Financial Reporting - GAAP and IFRS

Financial reporting

Table of Contents
INTRODUCTION...........................................................................................................................1
1. Purpose of financial reporting.................................................................................................1
2. Accounting principles and their purpose.................................................................................2
3. How stakeholders of company benefit from financial information........................................3
4. Benefits of financial reporting in meeting organisation goals................................................4
5. Presentation of Financial statements.......................................................................................6
6. Interpretation and Analysis of Hilton Ltd...............................................................................8
7. Difference between International Accounting Standards (IAS) and International Financial
Reporting Standards (IFRS)......................................................................................................10
8. Benefits of IFRS....................................................................................................................11
9. Compliances with IFRS and factors which impact on these compliances............................12
CONCLSUION..............................................................................................................................13
REFERENCES .............................................................................................................................14

INTRODUCTION
Financial reporting is very important aspect in determining the financial position of
business (Leuz and Wysocki, 2016). Financial information is beneficial for external shareholders
and management of the company so that they have a clear idea where to invest. Generally GAAP
and IFRS standards are used to prepare financial statements. Present report is based on Deloitte
who is audit, consultancy and tax service company. It is a private company. Report will contain
the purpose of financial reporting, purpose of accounting principles and how shareholders
benefits from financial information. Study will further cover the difference between IAS and
IFRS, how financial information is useful in reaching company goals and objectives, benefits of
IFRS. Lastly report will contain cash flows, profit and loss statements and factors which impact
compliance in the nation.
1. Purpose of financial reporting
Financial reporting:
Financial report of a company reveal the finance related information to external
shareholders (e.g. governments, customers, investors etc.) and management to check the
performance of the company over a period of time (Flower, 2018). Financial reports are usually
maintained or issued on quarterly basis or annual basis. Public and private company perform
their financial report with GAPP (generally accepted accounting guidelines). While companies
working in international markets perform their financial report with IFRS (international financial
reporting standards). These standards provide the guideline under which financial report is
prepared. Financial reports of Deloitte include the following :
 Balance sheet, which shows the assets, liabilities and equities of company.
 Income statement, which shows the income earned and expense incurred of the company.
 Statement of preserved earnings, which shows changes made by the company in its
equity.
 Cash flows, which shows the cash related activities which includes financing, investing
and operating activity (Williams and Dobelman, 2017).
The main purpose of preparing financial reports are as follows: Provides company's financial information: The purpose of making financial statement is
to provide information to its shareholders and management about the performance and
how much potential a company has. If company uses IFRS then they need to provide 5
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statements. a) balance sheet b) profit and loss statement c) cash flow d) change in equity
e) notes of financial statement. Assist potential investors: It is beneficial for investors to obtain information of target
companies from financial reports so that they can use this information to make
investment decision like withdraw the old investment or invest more in existing
investment. This information is beneficial for both old and new investors to analyse and
crack-up the investment decision (Acharya and Ryan, 2016). Investors can evaluate the
company's profitability against competitors and their return on investment. Investors also
have an idea that company is using its resources efficiently.
 Overview of future cash flow: The purpose of this report is to not only give information
about how good or bad a company's position is but it is also used to determine the future
cash flows. It is beneficial for employees of the company to measure the stability so that
their job is secured. It evaluate the actual cash flow in determining future cash flows and
profitability (Flower, 2018).
2. Accounting principles and their purpose
Accounting principles:
It is basic guidelines or rules that companies follow in preparing financial reports.
Accounting principles are different in every country (Tschopp and Huefner, 2015). Investors
need to be cautious while comparing companies because accounting principles differ from
country to country. There are some principles that rule the accounting are: Full disclosure principle: This principle states that it is very important to disclose all the
information related to financial statement so that potential of company can be identified.
It is required to disclose every detail in the statements. The purpose of this principle is to
provide all the essential information to the people who want to invest in the company. It
is beneficial for Deloitte to disclose its information to build its goodwill (Acharya and
Ryan, 2016). Going concern principle: This principles states that the company will exist for longer
period and continue its business to earn objectives and fulfil its commitments. Company
will not liquidate in future if its sales are low. The purpose of this principle is to show the
stability of company to the shareholders which impact the price of stock (Abbott and
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et.al., 2016). Company need to prepare financial report by assuming the company is
going concern. Revenue recognition principle: This principles states that company need to recognize its
revenue when the product is sold. Company need to recognize its revenue irrespective of
when the money is received. For e.g. Deloitte completes its services for £2000 , company
need to recognise £2000 as early as possible irrespective of whether money is received or
not. The purpose of this principle is to show real time profit and loss of the company.
This gives accurate financial position of the company (Johnston and Petacchi, 2017).
 Conservatism principle: This principles states that if there is a condition where 2
acceptable alternative are there for reporting a component, this principle guides the
accountant to select second option which results to a lesser extent of net income.
Conservatism principle tells accountant to to disclose all the losses but this does not mean
to disclose profits (Accounting principles, 2019). It expects accountant to be impartial
and be objective oriented. The purpose of this principle is to predict future loss but not
profits. It also predicts doubtful debts and forecast whether cost will reduce or not.
3. How stakeholders of company benefit from financial information
Stakeholders:
Stakeholders are are group of people who are interested in the company. These people are
affected by the business (Call and et.al., 2017). Stakeholders use this information in making
decision to invest in the particular company or not. There stakeholders of the Deloitte are
investors, employees, customers, government, suppliers, creditors, lenders and competitors.
These stakeholders benefits a lot from financial information of the company are as follows: Investors: Financial information is beneficial for both potential and actual investors.
Actual investors uses this information in checking that how their funds are used by the
managers and the expected performance of enterprise in coming days to earn growth and
profit. It is beneficial for potential investors, with the help of financial information
investors make decision whether this company is suitable for investment or not
(Lawrence Minutti-Meza and Vyas, 2017). Lenders: Lenders are financial institutions who lend money to enterprise to earn income.
Financial information is beneficial for them so that they can evaluate the performance of
company and check where the company stands (Ewers, 2017). This helps them to decide
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to whom are they lending and is company able to repay its amount on time and pay
interest as well. Owners:Owners of the company need to know the accurate information because they
invest capital in business and their objective is to earn profits. They need to know the
position of company i.e. what it has earned and missed over time. This information
benefits owners in making future decision to expand the company or not. Government: Government benefits from this information by checking whether company
has paid tax or not (Beatty, Liao and Zhang, 2019). Financial information confirms that
company is running under rules and regulations given by the government and also
protects the interest of shareholders. Employees: Employees are also stakeholders of the company who want to know the
stability of company. Financial information tells the potential of employers in providing
remuneration, employment and retirement benefits. It is beneficial for employees to
make decision in leaving the organisation or continue working for them.
 Customers: Accounting information tells customer about the position of company to
make decisions in future. Customers are of 3 types manufacturers, wholesalers and
retailers. It benefits customer in deciding whether to provide raw materials to company or
nor, whether company is able to repay money or not. Thus financial information is
essential for all (Lawrence Minutti-Meza and Vyas, 2017).
4. Benefits of financial reporting in meeting organisation goals
Financial reporting has many benefits in achieving organisation objectives: Making economic decision: The goal of economy is to reduce social welfare for which
proper resource allocation is required. Financial reporting tells the position of all the
companies thus help in finding growth of economy. Change in economic conditions like
increase and decrease in the rates of inflation, interest, foreign exchange etc. affects the
company's stock price. These economic decisions is beneficial for Deloitte in making
decisions and maximise their wealth (Flower, 2018). It helps in better allocation of
resources which makes company reach its goals and objectives. Cost of capital: Disclosure of financial reports is anticipated to enhance the price of share
for long run. Higher share price shown in the disclosure have pleasing impact on the cost
of capital (Ghosh and Tang, 2015). It benefits company in enhancing future price to issue
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company shares. Higher stock price will reduce cost of capital and make company earn
higher and achieve objectives. Equilibrium in share price: Adequate disclosure of financial information decreases the
share price. Fluctuation in the price of stock occurs when uncertainty is ignored in the
investment market. If there is full information available then uncertainty can be avoided.
Full disclosure of information prevent manipulation and fraud. This benefits company in
smooth functioning and achieving goals. Employee decision: Employees decision is affected by the financial information.
Employees use this financial reports in evaluating growth and risk of company, therefore
knowing the possibility of job security and promotions (Leuz and Wysocki, 2016). If
employees see growth and development of themselves in the company then they work
better in order to achieve objectives of enterprise. Hence employees perception matters in
increasing profitability of organisation.
 Customer decision: From the data disclosed in the financial statement affects the
customers of company, thus change in the demand and supply of economy. From the
financial information customers predict whether company will run for longer period or go
bankrupt and unable to meets its commitments. This information is important in
predicting availability of services provided by company. If company fulfils all its
commitment then automatically goal is achieved and customers are also satisfied (Flower,
2018).
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5. Presentation of Financial statements
Calculation of statement of Profit & Loss for the year ending 31st December 2018
Statement of Profit & Loss for the year ending 31st December 2018
Particulars Amount (£)
Revenues 585100
Less: Cost of sales -391700
Profit 193400
Add:Other Income 9600
Gross Profit 203000
Less: Operating expenses -101277.5
Operating Profit 101722.5
Less: Finance cost -1200
Profit before tax 100522.5
Less: tax -9500
Profit after Tax 91022.5
Calculation of changes in equity for the year ending 31st December 2018
Statement of changes in Equity for the year ending 31st December 2018
Particulars Share Capital
Retained
Earnings
Revaluation
surplus Total Equity
£'000 £'000 £'000 £'000
Balance at 1st
January 2018 113200 45500 40000 198700
Changes in
Equity for the
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year 2018
Issue of share
capital 0 0 0 0
Income for the
year 0 91022.5 0 91022.5
Revaluation gain 0 0 0 0
Dividends 0 -7000 0 -7000
Balance at 31st
December for the
year 2019 113200 129522.5 40000 282722.5
Calculation of Balance sheet as at 31st December 2018
Statement of financial position as at 31st December 2018
Particulars £'000 £'000
Asset
Current assets
Trade Receivables 78000
Inventory 25000
Bank 19600
Total current assets 122600
Non- Current assets
Land and Property 106562.5
Plant & Machinery 98260
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Investment Property 28000
Total Non current assets 232822.5
Total Assets 355422.5
Equities & Liabilities
Shareholders fund
Ordinary share capital 25 p
shares 86700
10% Redeemable Preference
shares £1 26500
Retained earnings 129522.5
Revaluation Reserve 40000
Total shareholders fund 282722.5
Current Liabilities
Trade Payables 62700
Deferred Taxation 10000
Total current liabilities 72700
Total Equities and liabilities 355422.5
6. Interpretation and Analysis of Hilton Ltd
Ratio analysis of Hilton for the period of 2017 and 2018 is as follows:
Profitability ratio analysis
Particulars Formula 2017 2018
Gross Profit 7854 7574
Net profit 1259 764
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Sales revenue 9140 8906
GP ratio Gross profit / sales * 100
85.9
%
85.0
%
NP ratio Net profit / sales * 100
13.8
% 8.6%
Interpretation: Profitability ratio of Hilton Ltd is decreasing from 13.8% to 8.6% which is not
good for the company (Annual Reports of Hilton Ltd. 2018). This shows that either company
should increase its revenue or decrease the expenses of the company (Kajananthan, 2018). Gross
profit of Hilton Ltd is good which shows that the company should mainly focus on the indirect
expenses of the company. Direct expenses of the company are same as the expenses were in year
2017.
Liquidity ratio analysis
Particulars Formula 2017 2018
Current assets 1986 1983
Current liabilities 2208 2615
Inventory 0 0
Prepaid expenses 111 160
Quick assets 1875 1823
Current ratio Current assets / current liabilities 0.90 0.76
Quick ratio
Current assets - (stock + prepaid
expenses) 0.85 0.70
Interpretation: Liquidity ratio analysis of Hilton Ltd is not good because current ratio of the
company is less than the ideal ratio i.e. less than 2: 1 which shows that the company is not
having enough current assets to pay all current liabilities of the company (Tan, 2017). Quick
ratio of Hilton Ltd is approximately same as current ratio which means that there is no effect of
inventory and short term borrowings.
Solvency ratio analysis
Particulars Formula 2017 2018
Long-term debt 6556 7266
Shareholder's equity 2072 551
Debt-equity ratio Long-term debt / shareholders’ equity 3.16 13.19
Interpretation: Solvency ratio of the company has been increased due to decrease in the
shareholders' equity which means that the owners are reducing there investment from the
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company or company is not retaining its profits for investing back into company (Rahman,
2017). It is not good sign for the company because it shows that the company is borrowing more
debt from outside the company which increases the finance cost of Hilton Ltd.
Efficiency ratio analysis
Particulars Formula 2017 2018
Turnover or sales revenue 9140 8906
Average total assets 20260 14152
Average fixed assets 17488 12167
Receivables or debtors 998 1150
Creditors or payables 282 283
Cost of god sold 1286 1332
Total assets turnover ratio Sales / average total assets 0.45 0.63
Fixed assets turnover ratio Sales / average fixed assets 0.52 0.73
Receivables or debtors
turnover ratio (in days) (Debtors * 365) / Credit sales 40 47
Creditors turnover ratio (in
days) (Creditors * 365) / COGS 80 78
Interpretation: Hilton Ltd is having good policy of collecting money from debtors and paying
money to the company's creditors (Omondi- Ochieng, 2018). It is good that the company is
collecting cash from debtors in 47 days and paying cash back in 80 days. Company should
continue the same policy in future.
Investment ratios
Particulars Formula 2017 2018
Earnings per share
(Net income - preferred dividend) /
Number of shares outstanding 3.32 2.5
Dividends per share Annual dividends / Number of shares 0.6 0.6
Interpretation: Earning Per share of Hilton Ltd is positive which means that the profit is
available for equity shareholders even after the dividend is paid to other shareholders. Company
is also paying £0.6 dividend per share which shows that company has the capability of paying
the dividend to its shareholders.
Overall the financial position of Hilton Ltd is showing good sign for the company and
company should maintain the same ratios in future (Daniel, 2015). Company should only put its
focus on revenues and indirect expenses of the company. Also, company should its focus on
debt- equity ratio of the company.
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7. Difference between International Accounting Standards (IAS) and International Financial
Reporting Standards (IFRS)
International Accounting Standards International Financial Reporting Standards
The standard was issued by International
Accounting Standards Committee (IASC).
This standard was made by International
Accounting Standards Board (IASB).
All the standards issued between 1973 and 2001
are call accounting standards.
All the standards which were issued after 2001
were called as IFRS (Sedki, 2018).
Total number of IAS are 41. Total number of IFRS are 9.
IAS was the first attempt set of accounting
standards (Capkun, 2016).
IFRS are rules, protocols ans compliance
standards which are abide at the time creating
public companies.
The main goal of IAS is to make businesses
easier to compare, aid in transparency and
increase in the international trade among
different countries.
The main goal of IFRS is to develop the
developing economies which helps the
international companies to compare there
businesses from peer to peer.
8. Benefits of IFRS
IFRS is common accounting regulations which every company need to follow making
financial reporting. There are several benefits of IFRS:
 Single set of accounting standards: Every county has different accounting standards
which makes it difficult for the Deloitte to adopt each standard. IFRS make company to
adopt this standard because this standard apply all over globe. The benefit here is it
increases transparency (Williams and Dobelman, 2017). Reduce time, expense and effort: IFRS reduces time as company cut down the time they
use to spend in preparing financial reports. It also reduces cost and effort as company do
not follow multiple standards. Thus it reduces time and effort.
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 Flexibility: IFRS system is principle based instead of following specific rules. That
means every standard in IFRS has value and there are many ways to overcome the
outcomes. It is beneficial for company to adopt global system according to the situations. Easy to do business: Increasing transportation technologies and internet has encouraged
companies to make their business global (Tschopp and Huefner, 2015). Every company
has power to enter in global markets beyond their origin in providing goods and services.
But companies faces cost of using different standards like GAAP and IFRS. Company
which uses single accounting standards have higher opportunity to expand their business
(Acharya and Ryan, 2016). Centralized authoritative body: If companies adopt IFRS than there will be only one
global standard. It is beneficial to adopt one standard because there will only be one
authority who will change the rules and policies. Using different standards will make
company to create different financial report in each country which will increase cost.
 High return on equity: Companies using IFRS standards earn high return as compared to
companies using GAAP standards. Net income shows decrease in different standards but
it supports economic growth and increase value of stock.
9. Compliances with IFRS and factors which impact on these compliances
Some common and internationally accepted norms have been made by International
financial reporting standards (IFRS) in order to bring consistency and transparency in financial
statements of all organisations.
Firm size is considered as major compliances with IFRS, size of the enterprises how big
entity is in term of assets (Call and et.al., 2017). But there are many firms which have
capabilities to generate more profit by investing less amount hence firm size cannot determine
the worth of actual business unit. Large organisations can disclose their necessary financial
details by cutting legislative cost which may show creditability of the enterprise. As big
companies have great detail and their documented creditability is also high hence large
companies have to bear less cost in these compliances as compare to small firms.
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Leverage is another major compliances element that highlights the amount need to entity to
run the business successfully. It is essential for leveraged enterprises to show or disclose all the
information every year in term of their annual reports. But it is also fact that if the firm is highly
leveraged then definitely it will have to bear more agency cost (Ewers, 2017).
Profitability is the component of compliances with IFRS, it highlights the return on equity.
If the firm is earning high profit, then it may create compliances with IFRS because in such
condition these enterprises will not be able to disclose each point carefully. Profitable companies
have to bear political cost hence these entities have to prepare their financial statements as per
the guidelines of IFRS. By this way companies show the creditability of firm to investors which
influences mind of investors and they plan to invest in such enterprises in order to gain high
return over their investments.
Age of entity is another major compliance element with IFRS, old companies have more
information to publish as compare to small firms (Lawrence Minutti-Meza and Vyas, 2017). As
old enterprises have more reliable and established reports which is cost effective for them. This
helps big firms in gaining competitive advantage as well. Whereas Appiach and et.al., (2016)
highlighted that there is no direct relationship between compliance level and age of firm because
it does not really matter because each private or public enterprise has to show their reports
publically.
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CONCLSUION
From the above study it can be concluded that financial reporting highlights the actual
economic performance of company. Investors always like to invest in such firm where they can
get high return over their investments. It is very essential for entities those which are operating at
international level that to follow guidelines of GAAP and IFRS. They have to prepare their
financial statements according to these principles and have to disclose it properly. This supports
business unit in showing their creditability and gaining more investments from the market.
Implementation of IFRS standards give benefit to the organisation and large number of
international investors invest in business by looking at its return capabilities. This is helpful in
growing at global level successfully. Further report concludes that company need to use follow
only one standards i.e. IFRS which benefits company in reducing cost and time. Using different
standards increases cost of the company as it has to prepare financial statements using multiple
standards.
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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.
Acharya, V. V. and Ryan, S. G., 2016. Banks’ financial reporting and financial system stability.
Journal of Accounting Research.54(2).pp.277-340.
Appiah, K. O. and et.al., 2016. Compliance with international financial reporting standards: the
case of listed firms in Ghana. International Journal of Accounting and Financial
Reporting.
Beatty, A., Liao, S. and Zhang, H. H., 2019. The effect of banks’ financial reporting on
syndicated-loan structures. Journal of Accounting and Economics.
Call, A. C. and et.al., 2017. Employee quality and financial reporting outcomes. Journal of
Accounting and Economics.64(1).pp.123-149.
Capkun, V., Collins, D. and Jeanjean, T., 2016. The effect of IAS/IFRS adoption on earnings
management (smoothing): A closer look at competing explanations. Journal of
Accounting and Public Policy. 35(4). pp.352-394.
Daniel, K. and Hirshleifer, D., 2015. Overconfident investors, predictable returns, and excessive
trading. Journal of Economic Perspectives. 29(4). pp.61-88.
Ewers, R. B., 2017. Enterprise Risk Management in Responsible Financial Reporting.
Flower, J., 2018. Global financial reporting. Macmillan International Higher Education.
Ghosh, A. A. and Tang, C. Y., 2015. Assessing financial reporting quality of family firms: The
auditors׳ perspective. Journal of Accounting and Economics.60(1).pp.95-116.
Johnston, R. and Petacchi, R., 2017. Regulatory oversight of financial reporting: Securities and
Exchange Commission comment letters. Contemporary Accounting
Research.34(2).pp.1128-1155.
Kajananthan, R. and Velnampy, T., 2018. Liquidity, Solvency and Profitability Analysis Using
Cash Flow Ratios and Traditional Ratios: The Telecommunication Sector in Sri
Lanka. Research Journal of Finance and Accounting. 5(23).
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