TABLE OF CONTENT INTRODUCTION...........................................................................................................................1 MAIN BODY...................................................................................................................................1 1. Context and purpose of financial accounting..........................................................................1 2. Requirement, purpose and key principles of regulatory and conceptual framework..............2 3. Main Stakeholders of an organisation and their benefits from financial information............4 4. Value of financial reporting for meeting organisational growth and objectives.....................5 5. Financial statements of the organisation.................................................................................6 A: Statement of profit and loss:..................................................................................................6 B: Statement of financial position:..............................................................................................7 6.Useoffinancialstatementsofacompanytointerpretandcommunicatefinancial performance.................................................................................................................................8 7 Difference between IAS and IFRS...........................................................................................9 8 Evaluation of benefits of IFRS...............................................................................................10 9 Ascertaining the varying degree of compliance with IFRS...................................................11 CONCLUSION..............................................................................................................................11 REFERENCES..............................................................................................................................12 APPENDIX....................................................................................................................................13
INTRODUCTION Financial reporting is a technique which is required for every company to formulate its financial statements like income statement, balance sheet and cash flow statements. All of them may help internal as well as external stakeholders to analyse actual position, financial health and evaluate performance of the organisation. The process of financial reporting guides the managers and investors to make strategic and investment decisions (Al-Matari, 2013). They determine the organisational performance and then managers make decisions to make improvements and investors pass judgement to invest their money in the business or not. Shareholders evaluate financial information that are recorded in the statements to analyse than their money is used effectively or not. Company chosen for this report is Marks and Spencer which is based in UK. The assignments aims at context and purpose of financial reporting, requirement, purpose and key principles of conceptual and regulatory framework, main stakeholders of the company, value of financial statements to attain organisational objectives and growth, preparation of financial statements and comparison of two years statements, benefits of IFRS and difference between IFRS and IAS. MAIN BODY 1. Context and purpose of financial accounting Financial reporting:It is the process of recording finance related business information infinancialstatementssothatstakeholdersmayanalyseorganisationalperformanceand financialstrength.AccordingtoIASBorganisationsarerequiredtoformulatefinancial statements to present actual status of the company in front of its shareholders. Appropriate and transparent information may help the business entities to operate business effectively. It is very important to follow all the accounting related principles, rules and regulations while recording data in different statements so that it may help to depict actual position of the organisation. For Marks and Spencer it is also very important to keep appropriate financial statements so that its stakeholders may analyse it performance. Transparent records helps to achieve predetermined organisational goals that are required to execute business. Marks and Spencer is preparing its financial statements regularly that helps to operate business globally and to run all the activities effectively. Purpose and importance of financial reporting is as follows: Purpose of financial reporting: 1
ï‚·Financial reporting is done by Marks and Spencer to facilitate mangers while forming strategic decisions so that objectives can be achieved. ï‚·It helps to evaluate market value, financial status and health of the company so that effective strategies can be formulated. ï‚·General purpose of financial reporting is to analyse the outcomes of those actions which has been taken by the organisation in a particular period of time. ï‚·To provide results of the operations to the external stakeholders to increase sales, profits and market share (Chae and Oh, 2016). ï‚·Help managers of the company to make effective planning for future period. Importance of financial reporting: ï‚·Financial reporting is very important for the organisations to analyse the financial performance. ï‚·For stakeholders financial reporting is very important as it may help them to analyse that their money is effectively used or not. ï‚·While organisations are willing to raise foreign capital and investment than appropriate financial reporting may help to attract international investors. ï‚·Properly managed financial statements are very important fro bidding, government supplies and labour contracts because it provides overview of the company to external parties. ï‚·It is very important to analyse actual performance and market position of the company. 2. Requirement, purpose and key principles of regulatory and conceptual framework Regulatory and conceptual framework:Conceptual framework is a type of analytical element with few variable quantity and textual matter. It is applied by organisations when an overall performance and status of business is required. It is mainly used by companies to make abstract differentiation and arrange business ideas. Regulatory framework is the set of legal rules and regulations that are set by legal authorities of UK for all the companies who are executing business activities there. According to the rules every company is required to conduct financial reporting for their business because it is required to determine actual position and financial status of the organisations. Marks and Spencer is following all the regulations that are set by IASB because it may help the stakeholders to analyse organisational performance effectively. These regulations are imposed in the form of IFRS which is explained below: 2
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IFRS:It is International Financial Reporting Standards that are introduced by IASB (International Accounting Standards Board). IFRS is the set of different principles that are set by regulatory authority. Few IFRS are explained below that are also known as principles of regulatory and conceptual framework: IFRS 1:It is related to first time implementation of international financial reporting standards in which companies adopt IFRS first time. It directs the organisations to formulate all the financial statements effectively and appropriately. IFRS 3:This is related to business combinations in which mergers and acquisitions are described. It help organisations to combine all their assets and liabilities so that debts can be paid to overcome from business crisis (Eker and Aytaç, 2016). IFRS 9:It is related to financial instruments in which direction for their treatment is provided. It mainly focuses on classification and measurement of financial instruments, impairment of financial assets and hedge accounting. IFRS 10:It directs business entities to form their financial statements in consolidated format so that all the transactions of parent and subsidiary company may be recorded in a single statement to determine performance of the entity. Purpose of regulatory and conceptual frameworks: Main purpose of regulatory framework is to guide organisations to prepare financial statements in appropriate manner. Purpose of conceptual frameworks is to analyse overall performance of a business entity so that stakeholders may take effective decisions about the company. Another purpose of regulatory and conceptual frameworks is to set a global language so that businesses can be execute at international level with the help of international capitals and investments. Both are formulated by the government to understand accounting practices and standards that are followed by companies while formulating final accounts. Qualitative features of financial information:Following are the characteristics of financial information that helps to make the information more reliable. It can be understood with the help of following points: Relevance:It is very important for the companies to record relevant data in the financial statements so that it may help to analyse actual performance and financial status. If the 3
information is not relevant than it cannot show the accurate performance and position of a business. ï‚·Faithful representation:This feature may help to gain trust of stakeholders like investors and shareholders because this will help them to assure that organisation is in good condition and they may get long term benefits like higher returns on their investments. All the rules and principles of regulatory and conceptual framework are followed by Marks and Spencer in order to expand their business with the help of increased investments and good market image. 3. Main Stakeholders of an organisation and their benefits from financial information Stakeholders refers to the internal or external parties of an organisation who have right to get actual financial information of an organisation. Marks and Spencer is also having various stakeholders who help to operate business effectively. Financial statements are evaluated by them to make decisions that may affect the business execution ability of an enterprise. Marks and Spencer is having various stakeholders that are customers, investors, managers, government, shareholders and creditors. Benefits of financial information to the internal and stakeholders are described below: Internal stakeholders:All of them are directly related to the operations of the company. They analyse financial statements to make effective decisions: ï‚·Shareholders:Shareholders of the company are the persons who provide funds to the organisation. In Marks and Spencer shareholders use financial information to analyse that their money is effectively used or not by the organisation. ï‚·Managers:Managers of Marks and Spencer get benefited by financial information as it help them to make decisions by evaluating the organisational performance. If business is not in good condition than they may implement appropriate strategies so that business may overcome all the challenges. External stakeholders:They are not directly in touch of the company but they have right to gather financial information because they are a part of the organisation. ï‚·Investors:These are the group of of persons who invest money in business for the purpose of acquiring higher profits. Financial information help them to determine exact 4
position of Marks and Spencer to make investment or not because if the company is not in good condition than investors does not show interest in that business. ï‚·Creditors:The persons who provide goods on credit to Marks and Spencer are creditors or suppliers. Financial information of the company is very beneficial for them as it may help them to analyse that organisation is able to pay back their amount or not which has been provided by them (Duncan, 2014). ï‚·Government:All the financial information of Marks and Spencer is determined by legal authorities of UK to insure that organisation is not performing any illegal activity. It also help the government to assure that company is paying tax appropriately. ï‚·Customers:Financial information is also beneficial for the customers as they may get satisfied by analysing that market image of Marks and Spencer is good. All the stakeholder of the Marks and Spencer get benefited with the help of financial information because it help them to analyse organisational performance and financial health. 4. Value of financial reporting for meeting organisational growth and objectives Financial reporting help the organisations to achieve objectives and identify growth opportunity. Marks and Spencer is operating it business all around the world and for the company it is very important to formulate appropriate financial statements so that all the stakeholders of the company get satisfied and show more interest in the company. Objectives of Marks and Spencer are to attract investors, satisfy customers and maximise profits and sales. All the goals can be achieved with the help of transparent information in financial statements of Marks and Spencer. Investors get attracted toward those company who are performing good in the market and able to provide them higher return on their investments. As Marks and Spencer is keeping accurate records which will help investors to analyse its performance and than enhance their interest in the company. Customer satisfaction is possible with the help of positive market image which can be determined by them with the help of financial statements that are generated by the company every year. If Marks and Spencer is having good image in the market than this may help customers to be satisfied because they will get assured that they are using products of a good company. Profits can also be maximised with the help of financial statements because if Marks and Spencer is performing good in the market than it will help to be more competitive in the market 5
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and acquire higher profits (Elbayoumi and Awadallah, 2017). Effective and accurate financial statements can help an organisation to identify growth opportunities and than grab them to be morecompetitiveinthemarket.FinalaccountsofMarksandSpencerhelptoanalyse organisational efficiency and profits. This willguide the managers to determine the funds that are acquired by the organisation in a year and they may take decision to invest the money effectively to increase production that may help to enhance sales. Financial statements also help to identify the business position in the market which will help to grow the business faster because having a good position in the market will attract large number of customers and help to expand the business by acquiring higher market share. Competitive advantage in the market can also be measured with the help of financial statements which will help to be the first choice of the customers. This will help to achieve growth in the market. 5. Financial statements of the organisation A: Statement of profit and loss: Consolidated statement of profit or loss Continuing operations Revenue385100.00 Cost of sales of goods291700.00 Gross Profit93400.00 Operating Expenses78500.00 Operating Profits14900.00 Finance Income5600.00 Finance Cost830.00 Profit before income tax19670.00 Income tax expenses15000.00 Profit after tax4670.00 Dividend 6
Equity830.00 Preference2330.00 Retained Earning1510.00 Profit and loss account for company during a financial year help to ascertain the total profit after making all adjustment such as tax expenses etc. The above mention P&L account for the company shows gross profit of 93400, profit after deducting operating expenses is 14900, profit before tax shows a balance of 19670 and profit after deducting tax amount 4670. There are different adjustment to be made while calculating profit for the firm such as property, plant and equipment balance, charges related to cost of good sold and expenses that are linked with operating activity (Formisano, Fedele and Calabrese, 2018). B: Statement of financial position: Financial Statement Assets Land & Property160700.00 Less:Depreciation-185100.00-24400.00 Property88000.00 Less:Depreciation-8000.0080000.00 Investment property23300.00 Plant & Equipment78000.00 Deferred tax assets8900.00 Other assets Total non-current assets165800.00 Inventories17230.00 Accounts receivable68000.00 Other assets Short-term investments 7
Cash and cash equivalents1500.00 Total current assets86730.00 Total assets252530.00 Equity and liabilities Equity Equity share capital86700.00 10% Pref. Share capital23300.00 Revaluation Reserve42800.00 Retained Earning33610.00 Total non-current liabilities186410.00 Provisions Accounts payable66120.00 Total current liabilities66120.00 Total equity and liabilities252530.00 The balance sheet statement or statement of financial changes is helpful for companies to ascertain the the actual cash position during an accounting year. The above mention balance sheet describe the total assets and liabilities held by company for a particular period. The balance of current assets for the year is 86730 and total non current assets 165800. The balance of total assets for year is 252530. Balance of total liabilities is 186410 and the amount for total equities and liabilities are 252530. 6. Use of financial statements of a company to interpret and communicate financial performance As analysed from appendix, revenues of Marks and Spencer were 10622000 in year 2017 which has been increased up to 10698200 in year 2018. Cost of sales for the company was 6629300 in year 2017 which has been increased in year 2018 up to 6745600. it has affected the profits that are decreased in year 2018 as the cost of sales has been changed comparatively high from other prior year (Guo, 2018). Profits in year 2017 were 3992700 and for year 2018 profits 8
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were 3952600. Total operating expenses of the organisation have also been increased in current year. For current year expenses are 10020800 and for 2017 they were 9914700. operating income of Marks and Spencer has also been decreased up to 677400 in year 2018 from 707300 which is for year 2017. Net income or profits of Marks and Spencer have been decreased in year 2018 as compare to 2017. Profits for both the years are 117100 and 25700 respectively. Organisation's cash has decreased up to 207700 from 468600 which is for year 2017. Receivables of Marks and Spencer have been increased in year 2018 as compare to 2017. for 2018 and 2017 receivables are 137800 and 144800 respectively. Total current assets of the company have been declined in year 2018. In 2017 total current assets were 1723300 and for 2018 it is 1723300. Total assets of the company have been decreased in year 2018. In 2018 these are 7550200 and in 2017 they were 8292500. Accounts payable of Marks and Spencer have been decreased in year 2018 from 967500 which was for year 2017. Short term debts of the organisation have also been decreased in year 2018 from 517600 that is related to year 2017. Long term debts of Marks and Spencer have been decreased up to 1622900 in year 2018 as compare to year 2017 which is 1663400. Common stock of Marks and Spencer remain same in both the year which is 406200. retained earnings of the company has been decreased up to 6560400 in year 2018 as compare to year 2017. Treasury stock of the company are in negative for both the years. Capital surplus for the company are same for both 2018 and 2017 years. Total shareholder's equity of the company has been decreased in year 2018. For 2017 equities were 3156300 and for 2018 these are 2956700. Financial ratios of Marks and Spencer Particular ratiosFormula20172018 Liquidity ratio’s: 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 *1001.08924870.272008 9
291 Gross profit ratiosGross profit/ Sales *100 2.3837318 772 1.4628629 115 ROETotal income/ shareholder equity 0.0224313 278 0.0310481 28 Efficiency ratio's Total assets turnover ratiosNet sales/ average total assets 1.0983443 709 1.4169161 082 Fixed assets turnoverNet sales/ Averages total fixed assets 1.6169396 578 1.7165412 448 From the above analysis it has been analysed that current ration of the company for year 2017 was 0.721 and it has been increased in year 2018 to 0.727. Liquid ratio of the company has been increased in year 2018 as compare to 2017. for both the years rations were 0.294, 0.407 respectively. Net profit ratio for both the years was 1.089 and 0.272 respectively. This ratio has been decreased in year 2018. Gross profit ratio of the organisation 2.383 in year 2017 and it has been reduced up to 1.462 in year 2018. ROE for 2017 and 2018 are as 0.022 and 0.031 respectively. Total assets turnover ratio for year 2017 was 1.098 and in 2018 it has been increased up to 1.416. Fixed assets turnover ratio for year 2017 was 1.616 and for 2018 it was 1.716. Techniques that are used to deal with financial problems: Benchmarking:It is a technique which is used by companies to compare their strategies to other companies so that they may set a standard for them selves and identify the actual cause of the problems. It can be used by Marks and Spencer to identify that what are the causes of financial problems and than they may deal with the same. KPI:these are Key performance indicators that are use by companies to determine results of processes that are used by them. It can be used by Marks and Spencer to evaluate the reason of financial problems like unforeseen expenses and than reduce them effectively. Brainstorming:It is a model which is used by organisations to find solutions for their problems in which various team members sit together and than find solutions for the problems. 10
This technique can be used by managers of Marks and Spencer to resolve all the financial problems by finding appropriate solutions for the problems. 7 Difference between IAS and IFRS. In accounting there are different set of principle that has to be kept in mind while making report and statements. All these standard are issued by International accounting standard boar (IASB) also commonly known as international accounting standard board. The International accounting standard (IAS) is a set of those particular principle that state about the posting of a transaction and other events in financial statement. But as the evolution of accounting in 2001 there are new set of principle that are known with the new name called International financial reporting standard (IFRS). It is observed that many time accountant are confused with the concept of IAS and IFRS. But both have sightly difference between each other it that these principle are published by IASC and IASB (Haneef and Smolo, 2014). Now days companies have started following the concept of international financial reporting standard because many of the IAS has been outdated. The basic difference between IAS and IASB are described below: International financial reporting standardInternational accounting standard. It is basically describe as the new standard that help accountant to report transaction in final account. Thesewereproducedtoprovidethebasic accounting standard to the business firm. In IFRS, all important relevant decision are performed by IASB. This is observed that all related decision made by IAS are examined by IASC. IFRS are introduced in 2001 by international accounting standard board. Inyear1973theinternationalaccounting standard committee introduced IAS. There is one main implication worth noting, is that any principle within IFRS that might be conflicting,will decidedly replace those of the IAS. Essentially, when conflicting standards are issued, older ones are usually respect. 8 Evaluation of benefits of IFRS. Itisobservedthatasthebusinessworldisbecomingstrictlyattentive,while implementing different set of rules and regulation that help in maintaining record properly. The companies are nor more strict towards the ways of trade and financial rules. In recent time it has 11
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been noticed that many companies in almost every part of world have moved to the generally accepted accounting standard principle (GAAP) towards the international financial reporting standard (IFRS) (Hassaan, 2012). In which it is clearly mentioned that any relevant information about the business happing must be revealed in financial statement and it also explain the process of how to post transaction in report and statement. With the help these standard the companies areable to solve many accounting problems that may led to the decrease in the profitability level. The implementation of IFRS makes company financial statements clear and transparent that makes shareholder and investor to know more about the company financial position. In case if government founds any company not following the appropriate standard, they will be not allowed to execute their business in future. There are basically some advantages of IFRS that are explained below: ï‚·With the help and use of suitable accounting standard support companies to grow and develop their operation that result in development of economy. ï‚·As companies uses the international accounting standard in their accounting system, that makes the report and statement clear and transparent. This result in attracting more number of investor from and outside the nation. ï‚·Companies using suitable IFRS provide shareholder the better understanding about the business growth. It also help investor to make right investment that will have better result. ï‚·The main advantage of using IFRS is that it help in increasing the fund from the foreign market at very cheap rate. ï‚·By using IFRS standard in making report, internal manager ease the work of accountant to analyse the statement and give their best opinion. ï‚·IFRS have a main advantage of developing the global language that help to develop the understanding with investors from any part of world. 9 Ascertaining the varying degree of compliance with IFRS In recent international financial reporting standard are becoming the world wide standard of accounting that is accepted in almost every nation that guide public or private complainers internal management to prepare and present financial statements. Recently there are thirteen IFRS and 29 IASs that are followed by almost every company at global level. IFRS are types of rule that arr to be followed by each kind of organisation whether they are large and small in size. 12
It is observed that mark and Spencer has adapted the standard of IFRS that help in formation of statement which are further helpful for stakeholder to make effective decision of investment. The standard support companies and the principle of the disclosure target entities infract of clearly setting the minimum compliance level. In general, compliance is the basic word that is related to the. It has been evaluated that recently IFRS standard are set according to the disclosure of the compliance in the context of both specific disclosure needs and the increasing level of principle of disclosure (Nakashima and Okuda, 2016). For example, in almost every country there are accounting rule to be followed by companies that are slightly in some manner. This help them in formation of statement and overcome different types of problems and issues. All standard may affect the capitalist decision of investing as they may not be able to examine the financial statements of the company. In UK government have implemented various accounting regulation for companies that guide Mark & Spenser to prepare statement for an accounting year. The company is operating their business in different part of world so it is not possible for their management to applies all kind of accounting role. Therefore, it is importance for company to applies the international financial reporting standardthathelpinmaintainingtheinformationproperly.Thisresultinattainingthe competitive advantage at world wide level (Zhao, 2017). CONCLUSION From the above project report it has been concluded that financial reporting is the process of preparing financial statements that are required to analyse organisational performance and financial status. It is very important for the companies to maintain their financial statements on regular basis so that stakeholders such as customers, investors, shareholders, government and managers can formulate their decisions according to financial health of the business. All the business entities are directed by IFRS while they are generating their financial statements as it may help them to formulate appropriate and accurate statements. 13
REFERENCES Books and Journals: Al-Matari, Y. A. A. T., 2013.Board of Directors, Audit Committee Characteristics and The Performance of Public Listed Companiesin Saudi Arabia(Doctoral dissertation, Universiti Utara Malaysia). Chae, S. J. and Oh, K., 2016. The Effect Of Family Firm On The Credit Rating: Evidence From Republic Of Korea.Journal of Applied Business Research.32(6). p.1575. Duncan, K., 2014. Relationship between the audit function and effective governance. Eker, M. and Aytaç, A., 2016. Effects of interaction between ERP and advanced managerial accounting techniques on firm performance: Evidence From Turkey.Muhasebe ve Finansman Dergisi.(72), pp.187-210. Elbayoumi, A. F. and Awadallah, E. A., 2017. The Usefulness of Different Accounting Earnings Measures: The Case of Egypt.GSTF Journal on Business Review (GBR).2(2). Formisano, V., Fedele, M. and Calabrese, M., 2018. The strategic priorities in the materiality matrix of the banking enterprise.The TQM Journal. Guo, N., 2018. Revisiting Corporate Financial Policy and the Value of Cash. Haneef, R. and Smolo, E., 2014. Reshaping the Islamic finance industry: Applying the lessons learnedfromtheglobalfinancailcrisis.IslamicBankingandFinancialCrisis Reputation Stability and Risks, pp.21-39. Hassaan,M.,2012.CorporategovernanceandcompliancewithInternationalFinancial Reporting Standards (IFRSs): evidence from two MENA stock exchanges(Doctoral dissertation, Aston University). Nakashima, M. and Okuda, S. Y., 2016. Implication of Internal Controls System and Accounting Information System. Zhao, S., 2017. Does Financial Development Necessarily Lead to Economic Growth? Evidence from China’s Cities, 2007–2014. InMATEC Web of Conferences(Vol. 100, p. 05032). EDP Sciences. Online IFRS.2018.[Online]Availablethrough: <https://www.ifrs.com/> 14
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APPENDIX Income statement of Marks and Spencer: particulars20182017 Revenue31/03/1801/04/17 Total revenue1069820010622000 Cost of revenue67456006629300 Gross profit39526003992700 Operating expenses Selling general and administrative33247003348600 Others-49500-63200 Total operating expenses100208009914700 Operating income or loss677400707300 Income from continuing operations Total other income/expenses net-610600-530900 Earnings before interest and taxes677400707300 Interest expense-95400-100200 Income before tax66800176400 Income tax expense3770060700 Minority interest-2500-5900 Net income from continuing ops29100115700 Net income25700117100 Balance sheet of Marks and Spencer: particulars31/03/1801/04/17 15
Current assets Cash and cash equivalents207700468600 Net receivables144800137800 Inventory781000758500 Other current assets10900167700 Total current assets13179001723300 Long-term investments4360051500 Property plant and equipment43939004837800 Goodwill7740078400 Intangible assets521800630600 Other assets1195600970900 Total assets75502008292500 Current liabilities Accounts payable872900967500 Short/current debt125300517600 Other current liabilities222600224300 Total current liabilities18260002368000 Long-term debt16229001663400 Other liabilities10994001062400 Minority interest-2500-5900 Total liabilities45960005142100 Stockholders' equity Common stock406200406200 Retained earnings65604006617600 16