Impact of IFRS on Earnings Management and Government Reporting

This assignment, based on selected academic papers and online resources, investigates the impact of International Financial Reporting Standards (IFRS) on earnings management and government reporting. It delves into the competing explanations for IFRS's effect on earnings smoothing, compares the impact of IPSAS on governmental financial reporting internationally, and evaluates the financial performance of commercial banks in Kenya. Additionally, it explores the benefits, obstacles, and intrigues of IFRS implementation in Nigeria, and assesses the quality of financial reporting under IAS/IFRS using European experiences. The assignment also includes illustrations and analysis of key financial ratios such as operating profit ratio, net profit ratio, current ratio, quick ratio, and debt to equity ratio.

FINANCIAL REPORTING

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
1. Outlining context and objective of FR...............................................................................1
2. Requirement of Conceptual and regulatory framework and Qualitative information that
make financial statements more reliable................................................................................2
3. Identifying key stakeholders Along with explaining benefits of information to them.......3
4. Assessing financial reporting's value to meet objectives of organisation and grow in market
................................................................................................................................................4
5. Presentation of financial statements...................................................................................5
6. Interpretation of financial performance of Marks & Spencer with the help of some financial
ratios.......................................................................................................................................7
7. Explaining difference among IAS as well as IFRS..........................................................11
8. Evaluation of benefits or advantages of IFRS..................................................................11
9. Factors affecting compliance with IFRS across the world...............................................12
CONCLUSION..............................................................................................................................13
REFERENCES..............................................................................................................................15

INTRODUCTION
A business operating its activities on regular basis, needs to prepare and produce its
financial reports at the end of each financial year. It is essential for every organisation whether
from service industry or manufacturing industry. These reports provide financial information to
its internal as well as external users that enables them in taking economic decisions for future.
This also helps in identifying and analysing an entity's liquidity, solvency, profitability and
financial position. It mainly includes statements such as income statement, Statement of financial
position, cash flow statement and statement of changes in equity. In the present report conceptual
and regulatory framework of financial statements has been provided with explaining qualitative
characteristics and preparation of financial statements for ROB plc along with explaining
application of and difference between IFRS and IASB.
1. Outlining context and objective of FR
Financial reporting is considered as one of the pivotal aspect within every organisation
where it supports to analyse financial transactions come into consideration. When such values
are properly tracked within firm then management able to know performance in the market
where it operates. There are some objectives and purposes due to which accountants apply FR
within working environment. Some basic as well as key objectives due to which FR used are
such as follows:
 FR helps to the manager for assessing as well as tracking all the transactions related to
financial aspects occur within firm. Such things are like profit, revenue, income, return
on investment, indirect costs, liquidity condition, expenses etc (Nandwa, 2016). If level
of total costs is the low as compared to targeted then firm able to make beneficial
strategies and resolve this issue.
 In order to prepare financial plans, apply at the workplace, evaluate, monitor as well as
execute then FR is one of the highly supportive concept. Due to this, financial objectives
will be achieved easily and business performance will be enhanced as well.
 FR helps to disclose receipts and payments made within one accounting period in front of
internal stakeholders. Therefore, decisions for making investment and doing expenses can
be made in profitable manner.
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 Considering and applying FR within working environment, entrepreneur can assess that
business is up to which level financially sound (Objectives of financial reporting, 2015).
On the basis of this, plans and strategies made for improving financial performance.
 Apart from this, for representing assets, liabilities, capital funded by owner etc. among
stakeholders of business also FR is taken into consideration.
2. Requirement of Conceptual and regulatory framework and Qualitative information that make
financial statements more reliable
Conceptual framework on financial accounting provides purpose and nature of
accounting. Conceptual framework need to consider conceptual and theoretical issues that are
surrounded to financial reporting along with formulating consistent foundation that provides aid
to development of accounting standards. In the context of financial reporting it can also be seen
as Generally Accepted Accounting Principles that provides evaluation of existing practices along
with development of new and improved practices (Conceptual Framework for Financial
Reporting, 2017). It also provides basis on how financial information should be communicated
and presented to its potential users.
Following are the contents of conceptual and regulatory framework:
Identification of objectives of financial statements: The Framework helps in identifying
objectives of preparation of financial statements. It can be summarised as follows:
Foremost objective of financial reporting is to provide relevant information to its users that are
potential investors, creditors and other lenders and stakeholders (Ahmed, Neel and Wang, 2013).
The information is used by the users to make future economic decisions regarding selling,
buying or holding equity. Through financial reporting information regarding entity's resources
can be assessed along with analysing efficiency of management responsibilities.
Reporting entity: An entity is said to be a reporting entity when its financial information and
financial statements is helpful for its users and significantly affects their decisions i.e. in order to
make economic decisions users rely over entity's financial information, such entity is regarded as
reporting entity as per conceptual and regulatory framework of financial accounting
(Brüggemann, Hitz and Sellhorn, 2013).
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Further, it also provides framework on qualitative characteristics that useful financial
information should possess:
Qualitative characteristics helps in identifying the type of information that are likely to be
most useful to its users for making economic decisions. Following are the characteristics:
Relevance: as per the framework, the information that is been presented in financial statements
must be relevant for its users i.e. it must be related to the reporting entity. An information is said
to be relevant when it contains confirmatory value, predictive value or both. These values can
significantly arise difference in the decisions of users.
Materiality: Information must be material i.e. only that data should be presented in reports that is
material or important to the organisation in terms of either Qualitative or quantitative (Ignore and
Kusa, 2013). For example, a transaction of £10, cannot affect the profitability of company if
presented in financial reports or not hence, it can be said that the information is not material.
Faithful Representation: This refers to that economic phenomena of accounting information i.e.
number and words must provide true and fair view along with being free from misstatements.
Verifiability: Financial reports must have the characteristic of communicating underlying
economics of the company's business.
Comparability: The usefulness of financial information will increase if they would be
comparable with the information of other entity or with the past year information so that
performance can be evaluated.
Understandability: It should be presented in such a form that can enable a reader having nominal
knowledge to easily comprehend it.
3. Identifying key stakeholders Along with explaining benefits of information to them
Key stakeholder is any person who is directly or indirectly affected by the decision
making and functioning of organisations activities and operations. In other words, person that
have vested their interest in an entity in any form are referred as organisation's main
stakeholders. These can be classified as follows:
External Stakeholders
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Creditors and other Investors: These individuals have provided goods on credit basis to the
business entity or have provided their money as loan to the entity (Brigham, 2014.). Therefore,
knowing liquidity position and solvency position of the company is important to them in order to
determine whether t will be able to refund their money within stipulated time.
Local Authority and Government: Government of the country in which the business is operating
is also a key stakeholder in order to determine profitability to secure its taxation revenue. Also,
to ensure that the policies of company is adhered to required regulations and legislations.
Customers: Customers are those stakeholders that can either make or break the company. An
organisation to become successful need to consider expectations and requirements of its
customers along with fulfilling customer satisfaction.
Internal Stakeholders
Employees: Employees are the main pillars of company, without whom a business cannot
operate its functions efficiently (Bonetti, Magnan and Parbonetti, 2016). The only interest they
have vested in company is their salaries. They assess financial information to determine whether
the company is in position to pay off their salaries on time or not.
Shareholders: Shareholders are considered as owners of business they are only interested in
knowing profit earning ability of an entity.
Following are the benefits of financial information to stakeholders:
 Identification of earning capacity of business.
 To get an idea about company's future plans, tactics and strategies.
 To determine the value of assets and liabilities that a business possess.
 To determine entity's liquidity, solvency and profitability position.
4. Assessing financial reporting's value to meet objectives of organisation and grow in market
A concept in which various kinds of financial transactions are recorded, analysed and
final accounts are prepared is known as financial reporting. It provides opportunity to managers
as well as accountants for assessing each and every transaction comes into consideration at the
workplace. During this, if any kind of problem or malpractices seen then firm able to make
strategies for resolving it. Considering to financial reporting, the firm able to prepare all the
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accounts properly along with in the appropriate structure (Ball, Jayaraman and Shivakumar,
2012).
Once the financials are appropriately structured then performance of whole business can
be easily determined in the industry where it has presence. Due to this specific procedure, actual
business performance can be interpreted where correction actions taken, if required then. On the
basis of this, management able to meet aims and objectives which are prepared while preparing
financial plans or operating in the market. For instance: with the help of financial reporting, firm
able to known profitability position along with making comparison with the last accounting
period. Herein, if low or negligible growth evaluated then strategies for managing cost and
enhancing profit will be applied. Therefore, objectives will be achieved easily which is clear sign
of grow in the market.
5. Presentation of financial statements
Income Statement
Statement of Profit and Loss for ROB Plc for the year ending 31st December 2016
Particulars Amount (£) '000
Revenue 285100
Cost of sales (COGS) -195700
Gross Profit 89400
Other income
Rental Income 1600
Operating expenses -46400
Operating profit 44600
Finance Cost: Bank Interest -1030
Profit Before tax 43570
Tax -12000
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Net Profit for the Year 31570
Statement of Changes in Equity
Statement of changes in equity of ROB plc at the year ended 31st December 2016
Particulars Share
Capital
Revaluation
Reserve
Retained
earnings
Total
£'000 £'000 £'000 £'000
Balance as per trial balance 26700 28000 23300 78000
Profit for the year 31570 31570
Preference Dividend -1330 -1330
Ordinary Dividend -5340 -5340
Closing Balance 26700 28000 48200 102900
Statement of Financial Position
Statement of Financial Position for ROB Plc as at 31st December 2016
PARTICULARS DETAILS AMOUNT (£'000)
ASSETS
NON-CURRENT ASSETS
Land and property @ valuation (84000-4000) 80000
Plant and Equipment [48000-
(24000+3200)]
22400
Investment Property (21300-3300) 18000
(A) 120400
CURRENT ASSETS
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Inventory (14000-400) 13600
Receivables 18000
(B) 31600
TOTAL ASSETS (A+B) 152000
EQUITIES and LIABILITIES
EQUITY
Ordinary share capital @25p each 26700
Revaluation Reserves 28000
Retained earnings 48200
(C) 102900
NON-CURRENT LIABILITIES
10% Redeemable preference share @ £1 each 13300
Deferred Taxation 6900
(D) 20200
CURRENT LIABILITIES
Payables 15700
Bank Overdraft 1200
Current tax payable 12000
(E) 28900
TOTAL EQUITIES AND LIABILITIES (C=D=E) 152000
6. Interpretation of financial performance of Marks & Spencer with the help of some financial
ratios
At the time of operating in one particular market or industry it is essential to assess
performance in the industry in proper manner. The reason behind this is that, it helps to make
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effective strategies can be applied when needed and make the whole organisation financially
sound. For assessing performance, financial ratios are taken into consideration as these are
effectual measurement tool (Robinson and et.al., 2015). For the current section, Marks and
Spencer (M&S) Company is considered which has global presence in retail sector. Further, this
is listed in two stock markets which are LSE as well as FTSE 100 component. Herein,
profitability, liquidity as well as gearing ratios are computed and analysed below:
2016 2017
0.00%
1.00%
2.00%
3.00%
4.00%
5.00%
6.00%
4.88%
1.79%
Illustration 1: Operating profit ratio
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2016 2017
0.00%
0.50%
1.00%
1.50%
2.00%
2.50%
3.00%
3.50%
4.00%
4.50%
3.86%
1.10%
Illustration 2: Net profit ratio
Interpretation: From the above charts of profitability ratios it can be pertained that, OP
ratio of M&S declines from 3.86% to 1.10% in the retail industry at the end of FY 2017. This
stated figures are reflecting that, management has not applied better level of strategies for
reducing cost of sales within workplace. Apart from this, decreasing trend of NP ratio which is
from 3.86% to 1.10% shows that it pays huge indirect costs. Due to lack of managing indirect
expenses adequately, M&S unable to perform well in the respective market segment. Herein, it
should employ cost management techniques so that will become able to generate more profits.
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2016 2017
0.67
0.68
0.69
0.70
0.71
0.72
0.73
0.74
0.69
0.73
Illustration 3: Current ratio
2016 2017
0.00
0.05
0.10
0.15
0.20
0.25
0.30
0.35
0.24
0.33
Illustration 4: Quick ratio
Interpretation: Aforementioned charts and table reflects liquidity position of M&S with
the help of current and quick ratios. Improving value of current ratio i.e. from 0.69:1 0.73:1 in
accounting period 2017 depicts that it able to enhance liquid position within industry. On the
basis of quick ratio it can be said that, M&L performs well where current assets are improved in
next fiscal period i.e. 2017. The reason is that proportion of acid test or quick ratio enhances
from 0.24:1 to 0.33:1 (Marks & Spencer Group PLC, 2017). However, in terms of standard value
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of CR and QR i.e. 2:1 and 1:1 respectively liquidity condition of M&S is low or poor. For this,
the company requires managing current assets and apply strategies for enhancing them.
2016 2017
0.49
0.49
0.50
0.50
0.51
0.51
0.52
0.52
0.53
0.53
0.50
0.53
Illustration 5: Debt to equity ratio
Interpretation: The debt to equity (D/E) ratio reflects capital structure of the company
where two components involve i.e. debt as well as equity financing. This ratio must be lower
than 0.5:1 at the every working environment (Samonas, 2015). In the case scenario of M&S it
can be seen that D/E ratio enhances from 0.50:1 to 0.53:1. It shows that business performs poor
where it should raise fund through equity financing rather than debt financing.
7. Explaining difference among IAS as well as IFRS
These both the stated terms are supportive in order to make all the accounting treatments
properly and concisely. Along with this, final accounts are to be prepared in an appropriate
manner using these both the concepts. On the another side, these have some differences which
are discussed below:
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 IAS concept is stated for “International Accounting Standard” whereas IFRS refers to the
“International Financial Reporting Standard”.
 In these both the aspects wide range of accounting principles, theories, regulations and
standards included. These all the things related to accounting published between fiscal
year 1973 to 2001 are considered under IAS. While publications of these all after 2001
are part of another term which is IFRS (Ikpefan and Akande, 2012).
 Governing as well as regulatory body of IAS is IASC while IFRS of the same is IASB
through which it is handled or regulated.
 Apart from this, standards, regulations, laws, principles etc. of accounting are when part
of one framework then not come under another aspect.
 Further, IAS consists of 41 accounting standards while IFRS comprises with only 9 type
of accounting standards.
8. Evaluation of benefits or advantages of IFRS
A concept or aspect which supports to the accountants for making adjustments and
treatments of several financial transactions is known as IFRS. When an accountant or manager is
going to prepare financial statements at the end of fiscal year then this is taken into
consideration. In addition to this, when the company is operating at the global level then IFRS
provides a clear and proper structure of final accounts. On the basis of this, customers or
stakeholders at the global level easily able to understand financial statements. Further, when a
company considers this particular aspect then become beneficial in several ways. The advantages
which gained by management from IFRS are stated below:
 Key benefit of IFRS is that, it supports to accountant for preparing financial statements
by following appropriate rules and standards. So that, every person able to interpret the
statements and make decisions in accordance to that towards the company (Christiaens
and et.al., 2015).
 It provides a particular structure or format for preparing every kind of financial
statements which include balance sheet, cash flow statement, profit and loss account etc.
On the basis of this, when business decisions are required to make to manager of the firm
within subsidiary then able to make profitable in manner.
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 Apart from this, it IFRS helps to make effective and appropriate kind of comparison with
the global level of companies. The reason behind this is that, accounting treatments and
structures are same where any kind of issue not has to face by the analyst. When different
kind of standards are followed then it is not possible to make effectual kind of
comparison and take better level of decisions.
 IFRS helps to the management for improving clear transparency in financial statements
and reporting both. When the final accounts are properly as well as accurately prepared
then entrepreneur can determine actual business performance in the industry (Palea,
2013).
 In order to complete the auditing procedure of financial statements at the workplace in
proper as well as clear manner then also IFRS is highly significant. As it is very
important aspect it should be completed in appropriate direction. Hence, it can be said
that IFRS is highly effective and beneficial for every business organisation. Specifically
in the case, when the company has global presence or operates at international level.
9. Factors affecting compliance with IFRS across the world
At the time of preparing and publishing financial statements in the firm and market
respectively then wide range of tools and methods are considered. Among them all one of the
best as well as effective kind of technique taken into account is IFRS. While applying IFRS and
its several numbers of standards then some factors create positive or negative impact on the
business. Further, those aspects which create influences on compliance with IFRS are explained
below:
 Key factor which creates directs impact on this particular aspect is size of the company in
the market. It involves large, medium and small size of the companies where some rules
change accordingly. When small size of the business operates in market then not
mandatory to apply regulations and standards of IFRS in strict manner like as large size
of entities (Borker, 2013).
 Capacity of the company for generating incomes as well as profits also create influence
on this specific aspect up to a great extent. A situation in which an organisation has better
and adequate level of profitability conditions then easily able to follow or implement all
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the rules of IFRS in proper manner. However, due to lack of huge margins the
management cannot apply such all the aspects appropriately.
 Leverage is one of the another factor which must be at the average level. When leverage
position of the firm is too much low or high, in that case, accountant of the company
cannot consider all the compliances associated with IFRS in adequate manner. Due to this
it can be said that leverage has greater level of impact upon the stated aspects of IFRS
(Capkun, Collins and Jeanjean, 2016).
 Other than the above mentioned factors, cash position, liquidity performance etc. also has
higher level of influence on compliance with IFRS. Due to change or fluctuations in
liquid condition, all the accounting treatments cannot be made in proper as well as
effectual manner.
CONCLUSION
Hereby, it can be articulated that financial reporting is one of significant aspect for every
organisation. Key reason behind this is that, it supports to prepare financial statements by
implementing every accounting standards properly wherever required. FR is several objectives
and purposes by which the company able to assess proper financial performance in the industry
and meet targets made while operating in the market. Apart from this, internal and external both
kinds of stakeholders use the financial information for making several decisions towards the
company. FR is supportive method where an enterprise easily able to meet desired goals as well
as objectives in proper direction. Looking at the financial ratios of Marks & Spencer then it can
be seen that, in the financial period 2017 it has poor business performance. On the another side,
liquidity position of the retailer improved in next year. When company considers IFRS then
various factors create impact upon compliance with IFRS.
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REFERENCES
Books and Journals
Ahmed, A. S., Neel, M. and Wang, D., 2013. Does mandatory adoption of IFRS improve
accounting quality? Preliminary evidence. Contemporary Accounting Research. 30(4).
pp.1344-1372.
Ball, R., Jayaraman, S. and Shivakumar, L., 2012. Audited financial reporting and voluntary
disclosure as complements: A test of the confirmation hypothesis. Journal of Accounting
and Economics. 53(1). pp. 136-166.
Bonetti, P., Magnan, M. L. and Parbonetti, A., 2016. The Influence of Country‐and Firm‐level
Governance on Financial Reporting Quality: Revisiting the Evidence. Journal of Business
Finance & Accounting. 43(9-10). pp.1059-1094.
Borker, D. R., 2013. Is there a favorable cultural profile for IFRS?: an examination and
extension of Gray's accounting value hypotheses. The International Business &
Economics Research Journal. 12(2). p. 167.
Brigham, E. F., 2014. Financial management theory and practice. Atlantic Publishers & Distri.
Brüggemann, U., Hitz, J. M. and Sellhorn, T., 2013. Intended and unintended consequences of
mandatory IFRS adoption: A review of extant evidence and suggestions for future
research. European Accounting Review. 22(1). pp.1-37.
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.
Christiaens, J. and et.al., 2015. The effect of IPSAS on reforming governmental financial
reporting: an international comparison. International Review of Administrative Sciences.
81(1). pp. 158-177.
Ignore, V. O. and Kusa, G. B., 2013. Determinants of financial performance of commercial
banks in Kenya. International Journal of Economics and Financial Issues. 3(1). pp.237.
Ikpefan, O. A. and Akande, A. O., 2012. International financial reporting standard (IFRS):
Benefits, obstacles and intrigues for implementation in Nigeria. Business Intelligence
Journal. 5(2). pp. 299-307.
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