IFRS and Financial Reporting Quality

This assignment delves into the effects of mandatory International Financial Reporting Standards (IFRS) implementation on financial reporting quality. It requires students to critically analyze academic literature, such as studies by Palea (2018), Riccardi (2019), Shahzad et al. (2019), and Suryanto & Komalasari (2019), examining the influence of IFRS on aspects like earnings forecasts and corporate social responsibility reporting. Students are also expected to evaluate real-world examples, including Sainsbury's 2018 Annual Report, and the revised Conceptual Framework for Financial Reporting (2018).

FINANCIAL REPORTING

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
1. Analysing the context and purpose of financial reporting......................................................1
2. Examining regulatory and conceptual framework and governance of financial reporting
with key principals for assessing requirement and purpose........................................................2
3. Identifying key stakeholders of organization and critically assessing need for financial
reports..........................................................................................................................................4
4. Analysing value of financial reporting for accomplishing the organizational growth and
objectives....................................................................................................................................5
5. Explaining International Accounting Standards (IAS) and International Financial Reporting
Standards with evaluation of benefits.........................................................................................6
6. Critical evaluation of financial reporting in an organization via application of theories and.7
models to support judgements and conclusions.........................................................................7
7. Determining variations in financial reporting across the world and evaluate the factors that
influences..................................................................................................................................10
the differences..........................................................................................................................10
8. Evaluating degrees of compliance with IFRS by different originations across the world....10
CONCLUSION..............................................................................................................................12
REFERENCES..............................................................................................................................13

INTRODUCTION
Financial reporting is replicated as disclosure of financial statements to multiple
stakeholders such as customers, regulators, investors related to performance of organization over
specified duration. The present report will analyse the purpose and context of financial reporting
and its conceptual and regulatory framework will be examined. In the same series, it will assess
its governance along with key principles, purpose and requirement. It will determine key
stakeholders of organization with their critical assessment of requirement for financial reports.
Moreover, it would analyse the important of financial reporting for attaining organizational
objectives and growth. In this aspect, it will provide explanation of International accounting
standards and International financial reporting standards and with evaluation of their benefits.
This report will provide critical evaluation of financial reporting in organization with application
of different theories and models for purpose of supporting conclusions and judgements.
Furthermore, it will determine differences in financial reporting throughout world with factors
for impact these variations. Lastly, this will evaluate degrees of compliance with IFRS through
various organizations throughout the world.
1. Analysing the context and purpose of financial reporting
Financial reporting is very vital in the world economies as its initial objective is to give
relevant and useful information to company;s owners where is division among control and
ownership of particular company. Generally, it occurs mainly in public limited organizations
where share capital is sold to public via stock market or exchange system. Moreover, the diverse
and potentially geographically dispersed shareholders does not involve in management of
companies as directors are appointed on their behalf (Financial reporting and corporate
governance, 2018). In the same series, owners attain a yearly statement which briefs positions
and performance of organization so that they could asses about performance of investment
during reporting period. With absence of reporting system, investors would be less inclined to
contribute as capital as they would have no mode to trace or monitor effectiveness of company is
being operated through directors, appointed stewards of firm who are directly supposed to work
in shareholders best interests.
In the similar aspect, for accomplishing needs of users of financial statements
organizations have to implement the accounting system that offers the required information. It is
also significant that system is regulated for purpose of ensuring information offered to users in
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proper format. It is very useful with context to requirements of information as this is attained via
framework of financial reporting with basis of conceptual framework. The purpose of financial
reporting is to give information related to financial position, changes and performance in
financial position of business which is very useful for broad range of users for undertaking
economic decisions (Dou, Wong and Xin, 2019). It provides information to organization's
management which is used with reference to analysis, decision making, benchmarking and
planning. This helps to provide information to promoters, investors, debt provider and creditors
enables to make prudent and rationale decisions on basis of credit and investment.
It helps in giving information to public and shareholders at large with context to different
listed companies related to multiple aspects of business unit. This provides information related to
economic resources and claims liabilities and owner;s equity and method that how resources and
claims have undergone with alterations over specified duration. Simultaneously, this offers
information about procurement of organization and implicating multiple resources. The
information related to performance management has been provided to multiple stakeholders of
business and how ethically and diligently they discharge fiduciary responsibilities and duties. In
the similar aspect, it provides information to various statutory auditors which directly facilitates
audit and enhance social welfare by observing into employee interest, trade union and
government.
2. Examining regulatory and conceptual framework and governance of financial reporting with
key principals for assessing requirement and purpose
The conceptual framework is coherent system of fundamental principles and interrelated
objectives. This prescribes nature, limits and function of financial accounting and statements as it
also helps in assisting IASB and to develop standards of IFRS which are on basis of concept of
consistencies (Conceptual Framework for Financial Reporting, 2018). This assists preparers
with context of developing the accounting policies for particular events or transactions where no
standard applies for standard which allows to select the accounting policy. This helps every other
party with context to interpret and understand the standards. In the present era, it also contains
comprehensive set of concepts and making some major alterations to past version, further, this
comprises guidance of measurement, reporting entity, de recognition, presentation and
disclosure. In simple words, it set concepts which underlie in presentation and preparation of
financial statements to different external users. The relationship among individual IFRS and
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conceptual framework is stated as; without regulation, management has to design accounting
policy. This has to be fully compatible with conceptual framework with absence of requirements
in IFRS which deal with same and related problems.
The IASs are replicated as single set of high quality, enforceable and understandable of
global accounting standards. On basis of regulatory framework, IASB ensures that users of
financial statements retain minimum amount of information which enables for making
meaningful decisions related to interest in reporting entity. The principals on basis of this
framework as based on conceptual framework like IASB. The standards of accounting are set
with context of conceptual framework (A revised ‘Conceptual Framework for Financial
Reporting’, 2018). The Financial reporting council is independent regulator which is responsible
to promote corporate governance of high quality and reporting. The standards of corporate
governance are directly promoted via UK corporate governance code and sets by FRC within UK
and monitor and enforces these standards.
This ensures for producing financial statements which are comparable, consistent,
accurate and easy for understanding. It is required for separation of ownership and control which
exists in various organization. It ensures reports submitted through management on financial
performance are fair and true so helps owners for taking decision (Bassemir and Novotny‐
Farkas, 2018). Simultaneously, this remove and reduce subjectivity through accounting as
prepared of financial information follows similar rules and standards so owners and investors
could access comparable and clear information related to entity's financial performance.
The regulatory activities oversees the professional accounting bodies and operates
independent disciplinary arrangements for public interest cases like accountants. The board of
FRC is supported through three committees which advises related to strategic issues and
technical matters via Audit and assurance council and actuarial council. This observes
disciplinary and monetary functions via monitoring committee and vase management committee.
With context to principles are entity specific information is very significant compared to
standardised descriptions. Moreover, duplication of information in various parts of financial
statements is not necessary and could make financial statements less understandable.
This enables accounting standards and generally accepted accounting practice to be
directly developed as over agreed principles (Liu and et.al., 2018). This accounting standards are
developed in such aspect with response to particular issue or abuse as this lead to inconsistencies
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among various standards among accounting legislation and standards. The lack of conceptual
framework might mean certain that critical problems are not appropriately addressed. The
transactions are transformed very complex and business becomes sophisticated where auditors
and preparers of accounts for dealing with transaction which are not subjected of accounting
standards. The conceptual framework strengthens financial reporting credibility and profession
of accounting as well.
3. Identifying key stakeholders of organization and critically assessing need for financial reports
The financial statements helps in giving information related to financial position,
performances and changes of enterprise which is important for broad range of users with context
to undertake economic decisions as framework of IASB. Generally, stakeholders of
organizations are users of financial statements which are stated below:
Board of directors: The board of directors and owners of Sainsubury would imply
financial statements for purpose of reviewing performance of management along with assessing
to company's overall performance. On basis of organization's smooth operation, the owners and
managers has requirement of financial reports for purpose of undertaking essential business
decisions. For instance the current debt to equity ratio is very significant for important business
decisions as this leads to decide amount of long term capital would be essential to be increase for
certain business decisions (Palea, 2018). Sainsbury has debt equity ratio of 66.31% which shoes
that it is financing its growth more through debt than equity. It is not bad thing, this could be
replicated that they are attaining growth more than if they do not utilise by financing outside. In
order to this, if earnings are raised through great amount of debt interest incurred then it is
advantageous to organization. Henceforth, for assessing this board would be pleased for
observing in financial statements.
Shareholders: Shareholders retain right financial statements as they are only
stakeholders. The interest of shareholders would in about doings of company with invested
amount that it is making profit or loss. If it is profitable, they raise requirement of dividends so it
would eb concerned with dividend level Sainsbury is paying on annual basis and highly potential
for dividend and profit on future basis. If level of profit and dividend payout diminishes or
dividends are not paid due to loss, then there will consideration of selling shares and investing
which will give high return. With this context, operating profit margin is required with context to
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measure overall performance. Sainsbury has operating profit margin of 1.82% in 2018 and
2.24% in 2017 which shows that it is decreasing.
Banks: These have extreme interest in organization like Sainsbury's financial statement.
For instance, if organization has an overdraft or a bank loan, then banks are required for ensuring
that company could afford to repay loans which owes off. If organization is applying for loan
with same considerations then bank would insist to observe up to date information compared to
last set of statutory accounts which could be instead out of date. Usually, banks would extract
with quick ratio which reflects ability of Sainsbury to repay current liabilities through liquid
assets. Sainsbury quick ratio is 1.70 : 1 which shows positive aspect for repaying it current
liabilites.
Creditors: The trade creditors and supplier of Sainsbury are highly interested in its
financial statements like income statement and balance sheet. The stakeholders would be highly
concerned that organization could repay regularly for its purchases through them, so they could
monitor in company's cash position like liquidity. They would be consequently interested in any
items in account which might influence liquidity like loans or bank overdrafts (Wang, Cao and
Ye, 2018). These items would represent cash issues in Sainsbury and render insecure buyer for
the future. Usually, creditors take keen interest in creditors days which is average payment
period to paybles expresses in days. Sainsbury has 39.17 days which is less than 90 days so it has
efficient flow of cash in year 2018.
4. Analysing value of financial reporting for accomplishing the organizational growth and
objectives
The importance of financial reporting could not be over emphasized as it is essential for
every stakeholder for different purposes and reasons which are stated below:
This provides helps to organization for purpose of complying with different regulatory
and statues requirements. It is essential for business to file financial statements to government
agencies and in listed organizations, annual and quarterly outcomes are required to be published
and filed to stock exchanges. This facilitates statutory audit which are required to audit
organization's financial statement for purpose of expressing opinion. In the similar aspect,
financial reports forms backbone for financial analysis, planning, benchmarking and decision
making (Chychyla, Leone and Minutti-Meza, 2019). Generally, they are elaborated with these
objective through multiple stakeholders. The most important is that it helps for raising capital
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overseas and domestics and with reference to financials, public in large could perform analysis
of organizational performance along with management. Moreover, purpose of labour contract,
bidding, government supplies etc., business are required for furnishing their financial statements
and reports.
The published accounting data within financial reports may have economic effects
through influence on behaviour of manager or corporate enterprises. Simultaneously, considering
accounting numbers for compensation of management schemes of market or fear of
misinterpretation of accounting reports gives direct impact on financing and operating decisions
of managers. The process of accounting is considered via shareholders which shows micro
economic events in detailed manner. However, they should be appropriately concerned about
ability of managers to report and manipulate data to increase compensation. The information
directly contributes for purpose of better decision making regarding investment and to promote
best understanding and creating environment to cooperate.
According to IASB, it provides information on basis of financial performance and
position and any changes in financial position which is mandatory for different range of users on
basis of undertaking economic decisions (Tomy, 2019). This gives helps to business to comply
with numerous regulatory and conceptual framework of financial reporting. This generates
confidence with favourable impact on organization's cost of capital and retains credibility and
give society with relevant and reliable information with economic transactions and events
without attempt to move economy in one direction rather than other.
5. Explaining International Accounting Standards (IAS) and International Financial Reporting
Standards with evaluation of benefits
The International Accounting standards are replicated as older accounting standards
which were replaced in year 2001 through International financial reporting standards. These
were issued by antecedent council of International Accounting standards and endorsed and
amended via International Accounting Standard Board. This set of accounting standards are
supervised and developed via UK based International Accounting Standards Board. This is
absence of authority with requirement of countries to comply with standards with jurisdictions
via world. It sets unified code of accounting ethics which are going to follow across different
cultures and simplifies disputes among organizations in diverse part of world and helps
organization to comply with various legal guidelines throughout the world. There is
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consideration of input through legal and professional authority around world. This could create
set of different ethical guidelines which does not favour single culture over other as this could be
case where foreign organization directly adheres for its own domestic ethical values.
This simplifies accounting for numerous multinational companies which facilitates and
operations in different countries. Instead of using accounting standards of home country in their
MNCs, foreign subsidiaries could institute international standards across geographical units for
avoiding confusion and increment in efficiency and accuracy of system.
The International Financial reporting standards are replicated as accounting standards
which are issued through IASB with aim of mutual language to raise transparency in financial
information's presentation (Ewert and Wagenhofer, 2019). It is set of common rules which
makes the financial statement transparent, consistent and comparable throughout the world.
Generally, this specifies that how organization must maintain and report accounts, defining
transaction's types along with other events with financial influence.
The business which are using same standards for preparing financial statements could be
accurately compared with each other. It is very useful for business comparisons and based in
different countries which might have different methodologies and rules to prepare documents.
The great comparability has multiple aided investors to better determining about investments.
However, the business is small or large every business can feel impact with adoption of IFRS.
The business might not have enough resources for implementing alterations which are introduced
with this. In simple terms, it is financial burden to organization and even not accepted globally.
6. Critical evaluation of financial reporting in an organization via application of theories and
models to support judgements and conclusions
The basic accounting theories which are held via conceptual framework as theories are
appropriate fit are stated below:
Equity theory: It is also replicated as residual equity theory which is in between entity
and proprietary theory. Here the equation is Assets minus specific equities is residual equity as
specific equities comprises claims of creditors along with equities of preferred shareholders. On
the contrary, in numerous cases where losses have been huge or in proceedings of bankruptcy
and common shareholder's equity might disappear along with bond holders and preferred
shareholders might be transformed as residual equity holders. The main aim of this theory is to
offer better information to its equity holders for undertaking decisions regarding investment. In
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the organization with definite continuity, the present value of equity share is directly dependent
primarily on future dividend's expectations (Riccardi, 2019). Conversely, future dividends are
dependent on expectations of total receipts excluding particular contractual obligations,
requirements for reinvestment and payment to particular equity holders.
Simultaneously, trends in value of investment could be also measured by observing
trends in value of residual equity measured with context to current values. The statement of
profit and loss and retained earnings reflect available income to residual equity holders and every
previous claims were accomplished which comprises dividends to preferred shareholders.
Furthermore, equity to common holders in statement of financial position should be reflected
separately through equities of preferred shareholders and other particular equity holders. The
statement of fund should reflect availability of funds to the business for purpose of payment of
common dividends and other aspect as well.
Legitimacy theory: It is known as generalised assumption and perception which is act of
any business is desirable, proper and appropriate among socially constructed system of values,
beliefs and norms. It has its function of providing explanation to organizational behaviour for
implementing and developing voluntary environment and social disclosure of information with
context to fulfil their social contract. This enables recognition of aim and sustainability in
turbulent and jumpy environment. In other words, this theory posits that company continuously
seek for ensuring that operate within norms and bounds of their respective societies. With
reference to adopting this legitimacy theory, organization will voluntarily report on activities
perceived through management which were directly expected through communities it operates.
Mostly, it is applicable for purpose of providing explanation to disclosure of environment and
social reports with reporting framework accountable and communicated with their stakeholders
by clarifying significance to their relationships.
Application of theories
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Illustration 1: CSR of Sainsbury, 2018
With reference to legitimacy theory, there is disclosure of environmental and social
issues of Sainsbury under Corporate responsibility and sustainability committee report. In this
context, there is fall in emissions and use of water and waste across entire value chain and many
more (Annual report of Sainsbury, 2018).
The above is depicting residual equity theory of Sainsbury is a contribution to balance
sheet. This provides better information related to its equity shareholder for purpose of
undertaking organizational decisions with irregular continuity along with present value of equity
share is high dependent on future dividend's expectations. Furthermore, common shareholder;s
equity is shown in statement of financial position and reflected individually via equities if
preferred shareholders and other particular equity holders as well.
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7. Determining variations in financial reporting across the world and evaluate the factors that
influences
the differences
In the present scenario, there are numerous factors which helps in identifying variation in
financial reporting across the world and get impacted as well. International Financial Reporting
standards is replicated as accounting method which is used in majority of countries throughout
the world whereas Generally Accepted accounting principles implementation in United States.
IFRS accounting standards are accepted globally which is used in more than 110 countries.
However, GAAP is exclusively used in United States and has presence pf various set of rules for
purpose of accounting than most of the world. This could be complicated when business is done
internationally (Dănescu, Oncioiu and Spătăcean, 2019). In this series, development cost is other
factor where it could be capitalized under IFRS as certain criteria is accomplished. It allows
business for leveraging depreciation on fixed assets and with GAAP, development cost should be
expensed the year it occur and not allowed for capitalized.
Further, with consideration of intangible assets like advertising, research and
development cost, IFRS highlights principles based method. It accounts that asset would have
future economic advantage as mode to assess the value. The intangible assets are measured under
GAAP and recognised at fair market value. Thus, the main differentiating factor among IFRS
and GAAP is related to qualitative characteristics to how to function accounting method.
Generally GAAP works within hierarchy of features like relevance, reliability, understandability
and comparability to make informed decisions on basis of user's specific circumstances. IFRS
works with similar characteristics with exception that decision could not be made on particular
circumstances of any individual.
8. Evaluating degrees of compliance with IFRS by different originations across the world
There are numerous jurisdictions which maintain their own local GAAP claim and is
based on similar to or converged with IFRSs. In some of cases wordings alteration seems minor
but in other wording it is quite different. Moreover, local jurisdiction of GAAP is not in English
as not every IASs/ IFRSs have been adopted on local basis. There is presence of time lag to
adopt IFRS as local GAAP (Shahzad, and et.al., 2019). For unlisted organizations, IFRSs
required for all signifies that unlisted company is essential or selecting to design for general
purpose financial statements. This must comply with IFRSs and does not necessarily mean that
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every unlisted organization in that jurisdiction arr required for preparing IFRS financial
statements.
IFRSs is permitted in the consolidated statements and prohibited in separate statements in
Austria and IFRS is equivalent required to big unlisted and permitted for others in Australia. The
New Zealand and Australia have adopted national standards which give description as IFRS
equivalents as these standards consists of reuqimrne tof IAS 1.16 as an entity where financial
statements comply with IFRSs and make explicit statement of compliance in notes. Within these
both countries, this statement is also stated in audit report. In the similar aspect, Hong Kong has
adopted national standards which are somewhat identical to IFRS wgich comprises option of
recognition and measurement, but in some cases its transition and effective dates are different.
The organizations which are based in Hong Kong but its incorporation is in other country are
permitted for purpose of issuing IFRS financial statements instead of GAAP statements of Hong
Kong.
The IFRSs adopted in Canada as full Canadian financial reporting standards effective
2011. On the contrary, mandatory option of IFRSs is deferred on basis of entities with activities
which are self regulated along with investment organizations. Simultaneously, with adoption of
IFRSs as Philippines Financial reporting standards, numerous modification were made to IFRSs
along with stated belief of transition such as decreased segment disclosure of reporting,
commodity derivative contracts of mining organization and exemption through applying tainting
rule for particular set of different financial instruments (Suryanto and Komalasari, 2019). On
basis of banks, losses through sale of different non performing assets were allowed to be directly
amortised over specified duration. Some additional alteration to pension of IASB, lease standards
and foreign exchange.
In the same series, Singapore has also adapted IFRS which is essentially word to words
as IFRSs equivalent to Singapore. On the contrary, they have made alterations to principles of
recognition and measurements in different IFRSs with adaption of Singapore standards where
they have not adopted other IFRSs. Lastly, Malaysian Financial reporting standards which are
stated as fully IFRS-complaint and this permit organization for making unreserved statement of
direct compliance with IFRSs and required to be followed through Malaysian non private entities
for yearly period.
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CONCLUSION
On basis of above report, it could be concluded that financial reporting is very important
for undertaking business decisions in every type of organization. It has shown that there are
various stakeholders of organizations which has high requirement of financial statements to
assess financial position and performance over specified duration. In the similar aspect, it helps
to increase capital both overseas and domestic as well. It has been articulated that International
accounting standards were replaced by International Financial reporting standards which was
issued though IASB in year 2001. Simultaneously, it has reflected that both equity and
legitimacy theory are significant for every organization and efficiently reflected in Sainsbury
annual report as well. Moreover, by determining differences in financial reporting with factors
such as quality characteristics, intangible assets, development costs and locally vs globally.
Lastly, with degree of compliance there are numerous adoption of IFRSs such as Australia and
many more.
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REFERENCES
Books and Journals
Bassemir, M. and Novotny‐Farkas, Z., 2018. IFRS adoption, reporting incentives and financial
reporting quality in private firms. Journal of Business Finance & Accounting. 45(7-8).
pp.759-796.
Chychyla, R., Leone, A. J. and Minutti-Meza, M., 2019. Complexity of financial reporting
standards and accounting expertise. Journal of Accounting and Economics. 67(1). pp.226-
253.
Dănescu, T., Oncioiu, I. and Spătăcean, I. O., 2019. Fraud Risk Management for Listed
Companies' Financial Reporting. In Network Security and Its Impact on Business
Strategy (pp. 137-156). IGI Global.
Dou, Y., Wong, M. F. and Xin, B., 2019. The effect of financial reporting quality on corporate
investment efficiency: Evidence from the adoption of SFAS No. 123R. Management
Science.
Ewert, R. and Wagenhofer, A., 2019. Effects of Increasing Enforcement on Financial Reporting
Quality and Audit Quality. Journal of Accounting Research. 57(1). pp.121-168.
Liu, R. and et.al., 2018. Audited financial reporting and voluntary disclosure: International
evidence on management earnings forecasts. International Journal of Auditing. 22(2).
pp.249-267.
Palea, V., 2018, September. Financial reporting for sustainable development: Critical insights
into IFRS implementation in the European Union. In Accounting forum (Vol. 42, No. 3,
pp. 248-260). Elsevier.
Riccardi, W. N., 2019. Do Audit Firm Tenure and Size Moderate Changes in Financial
Reporting Quality due to Mandatory IFRS adoption?. Auditing: A Journal of Practice and
Theory.
Shahzad, F. and et.al., 2019. Financial reporting quality, family ownership, and investment
efficiency: An empirical investigation. Managerial Finance.
Suryanto, T. and Komalasari, A., 2019. Effect of mandatory adoption of international financial
reporting standard (IFRS) on supply chain management: A case of Indonesian dairy
industry. Uncertain Supply Chain Management. 7(2). pp.169-178.
Tomy, R. E., 2019. Threat of entry and the use of discretion in banks’ financial
reporting. Journal of Accounting and Economics. 67(1). pp.1-35.
Wang, X., Cao, F. and Ye, K., 2018. Mandatory corporate social responsibility (CSR) reporting
and financial reporting quality: evidence from a quasi-natural experiment. Journal of
Business Ethics. 152(1). pp.253-274.
Online
A revised ‘Conceptual Framework for Financial Reporting’. 2018. [Online]. Available through
<https://www.grantthornton.global/globalassets/1.-member-firms/global/insights/article-
pdfs/2018/ifrs-news---a-revised-conceptual-framework-for-financial-reporting.pdf>.
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Annual report of Sainsbury. 2018. [Online]. Available through
<https://www.about.sainsburys.co.uk/~/media/Files/S/Sainsburys/documents/reports-and-
presentations/annual-reports/sainsburys-ar-2018-full-report.pdf>.
Conceptual Framework for Financial Reporting. 2018. [Online]. Available through
<https://www.ifrs.org/-/media/project/conceptual-framework/fact-sheet-project-summary-
and-feedback-statement/conceptual-framework-project-summary.pdf>.
Financial reporting and corporate governance. 2018. [Online]. Available through
<https://www.accaglobal.com/pk/en/member/regulation/auditing-standards/reporting-
governance-uk-ie.html>.
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