purpose of presenting the information of the company's financial health to the stakeholders and owners of the company. This project discusses about the analysis of financial reporting and regulatory frameworks that are adopted by the company in order to make financial statements more understandable and reliable. The use of different models of reporting and auditing has also been done here. The objectives that are fulfilled by adopting financial reporting standards. ( Barth, and Landsman, 2010 ) Finally the differences in the reporting standards across different countries has also been evaluated here.
P1: Analyse Financial reporting including regulatory framework and its governance
Financial reporting: Financial reporting plays an critical role in the economic world. The primary objective of financial reporting is to provide the owners with the relevant information about the financial position of the company, where there is division between the management and ownership of the company. Financial reporting plays most important role in the public limited companies where the shares of the company are offered to the general public by way of stock market or exchange system. The main function that is performed under financial reporting is the preparation of financial statements that possess relevant information which the shareholders of the company can use and take important decision regarding whether or not to invest in the shares of the company. (Council, 2012) The directors of the company uses these annual statements to check the financial performance of the company and take any corrective actions if required.
If there were no function of financial reporting in the company, then the investors would be less inclined towards investing in the capital of the company because they are not getting the relevant information regarding the financial position of the company. For meeting the requirements of the stakeholders of the company the managers needs to implement certain accounting standards that assures about the quality of information, which can be achieved through financial reporting framework.
Regulatory framework under which financial statements are prepared: financial information users come from broad and diverse groups and as it has been seen in financial accounting. The users of financial statements use them for a different types of reasons. Although, even of various reasons , what every user of financial statements require is that the information contained in those are relevant and true and represents fair picture of the financial health of the company. The users also need that financial information is easy to understand, interpret and comparable with other companies and industry average. All these things can be achieved with the assistance of financial reporting standards.( Firoz, and Ansari, 2010) Every company operating in the world has to adopt any of reporting standards of their choice which is applicable in the company's country. IFRS accounting standards are accepted all over the globe and can be adopted by any company no matter where it is operating. International financial reporting standards (IFRS) are formulated by an internationally recognised regulatory body namely International accounting standards boards(IASB).
P2: Purpose of financial reporting in meeting different objectives
Financial reporting is the process of of preparation of financial statements of the company such as statement of profit and loss, balance sheet, and cash flow statements by adopting a certain set of financial reporting standards that are offered by the regulatory bodies such as IASB. These reporting standards play a significant role in the achievement of various objectives which are discussed as under:
Taxes: This is probably the most important reasons that the companies use financial reporting standards. When the companies prepare the financial statements of the company with the adoption of these accounting standards, then government and other tax authorities use these statements with trust for the calculation of the amount of tax the company has to pay for different things and to ensure that the company is paying a fair share of taxes to the tax authorities.
Investors and shareholders: For investing in the shares and other projects of the companies the shareholders and other investors require that the company report their financial statements using a certain set of standards, so that they can rely on the information that is shown in the statements. These standards ensure that the company is showing a true and fair view of the company's financial health and financial position in its statements so that they can freely invest in the company's projects and capital of the firm.(Glancy, and Yadav, 2011)
Internal decision making: Though the financial reports are not the best tools for the internal decision making process of the company, but the financial reports can assists the managers in the formulation of other reports such as management accounting reports which are the most suitable for the internal decision making and these reports include the summary of financial reports which are prepared using the financial reporting standards.
Use-cases for financial reporting: Up to this point, we have been discussing the general things of the requirements financial reporting standards. Now these below questions will discuss other benefits that company gain because of the financial reports:
Is purchasing a particular stock beneficial?
If the investor is crucially examining the financials of the company for the purpose of investing in the stocks of the company then the financial reports can really assist in providing a hard data that can be used to supports the decision.( Jones, and Finley, 2011)
M1: Assess how the context and purpose of financial reporting meets stakeholder needs and requirements
Stakeholders are the parties who are directly effected by company's actions and decisions, some stakeholders are creditors, debtors, shareholders, investors, shareholders etc. These stakeholders are directly connected to the organisation and their needs can be met by effective financial reporting in various ways, few of these ways are:
- Stakeholder invest in any company after analysing financial statements thoroughly and in this process financial reporting helps them to find out various financial ratios.
- Financial reporting is a core of any financial planning, and this financial reporting helps stakeholder in decision-making process and analysing company's true and fair financial position.
D1: Various regulatory frameworks and their governance for specific stakeholders
The different types of regulatory frameworks that are adopted by the companies include IFRS, US-GAAP, Ind.-AS etc. and their governance are done by the regulatory bodies which formulates them. The IFRS is governed by IASB, US-GAAP is governed by FASB and so on, so that the stakeholders of the company can rely on the statements made by the company for taking certain decisions.
P5: Benefits of International Accounting Standards (IAS) and International Financial Reporting Standards (IFRS)
Benefits of International Accounting Standards:
IAS or International Accounting Standards are older set of universally followed standards which states in what way a transaction should be presented and recorded in financial statements. International accounting standards are resultant to be beneficial for organisation as well as for other parties too, some of the benefits are listed below:
- International accounting standards helps to build trust between organisation and third parties like investors, debtors, creditors etc.
- IAS helps to prepare effective financial books and records which results to be an asset for company.
- These standards are adapted and followed by every organisation, which brings uniformity in all financial statements of all organisation.( Klai, and Omri, 2011)
- The basic benefit of using these accounting standards is ease of understanding of financial standards by all related parties of the company either directly such as shareholders, debtors, investors etc or indirectly such as prospect investors etc.
- With the help of Intentionally followed accounting standards, accountants are benefited as they have guidance of these standards, if the accountants face any issues than they can refer these accounting standards for the rescue and can determine how to record certain transactions.
Benefits of International Financial Reporting Standards (IFRS):
International Financial Reporting Standards or IFRS are new set of financial standards which are developed by International Accounting Standards Board(IASB), these standards are universally accepted and followed which provides framework to record every transaction in financial statements of an organisation. These standards are developed for the ease of organisation and other related parties, some of the benefits are listed below:
- IFRS helps an accountant to produce standardised and effective financial accounting statements, which will comply all necessary requirements of the local as well as global authorities.
- These financial accounting standards are beneficial for an organisation as they help in effective decision making by enhancing transparency in the financial statements so that unbiased and useful decisions can be made.( Zechman, 2010)
- IFRS also results in optimum utilisation of available resources as they provide proper data related to organisation's assets and liabilities.
- Effective financial statements helps to get faster access of financial statements which helps in improved regular operations handling.
- International financial reporting statements benefits an organisation by improving tax planning process.
P6: Models of financial reporting and auditing
Financial modelling: The Financial reporting models include the general financial statements, notes to financial statements, and required supplementary information. The existing financial reporting model has been operating since the year 1999, making it a major thing to review.
This is procedure with the help of which the companies present financial representation of some or most of the aspects of the company or a given type of security such as share, debenture, etc. The financial models are generally characterised by performing the calculations related to the financial transactions of business and making recommendation on the basis of that information. The model can also summarise certain events for the end user such as the investment management returns and the ratios such as Sortino, or this modelling process can also assist in estimating the direction of the market, for example fed model.( Leuz, and Wysocki, 2016)
Fed model: This type of model is used as a tool for the determination of whether the stock market of US is valued fairly at a given point of time. The model is based on the basis of equation that helps in comparison of earning yield of the S&P 500 with the interest rate on 10 year US treasury bonds.
Multistage dividend model: This model helps in the equity valuation of the company that is created on the basis of Gordon Growth model. In this method the different types of growth rates are applied to the calculation. Under this method the calculation is done by considering the changing growth rates that are applied for different time periods.
Auditing Models: Models of auditing can be implemented with features that already in built or with the company's own mechanism. The kinds of information that are recorded in the models are state of the object before the action was taken, the person's name who performed the actions, the whole statement about the action that was undertaken.
M3: Evaluate financial reporting and auditing through application of theories and models
Financial reporting is the process of recording and preparing the financial statements of the company by using various models and taking into consideration the theories of financial reporting. The models that are used in the process of financial reporting include financial modelling, multi stage models, fed models and auditing models.
P7: Difference and importance of financial reporting across different countries
As it has been discussed earlier that the financial reporting mechanism plays a critical role in the preparation of financial statements of the company. It does not matter where the company is operating in the world, it has to choose any reporting standard which is applicable in country where it is operating. There are many differences and importances of financial reporting in different countries which will be discussed as follows:
Every country in the world has prepared its own set of financial reporting standards which the companies has to adopt for the recording and preparation of financial statements of the company. But in the modern world where the companies are operating across the border and in different geographical locations at the same time. The standard setters have come with the standards that must be applicable all over the world for the smooth operations of the company.( Outa, 2011) If all the companies around the globe will adopt these common set of standards than there will be no issues in the operation of companies which operate globally. There are two most common reporting standards that are adopted by most of the companies in the world they are namely IFRS(International financial reporting standards) which are recognized globally and another is US-GAAP which is applicable in united states and other countries also. The differences in these standards are discussed underneath:
GAAP vs. IFRS:
Principle-based vs Rule-based
The most common difference between IFRS and GAAP is that IFRS focuses on principle based reporting whereas the US-GAAP focuses on rule based reporting. The principle-based reporting frameworks suggest that reporting should be done by considering principles of accounting and no one should perform any illegal or unethical reporting for the purpose of personal benefit. On the other hand rule-based reporting has pre specified rules which the accountants has to follow, which leaves them a scope for doing unethical reporting in a new way even after following the rules that were specified.
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The other examples of differences between US-GAAP and IFRS are:
- Statement of profit and loss:Under US-GAAP the extraordinary items are shown under net income whereas in IFRS it is separated from the income statement.
- Inventory:Under IFRS, the use of LIFO inventory management system is not allowed, whereas in US-GAAP there is a choice between FIFO and LIFO.
- Development costs:the cost related to development are considered as expense under GAAP whereas under IFRS the development cost are allowed to be capitalized if certain criteria are met. ( Shivakumar, 2013)
M4: Factors that influence international differences in reporting standards
There are various types of reasons that are responsible for the international differences in the reporting standards. US CFOs need to understand these in order to get know-how about global competitors, acquisition targets etc. Some of the factors which lead to differences are environmental factors, Culture, nature of business ownership, level of education and expeirience of accountants and political pressure.
D3: Application of IFRS and differences in reporting standards based on model and theories
IFRS has been adopted by various companies that are operating in the united states and the SEC also do not require the IFRS reporting firms to reconcile their statements under US GAAP. But there are some differences in the IFRS reporting standards and US-GAAP such as:
- Inventory- US GAAP provides a choice on LIFO and FIFO for the inventory management, on the other hand IFRS prohibits the use of LIFO
- Income statement: Under IFRS the extraordinary items are separated from the profit and loss account whereas in US-GAAP these items are shown under net income. ( Tschopp, and Huefner, 2015)
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The above project report concludes that financial reporting plays a critical role in presenting the financial statements to the stakeholders and owners of the company in a maneer that is understandable, reliable and shows the true and fair view about the financial position of company. This can be only achieved when the company adopt certain set of reporting standards provided by regulatory bodies.
- Barth, M. E. and Landsman, W. R. , 2010. How did financial reporting contribute to the financial crisis?. European accounting review. 19(3). pp.399-423.
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- Firoz, C. M. and Ansari, A. A. , 2010. Environmental accounting and international financial reporting standards (IFRS). International Journal of Business and Management. 5(10). p.105.
- Glancy, F. H. and Yadav, S.B., 2011. A computational model for financial reporting fraud detection. Decision Support Systems. 50(3). pp.595-601.
- Jones, S. and Finley, A., 2011. Have IFRS made a difference to intra-country financial reporting diversity?. The British Accounting Review. 43(1). pp.22-38.
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- Outa, E. R. , 2011. The impact of International Financial Reporting Standards (IFRS) adoption on the accounting quality of listed companies in Kenya.
- Shivakumar, L. , 2013. The role of financial reporting in debt contracting and in stewardship. Accounting and Business Research. 43(4). pp.362-383.
- Tschopp, D. and Huefner, R. J. , 2015. Comparing the Evolution of CSR Reporting to that of Financial Reporting. Journal of Business Ethics. 127(3). pp.565-577.
- Zechman, S. L. , 2010. The relation between voluntary disclosure and financial reporting: Evidence from synthetic leases. Journal of Accounting Research. 48(3). pp.725-765.