Financial Reporting - Assignment Sample

Financial
Reporting

Table of Contents
INTRODUCTION...........................................................................................................................1
TASK 1............................................................................................................................................1
1. Context and purpose of financial reporting.............................................................................1
2. Conceptual, regulatory framework, key principle and qualitative characteristics..................2
3. Main Stakeholder and benefit to financial information..........................................................3
4. Value of financial reporting to meet objective and growth.....................................................5
5. Main Financial Statements......................................................................................................5
6. Interpretation and communication of financial performance..................................................8
7. Differences between IAS and IFRS........................................................................................9
8. Advantages of International financial reporting system.......................................................10
9. Degree of compliance with IFRS..........................................................................................11
CONCLUSION..............................................................................................................................12
REFERENCES..............................................................................................................................13

INTRODUCTION
In the present time, every type of business has different departments to conduct business
activities and present daily operational activities in a successful way. It helps to achieve
organizational goals and objectives (Bennett, James and Klinkers, 2017) . The functioning of
these sections are based on other departments but mainly connected with accounting and finance
section which are provided useful resources to present different types of business activities. The
main concept of financial reporting is connected with the disclosure of meaningful financial
information which presents in front of stakeholders. On the basis of this information, they can
analyse overall performance and present situation of company in a particular period of time. At
the end of accounting process present some typical factors of financial reporting like financial
statements, annual reports, catalogue, and management analysis and decision. To better
understand concept of financial reporting KPMG one of the largest financial accounting
organization which provide several financial services.
In the report consist of purpose, benefits to stakeholder, conceptual and regulatory
frameworks and value of financial reporting for a company is discussed. Apart from the report,
differences between IAS and IFRS, an advantage of IFRS and degree of compliances are
discussed respectively. Additionally, prepare different types of financial statements such as
balance sheet, statement of equity and income statements using financial information.
TASK 1
1. Context and purpose of financial reporting
In current times, financial reporting plays a significant role in the world economy and it
will provide authentic and reliable financial information to owner of company. This financial
information present through financial statements like balance sheet, income statement, and
statement of changes in equity. On the basis of these statements they analysis of overall
performance then take effective decisions to improve profit margin. These statements are
prepared on an annual basis and summarise the real performance of several operations and staff
members. Financial reporting consists of disclosure of financial information to top management
which is defined about the performance of an organization in a specific period of time (Chen,
Zhang and Zhou, 2018) .
1

It helps in further investments and generates profit through various operations. It is getting that
financial statements important for KPMG to meet the necessity then apply with an appropriate
accounting system. It enables to provide the right information that is important to make a future
investment decision. There are defined purpose of financial reporting, that are as follows:
 The main purpose of financial reporting management connect with effective decision
making and concerning the objective of business as well as overall strategies.
 It will help to provide reliable and appropriate information to those stakeholders who are
connected with company and help in decision-making process.
 This support in several appearances like information connected to credit to a customer,
lend of the borrower and either to invest in a particular business or move to another
alternative.
 The financial reports of a company provide important information which is connected
with net inflows and outflows of cash within an organization. There are including
appropriate time and unprofitable activities that will determine of liquidity of a company.
 The financial data help to management recognize strengths and weaknesses of company
and also about overall financial health.
 In case if there are a number of subdivision or partner working within main organization
then financial reporting must act as main part of a crucial agreement in between various
sections which make easy for stakeholders and investor to have enough knowledge
regarding money (Cohen, 2017) .
2. Conceptual, regulatory framework, key principle and qualitative characteristics
Conceptual and Regulatory framework:
The concept of financial reporting is connected with financial reports which define about
the different financial types of statements that help in decision making process for future
improvement. There are various stakeholders who is directly connected with annual financial
position as well as position of business, they are investors, creditors, financial institutions and
general public who wants to become part of business sharing. A regulatory framework of
business beneficial due to valuable predication for improving efficiency of financial standards
and principles. It will provide support to control financial activities in efficient manner. The
selected company follow the procedure and principle of IFRS which is as follows:
2

 The particular reports provides valuable ideas that can support for determine the necessity
of total amount which is essential to survive business operations in successful way.
 It is advantageous for creating and managing the financial information as per the
requirement of accounting standards.
 These are supporting for develop good image of company with the help of increase
growth and grab opportunities (Hanlon, 2018).
Qualitative Characteristics of financial reporting
It is understand that financial reporting must have different types of qualitative
characteristics that will support to management to make decision. It will depend on the financial
reports which is reliable and more faithful. Some of these are discussed below: Relevance – It support to make effectual differences within the decision make by user
and it is defined about the corroborative and predictive amount. Faithful Representation – According to this it is defined after completed of report and
can not find any error then present in front of those stakeholders who is related with
company. Timeliness – It is essential for company to provide reliable and accurate information to
stakeholders. These are preparing in particular period of time such as quarterly, monthly
and annually basis.
 Understandability – The provided information must be clear, classified and concisely
which is easily under stable by end user.
3. Main Stakeholder and benefit to financial information
Stakeholders are important part of any business who can invest to run business. They are
influenced to business growth and performance in direct and indirect manner. There are included
creditors, suppliers, government, customers, investors or the society. These are connected with
company with different interest as per the involvement groups. These are categorised into
internal and external entity. KPMG has different interest groups which kind of a consortium of
stakeholders for it (Indrawati, 2017) .
There are two types of stakeholders in a business unit -
Internal stakeholders
These are considering as internal members of an organisation who is connected with
internal activities and influenced by any results of the business actions.
3

 Board of Directors – These types of stakeholders afraid about the administration of the
company. These members are taking strategic decision regarding to functioning of the
business entity. If organisational performance goes down so they will influenced by
corporate position. In KPMG, Board of directors consider as first line of defence. The
assure about employee appointment, agreements, regulatory norms and preparation of
policies.
 Employees – They are part of internal stakeholders and afraid about those business
activities which is directly related to employment security, monetary benefits and non
monetary benefits. Staff members of KPMG are connected on different levels thus have
various types of associate with clients (Kaspersen and Johansen, 2016) .
External stakeholders
These types of stakeholders have no interest with the daily activities of the business but
in a way or another duly influenced by the activity which is taken by an organisation. The
selected company KPMG, it is composed broad lodge of external stakeholders including majorly
of governments, investors and creditors. Investors – These types of investors are investing their money in the business and include
of debt holders and share holders. On their investing money expect good rate of return. It
is mainly depended on the market value of a company. The investors of KPMG in
proportionate ratio of debt to equity. To satisfy of their customers KPMG has performed
in effective manner. Creditors – They are providing loans, goods, services and other advantages to a business.
The creditors of a company expect to timely return of the debt along with the interest. So
they wants to good financial position and survive for long time in market because they
totally depended on profit of a company.
 Government – It is a part of external stakeholder of any business due to collect corporate
taxes, payroll taxes and other taxes like GST. Every organisation paid tax to government
for contribute in GDP to increase growth rate and reduction of unemployment which
related with any government (Kurt, 2018).
4. Value of financial reporting to meet objective and growth
The financial statement are helpful for every organisation which can help to attain their
objectives of an organisation (Young, Cohen and Bens, 2018). Most of the companies use
4

financial reports foe analysis overall performance and actual situation in present time of
company. It helps to develop plan and strategies as per the requirement and financial reports
interprets the financial information in effective manner. Such as in the KPMG company, they
develop several type of financial statements due to accomplish their goals and objectives. With
the help of financial report a company achieve their objectives in particular period of time.
Financial Reporting and development of organisation
With the help of financial reports develop business because it reflects on the financial
position of the companies. These are helping to take effective decision for further investments.
Such as an organisation wants to spread out of their business operations. For this need to analysis
of financial documents and if there is profit then they may expand. So it is said that financial
reporting important part of any organisation and help in development of the companies. The
selected company take effective decision on the basis of development for their venture.
Additionally, in the absence of these financial reports it is difficult to understand about the
companies and take decision about the development (Menicucci and Paolucci, 2016) .
Financial reporting and growth of business
Apart from it, the financial statements are considering as important part of any
organisation which plays role in the development of the business. Through these reports present
all financial data in front of internal and external stakeholders. On the basis of these reports they
can analysis of financial performance of an organisation. If company have good market position
so investors will increase and take interest to invest in particular company. The efficiency of a
business improve after followed of financial accounting and presenting the financial statement on
time. The selected organisation KPMG limited produce financial statements that help them in
growth.
5. Main Financial Statements
A) Profit and Loss statement
31.12.18
(£'000)
Continuing operations
Particulars Amount
5

Revenue from Operations (A) 585100
Cost of goods sold (391700)
Cost of providing services -
Gross profit 193400
Less: Operating expenses 80500
Less: Depreciation (W.N. 1) 26715
Less: Other Income (9600)
Operating profit 95785
Less: Bank interest 1200
Profit before exceptional items and tax 94585
Exceptional Items Nil
Profit before tax 94585
Less: Income tax expense 9500
Profit after tax 85085
Add: Other Comprehensive income -
Total Comprehensive income 85085
Working Note:
Calculation of depreciation expenses:
Land and machinery: 150000/16 = £9375
Plant and equipment: 148000-32400 = £115600
115600*15/100 = £17340
Total depreciation = 9375+17340 = £26715
B) Statement of changes in equity for the year ended 31 December 2018
Particular
Ordinary
share capital
Revaluatio
n reserve
Retained
earnings Total
As per trial balance 86700 40000 45500 172200
6

Total Comprehensive income - 85085 85085
Preference dividend -2500 -2500
Ordinary dividend -4500 -4500
86700 40000 123585 250285
C) Statement of financial Position.
Balance Sheet as at 31.12.18
(£'000)
Particulars Amount
ASSETS:
1. Non-current assets:
(a) Property, Plant and equipment 298000
Less: Accumulated Depreciation 32400
Less: Current Year Depreciation 26715 238885
(b) Investment Property 28000
(e) Deferred tax assets(net) 10000
(f) Other non current assets -
2. Current assets:
(a) Inventories 25200
(b) Trade receivables 78000
(c) Other current assets 10900
Total 390985
EQUITY AND LIABILITIES:
1. Equity:
7

(a) Ordinary share capital 86700
(b) Other equity (Note) 205585
(b) Preference share capital 26500
2. Non current liabilities:
(a) Deferred Taxation -
3. Current Liabilities:
(a) Trade payables 62700
(b) Bank OD -
(c) Provision for current tax 9500
Total 355985
6. Interpretation and communication of financial performance
TESCO is the leading retail business industry with huge manpower of approximate
450000 members. Group sales were recorded as £56.9 billion, group operating profit was
calculated as £2206 million. Financial position analysis of company is given below which is as
follows.
Profitability Ratios – These types of ratios used by every company to know profitability
of a company in particular period of time. It is mainly based on the financial metrics and measure
the ability of a business to compute revenue in certain period of time (Mio, Marco and Pauluzzo,
2016). Tesco determine profitability of company on the periodic basis to present in front of
shareholders -
 Return on capital employed: Operating profit / total capital employed
Particulars 2019 2018
Operating profit 2153 1839
Capital employed 28367 25651
ROCE 75.90% 71.16%
8

Interpretation- On the basis of above calculation, this can be analysed that ROCE of tesco
company is different in both of years. Such as in year 2018, it is of 71.16% which raised in next
year and became of 75.90%.
 Return on equity: Profit after interest, tax and dividend / total equity
Particulars 2019 2018
Profit after interest, tax and
dividend
1320 1210
Total equity 14834 10480
Return on equity 0.89 : 1 0.12 : 1
Interpretation- On the basis of above table, this can be analysed that in year 2018, the return for 1
equity is of 12 p. While in year return for 1 equity is of 89 p. This shows that company's position
is better in year 2019.
 Net profit margin ratio: Net profit / revenue * 100
Particular 2019 2018
Net profit 2153 1839
Revenue 63911 57493
Net profit margin 2153 / 63911 * 100 = 3.39% 1839 / 57493 = 3.20%
Interpretation: From the above table it is getting that net profit ratio in 2019 good for
company rather than to 2018. Net profit margin for the year 2019 was recorded as 3.39% and
3.20% for the year 2018. This indicates that company's financial position of above company in
year 2019 as compare to year 2018.
 Gross profit ratio: Gross profit / net sales * 100
9

Particular 2019 amount in (£ million) 2018 amount in (£ million)
Gross profit 4144 3352
Revenue 63911 57493
Gross profit margin 4144 / 63911 * 100 = 6.48% 3352 / 57493 = 5.83%
Interpretation- On the basis of above table this can be analysed that company's gross
profit in year 2018 is of 5.83% that increased in next year and became of 6.48%.
Liquidity Ratio – It is considering as essential class of financial metrics applied to analysis of
ability to debtors to pay off current debt responsibility without arising external capital. It is
mainly applied to measure liquidity of a company and their margin of safety. A determination of
liquidity ratio of Tesco whether it has enough liquid funds to meet in short term.
 Current Ratio - Current assets / current liabilities
Particular 2019 amount in (£ million) 2018 amount in (£ million)
Current assets 12570 13600
Current liabilities 20680 19233
Current ratio 12570 / 20680 = 0.60 13600 / 19233 = 0.70
Interpretation: From the above table it has been analysed that current ratio of the
company did not meet with ideal ratio of 2:1 and stable in both years in 2019 and 2018. The
ratio for 2019 was calculated as 0.61 times and 0.70 was calculated for the year 2018. Current
assets get decreased that may enlarge the lag in period to suppliers and creditors.
 Quick Ratio: Quick assets / current liabilities
Particular 2019 amount in (£ million) 2018 amount in (£ million)
Quick assets 12570-2617 = 9953 13600-2264 =11336
Current liabilities 20680 19233
Quick ratio 0.48 times 0.58 times
Interpretation: As per the above table it is understand that in 2019 the quick ratio of the
company 0.48 times which is not near about the ideal ratio of 1:1 but in 2018 it is getting
10

increase and became of 0.58 times. The quick ratio of organisation can be exceeding in terms of
payment of quick liabilities which is mainly.
 Turn over of capital employed assets: Revenue / capital employed
Particulars 2019 2018
Revenue 63911 57493
Capital employed 22846 25651
Turn over of capital employed
assets
2.97 2.24
Interpretation- On the basis of above table this can be analysed that in year 2018 this ratio
is of 2.24 and in year 2019, it is of 2.97. This indicates that company's condition is better in
current year as compare to year 2018.
 Non current assets turn over ratio: Revenue / non current assets
Particulars 2019 2018
Revenue 63911 57493
Non current assets 36379 31135
Non current assets turn over
ratio
1.76 1.85
Interpretation- As per the above table, this can be analysed that in year 2018, the non current
assets turn over ratio is of 1.85 that decreased in year 2019 and became of 1.76. It shows
that company's position is better in both years because the ratio is above one.
 Current assets turn over ratio: Revenue/ current assets
Particulars 2019 2018
Revenue 63911 57493
Current assets 12570 13600
Non current assets turn over 5.08 4.22
11

ratio
Interpretation- As per the above table, this can be analysed that in year 2018, the current assets
turn over ratio is of 4.22 that increased in year 2019 and became of 5.08. It shows that
company's position is better in year 2019 as compare to year 2018.
 Average inventory days: Average inventories / cost of revenue * 365 days
Particulars 2019 2018
Average inventories 2617 2264
cost of revenue 59767 54141
Average inventory days 16 days 15 days
Interpretation- On the basis of above table, it can be addressed that average inventory days in
both of years are almost similar. Such as in year 2018, the inventory days are of 15 days while in
year 2019, it is of 16 days.
 Average trade receivables days: Average trade receivable / revenue * 365
Particulars 2019 2018
Average trade receivable 1640 1504
Revenue 63911 57493
Average trade receivables days 9 days 9.54 or 10 days
Interpretation- On the basis of above table, this can be analysed that in year 2018, the average
receivable days are of 10 days. While in year 2019, this is of 9 days. This shows in year
2019, company's situation is better to get back debt amount from debtors.
 Interest coverage ratio: Profit from operating activities / finance cost
Particulars 2019 2018
12

Profit from operating activities 2153 1839
Finance cost 538 600
Interest coverage ratio 4 times 3.085 times
Interpretation: On the basis of above table, this can be analysed that in year 2018, the interest
coverage ratio is of 3.085 time while in year 2019, this is of 4 times. It shows that
company's position is better in year 2019 as compare to 2018.
7. Differences between IAS and IFRS
International accounting standard (IAS) were the first international accounting standards
and it was issued by the international Accounting standards committee (IASC). It was settled in
1973 to make it easier to compare businesses around the world. It is defined as most approved
frameworks that provides important rules and principle which is related to financial structure of a
business (Nijam, 2018) .
International financial reporting standards is define as set of accounting standard and
developed by an independent international Accounting standards board (IASB). It is one of the
use accounting standard which can help to analysis of valuable results within organisation. These
standards are globally accepted to develop faithful situation and culture for a company to
generate profit.
IAS IFRS
It is known as older accounting standard which
provide proper guidelines to company. It will
direct how to perform different types of
business activities at international accounting
council.
IFRS establish for financial reporting and
prepare in effective manner. It might further
beneficial in processing of the report that will
use by managers as well as accountants.
These standards are published by IASC It is issued by IASB to provide success of
IASC.
It is published in between 1973 and 3001. IFRS was issued in 2001 onwards.
These standards are developed to create
display of IFRS.
It is developed for accounting process and
finish at particular period of time.
13

8. Advantages of International financial reporting system
International financial reporting standards or IFRS are most beneficial for those
companies who connected with business. It is connected with growing international
shareholdings and mutual trade practices (Patterson, Smith and Tiras, 2016). To prepare of
accounts of company it provides a common language which is understand by every organisation
and it will support to activities of company accounts to make differentiable. After applying of
IFRS any company analysis of accounting information and it provides clarity, accountability and
high quality to the financial of a firm. It contributes in the economic development and determine
the opportunities of investors. With the help of these standards develop a universal set of
principles that is adopted by all businesses in several parts of the world that setting a way for
standardised reporting. The body of IASB responsible for preparation of IFRS and these
regulatory bodies related to various countries to analysis the global needs of kinds of users and
acquire the information in the reference of various principles.
In every organisation investors are considering as major stakeholders who is provided
benefits to the company due to produce financial statements to followed of IFRS. After adopted
rules and regulation of IFRS, businesses will be capable to measure their operations and financial
activities of company which is more precisely, setting the stage for increase the performance of a
company. They will also gain better insights into the operations for its competitors, customers
and partners may make the transactions. There are defined benefits of IFRS -
 It is improving of financial reporting as well as tax planning to prepare standardised and
consistent set of accounting (Schaltegger and Burritt, 2017).
 Better managed resources – After implementing of IFRS in the company able to evaluate
and contour accounting systems across the business and deduct the cost of auditing.
 Improved day to day operations – After IFRS businesses get faster access to more in
depth financial performance information use for making better decisions.
 Improved financial controls - The approach of IFRS help to control cost of financial
activities and deduct the risk of penalties and compliances problems.
9. Degree of compliance with IFRS
Ever since the concept of international reporting has grown into a full-fledged concoction
of meeting disclosure requirements to adopting comprehensive set of IFRS standards, the
14

reporting paradigm has shifted to a scientific approach to handle accounts from a mere auxiliary
perspective. Approximately 120 nations and reporting jurisdictions made it mandatory for
domestic listed companies (Verawaty, 2017). Developed economies like Canada, japan, US,
Australia has adopted the IFRS fully whereas other developing nations has nodded to be a part of
IFRS regime in nearing future. The system of differentiation between the organisations has been
bifurcated with the help of equity outsider system where organisations has been classified as
class A and class B . The factors on which such division is dependant are market size of the
industry, the country's GDP size, and the ratio of individual unit in the economy as a
contribution. Big companies like Nestle, Deutsche bank etc. has technically weaker equity
markets meanwhile they still adopted class A standards. Organisations in Various countries has
been grouped instead of their individual recognition to a class group in Europe majorly. In class
A, countries like UK , Netherlands, Denmark , Ireland have profound equity position which are
highly commercially driven. In class B countries, like Germany, France, Italy etc. have
comparatively weaker equities segment and for that are considered under class b system of IFRS.
Factors which impact compliance in a nation
There are various micro as well as macro factors around every nation which affects
almost everything in and out of it. IFRS compliance is also a part of such influences because
every nation is susceptible to the traditionally perceived methods of accounting. Some factors are
perennial to the organisation and some arise out of different happening of the macro events.
Some factors which determine the reporting dimensions in an organisation are :
Internal factors: There exist variable and fixed internal influences which work as a
determinant for the establishment of compliance mechanism in a nation. Like the organisations
culture comes out as a major influence. Organisations who are more change favouring will take
the IFRS implementation in a positive way while the one's who are averse to change would
remain on the old standards. Other thing is the cultural influence of a particular nation
determines great degree about its likely hood to adopt certain compliance mechanism. For e.g.
Countries who were a colony to British empire have colonial influence of adopting laws.
Countries who are culturally diffuse are averse to adopt new framework as opposed to western
idea of acceptance (Wangerin, 2017) .
External factors: There are numerous external influences to a nation and a organisation
in a nation to which they are highly susceptible. Government political structure, tax policies,
15

demand supply paradox, economic health, social & religion, culture etc. contribute to a corpus of
factors influencing reporting. For e.g. Middle east countries are influenced by Sharia law
dominance and for the reason prefer Islamic system of reporting in contrast with the western
policy regime.
CONCLUSION
From the above discussion it summarises that financial reports are important part of any
organisation which provide financial information of particular company. On the basis of these
reports communicate with external and internal stakeholders who take interest to operation of
business. Stakeholders are creditors and investors who invest money for gain consideration. The
main purpose of financial reporting to present accurate and reliable financial information to
manager of KPMG. After analysing of these information planning, analysing, benchmarking and
take effective decision. These reports are prepared to meet objectives of company and
authenticity and accuracy is qualitative characteristics of report that can help to achieve growth
in certain period of time. The financial statements of any company prepared by following of
accounting standards so there is not getting any error regarding to transactions. Mainly
organisation adopted IFRS accounting standards and which is beneficial to analysis of degree of
compliance within company across the world.
16