Financial Reporting Answers Assignment

Financial reporting

Table of Contents
INTRODUCTION...........................................................................................................................1
MAIN BODY...................................................................................................................................1
Q1 Context and purpose of financial reporting............................................................................1
Q2 Conceptual and regulatory framework...................................................................................1
Q3 Stakeholders of an organisation and how they are benefited by financial information.........3
Q4 Value of financial reporting for meeting organisation objectives..........................................4
Q5 Presentation of financial statements.......................................................................................5
Q6 Interpretation of financial performance.................................................................................7
.....................................................................................................................................................8
Q 7 Difference between IFRS and IAS........................................................................................8
Q8 Benefits of IFRS.....................................................................................................................8
Q9 Degree of compliance with IFRS by various organisations...................................................9
CONCLUSION..............................................................................................................................10
REFERENCES..............................................................................................................................11
APPENDIX:...................................................................................................................................12

INTRODUCTION
Financial reporting is defined as a framework which involves disclosure of financial
information about the company's performance during an accounting year. It consists of preparing
financial statements i.e. balance sheet, profit & loss account, cash flow statements etc. to get an
idea of the position of a firm in terms of liquidity and profitability. A regulatory framework is
one of the most important element in determining accuracy, reliability as well as faithful
representation of final accounts. The accountancy firm selected for this report is Ernst & Young
whose client is Marks & Spencer (Abata, 2015). M&S is a multinational company whose
headquarters are situated in London, UK and was founded in 1884. The company offers different
types of products as well as services including haircare, make-up, clothing, skincare etc. This
report emphases on the purpose and need of financial reporting, conceptual regulatory
framework, various reporting models and benefits of using IFRS, IAS.
MAIN BODY
Q1 Context and purpose of financial reporting
Financial reporting: This refers to a framework which involves communicating with the
users of financial information like investors, suppliers, creditors etc. It is a system which prepare
statement of accounts for companies i.e. statement of financial position, profit & loss, changes in
equity, cash flow statement (Financial reporting framework, 2019). This consists of calculating
ratios for a firm to determine their position in terms of availability of finance, working capital
position etc. Marks & Spencer prepares statement of accounts to evaluate performance of
revenue figures as well as maintaining cash stability with the use of reporting standards such as
IAS, IFRS. The purpose of financial reporting is to put together and review how much a
company is generating during an year.
Q2 Conceptual and regulatory framework
Conceptual and regulatory framework: It refers to a statement of GAAP which forms
a framework for financial reporting by providing a basis for new standards and any up gradation
in previous ones. This is a combination of both IFRS as well as IAS (Churet and Eccles, 2014). It
includes principle based and rule based systems which govern various regulations to be followed
by Marks & Spencer. These are required to ensure timeliness, relevance, completeness of
accounts. Some of them are listed below:
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IFRS 15 - Revenue from contracts with customers: Revenue is considered to be one of
the most important criteria of a business. Marks & Spencer follows this standard to determine
growth in its sales by following the following process:
Identify the contract with a customer: A contract is a written agreement of terms and
conditions which are agreed by all members in the board. It can be in written, oral or verbal.
Identify separate performance obligations: These are the promises made by a company
when a promised good or service is transferred to the customer.
Determine the transaction price: It is a price which an entity expects to receive when a
promised good or service is transferred to the customer (Aletkin, 2014).
Allocate the transaction price to each performance obligation: This is allocated to
each and every performance obligation as per the stand alone selling price. It refers to a price at
which a company would sell a good or service separately to the customer.
Recognise revenue when (or as) a performance obligation is satisfied: Revenue is
recorded only when goods are delivered to the customer. It is recognised in the income statement
of a firm.
IFRS 5 – Non-current assets held for sale and discontinued operations: This standard
sets out requirement for classification, measurement, presentation of non-current assets held at
sale. It covers both continuing as well as discontinuing operations. An entity shall classify a
NCA if carrying amount is recovered principally through a sale transaction rather than through
continuing use. It is measured at lower of carrying amount and fair value less costs to sell
(Dowdell Jr, Herda and Notbohm, 2014). This is presented in the statement of financial position
under current assets. Marks & Spencer records its non-current assets as held for sale by
calculating carrying amount and fair value of assets.
Purpose of conceptual and regulatory framework: The main purpose of conceptual
framework is to assist IASB in development of new accounting standards (Fleming and others,
2016). It aims at providing accurate, relevant, reliable etc. information top the users of financial
information. This is required to satisfy needs of external parties.
Qualitative characteristics: Qualitative characteristics for useful financial information
are faithful representation which states that information must be complete, neutral and free from
error. Marks & Spencer collects data from areas that provide accurate facts regarding statement
of accounts. Another characteristic is understandability which provide users with consistent
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information prepared by supervisors that carry knowledge about items listed under financial
statements. Marks & Spencer hires specialised accountants which have an expertise in the field
of accounting.
Q3 Stakeholders of an organisation and how they are benefited by financial information
Stakeholders are a group of person who can affect or be affected by the decisions made
in a company. There are three type of shareholders i.e. internal, connected and external. The
primary stakeholders of Marks & Spencer are employees, suppliers, government, customers,
shareholders, competitors, investors etc.
Internal stakeholders: These are the stakeholders who work internally for the growth
and development of an organisation and include shareholders, employees etc. They are benefited
from financial information by:
 Shareholders: They are benefited by the financial information as these need it to make
decisions about investing in equity instruments like stock, reserve, options, shares etc.
as further dividend is distributed to shareholders as per their holding in the company.
 Employees: They are benefited by the financial information as it gives them an idea
about the accountability of firm in which they will be working, its ability to pay debts
on time.
External stakeholders: These are the stakeholders who work outside of a business or
project and can be affected by the external environment and include customers, investors etc.
They are benefited from financial information by:
 Customers: Customers are benefited by financial statements as it gives them an idea
about the liquidity as well as profitability position of an organisation.
 Investors: Investors are benefited by financial statements as it gives them information
about the economic sources of an enterprise and effect of different business transactions
on preparation of accounting records.
Financial reporting helps the stakeholders by giving them an idea about the working
capital position of a company (Flower, 2015). Marks & Spencer values its stakeholders by
providing them with accurate and complete financial information which is understandable by the
users.
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Q4 Value of financial reporting for meeting organisation objectives
Financial reporting plays a very important role in defining goals and objectives of an
entity by generating high sales revenue. In order to achieve organisational objectives,
development and growth. Marks & Spencer prepares statement of accounts that reflect its ability
to pay debt and maintain a balance among assets, equity & liabilities.
There are different models in financial reporting which help in achieving organisational
objectives, development and growth. Some of them are explained below:
Financial reporting model: It is a model followed by companies to evaluate financial
performance of its statement of accounts. Marks & Spencer prepares its financial statements as
per the conceptual regulatory framework issued by International Accounting Standard Board.
Some of the models are explained below:
Three statement model: It is a type of model which is prepared by all companies to
analyse the financial position during an accounting year. This consists of three statements i.e.
balance sheet, profit & loss account, cash flow statement. Balance sheet is a statement which
includes effect of assets, equity and liabilities. This is prepared by companies to analyse their
working capital position. It's presentation involves a 'T' shaped format where assets are shown on
the top followed by equity & liabilities (Müller, 2014). Assets are the resources that bring
economic benefit to the company whereas liabilities are present obligation as a result of past
event. Profit & loss account is a statement which record gains & losses that may arise during an
accounting year. This is prepared by companies to measure their profitability position. It includes
revenue, cost of sales, administrative expenses etc. Cash flow statement is a statement which
records inflows and outflows of cash for companies. This is prepared on the basis of IAS-7
Statement of cash flows which includes three activities i.e. operating, investing and financing.
These consist of loss/profit on investment and working capital changes, purchase/sale of fixed
assets, issue/repayment of shares etc.
Consolidation model: It is a model constructed by combining financial results of various
businesses into one model. This involves a parent and subsidiary company and is prepared as per
IFRS-10 Consolidated financial statements. These are presented in the form of tables in a
spreadsheet or in the form of graphs or charts (Pelger, 2016). It includes calculation of goodwill,
group retained earnings, non controlling interest, unrealised profit etc. for preparation of final
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accounts of a company. The effect of IFRS-3 Business combinations is also considered while
preparing consolidated financial statements.
Auditing model: It is a type of model which represents systematic examination of books,
statutory records, vouchers etc. of an organisation. This consists of various techniques to check
completeness of data. Some of them are explained below:
Reconciliation: It is a technique used by auditors to check any errors in the statement of
accounts. These are prepared to identify any misconduct, fraud or error, loss of theft that may
arise while preparing financial statements.
Physical examination: This requires verification and physical inspection of tangible
assets and other line items in balance sheet as it confirms their existence.
The financial reporting models help in achieving organisational objectives, growth by
giving a brief idea to user of how financial statements are prepared whereas the auditing models
helps the user in giving accurate, reliable, relevant and complete information regarding the
preparation of accounting records. In order to maximise profit as well as maintain completeness
of records it is necessary for Marks & Spencer to follow, prepare different financial reporting as
well as auditing models which will help in achievement of goals and objectives of an
organisation.
Q5 Presentation of financial statements
Statement of profit or loss & other
comprehensive income of Godwin Plc for
the year ended 31st December, 2018
Particulars Amount
Revenue (585100+9600) 594700
less: cost of sales (working note-3) 403638.75
Gross profit 191061.25
less: operating expenses (working note-4) 92138.75
less: bank interest 1200
Profit before tax 97722.5
less: income tax expense 9500
Profit for the year 88222.5
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Other comprehensive income:
gains on property revaluation -
Total OCI 88222.5
Interpretation: The above statement shows calculation of net profit for Godwin Plc by
deducting all expenses & losses, adding income & gains. A charge of income tax is subtracted
from the profit. Cost of sales figure includes depreciation on non-current assets and valuation of
closing stock. A portion of rental income is added to sales revenue (Flower, 2018). Cash flow
provides information regarding depreciation, income tax expense etc. Profit for the year is
considered while calculating value of operating activity.
Statement of changes in equity of Godwin Plc as at 31st
December, 2018
Particulars Share capital
Retained
earnings
Revaluation
reserve
As per TB 86700 45500 40000
less: preference dividend 2500
less: ordinary dividend paid 4500
Profit for the year 88222.5
Total 86700 126722.5 40000
Statement of financial position of Godwin Plc for the
year ended 31st December, 2018
Particulars Amount
ASSETS
Non-current assets
Property, plant & equipment (working note-1) 270322.5
Current assets
Trade receivables 78000
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Closing inventory 24700
Total assets 373022.5
EQUITY & LIABILITIES
Equity
Ordinary share capital 25p shares 86700
Retained earnings 126722.5
Revaluation reserve 40000
Non-current liabilities
10% redeemable preference shares 26500
Deferred tax 10000
Current liabilities
Trade payables 62700
Taxation 9500
Bank overdraft 10900
Total equity & liabilities 373022.5
Interpretation: The above statement provides information related to debtors, creditors,
closing inventory, fixed assets, reserves & surplus etc. It bifurcates assets and liabilities as
current, non-current including a portion of equity capital. Cash flow emphasises on providing
purchase/sale of fixed assets, issue/repayment of shares, dividend, interest paid etc. CFS shows
these under investing and financing activity.
Q6 Interpretation of financial performance
Current ratio= Current assets/ Current liabilities
0.89657189
66
0.93741808
65
Particulars 2017 2018
Current assets 153260 114440
Current liabilities 170940 122080
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Interpretation: The current ratio of Marks & Spencer is increasing by 0.04%. It shows
that the company does not enough funds to meet its liabilities (Frias‐Aceituno, Rodríguez‐Ariza
and Garcia‐Sánchez, 2014). The ideal current ratio should be 2:1.
Quick Ratio= Quick assets/ Current
0.45284895
28
0.29767365
66
Particulars 2017 2018
Quick Assets 77410 36340
Current liabilities 170940 122080
Interpretation: The quick ratio for Marks & Spencer is diminishing which shows that
the company's liquid position is not stable and it is having difficulties in paying trade payables.
Ideal quick ratio should be 1:1.
Debt-Equity Ratio= Total debt/ Shareholders fund
1.40332034
34
1.67208384
61
Particulars 2017 2018
Total Debt 442930 394060
Shareholders Fund 315630 235670
Interpretation: It reflects unfavourable condition of debt for Marks & Spencer as the
total debt for the company has decreased by 11% and share capital has decreased by 25%. This
shows that no shares have been issued during the financial period.
Total asset Turnover Ratio= COGS/ Total Asset
0.81825026
54
0.91444683
94
Particulars 2017 2018
COGS 662930 674560
Total asset 810180 737670
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Interpretation: There is a slight increase in the asset turnover ratio which implies that
the profitability condition of Marks & Spencer is not going very well. The company is having
difficulties in receiving money from its debtors.
Q 7 Difference between IFRS and IAS
Basis IFRS IAS
Overview They stand for International
Financial Reporting Standards
which were published by IASB
after 2001.
They stand for International
Accounting Standards which were
published by IASC between 1973 and
2001.
Standards It includes standards relating to
revenue, consolidation, fair value
measurement, share-based
payments etc.
It includes standards relating to
valuation of inventory, earnings per
share, insurance contracts, cash flow
statements etc.
Establishment These were established due to the
problems which arose in making of
IAS.
These were established due to the
problems faced by companies while
making financial statements.
Q8 Benefits of IFRS
The following are the benefits of IFRS:
 It has created a single set of standards that are followed around the world.
 These have benefited the economy by growing its operations in international businesses.
 It offers more flexibility in performing various accounting practices followed by
companies (Gigler and others, 2014).
 It improves rate of foreign direct investment in the international market.
Q9 Degree of compliance with IFRS by various organisations
Every country follows different financial reporting processes for complying with rules &
regulations. For example, U.S. follows general principles based on Generally Accepted
Accounting Principles (GAAP) whereas a separate set of accounting standards are follows by
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U.K. i.e. IFRS (Perera and Chand, 2015). The differences between financial reporting in both
countries is mentioned below:
Basis Financial reporting in US Financial reporting in UK
About The accountants follow specific
rules based on GAAP.
The accountants follow specific
rules based on IFRS.
Issued by They are issued by FASB and
adopted by U.S. Securities and
Exchange Commission which help
companies in preparing final
accounts.
These are issued by IASB to
provide a criteria for companies in
preparation of financial statements.
Objective These are principles that help in
remembering mission an direction
of GAAP system.
These are accounting standards that
help in forming activities of an
organisation.
Examples It includes principle of regularity,
consistency, sincerity, prudence
etc.
It includes revenue recognition,
leases, financial instruments, share-
based payments etc.
Factors which may impact compliance with IFRS by organisations: It is important for
organisations in every country to comply with financial reporting framework. This is necessary
as it helps in maintaining financial transparency, evaluating tax liability, identifying any errors as
well as for better decision making among the management. This also facilitates statutory audit
which is required in auditing of financial statements for an organisation so that they can express
their opinion Every country follows different set of principles or standards which are complied
by rules & regulations. It acts as a backbone for planning, analysing, benchmarking etc. of FR by
stakeholders. This gives an idea about how financial statements are made within a company
(Williams and Dobelman, 2017).
For example, suppose Marks & Spencer has been offered to prepare financial statements
for various organisations in Australia, UAE, Canada, U.K. Since there will be so many
organisations for which the company has to produce accounting statements so it will result in a
complex process to apply various standards. For making the process easier, the company adopts
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and complies with IFRS which will make it easy for the accountant of Marks & Spencer to
prepare final accounts for all organisations. IFRS states different standards to be followed which
includes revenue recognition, leases, consolidation etc.
Due to adoption of IFRS, stakeholder in the firms will get a better understanding about
presentation of financial statements. Every company will be able to produce statement of
accounts on their own by appointing well-equipped managers.
CONCLUSION
It is concluded from the above report that every company needs to comply with financial
reporting standards as well as conceptual regulatory framework in order to prepare financial
statements. For that businesses follow IFRS which includes revenue recognition, non-current
assets held for sale and discontinued operations etc. Marks & Spencer also considers impact of
shareholders on organisational objectives and growth. The company also calculates ratios to get
a clear picture of liquidity and profitability position. Every country has different rules &
regulations to be followed by accountants in producing financial statements like U.S. Follows
GAAP whereas U.K. Implements IFRS which are issued by IASB. FR plays a very important
role in formulating accounting policies and procedures for the welfare of company.
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REFERENCES
Books and journals:
Abata, M. A., 2015. The impact of international financial reporting standards (IFRS) adoption on
financial reporting practice in the Nigerian banking sector. Journal of Policy and
Development Studies. 289(1850). pp.1-16.
Aletkin, P. A., 2014. International financial reporting standards implementation into the Russian
accounting system. Mediterranean Journal of Social Sciences. 5(24). p.33.
Churet, C. and Eccles, R. G., 2014. Integrated reporting, quality of management, and financial
performance. Journal of Applied Corporate Finance. 26(1). pp.56-64.
Dowdell Jr, T. D., Herda, D. N. and Notbohm, M. A., 2014. Do management reports on internal
control over financial reporting improve financial reporting?. Research in Accounting
Regulation. 26(1). pp.104-109.
Fleming, A. and et.al., 2016. Financial reporting fraud: Public and private companies. Journal of
Forensic Accounting Research. 1(1). pp.A27-A41.
Flower, J., 2015. The international integrated reporting council: a story of failure. Critical
Perspectives on Accounting. 27. pp.1-17.
Flower, J., 2018. Global financial reporting. Macmillan International Higher Education.
Frias‐Aceituno, J. V., Rodríguez‐Ariza, L. and Garcia‐Sánchez, I. M., 2014. Explanatory factors
of integrated sustainability and financial reporting. Business strategy and the
environment. 23(1). pp.56-72.Nobes, C., 2014. International classification of financial
reporting. Routledge.
Gigler, F. and et.al., 2014. How frequent financial reporting can cause managerial short‐termism:
An analysis of the costs and benefits of increasing reporting frequency. Journal of
Accounting Research. 52(2). pp.357-387.
Müller, V. O., 2014. The impact of IFRS adoption on the quality of consolidated financial
reporting. Procedia-Social and Behavioral Sciences. 109. pp.976-982.
Pelger, C., 2016. Practices of standard-setting–An analysis of the IASB's and FASB's process of
identifying the objective of financial reporting. Accounting, Organizations and Society.
50. pp.51-73.
Perera, D. and Chand, P., 2015. Issues in the adoption of international financial reporting
standards (IFRS) for small and medium-sized enterprises (SMES). Advances in
accounting. 31(1). pp.165-178.
Williams, E. E. and Dobelman, J. A., 2017. Financial statement analysis. World Scientific Book
Chapters. pp.109-169.
Online
Financial reporting framework. 2019. [Online}. Available through:
<https://www.edupristine.com/blog/financial-reporting>
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APPENDIX:
Income Statement of Marks & Spencer-
Particulars 2018 2017
Revenue
Total revenue 1069820 1062200
Cost of revenue 674560 662930
Gross profit 395260 399270
Operating expenses
Selling general and administrative 332470 334860
Others 4950 6320
Net profit 57840 58090
Balance sheet of Marks & Spencer-
Particulars 2018 2017
Current assets
Cash and cash equivalents 20770 46860
Net receivables 14480 13780
Inventory 78100 75850
Other current assets 1090 16770
Total current assets 114440 153260
Long-term investments 4360 5150
Property plant and
equipment 439390 483780
Goodwill 7740 7840
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Intangible assets 52180 63060
Other assets 119560 97090
Total assets 737670 810180
Current liabilities
Accounts payable 87290 96750
Short/current debt 12530 51760
Other current liabilities 22260 22430
Total current liabilities 122080 170940
Long-term debt 162290 166340
Other liabilities 109940 106240
Minority interest -250 -590
Total liabilities 394060 442930
Stockholders' equity
Common stock 40620 40620
Retained earnings 656040 661760
Treasury stock -442630 -428390
Capital surplus 41640 41640
Other stockholder equity -442630 -428390
Total stockholder equity 295670 315630
Net tangible assets 811810 929500
Working notes:
1) Property, plant & equipment:
Particulars
Plant &
equipment
Land &
property
Investment
property
Cost 148000 150000 28000
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