Financial Reporting and International Business

This document is a compilation of references related to financial reporting and international business, including books, journals, and online resources. It covers topics such as financial reporting quality, auditing, and business strategy. The document aims to provide insights into the importance of financial reporting in businesses, especially for companies operating internationally.

FINANCIAL REPORTING

Table of Contents
INTRODUCTION...........................................................................................................................4
1. Context and purpose of financial reporting.............................................................................4
2. Requirement of conceptual and regulatory framework and importance of qualitative
characteristics..............................................................................................................................5
3. Benefits of financial information to stakeholders....................................................................6
4. Value of financial reporting for organisational growth and objective.....................................7
5. statements analysis...................................................................................................................8
(a): Income statements.................................................................................................................8
(b): Changes in equity..................................................................................................................9
(c) Balance Sheet of Godwin PLC...............................................................................................9
(d): Statement of cash flow........................................................................................................10
6. Interpretation of Financial Statements of Marks and Spencer...............................................11
7. International Accounting Standard (IAS) vs International Financial Reporting Standards
(IFRS)........................................................................................................................................12
8. Benefits of International Financial Reporting Standard (IFRS)............................................13
9. Varying degrees of compliance with IFRS............................................................................14
CONCLUSION..............................................................................................................................15
REFERENCES..............................................................................................................................17
APENDIX......................................................................................................................................18

INTRODUCTION
In any industry, whether manufacturing and service, multiple departments work for
business to achieve its objective and every department is connected with finance department.
Financial reporting helps to keep financial and accounting aspects of each and every department
of business. Financial reporting is a process of producing financial statements that discloses
financial status of business. Financial status helps to make decision to management and also to
interested investors. These statements show financial growth of business and also how well funds
are utilised in business to generate revenues. Every organisation works to earn revenues and
managing funds helps to earn more with financial reporting (Bertoni and De Rosa, 2012). Marks
and Spencer is working towards effective financial reporting and to achieve it a report which
consist of various things is prepared. This report consists of purpose of financial reporting,
conceptual and regulatory framework of financial reporting. This also includes qualitative
characteristics that improve financial reporting, stakeholders that are benefited by financial
reporting. Values and objective. Importance and benefits of IAS and IFRS.
1. Context and purpose of financial reporting
Financial reporting is described as disclosure of financial results and related information
to management and external shareholders. Financial status of an organisation can be measured by
various financial statements that represent financial condition of business. These statements are
profit and loss account, balance sheet, cash flow statements. General purpose of financial
reporting is to provide information about results of operations, financial position and cash flow
of organisation. This information is used by the readers of financial statements to make decision
regarding allocation of resources.
Financial reporting plays a vital role in words economies. Its primary purpose is to
provide financial information to owners of company when there is division in management and
ownership of company. This occurs in companies like Marks and Spencer which is a public
limited company that means share capital of company is collected from public at large. These
companies trade in shares through stock exchange (Nobes, 2014). There is geographical disparity
in shareholding pattern and that restricts owners to involve in management of company.
Directors are appointed by shareholders who takes decision about all the aspects in company.
Owners receive annual financial statements that describes them about financial performance of
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business. Without this reporting system owners will be less inclines on the part regarding use of
their invested capital. Other purpose of financial reporting is that it makes financial statements to
comply will all the IFRS that makes financial reporting fair. IFRS provides set standards that are
required to be followed while preparing financial reporting. Financial reporting is also used by
various interested investors to make investing decision. Financial reporting is also used for
making comparison between two accounting years of company and also to compare financial
performance of competitor (Ball, Jayaraman and Shivakumar, 2012). Financial reporting is used
to compare financial performance of two years and variations are recorded. Management use this
information to make planes for future.
2. Requirement of conceptual and regulatory framework and importance of qualitative
characteristics
In financial reporting conceptual framework is a theory of accounting prepared by
following financial standards. Objective of the framework document is to set out a concept that
underline the presentation of financial statements. It is important to understand that conceptual
framework provides set standards on basis of which financial statements are prepared. This give
consistency in financial statements as basis is same and that makes comparison easy. Conceptual
framework deals with fundamental financial reporting issues such as objectives and users of
financial statements, characteristics that makes accounting more useful. It is required to solve
disputes in financial in accounting as fundamental principles are used to prepare financial
statements.
Regulatory framework is a series of steps taken by a regulator to develop responsive
regulations. A regulatory framework is necessary for number of reasons for Marks and Spencer.
Regulatory framework ensures that needs of users of financial statements are met with basic
minimum information. This ensures that all information provided is relevant in economic area
that provides comparability and consistency. When regulations are followed in preparation of
financial statements confidence of users increases in reports (Dyreng, Mayew and Williams,
2012).
Financial information is necessary to make various decision by international management
of Marks and Spencer. To make information more reliable and fair quality of information
provided is considered necessary to be taken care. There are three main quality factors that
information must have is relevance, faithful representation and under stability. Information
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provided in financial statements should have some basis on which they are prepared that creates
relevancy of information provided. Statements should be formed in such manner that they are
easy to understand by public at large even to those who have no knowledge of finances.
Information provided should be true and fair there should be no biased information that leads to
misleading decision making to investors and to managers of businesses.
3. Benefits of financial information to stakeholders
Stakeholders are the persons who can affect or are affected by actions taken by Marks
and Spencer Stakeholder is any person, organisation, social group or society at large who have
stake in an organisation. Stakeholders are directly and indirectly affected by actions taken by
organisation (Hope, Thomas and Vyas, 2013). Stakeholder is an investor in businesses whose
action determines results of business decision. Every organisation deal with two type of
stakeholders internal and external stakeholders.
Internal stakeholders are the one who are already committed to serving to organisation as
directors, employees and owners of business. These stakeholders are related to business and
directly affected by every decision taken by business. Financial information is used by various
stakeholders and benefits of this information to different internal stakeholders are as follows-
 Employees- Organisations growth and employee’s growth both move together.
Employees prefer to work with a company that is continuously growing and to measure
growth financial statements are very important. When financial status of a company is
really good and scope of continuous growth is there then that leads to attract and retain
efficient employees.
 Owners- Financial information of business is required by owners to calculate efficiency
of utilisation of funds invested by them. Financial information helps to measure growth in
business during an accounting year and if any variation is there from set standards then
that must be mentioned.
External stakeholders are the one who are not directly related with business but indirectly
got affected by actions and policies of business. These stakeholders are not within the business
but are affected by performance of business entities. External stakeholders of Marks and Spencer
who are benefited with financial reporting are as follows-
 Investors- Financial information serves as basis for investors to make investing decision
in company. Before making any investment decision past performance if business is
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considered and that is evaluated by its financial statements. Every investor invests in a
company that shows profits and scope of growth in their financial reporting.
 Creditors- Creditors are the person to whom business needs to repay its dues. In business
transactions are done and paid on credit basis and a financially sound business is
considered more viable to provide credit. Creditors use financial reporting information to
know about financial condition of business to whom they are serving credit. This is
important to secure funds.
4. Value of financial reporting for organisational growth and objective
Financial reporting is considered as one of the important factor that influences growth
and objective of businesses. Marks and Spencer is an organisation that focus on objectives like
increasing market base, increasing credit rating and increasing profits. To attain these objective
organisation needs to grow on continuous basis. To know growth of a business its financial
statements are considered as basis. When financial conditions are increasing that reflects growth
of business. When organisation is growing and increasing on continuous basis that reflects that
objectives of business are achieved by business organisation (Bentley, Omer and Sharp, 2013).
Financial reporting should reflect fair financial position to conclude effective growth of business.
Organisation works towards achieving various objectives and one of the most important
objective is continuous growth with increasing revenue. Marks and Spencer is working towards
achieving its objective and preparation of financial reporting helps them to achieving these
objectives. As internal management of company requires financial information to allocate
various resources that are available with company. Internal management makes planes for
company that are needed to be initiated in future to achieve future objectives. Management of
company prepares planes that are based on past results. Growth plans are designed for every
financial year and that plan includes new objectives and also if any variance in past performance
then effective measures to cope up with that is also included.
Financial performance of business is a huge concern for different stakeholders of
business. Information regarding financial performance of business is gathered for financial
statements that shows true and fair view of financial status of business. A financially sound
business attracts more investors as more returns are expected from investing in this company.
More investors will bring more funds to company and availability of more capital to invest will
be there with the company. When company is getting more funds as investors that increases
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public image of company. Availability of more funds to business creates more investing
opportunities and helps them to earn more and increase revenues. Good financial performance
attracts more suppliers to serve credit. Business that enjoys more credit facility can utilise its
fund in other productive activities. Marks and Spencer enjoys good financial status that reduces
requirement of funds as payments needs to be made in time intervals. A good credit rating of a
company helps to generate more funds on credit whenever demanded. Creditors to evaluate
financial performance requires financial statements of company that represents its financial
status.
Good financial condition attracts more and more consumers as a company which earns
more have a positive image for consumers. This positive image also increases consumer base as
one consumer influence other one to buy goods and services of company. When consumer base
increases that ultimately leads to increase in sales and also market share of company will
increase. When market share of company will increase that ultimately leads to more profits for
company. Company will achieve one of the most important objective of profit maximisation by
effective financial reporting (Fu, Kraft and Zhang, 2012). More profits will bring more earnings
to owners and investors and value of company will increase in market. This increased image will
help company to attain its future objectives more efficiently in minimum time period.
5. statements analysis
(a): Income statements
Godwin PLC Statement of Profit and
Loss for the year ended 31 December
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2017
Particular Amount
Revenues 385100
Less: Cost of sales -297563
Profit 87537
Add: Other income 5600
Gross profit 93137
Less: operating expenses -83663
Operating profit 9475
Less: Finance cost -830
Profit before tax 8645
Less: Tax -1500
Profit after tax 7145
Add: Other comprehensive income 2100
Total Comprehensive income 9245
(b): Changes in equity
Godwin Plc Statement of
changes in equity for the year
ended 31 December 2017
Particular
Ordinary share
capital
Revaluation
reserve
Retained
earnings Total
As per trial balance 86700 40700 32100 159500
Total Comprehensive income 2100 7145 9245
Preference dividend -2330 -2330
Ordinary dividend -4340 -4340
86700 42800 32575 162075
(c) Balance Sheet of Godwin PLC
Statement of financial position
Assets Amount
Non-current assets:
Land and property 115000
Plant and equipment 37275
Investment property 25400
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Total non-current assets 177675
Current assets:
Inventory 17300
Trade inventories 62000
Total current assets 85300
Total assets 262975
Equities and liabilities
Ordinary Share @25 each 86700
Revaluation reserve 42800
Retained earning 32575
Total equities 162075
Noncurrent liabilities:
10% redeemable preference share 23300
Deferred taxation 8900
Total noncurrent liabilities 32200
Trade payables 65700
Bank overdraft 1500
Tax payables 1500
Total current liabilities 68700
Total equities and liabilities 262975
(d): Statement of cash flow
The another important financial statements are cash flow which used to provide specific
information about the cash inflows and outflow. With the help of income statement company can
easily be able to get information about the total revenue they are getting and from which
activities. Some another data that is collected from the help of using balance sheet. The liquidity
position as well as profitability strengths can also be analyse through using the specific data from
the all financial statements.
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6. Interpretation of Financial Statements of Marks and Spencer
The various ratios show the financial position of the company. Also it shows the growth,
profitability and efficiency of Marks and Spencer. The ratios are as follows:
Financial ratios of Marks and Spencer
Particular ratios Formula 2017 2018
Liquidity ratios:
Current ratio: Current asset/ current liabilities
0.7217415
115
0.7277449
324
Liquid ratio: Current asset- inventory+ prepaid
expenses/ Current liabilities
0.2940306
681
0.4073057
432
Profitability ratio
Net profit ratio: Net profit / Sales *100
1.0892487
291 0.272008
Gross profit ratios Gross profit/ Sales *100
2.3837318
772
1.4628629
115
Financial leverage EBIT +Fixed cost / EBIT 2.63 2.55
ROE Total income/ shareholder equity
0.0224313
278
0.0310481
28
Efficiency ratio's
Total assets turnover
ratios Net sales/ average total assets
1.0983443
709
1.4169161
082
Fixed assets turnover Net sales/ Averages total fixed assets
1.6169396
578
1.7165412
448
Total assets turnover
ratio Total assets / Net sales *100 1.27 1.35
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1. Current Ratio for the year 2017 and 2018 are 0.73 and 0.72 respectively. This shows that
company has failed to meet out its short-terms obligations as compared to 2017.
2. Quick Ratio for the year 2017 and 2018 are 0.33 and 0.29 respectively. This indicates that
the most liquid assets such as cash and all cash equivalents and marketable securities
have reduced in 2018 (Bevis, 2013).
3. Financial Leverage shows the relationship of total debt to total assets. The leverage of
2017 and 2018 are 2.63 and 2.55 respectively. There is a decrease in financial leverage,
which means that the company has been able to repay its debts in 2018. Higher financial
leverage is bad for the company as it could the chances of bankruptcy is high.
4. Debt to Equity indicates the proportion of shareholders' equity and debt used to finance a
company's assets. The ratio for 2017 and 2018 are 0.54 and 0.56 respectively. The
increase in the ratio in 2018 shows that the financial soundness of the company is good
from the last year. In will attract creditors to invest in the company.
5. Return on Assets ratio indicates how much profit the company has earned by utilizing its
overall resources. The ratio is 1.40 for 2017 and 0.32 for 2018. There is a decrease in this
ratio from 1.08, which shows that company is not making enough profits from its assets.
6. Return on Equity reflects the relationship of the profitability with the equity. It is used for
measuring the earnings from the investment. The ratio is 3.55 for 2017 and 0.84 for 2018.
It has reduced by 2.71 from the last year. The fall indicates that company is failing to
make profits with the capital available in the company (Alali and Foote, 2012).
7. Receivables Turnover shows the number of times Marks and Spencer takes to collect its
average accounts receivable. It is used to measure the ability to give credits to the
customers and collect funds from the creditors within the specified time. The turnover are
94.38 and 95.86 for 2017 and 2018 respectively.
7. International Accounting Standard (IAS) vs International Financial Reporting
Standards (IFRS)
International Accounting Standard (IAS) International Financial Reporting
Standards (IFRS)
1. IAS are the standards applied on the
transactions shown in the financial statements.
1. IFRS are the revised and updated version of
existing IAS.
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2. International Accounting Standards
Committee (IASC) is the governing body of
IAS.
2. The responsibilities of IASC has been taken
over by International Accounting Standards
Board (IASB).
3. The number of IAS that have been issued by
IASC till 2001 is forty-one.
3. All the standards issued after 2001, are to be
known as IFRS. There are only 9 IFRS issued
till now.
4. In case of contradiction, these standards will
not be applicable as they no longer exist.
4. IFRS will prevail IAS in case of any
contradiction.
8. Benefits of International Financial Reporting Standard (IFRS)
The use of IFRS will provide greater transparency, easier comparability of financial data,
easy regulation of securities markets, lower cost of capital and higher share prices. There are
many benefits of adopting IFRS. The benefits of IFRS are as follows:
Benefits to investors:
1. The financial statements prepared by using IFRS are easy to understand by the investors.
The financial statements prepared under IFRS gives accurate, reliable, timely and wide-
ranging financial statement information.
2. The simple form of these statements makes it easy for small or new investors to
understand it, also reduces the risk while dealing with other professional on the basis of
financial statements as these standards put new or small investors in the same level as of
professional investors (Botzem, 2012).
3. IFRS has made harmonized and standardized reporting standards which has eliminated
the fees that was required earlier for processing and adjusting the financial statements in
order to understand them.
4. Uniformity in the reporting standards have reduced the international differences in case
of cross border merger and acquisitions.
The simpler and easy to understand IFRS have reduced the risks and costs of the
investors. Also it has improved the quality of presentation of financial statements.
The other benefits of IFRS are:
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1. The feature of recognizing the loss immediately has benefited investors, lender and
stakeholders within a company. This feature has increased contracting efficiency,
corporate governance and transparency. It is mandatory for companies to recognize the
loss immediately. Further , it helps the company to review its books.
2. The uniformity in the IFRS has provided improved comparability factor. Comparability
was much needed in IAS which has been now achieved by IFRS. This has removed the
complexity, which was present in IAS (Beatty, Liao and Yu, 2013).
3. The standardization of accounting and financial reporting has removed the trade barrier
and improved the comparability of financial statements.
4. The consistency and transparency has resulted in better and improved relationship
between investors and companies.
5. The financial statements prepared under IFRS have provided better access to foreign
capital markets because there is no difficulty in understanding the financial statements.
6. The major advantage of IFRS is that it shows the true and fair view of transactions of
companies. The gains and losses are put in a timely and reliable manner while reporting.
7. Due to the reduced complexity and increased consistency, the balance sheets prepared
under IFRS become more useful.
8. It has become less manipulative as manipulation by managers are not allowed in IFRS.
9. Varying degrees of compliance with IFRS
The expansion of companies to various countries has made it difficult for them to make
financial statements which can be interpreted and understand by the investors of different
countries. The main reason behind revising IAS was to provide updated, harmonized and
standardized standards for preparing financial statements. The harmonized and standardized
accounting principles has made it for investors across the world to understand the financial
statements (Flower, 2016). A company operating in more than one country may required to get
itself listed in the stock exchange, the IFRS help such companies to get its financial statements
prepared in a format which can be understood by all the investors irrespective of the country in
which they live. IFRS provides comparability and transparency of financial statements. The other
benefits that a company gets by preparing financial statements under IFRS are that it increases
the market efficiency, increasing the foreign direct investment and reduction in the cost of
financial reporting and its analysis. The level of compliance with standards are evaluated by the
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level of disclosure or the standards that are applicable in the country in which the company is
operating (Lee and Parker, 2014). The company operating in more than one country can check
the level of compliance with IFRS by evaluating the financial statements prepared with IFRS and
the accounting standards prevailing in the country of operation. A company may use various
factors to evaluate the compliance level such as firm size etc. The level of compliance will help
the company to attract more investors. For attracting investors, the companies should maintain
transparency by providing accurate, fair, and reliable information in financial statements.
Emerging companies tends to expand their business, this could increase the agency costs and
information gap. The factors that may affect the compliance are as follows:
 Size- A size of the firm greatly affect the level of compliance. The large companies may
reduce the costs by increasing the reliability of financial statements by adopting IFRS.
Generally, larger companies maintain effective information systems, hence, the costs
associated with compliance is reduced (Profitability, 2017).
 Leverage- if the leverage is high, then it will raise the agency costs. Using IFRS will
reduce the costs and duplication of information.
 Listing status- The public companies are more inclined to comply with IFRS as compared
to private companies. The companies that are listed on stock exchanges are required to
prepared financial statements according IFRS to provide reliable information to the
investors.
 Profitability- The political costs in profitable companies are high therefore to reduce the
cost they need to provide reliable financial statements information this can be achieved
through complying with IFRS.
Marks and Spencer is a multi-national company. It is required to prepare financial
statements according to the accounting standards applicable in the country of its operation. In
such a case, it will become a difficulty for the company to prepare financial statements according
to national accounting principles (Anandarajan, Anandarajan and Srinivasan, 2012). Also, it will
be difficult for the investors to interpret the financial statements. Therefore, to provide an
uniformity in the accounting principles, IFRS has been adopted by it.
CONCLUSION
Financial reporting are important for companies to be accurate, timely and reliable as
investors use this information for making decision regarding investing in the company or not.
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Further, International Financial Reporting Standards are the standards that are necessary to be
followed by multinational as well as domestic companies. It provides transparency, consistency,
harmonization and standardization in the financial statements. The investors all over the world
can understand the financial statements prepared according to IFRS. It also reduces the overall
costs of the organization and enhance the contacting ability of the companies. Along with this, it
helps in raising funds from international markets. All the features makes it useful and appropriate
to be used by the companies.
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REFERENCES
Books and Journals:
Alali, F. A. and Foote, P. S., 2012. The value relevance of international financial reporting
standards: Empirical evidence in an emerging market. The international journal of
accounting. 47(1). pp.85-108.
Anandarajan, M., Anandarajan, A. and Srinivasan, C. A. Eds., 2012. Business intelligence
techniques: a perspective from accounting and finance. Springer Science & Business
Media.
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(1-2). pp.136-166.
Beatty, A., Liao, S. and Yu, J. J., 2013. The spillover effect of fraudulent financial reporting on
peer firms' investments. Journal of Accounting and Economics. 55(2-3). pp.183-205.
Bentley, K. A., Omer, T. C. and Sharp, N. Y., 2013. Business strategy, financial reporting
irregularities, and audit effort. Contemporary Accounting Research. 30(2). pp.780-817.
Bertoni, M. P. G. V. A. G. and De Rosa, B., 2012. Green accounting: an alternative approach to
reporting emission trading allowances in financial statements.
Bevis, H. W., 2013. Corporate Financial Reporting in a Competitive Economy (RLE
Accounting). Routledge.
Botzem, S., 2012. The politics of accounting regulation: Organizing transnational standard
setting in financial reporting. Edward Elgar Publishing.
Dyreng, S. D., Mayew, W. J. and Williams, C. D., 2012. Religious social norms and corporate
financial reporting. Journal of Business Finance & Accounting. 39(7‐8). pp.845-875.
Flower, J., 2016. European financial reporting: adapting to a changing world. Springer.
Fu, R., Kraft, A. and Zhang, H., 2012. Financial reporting frequency, information asymmetry,
and the cost of equity. Journal of Accounting and Economics. 54(2-3). pp.132-149.
Hope, O. K., Thomas, W. B. and Vyas, D., 2013. Financial reporting quality of US private and
public firms. The Accounting Review. 88(5). pp.1715-1742.
Lee, T. A. and Parker, R. H. Eds., 2014. Evolution of Corporate Financial Reporting (RLE
Accounting). Routledge.
Nobes, C., 2014. International classification of financial reporting. Routledge.
Online
Profitability. 2017.[Online]. Available through:
<https://www.tandfonline.com/doi/pdf/10.1080/1331677X.2016.1163949>.
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APENDIX
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