Impact of IFRS on Organizations

This assignment delves into the effects of adopting International Financial Reporting Standards (IFRS) on organizations. It examines both positive and negative influences, considering factors like comparability, transparency, and cost implications. The analysis draws upon academic research and real-world examples to understand the complex relationship between IFRS adoption and organizational performance.

FINANCIAL REPORTING

INTRODUCTION
Financials are one of the essential aspect for every company in which different
information involved like cost, profit, expenses, payments etc. Process in which financial
statements are framed and then published among all internal and external stakeholders is
considered as financial reporting. The current project shows about objectives of the financial
reporting along with its basis principles used for completing this specific procedure. Apart from
this, with the help of Trial balance of Rita Plc Basic financial statements are prepared for the
year ended 31st December 2016. The study reflects on the business performance of Glaxo Smith
Kline (GSK) enterprise from accounting year 2016 to 2016. Besides these, difference among IAS
and IFRS is shown along with benefits of IFRS for an organisation.
1. Context as well as objectives of financial reporting
When the company uses financial reporting in the workplace then become beneficial
different ways. Further, its several objectives are mentioned below:
 Key purpose of the financial reporting is to provide those kinds of information to the
company which helps to make an effective decision.
 It helps to the management and investors both in order to assess or track cash availability
within the workplace. On the basis of this, creditors and suppliers also make fruitful
decision towards the company (Objectives of financial reporting, 2015).
 Information related to the economic sources of the company also provided by financial
reporting. Such information include liabilities, equity of owner etc.
 Another objective of financial reporting is to provide statutory auditing information
which becomes change with facilitates audit.
 For identifying various scandals and malpractices incurred within financial statements
and resolving them the financial reporting is an important aspect.
2. Evaluating different framework and its key principles
In the financial reporting various frameworks included which regulate to the whole
process and amend required changes. On the basis of this, the management able to prepare
financials and publish in the market using legal rules. Further, any of the stakeholder easily able
1

to understand and analyse the statements of financial of the company. There are various
principles associated with financial reporting which are listed out below:
 Expense principle
 Cost principle
 Objectivity principle
 Consistency principle
 Matching principle
 Revenue principle
 Going concern principle
 Separate entity assumption
 Continuity principle
 Unit-of-measure assumption
When looking at the qualitative aspect then it helps to make clear explanation about the
business and its performance in regarded industry. The quantitative considers only numerical
data which can be understood by only financial employees (Reheul, Van Caneghem and
Verbruggen, 2014). On the other side, qualitative supports to both kinds of the people like
financial or non-financial for assessing performance and take fruitful decisions towards the
organisation. Further, the qualitative kind of information helps to provide reliable as well as
appropriate data to the stakeholders.
3. Key stakeholders of an entity and benefits to them of financial information
Financial information of the company always used by different stakeholders in proper
way for taking better decisions. Furthermore, ways through which basic stakeholders consider
financial information are described below: Managers: One of the important internal stakeholders of an organisation are managers
who make decisions for the business using financial information (Nobes, 2014). In this,
they decide about investment making in any new project or other alternatives, produce
more products, increase salary or wages etc.
2

 Employees: These are internal stakeholder of the company which makes assumptions
related to the salary, wages, bonuses, allowances and other monetary benefits on the basis
of financial information. For instance: if the enterprise generates more profit, then will
attract more for doing job and sustaining and vice-versa.
 Shareholders or investors: These kinds of external stakeholders always seeks towards
the higher dividend and return on investment (Flower, 2016). During analysis of the
financial information if the firm generates higher level of profit on consistent basis then
will expect more dividend amount. Furthermore, to take investment decisions these
stakeholders use financial information.
Apart from the above stakeholders, customers, creditors, government, suppliers etc. also
use the financial information of an organisation to take respect decisions towards business.
4. Importance of financial reporting for meeting objectives and growth of the firm
The financial reporting is supportive for assessing business performance in proper way
where management can determine level of profits. Apart from this, using auditing process
malpractice associated while preparing financial statements can be identified. In accordance to
these all, if it has been ascertained that objectives of sales or profit increasing, cost decreasing
and any other are achieved or not (Wagenhofer, 2014). Moreover, during making the accounting
treatments in the financial statements if any issue found then eliminated by taking corrective
actions. Therefore, it can be stated that, with the help of financial reporting the company easily
able to meet the agreed purposes and grow in positive way ion respective market.
5. Presenting key financial statements considering provided information
Statement of profit and loss:
Particulars Amount (in '000 GBP) Amount (in '000 GBP)
Sales revenue 285100
Less: Stock at the end of year 14000
Cost of sales 271100
Add: Rental income earned
from investment properties 1600
3

Gross income 272700
Operating expenditures 39500
Operating income 233200
Less: indirect expenditures
Interest amount 1030
Dividend on preference shares 1330
Dividend on ordinary shares 5340
Accumulated depreciation 51900
Taxation amount 12000
Net income 161600
Statements of changes in equity:
Particulars Amount (in '000 GBP) Amount (in '000 GBP)
Owner's capital 161600
Retained earnings 23300
Capital of ordinary shares 26700
10% redeemable preference shares 13300
Total owner's equity 98550
Statements of financial position of balance sheet:
Assets Amount (in '000 GBP) Liabilities Amount (in '000 GBP)
Trade receivables 18000 Trade payables 15700
Investment property 18000 Revaluation reserve 28000
Land & property 80500 Deferred taxation 6900
4

Plant & equipment 19600 Bank loan 1200
Inventory 14000 Total owner's equity 98300
Total assets 150100 Total liabilities 150100
Information involved in cash flow statement and comparison with I/S and B/S
The statement of financials which comprises with cash incomes and outflows of an
enterprise and shows about cash and cash equivalent position of the business is known as cash
flow. Further, in this specific account, expenditures related to major three types of business
activities are reflected which include operating, investing and financing. When considering to the
income statement then comprises only two types of the financial information i.e. incomes and
expenses associated with the firm in each year (Zeff, van der Wel and Camfferman, 2016).
Moreover, another statement i.e. balance sheet focuses on the liabilities and assets only of an
organisation for the financial year ending. The I/S reflects only profitability position whereas
through B/S only liquidity situation of the enterprise can be assessed. However, cash flow
statement focuses on these all the conditions because cash availability is symbol of profit
position and liquid both. When making comparison of these all the statements then cash flows is
one of the better which consists with incomes, payments, cash etc.
6. Analysing financial performance of GSK enterprise
In order to simplify or interpret the financial statements a highly considered tool is
financial ratio. It shows that, the company performing in which manner in the respective industry
and which kind of strategies it should employ. For the present section Glaxo Smith Kline
business is chosen which operates under pharmaceutical industry and listed in FTSE 100.
Moreover, financial performance using ratios of GSK is interpreted below:
5

 Net profit ratio: It shows position of profitability at the end of financial year by
deducting all direct and indirect expenses. Declining NP ratio from 35.2% to 3.27% at the
end of fiscal period 2016 is clear indication of performance declining. Apart from this, it
reflects that GSK not employed cost management and revenue enhancing strategies in the
workplace. Current ratio: A tool through which liquid position of the firm interpreted along with
capability of fulfilling short term debt is known as current ratio. In the current case
scenario, CR was 1.24:1 at the end of financial period 2015 in GSK which decreases in
the next period (GlaxoSmithKline PLC ADR, 2016). Furthermore, CR in FY 2016 is
0.88:1 only which states poor performance in the pharmaceutical industry.
 Debt to equity ratio: When level of capital structure of the company is required to
calculate and analyse in the market then debt to equity ratio is applied. Ideal proportion of
this specific tool is 0.5:1 and in the GSK company it is 2.97:1 and 13.04:1 at the end of
2015 and 2016 respectively. On the basis of these values it can be pertained that, GSK
raises high level of fund from debentures and ignore to the equity financing up to the
higher extent.
When looking at the overall financial ratios then it has been analysed that, Glaxo Smith
Kline firm unable to perform well in the pharmaceutical industry in the next accounting period
i.e. 2016 in comparison to 2015. According to this, the management should implement cash and
6

cost reducing tactics in the workplace. Along with this, it must train to employees for utilising
resources in highly optimum direction.
7. Differentiate IAS as well as IFRS
IAS IFRS
IAS refers to the International Accounting
Standards in the field of accounting study.
On the other side, IFRS stands for the
International Financial Reporting Standards
which help to prepare final accounts in proper
manner.
Those principles, standards and accounting
rules which published from the year 1973 to
2001 are involved in IAS.
Further, these all the terms which published
after FY 2001 are considered under the IFRS.
In the present time, majority of the enterprises
using IFRS in comparison to IAS (Bašić, Jahić
and Jahić, 2013).
A body which regulates to the IAS is IASC and
through this the rules are published.
On the other side, governing body of IFRS is
IASB.
Number of total standards involved in IAS are
41.
However, the IFRS comprises with only 9
types of the accounting standards.
8. Analysing benefits of IFRS
IFRS is mainly supportive for those businesses which have presence at the global level in
order to prepare financial statements in effective manner. It clubs to all the organisations for
using same formate for framing the final accounts and create effectual understanding for
stakeholders. Further, when an organisation considers IFRS then beneficial in below stated ways:
 In order to compare financial performance of the company with competitor at the global
level the IFRS is an important aspect. The reason is that, formate and way of preparing as
well as presenting financial statements is same where any difficulties not have to face
(Cascino and Gassen, 2015). However, due to not using IFRS, the enterprise unable to
make comparison at the worldwide level.
7

 Recognition of the financial statements in the company takes more time which hamper
efficiency and productivity of employees and firm respectively. IFRS is a method
through which time-frame of the financial recognition is to be decreased up to the higher
extent.
 At the time of getting access of an organisation under foreign capital markets, wide range
of issues and obstacles are faced by it. When the management uses IFRS then accounts
are prepared at the international level which helps to take effective access to capital
markets of abroad.
 When the stakeholders use financial statements then they will able to easily understand
them, if firm considered IFRS principles and standards. Moreover, it can be said that the
IFRS helps to create proper and broad level of understanding for interpreting final
accounts (Tsalavoutas, André and Dionysiou, 2014).
 Besides these all, IFRS is a pivotal place for the management in order to improve
transparency related to the financial reporting. Along with this, auditing process can be
also accomplished in proper and smooth way when financials are prepared using IFRS
concept.
9. Elements create impact on compliance with IFRS
At the time of considering wide range of principles, theories and standards related to
IFRS then some factors create huge impact, which are explained below:
 One of the basic element which has a higher impact on compliance with IFRS and
follow its rules in proper way is size of the company. Under this, disclosure
compliance are at the higher extent which associated with the enterprise (Terzi,
Oktem and Sen, 2013). Along with this, size of the entity has positive influence on
the workplace.
 The term which indicates level of equity capital available in the workplace in
exchange to bank loan is considered as leverage. Further, it has the huge impact on
the business when it considers all compliance included with IFRS. Higher the level of
leverage has negative impact and vice-versa.
8

 Liquidity is undertaken in the workplace for deriving financial position of entity in
the industry. When this particular aspect either increase or decrease in the business
environment then affect to the compliance involved with the International Financial
Reporting Standard in same direction.
 Other than the above described factors, age of an enterprise, structure of business
ownership, presence whether at national or global level etc. also have huge impact
(Wild, Creighton and Simmonds, 2015). Further, when the management generates
high or low level of the incomes or profits then also effect the compliance with IFRS.
CONCLUSION
It has been analysed using the above study that, financial reporting is an essential tool
through which the company able to publish financial statements in legal direction. Further, there
are different internal and external stakeholders use financial information for making profitable
decisions towards the firm. From the financial ratios it can be concluded that, GSK business has
poor and negative performance in pharmaceutical sector at the end of 2016 compared to FY
2015. Further, International Financial Reporting Standard and International Accounting Standard
both are different up to the certain extent. Apart from these all, when an organisation uses
compliance with IFRS then wide range of aspect create wither positive or inverse influence.
9

REFERENCES
Books and Journals
Bašić, M., Jahić, H. and Jahić, L., 2013. Analysis of Causes and Effects of Applying IAS And
IFRS in Case of Mergers and Acquisitions of Banks in the Federation of Bosnia and
Herzegovina. European Journal of Sustainable Development. 2(4). pp.149-162.
Cascino, S. and Gassen, J., 2015. What drives the comparability effect of mandatory IFRS
adoption?. Review of Accounting Studies. 20(1). pp.242-282.
Flower, J., 2016. European financial reporting: adapting to a changing world. Springer.
Nobes, C., 2014. International Classification of Financial Reporting 3e. Routledge.
Reheul, A. M., Van Caneghem, T. and Verbruggen, S., 2014. Financial reporting lags in the non-
profit sector: An empirical analysis. VOLUNTAS: International Journal of Voluntary and
Nonprofit Organizations. 25(2). pp.352-377.
Terzi, S., Oktem, R. and Sen, I. K., 2013. Impact of Adopting International Financial Reporting
Standards: Empirical Evidence from Turkey. International Business Research. 6(4). p.55.
Tsalavoutas, I., André, P. and Dionysiou, D., 2014. Worldwide application of IFRS 3, IAS 38
and IAS 36, related disclosures, and determinants of non-compliance. ACCA Research
report. 134.
Wagenhofer, A., 2014. Trading off costs and benefits of frequent financial reporting. Journal of
Accounting Research. 52(2). pp.389-401.
Wild, K., Creighton, B. and Simmonds, A., 2015. GAAP 2000: UK Financial Reporting.
Springer.
Zeff, S. A., van der Wel, F. and Camfferman, C., 2016. Company financial reporting: A
historical and comparative study of the Dutch regulatory process. Routledge.
Online
GlaxoSmithKline PLC ADR, 2016. [Online]. Available through:
<http://financials.morningstar.com/balance-sheet/bs.html?
t=GSK&region=usa&culture=en-US> [Accessed on 24th October 2017].
10

Objectives of financial reporting, 2015. [Online]. Available through:
<https://www.accountingtools.com/articles/objectives-of-financial-reporting.html>
[Accessed on 24th October 2017].
11