Importance of Financial Reporting for Organizations

The provided document is a detailed assignment that explores the significance of financial reporting for organizations. It discusses how financial reporting helps meet organizational objectives and promotes growth, including increased performance and profitability. The assignment also delves into the differences between IFRS and IAS, as well as varying degrees of compliance with IFRS. Main financial statements such as profit and loss statements, statement of equity, and balance sheet are also discussed.

FINANCIAL REPORTING

Table of Contents
INTRODUCTION...........................................................................................................................3
MAIN BODY ..................................................................................................................................3
1. Context and purpose of financial reporting..............................................................................3
2. The conceptual and regulatory framework of financial reporting and its qualitative
characteristics...............................................................................................................................4
3. The main stakeholders of an organization and benefits of financial information to them ......6
4. Value of financial reporting for meeting organizational objectives and growth ...................7
5. Main financial statements as per IAS 1....................................................................................8
6. Two years financial statements of marks and Spencer..........................................................11
7. Difference between international accounting standard (IAS) and International Financial
reporting standards (IFRS).........................................................................................................13
8. Benefits of IFRS.....................................................................................................................14
9. Identifying the varying degree of compliance with IFRS by organization across the world
....................................................................................................................................................15
CONCLUSION .............................................................................................................................16
REFERENCES..............................................................................................................................17

INTRODUCTION
Financial reporting is a process through which financial information is presented in the
statements. It helps in providing information to stakeholders about the performance and position
of firm. Financial reporting includes profit and loss statement, balance sheet and cash flow
statement. This assignment will include context and purpose of financial reporting. Furthermore,
it will examine the conceptual and regulatory framework of financial reporting and its qualitative
characteristics that makes the financial information more reliable. Also, it will provide main
stakeholders of organization and benefit to them by financial information. Moreover, it will
provide importance of financial reporting. Also, it will contain information about the financial
statement of the organization to identify its performance. This assignment will consist
difference between international accounting standard and international financial reporting
standards.
MAIN BODY
1. Context and purpose of financial reporting.
Financial reporting includes disclosure of financial information to management to
provide them information about the performance of organization to make effective decision to
improve the performance of firm. Financial reporting is used for the serving two purposes. first,
it helps management in effective decision making which helps the organization in performing
effectively and efficiently in the industry to increase its profitability (Chen and et.al., 2016). It
provides information to management about the strength and weakness of company to make
strategies and planning to reduce the weaknesses to improve performance of firm. Second,
financial reporting provides information to the stakeholders of company about the financial
health and activities of the firm.
This information provides assistance to stakeholders to make their decision about the
investment to be done in the organization. Also helps the stakeholder to compare the firm
performance with that of other to identify its growth in the industry (Nobes, 2014). It provides
assistance to management by providing them relevant and useful information. Financial reporting
includes profit and loss accounting, balance sheet and cash flows statements.

Profit and loss accounts are prepared to provide information about the net profit and loss
for the company. This statement provides the information about performance of the organization
by operating its various activities (financial reporting, 2016). Balance sheet is prepared in which
assets and liabilities of the firm are provided on the basis of which the position of the
organization is determined at a particular point of time. Cash flow statement under the financial
reporting provide information about cash inflow and outflow for the period on the basis of which
cash requirement of the company are determined to maintain the cash requirement for
performing various future activities of the company.
Financial reporting support in preparing budget for the future activities to perform the various
activities according to budget to get the profitability derived according to budget. Financial
reporting is used for various purposes which include decision making, information to
stakeholders, to identify the profitability and performance, determining the cash requirement etc.
2. The conceptual and regulatory framework of financial reporting and its qualitative
characteristics
The conceptual framework of financial reporting is based on objective of general purpose
of financial reporting and it also provides various qualitative characteristics on the basis of which
financial reporting are prepared. It set out the definition of assets , liabilities , equity, incomes
and expenses. The conceptual framework include the criteria for including assets and liabilities
and various measurement bases for them. It provides the concepts and guidance for presentation
and disclosure and also provide concepts relating to capital and capital maintenance.
Financial reporting are governed according to the standards set by international
accounting standard board. According to the set standards the main objective 0fn financial
reporting is to provide financial information to the stakeholders to make their decisions about
company growth. Financial reports are prepared according to the set standards to provide useful
and relevant information to various stakeholders of the organization. This information helps
them in determining the performance and position of the firm in the market. Regulatory
framework for financial reporting is different for different organization such as sole proprietor,
partnership and company.

The financial reports are governed according to various rules and guidelines to form the
authentic information about the various activities of the organization. It is governed according to
IFRS and IASB. These are the boards which are formed for handling matters relating to reporting
of financial information. IFRS is international financial reporting standard boards which have set
the various standards for preparing the financial reporting. IASB is the board which has lead
down some rules which firm have to follow while preparing financial reports.
The qualitative characteristics of financial reporting
These are the attributes that makes the financial information provided in the financial
statements useful for the users. It denotes the quality of information provided and ensures that
the information is reliable and authentic. The following are the various quantitative
characteristics of financial reporting:
 Relevance: it implies that the information contained in the financial statements are useful
to users as it helps them in making decisions. The information included must provide
helps the users in evaluating the past, present and futures activities of the firm.
 Reliability: the information must be reliable and free from material error (Patelli and
Pedrini, 2015). Thus the information presented in the statements must be faithful and
present the authentic information about the transactions.
 Comparability: the information provided in the financial reports must be comparable
with the other financial information of other accounting periods to determine the
performance of firm over the years.
 Understandability: the information must be readily understandable to the users of
financial statements. It means that the information must be clearly presented to five
better understanding of the various activities of the firm.

3. The main stakeholders of an organization and benefits of financial information to them
`There are various stakeholders of the organization which use the financial information to
determine various information about the company to make decision. There are internal and
external users of financial information.
`Internal stakeholders: It consist of users of financial information which are working in the
organization it consists of management, employees etc.
 Management: the management of firm require the financial information for making
decisions to improve the performance and profitability of the firm on the basis of
information contained in the financial statements (Hunton, Libby and Mazza, 2015).
Management is provided with the financial information to make various operational and
financing decisions.
 Employees: They are provided the financial information to determine the financial
performance of the firm in which they are working to identify their career goals.
Financial statements are provided to them to increase their employee involvement and
provide them understanding of the business.
External stakeholders: there are users of financial statements which are outside the
organization but have their interest in knowing the financial performance and position of firm. It
consists of the following:
 Customers: they are provided by the financial statements to attract them towards the
organization to purchase their goods and services (Users of the Financial Statements,
2017). Financial statements help the customers in identifying the organization ability to
provide products and services according to their demands.
 Investors: they are provided with the financial statements to provide them information
about the financial health of the firm to invest their money in business to get higher
returns.
 Lenders or suppliers: they are the users of financial statements which lend money and
supply goods and services to organization. They require financial statements to get the
assurance about their money to be paid back which they have lent to the firm.

 Government: financial statements are provided to the governments to identify if the firm
is performing its activities according the rules and regulations or not. Governments use
the financial information to determine if the company has paid the tax amount properly or
not.
Benefits to stakeholders of financial information
 It helps the users of financial information to determine the profitability of the firm.
 It supports the management in making decision or the organization to improve its
performance.
 It helps investors in identifying the firm ability to generate higher returns for them.
 It helps the suppliers and lenders in identifying the ability of the firm to pay its various
obligations.
4. Value of financial reporting for meeting organizational objectives and growth
Financial reporting is important for determining the profitability and position of the firm.
Financial reporting is valuable for achieving the objectives of organization as it helps the firm in
identifying its financial conditions on the basis of which firm is able to take decision. Financial
reporting assists the organization in improving their liquidity position to achieve their objectives
and targeted goals to attract more customers towards the firm (Leuz and Wysocki, 2016).
Financial reporting helps in increasing the brand image of the firm which assist in increasing the
investors for the company. Financial reporting assist in formulating strategies to improve the
operational activities of firm. It helps the firm in achieving their targeted goals by making
effective decisions for increasing the profitability of firm.
It assists in identifying the future cash requirement of the firm to perform various
activities accordingly to maintain the cash to pay the obligation of the organization. Financial
reporting helps the firm in identifying its performance to compare the results with its
competitors. Financial reporting is important to identify the various transactions taken place in
the firm to determine the growth of the firm and compare its performance with the past.
Financial statements prepared by the organization helps in providing direction to the organization
to improve the functioning to achieve the targeted goals of company effectively and efficiently

(Francis and et.al.,2015). It assists in identifying the value of its assets in the market to have
strong financial position to grow their business.
5. Main financial statements as per IAS 1
a) Statement of profit and loss and other comprehensive incomes

b) Statement of equity

c) Statement of financial position

d) Cash flow statements provide information relating to cash inflow and outflow which helps 9n
determining the minimum cash requirement of the organization (Chen and et.al., 2016). Cash
flow statements include various activities such as operating activities, financing activity and
investing activity. There are various information which is not includes in the profit and loss
statements and balance sheet and are included in the cash flow statements. This information
include payment to suppliers for goods and services, buying merchandise receipts of sale of fixed
assets , payments related to mergers and acquisitions, payments of dividends, net borrowing etc.
cash flow shows changes in balance sheet and income affect cash and cash equivalent. Profit
and loss statements only include the activities of relating to expenses and incomes whereas cash
flow statement includes all the activities which causes inflow and outflow of cash. Balance sheet
statement include liabilities and assets which are important for identifying the position of
organization which are not included in cash flow statement as various activities which result into
flow of cash are included in the cash flow statement.
6. Two years financial statements of marks and Spencer
Profitability ratio shows the profits generate by organization by selling its products and
services in the market. From the above computation it can be interpreted that the operating profit

ratio is 6.51 % which reduced to 6.27 % that shows profitability of marks and Spencer is
reduced. Furthermore, it can be interpreted that net profit of marks and Spencer were 1.09 % in
2017 which reduced to 0.27 % in 2018 that shows the profit for the period is reduced.
Liquidity ratio shows the ability of organization to pay its obligation. Current ratio as
computed above is 0.73 in 2017 which increased to 0.29 in 2018. It shows that the firm does not
have enough current assets to pay its obligations. Furthermore, it can be interpreted that quick
ratio as calculated is 0.41 in 2017 which reduced to 0.29 in 2018 it shows that firm is not capable
of paying its obligations.
Efficiency ratio measure the ability of organization to use its assets to generate income.
From the above computation it can be interpreted that stock turnover ratio is increased to 8.64 in

2018 which previously was 8.38 in 2017. Also , it can be interpreted that fixed assets turnover
ratio is increased in 2018 as compared to 2017 which shows that firm is effectively utilizing its
fixed assets to generate incomes. Furthermore, it can be interpreted that in 2017 total assets
turnover ratio was 1.27 which increased to 1.35 in 2018 which is beneficial for organization.
Investment ratio as computed above consist of earning per share and dividend per share.
EPS in 2017 was 0.14 which reduced to 0.03 in 2018 it shows that earning of the organization
are reduced. Also, dividend per share is increased which shows that company paying ability is
improved as compared to 2017.
7. Difference between international accounting standard (IAS) and International Financial
reporting standards (IFRS)
Accounting standards issued by the International accounting standard committee are
known as international accounting standards (Davidson, Dey and Smith, 2015). Whereas
international financial reporting standards are issued by IASB. the international accounting
standards started in mid-1960’s with an initial proposal to enact the ICAEW, AICPA and CICA
for England and Wales, US and Canada. These standards were not followed everywhere due to
which new standards were released which will be followed worldwide and after that the
international accounting standard committee as changed to international accounting standard
board. Also, it was agreed to adopt all IAS and name the future standards as IFRS. IAS are the
old standards whereas IFRS are the new version of them.
Furthermore, international accounting standards are not followed by every organization
while preparing their financial statements but international financial reporting standards are
mostly followed by every organization for preparation of financial information. International
accounting standards are provided by IASC and International financial reporting standards are

provided by IASB (Abbott and et.al., 2016). IAS standards are changed to IFRS which is
applicable to worldwide.
IFRS principles are accepted if there is any contradiction with IAS which result in drop
of IAS principles. IAS standards were published in 1973 and 2001. While IFRS standards were
published from 2001 and onwards.
8. Benefits of IFRS
International financial reporting standards are issued by the international accounting
standard board. There are various benefits adopting IFRS:
IFRS helps in adopting global financial reporting which will enable company to be
understood in a global marketplace.
A consistent financial reporting would help a multinational company to apply common
accounting standards with its subsidiaries worldwide. This will improve internal communication,
quality of reporting and group decision – making.
 IFRS allows a company to benchmark itself against its peers throughout the world and
allows investors and others to compare the company‘s performance with its competitors
globally.
 IFRS benefits the economy by increasing the growth of its international business.
 International financial reporting standards by encouraging investors to invest, it assists in
encouraging more foreign capital flows to country.
 Financial statements prepared using common set of accounting standards assist investors
to better understand investment opportunities as opposed to financial statements prepared
using different set of national accounting standards.
 It helps in managing resources nu standardizing processes and accounting (Biddle and
et.al., 2016) .
 It assists in financial control which will reduce the risk of penalties and compliance
problems.

 Under IFRS , organization will produce a standardized and consistent set of accounting
and financial reporting for complying with local statutory and consolidated requirements.
 Businesses using similar standards to prepared statements can more accurately compare
with each other.
 It offers accounting professionals more opportunities in any part of the world if same
accounting practices are followed throughout the world.
 This set of standards will have the goal of arriving at a reasonable valuation with various
ways to accomplish task. This would give organization the freedom to adopt IFRS to
their specific situation.
 IFRS will provide assistance to the organization to use those standards which are
applicable everywhere.
 IFRS provide benefits to stakeholders in the future together with improve corporate
governance.
9. Identifying the varying degree of compliance with IFRS by organization across the world
There is varying degree of compliance with IFRS due to lack of standardization because
many countries across the world are not following IAS and IFRS and are following their own
GAAPs. There are no set rules for international financial reporting standards as it is based on
principles and GAAPs are based on rules. For example, UK is following UK GAAPs and US is
following US GAAP due to which IFRs is not having that much popularity among various
countries. UK is following UK GAAP for reporting of various accounting transactions.
International financial reporting standards are not followed by various countries for preparing
various financial statements for the activities performed by company. Complying with the
standards set by international accounting standard is required by organization but due to non-
compliance of the standards set by the ISB there are various factors which affect compliance of
IFRS such as high cost of adopting the international financial reporting standards. It also has
lack of standardization due to which many organization are not adopting this set of standards.
Organization in different countries is adopting their own country’s standards rather than IAS and
IFRS. According to the rules, every organization is required to follows standards as per IFRS

while preparing the financial statements to prepared the reports accurately and are easily
understandable by the investors (Beck, Glendening and Hogan, 2016). Bust due to non-
compliance of this standards and following their own standards IFRS is having varying degree of
compliance. Financial reporting must be prepared according to the standards set by IFRS which
are commonly accepted set of standards. There are various factors in different nation that may
impact compliance includes economic conditions, taxation policy, education level lack of
adequate results etc. the country which adopted IFRS was America but the financial statement
prepared according to IFRS were completely different from the normal financial reporting due to
which many countries are not adopting IFRS for preparing financial reporting.
Financial reporting are important in different countries as it helps the organization is
determining their performance and comparing it with the others. There are different accounting
practices followed by different countries such as UK is following accounting practices which are
consisted in UK GAAPs. Also, different countries are following different policies and procedure
of their own.
CONCLUSION
From the above study it has been concluded about financial reporting which is
presentation of financial information in the reports which has helped in determining the financial
position and performance of the firm. This assignment has included content and purpose of
financial reporting which has identified that financial reporting is prepared to serve two purposes
which consisted of first, providing information to management to make decision for organization
and another purpose is of providing information to the stakeholders about the financial health of
the organization. Furthermore, it has provided information about the conceptual and regulatory
framework of financial reporting that has provided with IFRS and IAS which govern the
financial reporting. Also, this assignment has contained information about the various
stakeholders of the organization which has included Management, customers, employees,
government and lenders. Moreover, it has given understanding of importance of financial
reporting for meeting the organizational objectives and growth that has included its importance
in increasing performance and profitability. This assignment has included difference between
IFRS and IAS and also varying degree of compliance for IFRS. It has also provided with the

main financial statements which has included profit and loss statements, statement of equity and
balance sheet.
REFERENCES
Books and journals
Abbott, L.J. and et.al., 2016. Internal audit quality and financial reporting quality: The joint
importance of independence and competence. Journal of Accounting Research. 54(1).
pp.3-40.
Beck, M.J., Glendening, M. and Hogan, C.E., 2016. Financial Statement Disaggregation,
Auditor Effort and Financial Reporting Quality. working paper. Michigan State
University.
Biddle, G.C. and et.al., 2016. Do Adoptions of International Financial Reporting Standards
Enhance Capital Investment Efficiency?.
Chen, K.C. and et.al., 2016. Financial reporting quality of Chinese reverse merger firms: The
reverse merger effect or the weak country effect?. The Accounting Review. 91(5).
pp.1363-1390.
Davidson, R., Dey, A. and Smith, A., 2015. Executives'“off-the-job” behavior, corporate culture,
and financial reporting risk. Journal of Financial Economics. 117(1). pp.5-28.
Francis, B. and et.al.,2015. Gender differences in financial reporting decision making: Evidence
from accounting conservatism. Contemporary Accounting Research. 32(3). pp.1285-
1318.
Hunton, J.E., Libby, R. and Mazza, C., 2015. Retraction: Financial Reporting Transparency and
Earnings Management. The Accounting Review. 90(4). pp.1711-1711.
Leuz, C. and Wysocki, P.D., 2016. The economics of disclosure and financial reporting
regulation: Evidence and suggestions for future research. Journal of Accounting
Research. 54(2). pp.525-622.
Nobes, C., 2014. International classification of financial reporting. Routledge.

Patelli, L. and Pedrini, M., 2015. Is tone at the top associated with financial reporting
aggressiveness?. Journal of Business Ethics. 126(1). pp.3-19.
Online
financial reporting. 2016. [Online]. Available through :<
https://searcherp.techtarget.com/definition/financial-reporting>
Users of the Financial Statements. 2017. [Online]. Available through :<
http://kfknowledgebank.kaplan.co.uk>