Financial Reporting Analysis: Lloyds Banking Group and IFRS

This report provides a comprehensive analysis of financial reporting, using Lloyds Banking Group as a case study. It begins with an introduction to financial reporting, defining its purpose and outlining the conceptual and regulatory frameworks, including IFRS and IAS, which are crucial for preparing financial statements. The report then identifies and discusses the major stakeholders of an organization, such as employees, shareholders, and the government, detailing how they benefit from financial information. It explores the value of financial reporting in meeting organizational growth and objectives, examining financial reporting models and auditing models. The report also includes financial statements like the profit and loss account and statement of financial position for Godwin Plc, providing interpretations and insights into their components. Overall, the report highlights the significance of financial reporting in evaluating a company's financial status and its impact on various stakeholders, using the example of Lloyds Banking Group to illustrate key concepts and applications.

Financial reporting

INTRODUCTION
Financial reporting is a framework which involves preparation of statement of accounts
i.e. balance sheet, profit & loss, changes in equity, cash flow etc. It is also used to determine a
company's liquidity and profitability position by calculating ratios (Evers, Meier and Spengel,
2014). Every company follows a different conceptual & regulatory framework according to the
need like U.S. Prepare financial statements by using GAAP whereas U.K. considers using IFRS
(Financial reporting, 2019). It is affected by a number of legislative factors like law, tax,
security exchange rules etc. For this report we have selected an accountancy firm i.e. KPMG
who has a client named Lloyds Banking Group. It is a public limited company whose
headquarters are situated in London, UK and was founded in 1995, 24 years ago. The banking
company offers a variety of services to the customers such as retail, commercial, investment,
private banking. Also, some other facilities are provided which include general or life insurance,
pensions etc. The below report also includes financial & regulatory framework, major
stakeholders of the organisation, implication of IFRS, IAS and the benefits derived from them.
MAIN BODY
Q1 Definition and purpose of financial reporting
Financial reporting can be defined as a process of producing statements that disclose an
organisation's financial status among the stakeholders. It involves identifying & analysing the
working capital position of a company with the help of ratios (Christiaens and et.al., 2015). This
framework is required by managers to evaluate performance of a firm by preparing financial
accounts like balance sheet, profit or loss, cash flow statement etc. For example, Lloyds Banking
Group prepare its statement of accounts to identify any potential buyers or defaulters during an
accounting year. The company also uses financial reporting as a tool to evaluate cash flow
stability, profitability & debt position of its figures.
Purpose of financial reporting: The major purpose of this framework is to provide
financial information about the reporting entity that is useful for existing & potential investors,
lenders and other creditors in making decisions about supplying resources to the entity.

Q2 Meaning of conceptual & regulatory framework
A conceptual & regulatory framework is a coherent system of interrelated objectives
along with business principles which prescribe nature, function or limitations of financial
statements. It is necessary to have a framework as that enables accounting standards & GAAP
practice to be developed in accordance with specific rules & regulations. This is required by
managers as it helps a company in identifying appropriate standards like IFRS for the preparation
of final accounts. Lloyds Banking Group follows a conceptual & regulatory framework to ensure
that users of financial statements receive a minimum amount of information that will enable
them to take meaningful decisions regarding their interest in the firm (Evers, Meier and Spengel,
2014).
IFRS 13 - Fair value measurement: This standard sets out a framework for measuring
fair value and require disclosure for its measurement. Fair value is a price that would be received
to sell an asset or paid to transfer a liability in an orderly transaction between market participants
at the measurement date. It includes three level inputs which are explained below:
Level 1- It comprises of quoted or observable prices for an identical asset or liability in a
active market at measurement date. This is considered to be providing most relevant information
and can be used without adjustment.
Level 2- It comprises of observable units that include quoted price for similar assets &
liabilities in active markets or prices for similar products in inactive market. This requires some
degree of adjustment.
Level 3- It consists of unobservable inputs for an asset or a liability based upon the best
information available that may be reasonably accessible in the market.
IFRS – 10 Consolidated financial statements: It refers to a statement which includes a
parent as well as a subsidiary company. This also involves calculation of NCI, group retained
earnings, goodwill, goods in-transit etc. The parent company is considered to be owner of the
firm whereas a subsidiary owns more than 50% share holding in an organisation (Tschopp and
Huefner, 2015).
Purpose of conceptual & regulatory framework: The purpose of this framework is to
assist board in development of new accounting standards while examining existing or previous
one's. It also help auditors when they are forming an opinion regarding preparation of accounts.

This can also aid the managers at Lloyds Banking Group by promoting harmonisation culture
which can reduce the impact of alternative standards permitted by IFRS.
Qualitative characteristics: They enhance internal qualities of a user by considering
various qualities such as relevance, faithful representation, timeliness, comparability etc. Lloyds
Banking Group uses qualitative characteristics in forming appropriate opinion for preparation of
financial statements. Some of them are mentioned below:
Relevance: Information is relevant if it has the ability to influence economic decision of
users and is provided in time to influence those (Robinson and et.al., 2015). Materiality plays an
important role in forming relevancy of information.
Faithful representation: In order for the information to be faithfully represented, it must
be accounted for and presented in accordance with the substance & economic reality not just
legal form. It should also possess completeness & neutrality while remaining free from error.
Enhancement quality: It is essential to produce authentic and reliable records to
stakeholders of an entity. Materiality of facts and figures helps to improve the quality of financial
report. Accountants and executives help in
Q3 Stakeholders of an organisation and how they get benefit from financial information
Stakeholders are a group of people who can affect or be affected by the economic
decisions taken by managers in an organisation and include internal, connected, external
(Flower, 2018). The stakeholders of Lloyds Banking Group are customers, shareholders,
employees, government etc.
Internal stakeholders: These are the people who work for the internal development of
an organisation and include shareholders, employees etc. They are benefited from financial
information by:
Employees: Employees are benefited from financial information as it gives them an
opportunity to know in detail about the financial position of Lloyds Banking Group. The
employee of group needs growth and development with decent hike in consideration. This would
only be possible when the entity will be in profitability situation.
Shareholders: These are the parties who invest a certain sum of amount in respect of
getting returns such as interest on invested amount. They are benefited from financial
information as it gives them an idea of how much to invest in Lloyds Banking Group by
overviewing the financial statements. Getting high returns remain the essential requirement of

shareholders in respect of investments made by them. Appropriate utilisation of investment is
helps in generating desired returns and shareholders get benefits by the organisation.
External stakeholders: These are the people who work externally for the growth of an
organisation and include government, customers etc. They are benefited from financial
information by:
Government: Regulatory reforms and legislation related to entities governed by
government for tax purpose. They are benefited from financial information as it gives them an
authority to change any rules & regulations especially when Lloyds Banking Group is suffering
huge downfall of cash. The better management and control tax liability the more government be
benefited.
Customers: These are the parties who get services and products form the group. Clients
wants loans and funding at reasonable interest rates and effective rate of returns on their deposits
and savings. Customers are benefited from financial information as Lloyds Banking Group offers
them facilities to save their money in different types of account such as saving, fixed deposit etc.
Q4 Value of financial reporting for meeting organisational growth and objectives
Financial reporting plays a major role in determining organisational objectives, goals and
targets for the welfare of a firm. Lloyds Banking Group prepares its final accounts from sources
which give relevant, reliable, complete information about the income & expenses during an
accounting year (Garanina and Kormiltseva, 2014). For that purpose, the company uses different
financial reporting as well as auditing models which help to determine the performance or
position of data. Some of them are explained below:
Financial reporting models: It is a model which evaluates financial performance of a
company by preparing balance sheet & income statement. Lloyds Banking Group considers
financial reporting models in preparation of financial statement as it gives an idea about the
liquidity & profitability position. Some of the models are mentioned below:
Four statement model: It is a very common model which is adopted by every company.
With the help of three statement model, Lloyds Banking Group prepares financial statements i.e.
balance sheet, profit or loss, cash flow (Kaya and Koch, 2015). Financial position statement is a
statement which records all assets, liabilities and equity of a firm in an easy manner by
categorising into different heads like current & non-current. Statement of Profit and loss a/c, also
known as income statement is a type of account which records all the earnings along with

expenditure in a firm during an accounting year. A statement of cash flow compiles all inflows
and outflows of cash by categorising each into operating, financing or investing activity.
Auditing models: These are used by managers to check completeness, timeliness,
statutory records etc. Lloyds Banking Group uses auditing models to identify any misconduct,
default of records. Some of them are mentioned below:
Inspection: It involves examining of documents & records both internally as well as
externally in electronic or paper form. Lloyds Banking Group inspects revenue & all other
expenses by comparing it with actual as well as budgeted figures.
Recalculation: It consists of checking mathematical accuracy of of documents or records
that can be performed by IT. With the help of recalculation model, Lloyds Banking Group
checks if there is an error in financial statements.
Both financial reporting and auditing models help Lloyds Banking Group to analyse any
deficiencies or fraud in financial statements or documentation. It helps the company to get an
idea about the liquidity & profitability position by preparing statement of accounts in order to
achieve organisational growth and objectives.
Q5 Preparation of financial statements
Statement of profit or loss & other comprehensive income of Godwin Plc for the year
ended 31st December, 2018
Particulars £
Revenue 585100
Cost of Sales w1
-
403639
Gross Profit 181461
Operating expenses w1 -92139
Operating Profit 89322
Investment Income 9600
Finance cost -1200
Profit Before Tax 97722
Taxation -9500
Profit for the Year 2018 88222
Working note 1:

Particulars
Cost of
sales Operating expenses
1. balance as per TB 391700 80500
2. add adjustment in closing inventory 300
3. depreciation on Property 2969 2969
4. depreciation on Plant and Equipment 8670 8670
403639 92139
Interpretation: The above statement is a profit & loss account which shows all the
income and expenses during an accounting year. It also includes other comprehensive income
which states any gain on revaluation of property, plant or equipment for the period. The
operating activity in cash flow also consists of any income or expenditure such as depreciation/
amortisation, income tax paid, profit before tax etc.
Statement of financial position of Godwin Plc for the year ended 31st December, 2018
ASSETS £
Non-Current Assets
Land and Property w2 144062
Plant and Equipment w2 98260
Investment Property 28000
Total Non-Current Asstes 270322
Current Assets
Inventory note (i) 24700
Trade receivables 78000
Total Current Assets 102700
Total ASSETS 373022
EQUITY AND LIABILITIES
EQUITY
Ordinary Share Capital @ 25p each 86700
Revaluation Reserve 40000
Retained Earnings 126722
Total Equity 253422
Non-Current Liabilities

10% Preference share Capital of £1 each 26500
Deferred Taxation 10000
Total Non-Current Liabilities 36500
Current Liabilities
Trade Payables 62700
Tax Payables 9500
Bank Overdraft 10900
Total Current Liabilities 83100
Total EQUITY AND LIABILITIES 373022
i) Cost of damaged goods 2470
Realisable value 2670
less remedial cost -500
Net Realisable Value (NRV) 2170
Closing inventory TB 25000
less cost of damaged goods -2470
add NRV 2170
Adjusted 24700
Note: IAS 2 accounting standard is used to evaluate the cost of inventory. As per this
accounting standard the value of inventory will be considered at cost and Net Realisable Value
(NRV) whichever is lower.
ii) Property is valued @ £95000 has a life 16 years
Depreciation on property = 95000/16 years 5938
iii)
Depreciation on Plant and Equipment = X%*(cost - acc dep) = 15%*(148000 - 32400)
= 17340
w2
Land and
Property P&E

Cost/valuation 150000 148000
Accumulated Depreciation as at 1 Jan
2018 32400
current depreciation charge -5938 -17340
144062 163060
Interpretation: The above statement shows a simplified way in which assets, equity &
liabilities can be recorded during an accounting year. For that purpose, it is categorised into
current and non-current. A cash flow statement provides information regarding purchase/sale of
fixed assets, working capital changes, issue/repayment of shares, dividend paid/received etc. in
three different type of activities i.e. operating, investing, financing.
Statement of change in equity position
Particulars
Ordinary Share
Capital @ 25p
Revaluation
Reserves
Retained
Earnings Total
£ £ £ £
Balance as per TB 86700 40000 45500 172200
Profit for the year 88222 88222
Preference dividend -2500 -2500
Ordinary dividend -4500 -4500
Total Equity 86700 40000 126722 253422
Q6 Interpretation of financial performance
To the board of management Diageo
Reference: Interpretation of the financial statements (performance appraisal) for 2017 and 2018
Dear sir/Mme
The below report defines the financial reports of Diageo in which four major sections are
categorised in to four sections as gearing ratio, profitability, stability and liquidity ratio.
Gearing and interest coverage ratio
Ratio 2018 2017 Change in %
Gearing ratio 0.811 0.63 26.56%

Interest cover 10.47 8.89 17.78%
The above ratio states that the long term liabilities of organisation get increased in respect
of last year by 26.56%. the interest coverage ratio also enhanced by 17.78% due to increase in
the amount of payable interest on long term borrowings.
Efficiency ratio
Ratio 2018 2017 Change in %
Inventories days 386.07 365.27 -3.65%
Receivables days 5.68 5.63 5%
Payable days 113.38 88.95 27.46%
Working capital cycle 336.93 341.21 -1.25%
Interpretation: The accounts receivable turnover ratio for Diageo has a minor increase
in number of days which shows comparison of its debtor collection period in 2017 & 2018. It
shows that the bad debts are able to pay within the specified duration of time and the company
does not have to provide any additional benefits to the debtors.
Profitability
Ratio 2018 2017 Change in %
Gross profit margin 61.90% 61.20% 0.70%
Operating profit margin 30.30% 29.50% .80%
ROCE 15.80% 16.04% -0.24%
ROE 0.2684 0.2304 3.80%
The gross profitability ratio states the increment of 0.70% which reflects positive signs
and operating profit margin also increased as 0.80% the slightly increment states that there is null
impact of increased borrowings fall upon the profitability.
Liquidity
Ratio 2018 2017 Change in %
Current Ratio 1.37 1.30 5.38%
Quick ratio 0.54 0.56 -3.57%

Interpretation: The current ratio for has Diageo declined by 5.38% from 2017 to 2018
that shows that the company is not able to pay its liabilities on time. Due to which, it has lost
some of valuable customers. An ideal current ratio should be 2:1 that implements the ability of a
firm to pay its suppliers.
Q7 Difference between IAS & IFRS
Basis IAS IFRS
About These are known as International
Accounting Standards which follow
rules & regulations implied by
GAAP.
These are a set of accounting
standards known as International
Financial Reporting Standards issued
by IASB.
Establishment They were published between 1973
and 2001 (Zakari, 2014).
They were published issued after
2001.
Standards It follows general principles of
accounting which relate to
published financial statements,
inventories, income tax, earnings
per share, intangible & impairment
of assets etc.
It follows a set of accounting
standards which include share-based
payments, business combinations, fair
value measurement, consolidated
financial statements, non-current asset
held for sale and discontinued
operations etc.
Q8 Benefits of IFRS
Below are listed some of the benefits of IFRS:
 It provides greater comparability to the user in preparation financial statements.
 This follows principle-based approach which gives more flexibility to adapt new
standards.
 It has a greater access to international capital and investments (Leuz and Wysocki,
2016).