Financial Reporting for Businesses - Semester 2, 2020/21

This report presents a comprehensive financial analysis of a business, addressing key aspects of financial reporting. It begins with an introduction to financial reporting, emphasizing the importance of accurate financial depiction for stakeholders, including revenues, expenditures, and cash flo...Read More

Financial Report for Business

TABLE OF CONTENTS
INTRODUCTION......................................................................................................................3
SECTION A...............................................................................................................................3
1..............................................................................................................................................3
2..............................................................................................................................................4
SECTION B...............................................................................................................................6
3..............................................................................................................................................6
4..............................................................................................................................................8
CONCLUSION........................................................................................................................11
REFERENCES.........................................................................................................................12

INTRODUCTION
It accounts for the standard practice which results into offering its stakeholders the
accurate depiction of the firm’s finances which involves the revenues, expenditure, profits,
cash flow in the form of a formal record which results into providing an in-depth insight into
the financial information. The each of these KPIs are very important as they demonstrate the
overall health of the organization when it comes to money. The proper and effective financial
planning results into improving the debt management of the company as it has the potential to
affect the progress of the entity leading to affecting the profitability and liquidity of the
concern. Apart from this, it also helps in evaluating the progress and compliance of the
company in terms of accuracy and robust. This report provides no insight in the application of
the various accounting standards which are essential for the purpose of effectively preparing
the financial reports of the company.
SECTION A
1.
Particulars
Pond Stream Consolidated
£’000 £’000 £’000
£’00
0 £’000 £’000
Non-current Assets
Property plant and equipment 160 95 255
Equity Investments at cost 390 50 440
Investment properties 860 230 1090
Acquisition of shares of Air (30000*3) 90 90
1500 375 1875
Current Assets
Inventories 127 58 185
Trade receivables 187 117 304
Cash and bank 57 371 24 199 81 570
Total assets 461 199 660
Equity and liabilities
Capital and reserves
Ordinary share capital (£1 each) 400 200 600
Share premium account 100 -
Retained earnings (600+ (2500*6 months)) 15600 96 15696
16100 296 16396
Non-current liabilities
10% Debenture stock 90 - 90
Current liabilities
Trade payables 511 218 729

Current tax payable 80 591 60 278 140 869
Total equity and liabilities 16781 574 17355
The consolidated balance sheet is the major financial statement in case of group
companies. As here are number of companies under the same group which presents the
financial position of the group as a whole (Sheets, 2020). This is usually done through the
accounting software and thus, helpful in making the consolidated balance sheet as and when
required, thus, effectively and timely preparing the accounting reports.
2.
IAS 1 Presentation of Financial Statements sets out the general necessities for
budget summaries, including how they ought to be organized, the base prerequisites for their
substance and superseding ideas like going concern, the gathering premise of bookkeeping
and the current/non-current differentiation. The standard requires a total arrangement of fiscal
reports to contain an assertion of monetary position, an assertion of benefit or misfortune and
other extensive pay, an assertion of changes in value and an assertion of incomes (Dzugwahi
and Schneider, 2019). IAS 1 applies to all universally useful budget summaries that are
arranged and introduced as per International Financial Reporting Standards (IFRSs). Broadly
useful fiscal summaries are those planned to serve clients who are not in a situation to require
monetary reports custom-made to their specific data needs. The general requirement
pertaining to the preparation and presentation of the financial statements are stated within the
IAS 1. But it is important to note that this standard is only related to the yearly financial
statement and along with that, it provides fair presentation and compliance with the IFRS,
GAAP, offsetting, materiality and aggregation.
In accordance to this, if there is change in the reporting period the business entities
are required to disclose this fact clearly and on time along with the cause behind such a
decision (Sihite and Mita, 2019). The businesses can also include the explanatory note
presenting the similar information that is tantamount, for example with same number of
months as current detailing period. The change in the reporting period is having an impact
over the two full reporting periods, as when the firm are a year after the change, the near
information is for a more drawn out/more limited period than a year, as this was the period of
change.
Generally speaking, the business organization should introduce similar data for the
previous period for all sums detailed in the current period, even without explicit necessity in a
given IFRS (Musinszki and Süveges, 2019). Nonetheless, it isn't needed to incorporate

account/clear data in association with the past year in the event that it isn't pertinent or
important to understanding it in the current period.
a)
Income statement
Sales revenue 135000
Cost of sales 62000
Gross profit 73000
Distribution costs 13000
Administrative expenses 14000
Interest paid 3600
Dividends paid 4000
Development expenditure 27000
Deferred tax 7200
Depreciation 28000
Capital allowance 50000
Profit before tax 26200
Less: Tax 7200
Profit after tax 19000
Revaluation of property 12000
Net profit 31000
b)
Statement of Changes in Equity
Particulars
£'000 Share
Capital
£'000 Accumulated
profits
£'000
Total
Ordinary share as at 31 December
2020 36000 36000
Accumulated profits 29800 29800
Revaluation reserve 12000 12000
C/f 31 December 2019 36000 41800 77800
c)
Balance sheet
Particulars
Amoun
t
Assets
Noncurrent assets
Property (58000-28000+5000+12000) 47000
Plant 9000
Current Assets
Inventories 21000
Trade receivables 26000
Bank 40600

Total Assets 147800
Equity and Liabilities
Equity shares 36000
Accumulated profits (10800+19000) 29800
Revaluation reserve 12000
Non-current liabilities
6% Loan note 61200
Deferred tax 3800
Current Liabilities
Trade payables 5000
Total equity and liabilities 147800
SECTION B
3.
a)
Cash Flow Statement
[£'000]
2019
Operating Cash Flow
Net Earnings 676
Plus: Depreciation & Amortization 110
Less: Changes in Working Capital 240
Less: Income tax 120
Cash from Operations 426
Investing Cash Flow
New product development 240
Investments in Property & Equipment 2,130
Cash from Investing 2,370
Financing Cash Flow
Issuance (repayment) of debt 10
Finance cost 44
Deferred tax 20
lease liabilities 50
Dividend paid 33
Issuance (repayment) of equity 1,840
Cash from Financing 1,703
Net Increase (decrease) in Cash (241)

Opening Cash Balance 470
Closing Cash Balance 229
Change in Working capital
Working capital for 2018 200
Working capital for 2019 440
Change in working capital 240
b)
A major part of the Financial Reporting test is the capacity to dissect a bunch of
fiscal summaries. The assertion of incomes is one of the essential fiscal summaries, and
Financial Reporting up-and-comers should have the option to clarify the exhibition of a
substance dependent on the entirety of the budget reports including the incomes given. The
money created from activities figure ought to be a positive figure. This guarantees that the
business produces sufficient money to cover the everyday running of the organization (Günay
and Fatih, 2020). The money created from tasks ought to likewise be adequate to cover the
day to day running of the business, as the organization ought to have the option to cover these
centre instalments without assuming additional obligation, giving offers or selling resources.
Any money left over in the wake of making payment of the tax and the interest liabilities is
considered as 'free money', and attention and focus ought to be paid with respect to where this
is to be spent. Preferably, a profit would be paid out of this free money, with the goal that a
firm doesn't need to take out longer sources of account to make normal payments to its
investors. Other great methods of utilizing this free money is put resources into additional
non-current resources (as this ought to create returns into the future) and taking care of
credits (as this will diminish further interest payments).
The cash flow from the investing activities focusses on the cash flows pertaining to
the non-current assets. For instance, sale of resources can be something worth being thankful
for if those resources are being replaced by another. Nonetheless, as expressed prior, if an
organization is auctioning off its premises and is presently leasing some place, this makes the
monetary position altogether more fragile, and banks will be less able to loan as there are less
resources for secure an advance against (Soboleva and et.al., 2018). Based on the above cash
flow statement, it can be inferred that the company is having positive cash flow from its
operating activities but is lower which indicates that the operating activity of the company is
not performing well which might result into affecting the performance of the business. If the
performance kept on deteriorating, then this might lead to making the entity procure
additional funds for the business either by way of borrowing debts or issuing equity shares.

Under both the cases, the long-term financial position of the company is being affected
(Easton and et.al., 2018). Raising funds through the way of issuing shares won't prompt
interest instalments and won't expand the degree of risk related with the entity. But it should
be determined and noticed that issuing shares will prompt more investors and conceivably
higher dividend payment later on in the future.
Along with that, the company has issued a huge amount of equity shares for the
purpose of meeting with its funds requirement which resulted into affecting the financial
capacity and ownership of it (Bhandari and Adams, 2017). Therefore, this is a point of
concern for the company and should look for the approach for overcoming the risk which is
being attached with it. On the off chance that business concerns present more periods in
similar data, they can do so just in primarily selected fiscal reports (for example two years of
similar data for P&L in particular). In any case, business concerns need to incorporate these
extra periods additionally in the notes.
Thus, the cash flow statement is helpful for the organization in determining the areas
where it is incurring huge amount of expenditure and how it will result into impacting the
overall functioning of the entity. Based upon this, corrective actions can eb undertaken in
respect to improving the financial positioning of the company.
4.
The deferred income tax accounting provision is stated under IAS 12 in order to
account for the difference among the tax base of an asset and liabilities and its carrying
amount. The deferred income tax and existing income tax involves the total tax expenses
within the income statement (Rathke and et.al., 2019). The tax base pertaining to an asset is
the sum that will be deductible for tax purposes against any available economic advantages
that will stream to the firm when it recuperates the conveying measure of the resource. On the
off chance that these benefits won't be available, the expense base of the resource is
equivalent to its conveying sum.
The tax base of a risk is it carrying sum, less any sum that will be deductible for the
tax purposes in regard of that obligation in future periods. On account of income which is
being received in advance, the assessment base of the subsequent risk is its carrying sum, less
any measure of the income that won't be available in future periods (Mear, Bradbury and
Hooks, 2019). The deferred taxable liability is determined in respect to all the differences
which arises like when the carrying amount of an asset is greater in comparison to the base
tax rate or the carrying amount of a liability is lower than its tax base. IAS 12 necessitates

that deferred tax obligation is recorded in regard of all available transitory contrasts that exist
at the year-end – this is now and again known as the full provision strategy.
Inside budget summaries, non-current assets with a restricted valuable life are
dependent upon devaluation. Nonetheless, inside tax calculations, non-current assets are
dependent upon capital remittances (otherwise called tax depreciation) at rates set inside the
pertinent tax enactment. Where at the year-end the aggregate depreciation charged and the
total capital remittances guaranteed are extraordinary, the carrying amount of the assets (cost
less aggregated depreciation) will at that point be distinctive to its duty base (cost less
gathered capital recompenses) and henceforth a taxable temporary difference accrues or
emerges.
It is imperative to know that the temporary contrasts can bring about requirement to
record a deferred tax asset rather than an obligation. Transitory contrasts influence the
circumstance of when expense is paid or when tax relief is being received. While typically
they bring about the instalment being conceded until the future or alleviation being gotten
ahead of time (and thus a conceded charge responsibility) they can bring about the instalment
being accelerated up or relief being due later on in the future date (Georgios, Georgios and
Maria-Rafailia, 2019). Under such situations, the temporary differences consequently lead to
the deferred tax asset arising or where the business concern has other bigger temporary
differences which resultant into creating deferred tac liabilities along with reduced deferred
tax liability. IAS 12 expresses that deferred tax liability and liabilities ought to be estimated
dependent on the assessment or tax rates that are relied upon to apply when the
resource/responsibility will be acknowledged/settled. Ordinarily, current assessment rates are
utilized to compute deferred tax on the premise that they are a sensible guess of future
expense rates and that it would be too inconsistent to even consider assessing future tax rates.
Deferred tax assets and liabilities address future assessments that will be recuperated
or that will be payable. It might thusly be normal that they ought to be limited to mirror the
time worth of cash, which would be steady with the manner by which different liabilities are
estimated. IAS 12, notwithstanding, doesn't allow or permit the limiting of deferred tax assets
or liabilities on practical grounds.
i) The deferred tax provision will be
220 – 180
= 40
Tax liability = 40 * 30%
= 12

The revaluation of the non-current assets is also taxable. When the non-current asset
is revalued to its current value in the financial statements, then the revaluation surplus is
recorded under the heading equity and is also reported as other comprehensive income. While
the conveying measure of the resource has expanded, the expense base of the resource stays
as before thus a transitory distinction emerges. Expense will get payable on the overflow
when the resource is sold thus the brief distinction is available. Since the revaluation excess
has been perceived inside value, to agree with coordinating, the expense charge on the excess
is additionally charged to value. In the above question, the carrying amount is 220 now while
the tax base is 180 therefore, the difference of 40. With the tax rate given to be 30%, the
deferred tax liability derived to be 12.
ii) £600 million * 30% * ¼
= £45
Schemes most of the times contain conditions which should be met before there is
entitlement to the offers. These are called vesting conditions. On the off chance that the
conditions are explicitly identified with the market cost of the organization's shares at that
point such conditions are overlooked for the motivations behind assessing the quantity of
value shares that will vest (Mear, Bradbury and Hooks, 2019). The intuition behind this is
that these conditions have effectively been considered when reasonable esteeming the offers.
In the event that the vesting or execution conditions depend on, for instance, the growth in
profits or profit per share, at that point it should be considered in assessing the reasonable
worth of the alternative at the award date. Under the given situation, the market-based
condition can be ignored for the purpose of the calculation. However, the employment
condition must be taken into account. The scheme will be spread over the four years as given
above.
iii) Deferred tax asset =
= 28 * 30%
= £8.4
Under the case where the revenue is received in advance and the revenue is taxed on receipt
but is basically deferred for the accounting purpose then the tax base of the liability is
equivalent to the carrying amount. Conversely, in case the income is recognized for the tax
purposes when the goods and services are received, then the tax base will be equal to nil.
iv) Deferred tax asset
= 58 – 44

= 14 * 30%
= £4.2
The conveying measure of conceded charge resources are surveyed toward the finish of each
announcing period and decreased to the degree that it is not, at this point plausible that
adequate available benefit will be accessible to permit the advantage of part or the entirety of
that conceded charge resource for be used. Any such decrease is consequently switched to the
degree that it becomes plausible that adequate available benefit will be accessible.
v) Deferred tax asset
5 (60-55) * 30%
= £1.5
The contribution towards the pension is only recognised for the tax purpose when it is paid in
the future. The pension expense is being ignored under the give case so that the liability has
the nil tax base. The entity will receive tax relief in the future and so a deferred tax asset of
1.5 should be recorded at the reporting date.
CONCLUSION
It can be inferred from the above that the financial report is very important from the
various aspects. As it assists in answering number of questions in respect to the
organization’s financial activities which results into providing both internal and external
stakeholders the more accurate, reliable and valid information. In addition to this, it offers
can insight into the strategic as well as operational metrics which is being utilized by the
organization for undertaking the relevant business decisions. Apart from this, it is also very
useful in availing credit or loans from the financial institutions as it clearly defines the
financial position of the company which provides better and useful information to the
investors, creditors who base their decision on it. It also provides an insight into IAS 1
pertaining to the preparation of financial statements which provides guidelines to be followed
while creating the financial statement which results into accurately keeping into account of
all the relevant standards, aspects, principles of accounting resulting making the financial
results more useful, true and fair. IAS 12 considers is in respect to the deferred taxation and
how it is to be calculated and accounted for under the various situations in which a company
comes across. Thus, the relevance and the significance of applicability of financial reporting
standards is determined and analysed along with practical application of it.

REFERENCES
Books and Journals
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Musinszki, Z. and Süveges, G.B., 2019. Strategic decision-making supported by traditional
financial indicators. Oradea Journal of Business and Economics. 4(1). pp.29-37.
Günay, F. and Fatih, E.C.E.R., 2020. Cash flow based financial performance of Borsa
İstanbul tourism companies by Entropy-MAIRCA integrated model. Journal of
multidisciplinary academic tourism. 5(1). pp.29-37.
Soboleva, Y.P., and et.al., 2018. Monitoring of businesses operations with cash flow
analysis. International Journal of Civil Engineering and Technology. 9(11). p.2034.
Bhandari, S.B. and Adams, M.T., 2017. On the definition, measurement, and use of the free
cash flow concept in financial reporting and analysis: a review and
recommendations. Journal of Accounting and Finance. 17(1). pp.11-19.
Easton, P.D., and et.al., 2018. Financial statement analysis & valuation. Boston, MA:
Cambridge Business Publishers.
Rathke, A.A., and et.al., 2019. Last chance for a big bath: managing deferred taxes under IAS
12 in Brazilian listed firms. Revista Contabilidade & Finanças, (AHEAD).
Mear, K., Bradbury, M. and Hooks, J., 2019. Is the balance sheet method of deferred tax
informative?. Pacific Accounting Review.
Georgios, K., Georgios, M. and Maria-Rafailia, L., 2019. The Impact of Deferred Taxation
on Banking Profitability and Capital Adequacy. Evidence from the Greek Banking
System. International Journal of Applied Economics, Finance and Accounting. 5(1).
pp.1-13.
Mear, K., Bradbury, M. and Hooks, J., 2019. The ability of deferred tax to predict future
tax. Accounting & Finance.
Sihite, B. and Mita, A.F., 2019, January. Trading volume reactions and the adoption of
international accounting standard (IAS 1): Presentation of financial statements in
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Conference, IBIMA 2018 (pp. 5154-5159). International Business Information
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OF FINANCIAL STATEMENTS: THE US, GERMAN AND NIGERIAN GAAPS.
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PROCEEDINGS, 2019 (p. 452).