Impact of IFRS Adoption on Firms

This assignment examines the consequences of adopting International Financial Reporting Standards (IFRS) for businesses. It delves into how IFRS adoption influences financial reporting quality, considering factors like audit quality and management forecasts. Furthermore, it investigates the potential operational effects of IFRS, particularly focusing on internal control over financial reporting and inventory management.

FINANCIAL REPORTING

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
(1)Outling context and purpose of financial reporting....................................................................1
(2) Examining conceptual and regulatory framework and their requirements as well as purpose
and key principles............................................................................................................................2
(3) Major stakeholders of an organization and way in which they benefit from financial
information......................................................................................................................................3
(4)Importance of financial reporting for meeting objectives and growth........................................4
(5)Statement of income, equity and financial position....................................................................5
(6) Measurement of company performance.....................................................................................7
(7) Difference between International accounting standard and International financial reporting
standard............................................................................................................................................8
(8) Evaluate the benefits of IFRS....................................................................................................9
(9)Compliance with IFRS and elements in country that have impact on compliance...................10
CONCLUSION..............................................................................................................................10
REFERENCES..............................................................................................................................11

INTRODUCTION
Financial reporting refers to way in which financial statements are presented. In the
current report, purpose of financial reporting is explained in detail. Apart from this, significence
of IFRS is also explained. Along with this, key principles of accounting are defined briefly.
Some of qualitative characteristics that an accounting information must have are also discussed.
In middle part of the report, income statement and balance sheet are prepared on basis of
additional information and trial balance. At end of the report, difference between IAS and IFRS
are explained in detail and reasons due to which nations are not adopting IFRS are also
explained.
(1)Outling context and purpose of financial reporting
Financial reporting refers to preparation of income statement, balance sheet and cash
flow statement. These statements are prepared by most of business firms because by using them
profitability in business is measured and financial position is measured. On other hand, in cash
flow statement cash flows from different activities like operating, investing and financing
activity is measured (Feng and et.al., 2014). It can be said that all these statements have
significent importance for the business firms. Major purpose behind preparing income statement
is to keep stakeholders and managers informed about company profitability and costing. On
other hand, major purpose behind preparing balance sheet is to measure company financial
position at end of the financial year. Thus, stakeholders and managers comes to know about
capial structure of the business firm and sort of risk to which firm is exposed. It can be said that
there is huge importance of these statements for the business firms. Cash flow statement is one
under which cash flow from operating, investing and financing activity are recorded and on that
basis it is identified that how much cash remain at end of the year. It can be said that there are
different purpose behind using all these statements in the business. Active usage of financial
statements in the business ensured that all operations will be performed in perfect way and good
amount of profit will be generated in the business (Gaynor and et.al., 2016). In past couple of
years many changes comes in the reporting standard and IFRS lay down modified standards that
need to be followed for reporting purpose. This is the reason due to which reporting structure
almost same is followed in the business by the firms. It can be said that financial reporting have
due importance for the firms and same need to be strictly followed in the business in order to
comply with international standards.
1 | P a g e

(2) Examining conceptual and regulatory framework and their requirements
as well as purpose and key principles
Conceptual and regulatory framework have due importance for the firms because in these
frameworks different accounting concepts are well defined and it is clearly stated that in what
way accounting transactions will be recorded in the company books of accounts. Thus, it is very
important for accountants to follow all these regulations tightly in the business. Major purpose
behind prerparing these frameworks is to ensure that there is common system of accounting of
transactions and it is possible to measure and compare firms performance in proper manner
(Thomson, 2017). There are some of the key principles that need to be followed while preparing
financial statements. Economic entity principle state that accountant need to keep all transaction
of company and its owners separately from each other. In books of accounts personal account
related transactions can not be entered so that profitability of company can be measured fairly.
Monetary unit principle state that only those transactions can be recorded that can be measured
in terms of money. Cost principle state that assets must be recorded at their purchase value.
Means that asset must be recorded at their actual cost irrespective of their price in the market.
Full disclosure principle state that all important transaction related details must be theoritically
explained in the company annual report. By doing so in proper manner information can be
provided to the stakeholders. Going concern principle state that organization will remain in
existence consistently and its owners will change with passage of time. Hence, accounting
transactions are recorded on company name not on basis of individuals. Matching principle state
that accounting transactions must be recorded in relevant time period. Means that wages must be
recorded in the period of sales from which its amount is paid. By doing so, recording of
transactions is done in systematic way and performance of company is measured accurately.
Revenue recognition principle state that any amount can be treated as part of revenue once
transaction is completed irrespective of time by which cash amount is received in the business.
Materiality principle state that one can volate an accounting principle if an amount related to
business transaction is insignificent (Tan, 2016). Conervatism principle state that if there are two
acceptable alternatives for reporting of an item accountant must choose to select an alternative
that result in less income and less asset in the business.
There are some of the qualitative characteristics that make financial information relaible
for the firms and stakeholders. These qualitative characterisitcs are understandability, relevance,
2 | P a g e

reliability and comparability. Means that information which is presented in the financial
statements must be easy to understand on taking single look. Apart from this, there must be
relevance of the information that is presented in these statements. Along with this, financial
information must be reliable in nature and all facts that are included in them must be fully
authentic in nature (Lee, 2014). It must be easy to compare financial statements as they must be
prepared by using same accounting and reporting standards. Financial statements that cover all
these things are assumed reliable in nature.
(3) Major stakeholders of an organization and way in which they benefit from
financial information
Stakholders have significent importance for business enterprise as they are entities that
underpin growth of the companies by assisting managers in implementing their business related
decisions. Some of the important stakeholders in respect to company are given below. Managers: These are those lead an organization and play decisive role in success and
failure of the company. Managers always needed an input for making business decisions.
These inputs are some facts and figures as well as company accounts. By using these
statements performance of the company is measures. Hence, through analysis managers
comes to know that in which area company is strong and weak. Maangers wage work on
weak areas and try to convert in strong point of the company. By doing so firm core
competency is increased and it is ensured that good return will be earned in the business. Suppliers: Suppliers are the another entities that have very high importance for the firms
because suppliers supply raw material to the business firm. There are already limited
suppliers in the business and in case if one of suppliers withdraw its support from the
business firm its business is havily affected like usually observed in case of companies
(Ghosh. and Tang, 2015). Suppliers number of times sold goods on credit basis and they
need to ensure that on time debt amount will be recovered from the company. In this
regard suppliers needed company statement and by using same identify whether company
will be able to pay all its debt on time. It can be said that financial information have due
importance for the business firms. Shareholders: These are those entities that make investment in the company shares.
Shareholders needed company information in order to determine whether investment
need to be kept in the company or capital must be withdraw from the company.
3 | P a g e

Shareholders also needed annual report because by reviewing them they comes to know
about company current business condition and direction in which company is performing.
Thus, it can be said that financial statements have huge importance for the firms because
it help them in making investment decisions. Employees: Employees needed company financial information because by analyzing
financial information they idenytify current company condition and decide whether they
must stay in the company or leave it (Sorrentino and Smarra, 2015).
(4)Importance of financial reporting for meeting objectives and growth
Financial reporting is give due priority by the business firms because it ensured that
accounting information will be presented in systematic manner and it will be easy to
understanding it just by taking single look on relevant statements. IFRS determine some of the
standards in respect to reporting of financial statements. IFRS also prescribe some of the formats
for income statement, balance sheet and cash flow statement. All firms in the specific nations
have to follow these standards tightly in the business so as to ensure that their financial
statements will be easy to compare with same of rivals and meaningful information will be
obtained easily. Thus, there is significent importance of financial reporting for the business
firms. Financial reporting helps firms in achieving growth this is because when any company
wants to form joint venture with any foreign company then in that case that nation firm will
demand firm financial statements and will measure firm performance. In case both firms
financial statements are prepared by following IFRS standards then in that situation it becom
easy to compare performance. Contrary to this, if IFRS is not followed then fair comparison is
not possible to be made between both firms. Long time is taken to make modifications in
financial statements in order to make comparison easy. Such kind of things demotivate firms
from entering in to such joint ventures easily because lots of time need to be spend on modifying
financial statements (Litt and et.al.,2014). Thus, it can be said that financial reporting assist firms
in achieving growth in their business. Main objective of many firms is to bring transparency in
the company business operations and to communicate more and more information to
stakeholders about the business. It is the financial reporting standards that ensure that only
relevant information will be depicted in the income statement and balance sheet and stakeholders
will be able to meausre company performance in proper manner. Thus, it can be said that
4 | P a g e

financial reporting help business firms in achieving their objective of making information to
stakeholders in simple manner.
(5)Statement of income, equity and financial position
Table 1Income statement
Revenue 285100
Cost of sales 191700
Gross profit 93400
Operating expenses 39500
Rental income from investment properties 1600
Bank interest 1030
Preference dividend 1330
Ordinary dividend 5340
Deferred taxation 6900
Depreciation 8450
Retained earnings 32450
Table 2Balance sheet
Assets
Trade receivables 18000
Investment property at valuation 18000
Land and property at valuation 78750
Plant and equipment at cost 3200
Closing inventory 14000
Bank 1200
133150
Liability
Trade payables 15700
Revaluation reserve 46000
105 redeemable preference shares 13300
Ordinary share capital 26700
Retained earnings 32450
133150
There is difference between cash flow statement and income statement as well as balance sheet.
In cash flow statement multiple information are available like revenue that is earned from major
operations, interest and dividend income as well as payment. Apart from this, in cash flow from
investing activity proceeds from and investment that is made on different assets are also recorded
5 | P a g e

which reflect the income from investment activities. In case of cash flow from financing activity
varied sources from which funds raised from the market and different income as well as
expenditures are recorded. From these things it can be said that cash flow statement is different
from income statement and balance sheet. This is because income statement does not reflect the
investment that is made in varied activties. Thus, it can be said that relative to income statement
cash flow statement provide more information to the managers and investors. Balance sheet and
cash flow statement are also quite different from each other (Li and Yang, 2015). It can be
observed that in case of cash flow statement operating activities information are also covered
whereas in balance sheet only information related to investing and financing activities are
covered. Hence, again it can be said that scope of cash flow statement is wide then income
statement and balance sheet. Investors, stakeholders and business owners must also make use
these statements altogether in order to make busines decisions and to find out areas where
organization strongly need to work in order to improve its performance at fast rate. However, it
is observed that sole properitors only prepare income statement because they just wants to know
about income earned and expenses made in the business. On other hand, partners give
importance to both statements because in balance sheet according to agreed proportion
classification of assets and liabilities happened. However, large firms require income statement,
balance sheet and cash flow statement because by using these they are able to evaluate business
widely and easily make business decisions.
6 | P a g e

(6) Measurement of company performance
Figure 1Ratio analysis of Tesco
Interpretation
 Gross profit ratio: It is the one of the ratio that is widely used to measure firm
performance. Usually, in the business multiple sort of expenses are made like direct and
indirect expenses. Direct expenses are those that are made in the production process
(Nieman and Fouché, 2016). Thus, in order to measure company capacity to control
direct expenses gross profit ratio is commonly used by the business firms. Gross profit
ratio of Tesco in year 2016 is 5.24% and same for the company in year 2017 is 5.26%.
On this basis, it can be concluded that slightly performance become better but scenerio
does not change at large level. 5% gross profit ratio is very low and more improvement in
the performance is required. In other words it can be said that Tesco need to bring more
control on its direct expenses in order to improve its performance.
 Net profit ratio: Net profit ratio value in year 2016 is 0.25% and same in year 2017 is -
0.07%. This means that net profit of the business firm declined and this happened
7 | P a g e

because firm loose control on its indirect expenses. On basis of gross profit and net profit
ratio it can be observed that firm does not have control on its direct and indirect expenses.
This is one of the major problem that firm is facing in its business. It can be said that
company must formulate suitable strategy and under this it must use techniques like
process reengeniering and business analysis in its business. By using these approaches
business operations can be measured in proper manner and those stags that are
unproductive in nature can be removed from entire process. By doing so cost can be
controlled in the business and profitability can be elevated at fast rate.
 Current ratio: Current ratio is the one of the important ratio that is used to measure the
liquidity position of the company (Warren, 2016). Higher is the value of current ratio it is
assumed that liquidity condition in the business is much better. Table given above is
reflecting that value of current ratio is 0.75 and same in year 2017 is 0.79. This means
that liquidity condition of company get improved to some extent. This means that firm
capability to pay current liability by using current assets increased to some extent in
comparison to previous time period. However, this is not sufficient as ideal current ratio
is 2:1 which means that for every one unit of current liability there must be double units
of current assets. In present case value of current ratio is less then 1 and this is indicating
that Tesco does not have sufficient quantity of current asset to pay current liability on
time. Hence, firm need to improve its performance and need to increase current assets in
business.
 Debt equity ratio: Debt equity ratio is one of the ratio that is often used by finance
experts in their day to day work (Debt to equity ratio, 2017). Debt equity ratio value in
year 2016 was 1.23 which increased to 1.44 and this indicate that debt proportion relative
to equity increased but still situation is in control as debt is not just double of equity.
Hence, to large extent firm capital structure is balanced in nature but still work need to be
done and there is need to control debt in the capital structure.
(7) Difference between International accounting standard and International
financial reporting standard
There is difference between International accounting standard and International financial
reporting standards. Major difference between both is that former reflect the standards that need
to be followed in the business for recoding of transactions in the business. On other hand,
8 | P a g e

international financial reporting standard reflect the rules that need to be followed for preparing
different sort of financial statements like income statement, balance sheet and cash flow
statement in terms of format and presentation of facts and information related to the company.
Thus, it is clear that both these are assisting organization and supporting accounting operations in
proper manner (Ewert and Wagenhofer, 2016). Standard related to IAS were published in 1973
and 2001 and in respect to IFRS standards were developed into year 2001. Issuer of both IAS
and IFRS are different from each other. IAS was issued by IASC and IFRS was developed by
IASB. Apart from this, there is difference between IAS and IFRS and it is that former does not
provide any information in which accounting related facts must be presented. On other hand, in
IFRS clearly some standards related to accounting are given and along with this way in which
financial information must be demonstrated is also clear. So, this is another area where IAS and
IFRS are different from each other.
(8) Evaluate the benefits of IFRS Focus on investors: IFRS assist firms in making all relevant information available to the
investors that can enable them to make business deicisons. It must be noted that in annual
report not only financial statements are available but along with this, varied information
are available in respect to company operations. Hence, it can be said that IFRS help firms
in treating their stakeholders in proper manner. Loss recognition timeliness: IFRS increase transparency of the company operations and
one just be taking a look at financial statements and annual report easily identify whether
firm make loss or earn profit in its business (Hope and Vyas, 2017). Comparability: IFRS is widely adopted by most of nations of the world and due to this
reason it become easy to compare financial statements of multiple firms operating in
different nations of the world. Apart from Europe in other continents also IFRS is
adopted and due to this reason it become easy to make comparison between different
firms operating in multiple nations of the world. Standardization of accounting and financial reporting: In IFRS on large scale many
rules and regulations are prepared in respect to accounting of records and presenting
these facts in annual report. Thus, it can be said that IFRS make presnetation of facts
effective in nature.
9 | P a g e

(9)Compliance with IFRS and elements in country that have impact on
compliance
It can be seen that with passage of time acceptance of IFRS increase at wide level. This is
because it become very difficult task to compare financial statements of two firms that operate in
two different nations if they are prepred by following different standards and reporting rules. In
last couple of years compliance with IFRS increased at rapid pace but there are number of factors
that have impact or affect compliance with IFRS. In every country there are different rules and
regulations related to reporting of financial statements. If any nation decide to follow IFRS then
in that case it have change its entire reporting system overnight which is not possible ( Pelger,
2016). In order amend nation reporting system lots of facts need to be taken in to account and
changes need to be made in standards which is long process and time consuming in nature.
Hence, many nations avoid to comply with IFRS. Apart from this, due to change in these
reporting standards tax reporting format and same of statutory reporting also get changed. Hence,
it can be said that change in reporting standards by doing replacement by IFRS is not an easy
task and due to this reason many nations avoid to comply with IFRS.
CONCLUSION
On basis of above discussion it is concluded that there is signficent importance of
acccounting standards for the business firms. This is because their usage ensured that all
transactions will be recorded at appropriate value. It is also concluded that more and more
nations are adopting IFRS but still there are many countries that are avoiding use of same for
accounting purpose. This is because it is hard task to change entire reporting structure overnight
in the nation. However, IFRS ensure that there will be transparency in the company operations
and shareholders will receive more information about company which will assist them in making
investment decisions. Hence, it can be said that there is huge significence of IFRS for the firms.
10 | P a g e

REFERENCES
Books and Journals
Ewert, R. and Wagenhofer, A., 2016. Why more forward-looking accounting standards can
reduce financial reporting quality. European Accounting Review. 25(3). pp.487-513.
Feng, M. and et.al., 2014. Does ineffective internal control over financial reporting affect a firm's
operations? Evidence from firms' inventory management. The Accounting Review. 90(2).
pp.529-557.
Gaynor, L.M. and et.al., 2016. Understanding the relation between financial reporting quality
and audit quality. Auditing: A Journal of Practice & Theory. 35(4). pp.1-22.
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.
Hope, O.K. and Vyas, D., 2017. Private company finance and financial reporting. Accounting
and Business Research. 47(5). pp.506-537.
Lee, T.A., 2014. Evolution of Corporate Financial Reporting (RLE Accounting). Routledge.
Li, X. and Yang, H.I., 2015. Mandatory financial reporting and voluntary disclosure: The effect
of mandatory IFRS adoption on management forecasts. The Accounting Review. 91(3).
pp.933-953.
Litt, B., Sharma, D.S., Simpson, T. and Tanyi, P.N., 2014. Audit partner rotation and financial
reporting quality. Auditing: A Journal of Practice & Theory. 33(3). pp.59-86.
Nieman, G. and Fouché, K., 2016. Developing a regulatory framework for the financial,
management performance and social reporting systems for co-operatives in developing
countries: A case study of South Africa. Acta Commercii. 16(1). pp.1-7.
Pelger, C., 2016. Practices of standard-setting–An analysis of the IASB's and FASB's process of
identifying the objective of financial reporting. Accounting, Organizations and Society. 50,
pp.51-73.
Sorrentino, M. and Smarra, M., 2015. The Term “Business Model” in Financial Reporting: Does
It Need a Proper Definition?. Open Journal of Accounting. 4(02). p.11.
Tan, B.S., 2016. Interim financial reporting: how frequent should it be?. International Journal of
Economics and Accounting. 7(2). pp.116-126.
11 | P a g e

Thomson, I., 2017, January. Commentary: A theoretical model of stakeholder perceptions of a
new financial reporting system. In Accounting Forum. Elsevier.
Warren, C.M., 2016. The impact of International Accounting Standards Board
(IASB)/International Financial Reporting Standard 16. Property Management. 34(3).
Online
Debt to equity ratio, 2017. [Online]. Available through:<
https://www.accountingformanagement.org/debt-to-equity-ratio/>.
12 | P a g e