The Importance Of Financial Reporting in Arnold Hill & Co

FINANCIAL REPORTING

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
MAIN BODY...................................................................................................................................1
1. Analysing context and purpose of financial reporting............................................................1
2. Explanation on conceptual and regulatory framework of financial reporting with principle
to assess its requirement..............................................................................................................2
3. Identification of key stakeholder of organisation and their need for financial reports...........6
4. Analysing value of financial reporting for meeting organisational objectives and growth....7
5. Explanation on international accounting standards and international financial reporting
standards with their benefits........................................................................................................8
6. Evaluation of financial reporting with appropriate theories and models................................9
7. Identifying differences in financial reporting across the world with the evaluation of
differences.................................................................................................................................10
8. Evaluating degree of compliance with IFRS by different organisations across the world...11
CONCLUSION..............................................................................................................................12
REFERENCES..............................................................................................................................13

INTRODUCTION
In order to analyse functioning and day to day operations of multiple departments of the
organisation, financial reporting plays an important role. It is the tool which such multiple
operation through reporting in documents of the company (Kimmel and et.al., 2016). Thus, this
assessment will develop to provide better understanding and purpose of financial reporting.
Chosen reputed accounting firm in this report is Arnold Hill & Co. which deals in providing
financial and legal services to clients. Further, conceptual and regulatory framework of this
accounting will also to be explained by analysing key stakeholder and their need for financial
reporting.
Moreover, explanation will also to be provided on international accounting standards and
international financial reporting standards with its degree of compliance across the nation.
Lastly, in this report through models and theories better understanding relates to financial
reporting will be developed.
MAIN BODY
1. Analysing context and purpose of financial reporting
Financial reporting is considered as vital term which plays an important role in the world
of economies. Main purpose of this accounting is to provide information which is relevant and
useful for owners and stakeholders of the organisation. This is the way of showing financial
ability of company in market among shareholders (Henderson and et.al., 2015). Thus, context of
this reporting is to comply with regulatory frameworks while preparing financial statements of
the company. Its governance includes duties and responsible of officer where manager is
responsible for preparing financial statement and business operation of company and director is
responsible to oversee such method which adopted by management for preparing such
statements.
Therefore, it can be said that in order to show efficiency and effectiveness of company
and to capture more investors, entity needs to comply with rules and regulations of regulatory
frameworks. This also helps directors and management to develop strategy in the area which
needs to improve for obtaining better efficiency of work.
Purpose of financial reporting:
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Goal of financial reporting is to meet expectations of shareholders and legislation in order
to evaluate company's performance. This helps investors and shareholders to make effective
decision to managing business operations. Three main goals of reporting includes:
 Meet users' expectation and legislation: users and government always in need of
company's financial report so that they will able to analyse operations strategies in order
to reinvest cash in business and to analyse how efficiency business is using its capital.
 Tracking of cash flow: through financial statement, managers and owners of company
will able to analyse flow of money in entity. This information helps to evaluate
performance of company for recovering its debt and to achieve growth (Narayanaswamy
2017).
 Prediction of future financial position and cash flow: through such statements, managers
and directors will able to monitor assets, liabilities and owner equity by which they will
able to predict future financial position of the company.
2. Explanation on conceptual and regulatory framework of financial reporting with principle to
assess its requirement
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Regulatory frameworks are the bodies which establishes with the motive of providing
rules and legislation for preparing financial statements of the companies. Thus, regulatory bodies
or system are:
 International accounting standards committee (IASC) Foundation
 International accounting standards Board (IASB)
 The standards advisory council (SAC)
 The international Financial reporting interpretations committee (IFRIC)
The structure for regulatory framework is as follows-
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Illustration 1: regulatory and conceptual
framework
(source: Conceptual Framework for Financial
Reporting, 2019)

Need and principles of regulation is as follows-
 Such regulations ensure that the accounts are reliable and useful and is prepared without
any kind of delay.
 For calculating taxable profits, financial accounts are used.
 Annual reports and financial accounts are considered as main tool to show shareholder
about the performance of the company.
 Stock market will also able to relay on company through financial statements only.
Role of regulators are as follos-
IAS: This is the body which provides rule for governing accounting transactions.
Standards which provided by such institution will only be applicable if it is accepted by national
regulatory bodies.
IASB: main objective of the foundation is to develop set of high quality accounting
standards which is in public interest (Cascino and et.al., 2017). Another objective is to promote
the use of those standards. Generally the body is responsible for issuing new IFRS.
IFRIS: such body is responsible for issuing guidance in areas which has different
interpretation of IAS and IFRS.
SAC: role of such body is to advice IASB in order to develop new accounting standards.
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Illustration 2: Regulatory framework
(source: Regulation in Financial Accounting, 2019)

The conceptual framework:
 To assist IASB board for developing or issuing new standards and to review existing one.
 For developing harmonising accounting standards and procedure for preparing effective
accounting statements.
 To help accountant in order to comply with new set of accounting standards while
preparing financial statements of the company.
Key accounting principles are as follows-
Going Concern This assumption states that business will continue with
operations for foreseeable future.
Accruals/Matching This concept assumes that income and expenses must matched
against each other within accounting period.
Consistency It assumes that item must be treated in same way in same year.
Materiality Information which is important must be demanded of all
information in financial statements.
Substance over form It assumes that economic substance of transaction must be
recorded (Harrison and van der Laan Smith, 2015).
Prudence It states that asset and income must not be overstated and
liabilities must not be understated.
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3. Identification of key stakeholder of organisation and their need for financial reports
Employees: this is the group of stakeholder who are mainly interested with the strategies and
practises of company in order to conduct efficient business operations. Their interest get
developed with by depending upon the nature of business which conduct by organisation. They
are in need of financial statement to analyse financial ability of company to pay their income.
Customers: For any entity, consumers are its main stakeholders. It is because motive of business
is to only serve customers. They mainly affected with the quality of service and value of
organisation. Their need of financial report is to analyse ability of supplier with the perspective
to remain long term in market.
Suppliers and Vendors: this is the group of stakeholders which sells goods and services to
businesses and will only relay on revenue which get generate with only ongoing business
activities (Christensen, Nikolaev and Wittenberg‐Moerman, 2016). Their need of financial report
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Illustration 3: Key stakeholders of organisation
( source: Assessing and identifying meeting stakeholder, 2018)

indicates that they have to decide whether is it safe to extend credit and to estimate ability of
business to pay back their loan.
Investors: this group include both stakeholder and debt holders. Their motive for investing in
company is with the expectation of earning a certain amount on rate of return on capital. Their
need of financial report is to analyse financial ability of company. They develop decision on
whether to invest more or to stop such investment which has been done previously.
Government: for entities, this is the another group of stakeholder which have interest in business
operations and in entities financial statements in order to analyse that whether such firm has paid
corporate tax or not or to establish tax upon income which has been earned by entities.
Communities: in large type of businesses, these are the major stakeholder of group which are
impacted by large range of things such as employment, economic development and also on
health and safety (Lev, 2018). These group require financial statements to analyse contribution
towards development of society and environment where business is established.
4. Analysing value of financial reporting for meeting organisational objectives and growth
Main function of financial reporting is to provide information about performance of the
entity in business market. It discloses information which is based on the ability of company to
meet its objectives and goals (Anderson, 2018). Hence, it is considered as end product of
accounting which discloses information through main three components that is balance sheet,
profit and loss and cash flow. Financial reporting also helps management for developing
economic decision with the proper evaluation and prediction of future perspective in order to
achieve organisational goals.
Importance of financial reporting cannot be overemphasized because it is the need of
every stakeholder in accordance with various types of reason. One among such reason is
regarding development of investment decision in company. Therefore, following are the points
which highlights importance of financial reporting in order to achieve organisational growth and
objectives-
 It helps organisation to comply various rules and regulation which is a regulatory
requirement. Organisations needs to file their financial statements to registrar of
companies and to government agencies so that they will able to evaluate business income
of the entity.
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 This is the tool by which entity will able to facilitate statutory audit. Such audit is
required so that auditor will able to express his/ her opinion on financial position of the
company.
 This is the main backbone for financial planning, analysis, bench marking and for
decision-making which is used by various types of stakeholders.
 It helps organisation to raise capital in both domestic as well as in overseas.
 It is also true that on the basis of financials, stakeholders and public analysed
performance and financial ability of the company in the business market (Brennan and
Merkl-Davies, 2018).
 Financial reporting also helps in tracking amount of flow of money in organisation where
proper information get generated regarding money which comes in and out. It also helps
in analysing profit and loss of the company which they incurred from their business
operations.
Thus, these are the importance of financial reporting through which entity will able to achieve its
organisational objectives and will able to develop strategies which helps in meeting future goals.
5. Explanation on international accounting standards and international financial reporting
standards with their benefits
International accounting standards:
These are the older set of accounting standards which was replaced by international
financial reporting standards in 2001. The main purpose of such standards is to ensure that
entities across the nation becomes more interconnected and will only use global financial
reporting frameworks while preparing book of accounts (Cañibano, 2018). The foundation
provides guidelines to entities regarding transactions of accounting standards which needs to be
recorded and reported in financial statements of the organisation.
Its benefits are as follows-
It facilitates ethical compliance:
This is the body which provides uniform code of accounting standards so that a business
world operates its function in appropriate behaviour. It is important because countries around the
world has their culture and practise and to understand financial statements of companies
investors will easily able to identify.
It improves international investment:
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Investors and stakeholder of the companies finds it more convenient when they compare
business performance with other international companies. Thus, this analysis makes it easier and
cheaper for entities for raising business capital from foreign investors.
International financial reporting standards:
These are the set of accounting standards which state how particular type of transactions
and other event must be recorded in the books of accounts of entity. Such standards are issued by
IAS where proper guidelines is been provided to accountants to in order specify exactly how
financial reports needs to be maintained (De George, Li and Shivakumar, 2016). Main motive of
creating this regulation is to develop common accounting language which will be understood by
entities across the world. According to this guidelines' accountant must maintain book which is
comparable, understandable, reliable and relevant.
Its benefit are as follows-
It creates more flexibly:
These are the regulations which is based upon principles therefore, its goals is to arrive at
reasonable valuation with the various ways to accomplishing tasks. For organisations, there is
freedom for its adoption because of that statements are more easily readable and useful.
It allows greater comparability:
Businesses which use similar kind of standards for preparing financial statements will
specifically able to compare financial statements accurately. Therefore, these regulations helps
foreign investors to easily understand financial statements of company and to easily develop
their economic decision.
6. Evaluation of financial reporting with appropriate theories and models
Importance of financial accounting for organisations will be more understandable with
following theories:-
Equity theory-
This is the theory which assumes that the shareholders in company are real owners.
According to this theory residual equity and net income of the shareholders is calculated by
subtracting claim of preference shareholder from the assets of the company. This theory assumes
that common shareholders takes the greatest risk because they are the one which are fully aware
of financial ability and performance of the organisation. For financial reporting, this theory has
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the same perspective of providing relevant information for retaining shareholder on long term
basis (Christensen and et.al., 2015).
Shareholders only get attracted in company when they full knowledge regarding business
operations of the company and equity theory also state that shareholder will only take great risk
when they are fully aware about entity's business operations.
Legitimacy theory-
This is the theory which is based on the assumption that action of the entity are desirable,
proper or appropriate within some norms, values, beliefs and definition. Normally this theory has
been used for explaining social and environmental reporting disclosure. This is considered as
useful concept for explaining corporate behaviour thorough report. For society or for
stakeholders, this theory is considered for external perception. Legitimacy is always present in
the type of disclosure which company chooses to present in financial statements. Thus, this
theory has been considered as a theoretical framework regarding level of disclosure adopted by
the company for its development.
Therefore, these are the two theories in context of financial reporting through which
proper guidelines for preparing financial report get developed.
7. Identifying differences in financial reporting across the world with the evaluation of
differences
In the beginning entity only comply with its internal reporting only but when it found that
more and more companies are ending because of large financial problems, it becomes necessary
for entities to comply with financial reporting standards where individual nation have created
their own standards for companies (Florou and Kosi, 2015). Further, when the term globalisation
has introduced more entities grasp the opportunity to expand their business globally by again
financial problems get arises to comply with rules and regulations of different countries. Thus,
this is the main problem which creating main difference in financial reporting across the world. It
is found that in every country there is a different culture and each society has their own
principles and norms and customs and these are developed in accordance with expectation of
society which create difference for entities to prepare their financial statements. Basis of
difference are as follows-
Shareholder orientation:
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Most important factor which create difference in financial reporting is the shareholder
orientation which mainly depend upon design of accounting statements. Shareholder do not want
to access internal information, their focus and need is to know financial position of the company
where they want to invest. Thus, for attracting more shareholders entities need to prepare their
accounting statements in accordance with values of investors.
Conservatism and accruals:
Another factor which create difference in financial reporting is the conservatism and
accruals. Valuation rules in some countries is more conservatism because financial information
is more creditor oriented and used for tax purposes and countries which has more shareholder
orientation will have more accrual information. Such accounting practises leads to create
difference in way of accounting practises and in valuation rules.
Uniformity, accounting methods and formats:
Mainly financial statements of companies are prepared with uniformity in code law of
countries. Thus, development of comprehensive set of balance sheet and profit and loss
statements will only prepared in accordance with accounting method which got adopted. For
providing information to government bodies, entities need to provide more detailed information
in their statements of position and balance sheet which create difference (Abbott and et.al.,
2016).
Deferred taxation:
This is the method which mainly create difference in accounting treatment for certain
items against the way which has been treated for tax purpose and for deferred tax consequences
which is either a liability or an asset.
8. Evaluating degree of compliance with IFRS by different organisations across the world
For many countries IFRS adoption is the main agenda and because of that adoption of
IFRS is always been popular research study in the field of accounting. Therefore, IFRS adoption
is always on debatable topic. One of main factor for non-compliance with financial statement is
regarding the inefficiency in the actions of auditors for reviewing company's financial ability and
information (Jana and Schmidt, 2018). It is also found that entity needs to bear high cost for its
adoption because generally most of the accountant did not know about the disclosure practises
and to provide them training and to hire new employees entities needs to develop high cost.
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Further, there are many countries which has their own set of principles such India has its
own IND AS, Australia has its own set of principle which is followed entities which established
their. It is argued that result which appear with own set of standards are completely different
from the result which appeared with IFRS which provide a huge effect business operations of the
company.
It is also argued by some authors that complying with IFRS standards reduces cost of
capital and increase equity value. It is because of increased and enhanced information
comparability. Further, Europe is the first nation which has successfully adopted IFRS in its
country where it is analysed by entities that with the adoption of IFRS their profitability got rises
because company will able to attract more foreign investors by developing financial statement in
common global language.
On the contrary US is the country which did not have adopted IFRS because entities in
such country will only follow GAAP accounting standard for disclosing financial information of
the company.
CONCLUSION
From the above report is can be concluded that financial reporting plays an important role
for evaluating financial performance of company in their books of accounts. In this report
purpose of financial reporting has been explained where it is analysed that it meet users
expectation. Further, conceptual and regulatory framework like IASB, IFRS, IAS has been
explained in order to know their motive in the world of finance. Differences in financial
reporting across the world is also explained in this report where in order to develop better
understanding of the term financial reporting.
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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.
Anderson, N., 2018. ‘The deteriorating usefulness of financial report information and how to
reverse it’: a practitioner view. Accounting and Business Research. 48(5). pp.494-496.
Brennan, N.M. and Merkl-Davies, D.M., 2018. Do firms effectively communicate with financial
stakeholders? A conceptual model of corporate communication in a capital market
context. Accounting and Business Research. 48(5). pp.553-577.
Cañibano, L., 2018. Accounting and intangibles. Revista de Contabilidad-Spanish Accounting
Review. 21(1). pp.1-6.
Cascino, S and et.al., 2017. The Usefulness of Financial Accounting Information: Evidence from
the Field.
Christensen, H.B and et.al., 2015. Incentives or standards: What determines accounting quality
changes around IFRS adoption?. European Accounting Review. 24(1). pp.31-61.
Christensen, H.B., Nikolaev, V.V. and Wittenberg‐Moerman, R., 2016. Accounting information
in financial contracting: The incomplete contract theory perspective. Journal of accounting
research. 54(2). pp.397-435.
De George, E.T., Li, X. and Shivakumar, L., 2016. A review of the IFRS adoption
literature. Review of Accounting Studies. 21(3). pp.898-1004.
Florou, A. and Kosi, U., 2015. Does mandatory IFRS adoption facilitate debt financing?. Review
of Accounting Studies. 20(4). pp.1407-1456.
Harrison, J.S. and van der Laan Smith, J., 2015. Responsible accounting for
stakeholders. Journal of Management Studies. 52(7). pp.935-960.
Henderson, S and et.al., 2015. Issues in financial accounting. Pearson Higher Education AU.
Jana, S. and Schmidt, M., 2018. Model-based fair values for financial instruments: relevance or
reliability? Conjoint measurement-based evidence.
Kimmel, P.D and et.al., 2016. Financial Accounting. Wiley Custom Learning Solutions.
Lev, B., 2018. The deteriorating usefulness of financial report information and how to reverse
it. Accounting and Business Research. 48(5). pp.465-493.
Narayanaswamy, R., 2017. Financial accounting: a managerial perspective. PHI Learning Pvt.
Ltd..
Online
Conceptual Framework for Financial Reporting. 2017. [Online]. Available through
<https://www.ifrs.org/issued-standards/list-of-standards/conceptual-framework/>
Rasmussen, D., 2018. Assessing and identifying meeting stakeholders. [Online]. Available
through <https://planyourmeetings.com/assessing-and-identifying-stakeholders/>
Regulation in Financial Accounting. 2019. [PDF]. Available through
<http://www.accountingtechniciansireland.ie/Files/Documents_and_Forms/
Advanced_Financial_Accounting_Sample_Chapter.pdf>
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