Impact of IFRS on Financial Reporting

The assignment discusses the importance of IFRS in enhancing transparency and accuracy of financial reporting. It also highlights the factors that affect compliance with IFRS, including company size, leverage, liquidity, age, ownership structure, and profitability. The report concludes by emphasizing the significance of IFRS in making profitable decisions for businesses and stakeholders.

FINANCIAL REPORTING

INTRODUCTION
Procedure of preparing financial statements with the help of different transactions of an
organisation and present to these in front of different stakeholders is known as financial
reporting. The present report shows about different stakeholders of an enterprise who uses
financial statements for taking profitable decisions. Apart from this, purposes as well as
objectives of the financial reporting are addressed in the current assignment. The study reflects
on procedure of preparing P&L, B/S as well as statement of changes in equity for the firm Rita
Plc for the year ended 31st December 2016 using trial balance. Further, advantages of the
International Financial Reporting Standard (IFRS) are described in present project. At the end of
project, those elements are introduced which create impact on compliance with IFRS.
1.
Financial reporting is supportive for the company in order to present publish final
accounts of it in front of various stakeholders. It is highly supportive for the management in
order to assess financial position and stakeholders as well. Further, its primary and important
purposes are stated as follows:
 Key objectove of it is to give highly proper data regarding to various financials to the
owner of the firm. On the basis of this, he or she easily able to know that it performs up
to which extent in the industry (Costello, 2011). Therefore, fruitful decisions which are
required to take in the workplace can be easily made.
 In order to keep all the financial statements of an entity legal, the financial reporting is an
important tool.
 For reducing issues like scandals, malpractices etc. in the final accounts also it is used by
the businesses.
 At the time of framing the financial reports in proper direction, various complexities and
issues incurred which are resolved with the help of financial reporting.
 With reference to shareholders, the financial reporting provides an outline of profitability,
liquidity and cash position of business to them. Further, profitable decisions for making
investment in the business are taken by shareholders in an appropriate way (Nobes,
2014).
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2.
The conceptual and regulatory framework of financial reporting is highly used by the
businesses due to helping in order to prepare effectual final reports. With the help of such
framework the management can easily examine its position in the industry in context to the
financials. Moreover, these are needed for making all the financial statements and publish them
in legal manner. In order to reflect actual performance of the company in front of all the people
who are directly or indirectly associated with it, the financial reporting is required for
management. It has some basic principles which are used by firms at the time of preparing and
reporting various financials, listed below:
 Revenue
 Expense
 Matching
 Cost
 Consistency
 Objectivity
 Continuity
 Going concern
 Unit-of-measure assumption
 Separate entity assumption
The qualitative characteristics are highly supportive for the firm in order to make various
reports regarding to financials reliable. The reason is that, it states clear and proper outline of the
overall business which are actually incurred with the firm. Under the quantitative, some
assumptions and estimations are made like budgets etc. which sometimes create
misunderstanding among stakeholders (Li, 2010). Hence, it can be said that qualitative kind of
information create reliable data of the firm in front of various stakeholders.
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3.
Financials of an enterprise are mostly used by the stakeholders whether they are internal
or external. The reason is that, it helps to make an effective as well as fruitful decisions towards
the businesses and gain proper and high level of returns. Further, ways through which different
stakeholders are beneficial from various financial information of the firm are stated below:
 Employees: These are one of the major stakeholders for the firm due to converting the
raw materials into finished goods and deliver these up to the customers. These are mainly
concern towards the firm that it will provide a satisfactory salary along with some
allowances and bonuses. Further, under the financial data, if level of profitability is of the
high level then they will analyse that company will give better salary and other
allowances in expected manner (Epstein and Jermakowicz, 2010).
 Managers: Managers of each department use the financial information in order to
determine level of profitability and liquidity. From this, they found that, business is up to
which extent able to provide salary and other bonuses or allowances in proper way. Apart
from this, if any financial plan or strategies are required to frame and employ then also
such information used.
 Customers: These are always concerned for higher quality of products at lower costs.
From the financial statements, if they found that firm generates higher profit then will
expect very lower cost of goods and services. Further, they expect some additional
discounts and schemes as well.
 Shareholders: Financial information used by shareholders in order to know firm's
capability in order to provide dividend or additional discounts on the shares purchased
(Barth and Landsman, 2010). Further, by considering financial statements these kinds of
stakeholders make investment decisions.
 Government: This is also a major external stakeholder of the company which looks
towards the financial reports for assessing tax payable capability of an organisation.
When enterprise generates higher profit then it will impose more tax rate along with insist
for making huge contribution in the social welfare activities.
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4.
The system of financial reporting reflects overall position of the company in front of
managers and owners. On the basis of financial position of the firm, the company easily able to
know that whether objectives are fulfilled or not. Apart from this, owner and managers able to
assess growth level in the industry of the firm. Further, by taking base of the different financials
the management frame strategies and tactics in accordance to resolve occurred financial issues
and resolve them. As they identified issues and malpractices during reporting then with the help
of employing strategies eliminate these and meet objectives of the enterprise (Chen and et.al.,
2011). Hence, it can be said that financial reporting is a tool through which purposes related to
financials are achieved by the firm. Therefore, business grow in proper and favourable direction
within respective market sector.
5.
A) P&L
B) Changes in equity
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C) B/S
In the company, different statements related to financials are prepared which reflect
different financial data and helps to stakeholders for taking fruitful decisions. The cash flow
statement shows cash position of the firm at the end of an accounting period. Further, it considers
expenses of majorly three kinds of activities which are like investing, operating and financing.
The P&L accounts reflects basic two types of the transactions which include receipts or gains
and outcomes or expenses. On the basis of this, profitability position can be determined in the
market where it provides its goods and services. When looking at the Statement of financial
position then it presents liquidity condition of the firm in respective sector (Cheng, Dhaliwal and
Zhang, 2013). By considering statement of financial position, management can determine its
capability for fulfilling external short term debts taken from external sources. With the help of
cash flow account, the company can assess its various expenditures along with incomes earned
under financing, operating and investing activities. Further, in comparison to I/S as well as B/S,
the account of cash flows provides all the information like cash position, incomes, expenses etc.
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6.
In order to make an effective interpretation of financial statements of an organisation, the
financial ratio method is one of the best tool. It clearly states that, a firm is performing in the
industry in which direction along with its rivals. In the present case, Glaxo Smith Kline (GSK)
company is chosen which is listed in FTSE 100 and operates in pharmaceutical industry.
Furthermore, the financial performance of GSK is stated below:
 NP ratio: Decreasing NP ratio from FY 2015 to 2016 i.e. 35.2% to 3.27% shows that
management of GSK not able to manage and decline its indirect expenses within
workplace. Under the calculation of NP ratio, all the indirect costs are used which create
high level of negative impact on the business performance. Apart from this, it not
considers any kind of cost declining strategies in proper manner which is major cause of
reducing the NP ration in pharmaceutical industry. Current ratio: Another ratio from the above table i.e. CR shows that business of GSK is
not more capable for facing the short term debts. From the accounting period 2015 to
2016 its capability for paying such debts is declining (GlaxoSmithKline PLC ADR, 2016).
Further, current ratio was 1.24:1 at the end of 2015 which reduces up to 0.88:1 at the FY
ending 2016. As per this, the GSK must consider or employ those strategies which are
supportive for managing cash or liquid along with the expenses.
 D/E ratio: This specific tool shows capital structure of an entity which comprises with
basic two kinds of financial information like debt as well as equity. Increasing direction
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of D/E ratio i.e. from 2.97:1 to 13.04:1 shows that, it has more debt or loan amount as
compared to equity capital. In comparison to standard D/E i.e. 0.5:1, business
performance of GSK is poor up to the larger level.
When considering to the overall ratios then it can be interpreted that, financial
performance of GSK within pharmaceutical industry is poor at the FY ending 2016 in
comparison to fiscal period 2015.
7.
 IAS stands for the International Accounting Standards while IFRS reflects to the
International Financial Reporting Standards in context to the financials.
 Those rules and standards which are published between the FY 1973 to 2001 are included
under IAS whereas standards published later to 2001 are part of IFRS which are presently
considered by majority of the firms.
 Issuing and regulatory body of IAS is IASC while IFRS issues or published in the
accounting term by IASB. Further, IFRS is updated or advanced version of IAS (Horton,
Serafeim and Serafeim, 2013).
 Those principles, rules as well as standards involved in IAS are not a portion of IFRS.
Therefore, both the terms have different principles and rules in their nature.
 Besides these all, IAS has total 41 standards while IFRS consists with only 9 standards.
8.
International Financial Reporting Standard (IFRS) is a concept which helps to the
multinational companies in order to frame different financial statements in proper direction.
When a firm adopts this particular aspect then become advantageous in different ways which are
stated below:
 Global comparability: When an organisation wants to compare its financial
performance or any other aspect in relation to financials then IFRS is helpful tool. The
reason is that, financial statements framed under this, are at the proper and international
level. On the other side, if it not prepares final accounts by considering IFRS then cannot
make comparison with those firms who have presence at international level (Shete,
2014).
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 Reduce recognition timeliness: In order to recognise any kind of financial statement and
publish as well by following all the laws, huge time was considered by the firms. As the
accountants consider various principles and standards of IFRS for preparing final
accounts of the firm then time-frame for acknowledgement is declined up to the greater
level.
 Better access to foreign capital markets: IFRS helps to frame the final accounts of a
firm at international level which leads to create high level of access to enter in the capital
markets of another countries. Furthermore, it creates better level of understanding for the
investors who invest sum of money in the company. Apart from this, when the
management wants to make chances for generating adequate level of accession in foreign
capital market IFRS is supportive (6 Advantages and Disadvantages of Adopting IFRS,
2015).
 Understandability: Besides these, in order to make proper understanding about the
financial statements of a company for several stakeholders the IFRS is helpful. Along
with this, stakeholders of the firm easily able to make an effective and fruitful decisions
towards the business.
 Enhance transparency of financial reporting: The IFRS is supportive in order to boost
up transparency as well as accuracy of the financial reporting system. Moreover, in order
to use process of the auditing the IFRS is an effectual along with profitable tool where
malpractice is easily detected.
9.
When the company is going to consider the principles, theories and standards of IFRS
within workplace then necessary to follow regulations and compliances of it. Due to lack of
using various compliances associated with IFRS the firm cannot frame final accounts in proper
direction. Those factors which create impact on compliance with IFRS are stated below:
 Company size is one of the major factor which affect to the compliance involved with
IFRS in the firm. The reason is that, there is very high level of disclosure compliance are
there incurred with IFRS. Apart from this, size of the company is involved in the business
in positive direction (Christensen, Hail and Leuz, 2013).
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 Leverage is another aspect which is involved within an entity in a positive manner and
highly affect to compliance with the International Financial Reporting Standard. Higher
the value of leverage is when incurred in the workplace then it is clear indication of few
and little equity capital availability.
 Liquidity is identified in the firm for assessing financial position in the industry which
should be of the higher proportion in the company. The basic reason behind this is that,
due to lack of adequate availability of this tool the firm unable to apply all the required
compliance with IFRS while framing final accounts. Moreover, there is positive relation
among these both the factors i.e. compliance with IFRS and liquidity.
 Apart from the above aspects, age of company, ownership structure, profitability
condition, national or international presence etc. factors are also having high level of
impact on this mentioned aspect (Brochet, Jagolinzer and Riedl, 2013).
CONCLUSION
From the above report it can be summarised that, financial reporting is a supportive tool
in order to make profitable decisions for business as well as stakeholders properly. There are
various people like customers, managers, owner, shareholders, government, employees etc. Use
financial statements in different manners. It can be assessed from the financial performance that,
Glaxo Smith Kline performs negative or poor in the pharmaceutical industry at the end of 2016
in comparison to 2015. Apart from these all, the IFRS differs from IAS and has wide benefits for
the company when it uses IFRS in the firm. Besides these, there are some elements like company
size and age, structure of ownership, leverage, liquidity, probability etc. create impact on
compliance with IFRS.
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