Financial Reporting: Analysis of Financial Statements and Framework

This report provides a comprehensive overview of financial reporting, examining its context, purpose, and benefits to stakeholders. It delves into the conceptual and regulatory frameworks, highlighting key principles and qualitative characteristics. The report analyzes the value of financial reporting in meeting organizational objectives and fostering growth, with specific examples from KPMG. It explores the main financial statements, including the profit and loss statement, statement of changes in equity, and statement of financial position, providing illustrative examples. The report also discusses the differences between IAS and IFRS, the benefits of the international financial reporting system, and the degree of compliance. The report concludes with a detailed analysis of financial statements and their importance in decision-making. The report uses the example of KPMG to illustrate the practical application of financial reporting principles and their impact on business operations and stakeholder engagement.

Financial Reporting

Table of Contents
INTRODUCTION ..........................................................................................................................1
QUESTION .....................................................................................................................................1
1. Context and purpose of financial reporting.............................................................................1
2. Conceptual, regulatory framework, key principle and qualitative characteristics. ................2
3. Main stakeholder and benefit to financial information...........................................................3
4. Value of financial reporting to meet objective and growth.....................................................4
5. Main Financial statements.......................................................................................................5
6. Interpretation and communication of financial performance..................................................7
7. Difference among IAS and IFRS............................................................................................7
8. Benefits of International financial reporting system...............................................................7
9. Degree of compliance with IFRS............................................................................................8
CONCLUSION..............................................................................................................................10
REFERENCES .............................................................................................................................11

INTRODUCTION
In every type of businesses there are different department that are responsible to perform
day to day operation in profitable manner in order to attain the organisational goals (Financial
reporting, 2019). So functioning of these section are interdependent to each other and are mainly
linked with accounting and finance department which provide useful resources to perform all
kind of activities. The concept of financial reporting is associated with disclosure of meaningful
financial information to respectful stakeholder so that they can analyse overall performance and
position of company over a specific time period. The end process of accounting is related with
financial reporting that have some typical elements such as financial statements, quarter and
annual reports, prospectus and management analysis and decision. To better understand the
concept of financial reporting KPMG one of the largest financial accounting organisation which
provide various useful financial services is selected.
In this report, purpose, benefits to stakeholder, conceptual and regulatory frameworks and
value of financial reporting for company is discussed. Additionally, the difference between IAS
and IFRS, benefits of IFRS and degree of compliance are discussed in this report. Different
financial statements like balance sheet, statements of equity and income statements are prepared
with the help of financial information.
QUESTION
1. Context and purpose of financial reporting.
In present time, financial reporting have a major role in world economy as it provide
authentic and reliable information to owner of company so that they might make effective
decision for improving the entire economy by raising profit margin. Company owner are entitled
to receive the yearly statements that summarise the real performance of various operation and
employees and also disclose the position which support in further assessment of most profitable
investment during the reporting period (Bigus and Hillebrand, 2017). It is observed that financial
statements are required to meet the requirement of uses so KPMG implement authentic
accounting system which enable to deliver best information that is needed to make future
investment decision. Financial-reporting have some major purpose that are as follows:
 It deliver advantageous information to interested share-owner, investor and lender to
make associated decision.
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 This support in different perspectives such as information related to credit to customer,
lend of borrower and either to invest in respective business or to move to different
option.
 Financial reports gives necessary information related with net inflows and outflows of
cash within company that include accurate time and unprofitable activities so that actual
liquidity can be determined.
 It also shows the total obligation and economic available resources within company so
that upcoming cash flows can be properly determined.
 In case if there are number of subsection or partner working within main organisation
then financial reporting must be act as a main part of crucial agreement among these
department which makes easy for the stakeholder and investor to have enough
knowledge about their money.
 In respective company, the concept of financial reporting is significant for its entire
operation and support to satisfy the actual need of common public thus it meet the
revealing requirement.
2. Conceptual, regulatory framework, key principle and qualitative characteristics.
Conceptual and Regulatory frameworks:
The entire concept of financial-reporting is related with revelation of financial reports
that involves valuable financial statements that ease the decision making for future improvement.
There are number of stakeholder those are deeply involved with annual financial position and
status of company such as investor, financial institutions, creditor and general public those wants
to be part of business sharing (Breuer, Hombach and Müller, 2017). Regulatory frameworks
benefit in making valuable prediction for increasing efficiency of financial standards and
principles which provide further support in attaining the financial control. In respective company
there are some meaningful procedures and principles that followed under IFRS these are as
follows:
 These reports helps to give valuable ideas that support to ascertain the actual requirement
of total amount that is needed to run the operations in profitable manner.
 It benefits in creating and managing the already implemented with aid of the accounting
standard.
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 This also support in developing impressive business position through increasing growth
and make more efforts to grab opportunities.
Qualitative characteristics of financial reporting.
It is observed that financial reporting must have fundamental and enhancing qualitative
characteristics which support in making financial information more faithful and reliable. Some of
these are discussed below:
 Relevance: This support to make a valid difference within the decision make by user and
it s relevant when it contain confirmatory and predictive value (Flower, 2016).
 Faithful representation: It is observed that once report is completed, free from any error
then it is faithfully represented to various stakeholder.
 Timeliness: It is necessary for company to provide relevant reports at accurate time at
quarter or yearly basis as per the agreement so that user can make decision.
 Understandability: It is crucial for the management to make information clear, classified
and concisely so that user can easily understand the reports.
3. Main stakeholder and benefit to financial information.
Stakeholder in business terms is any individual, cartels, government, customers,
investors, creditors, or the society at large who directly or indirectly gets affected by the actions
of the organisation. All stakeholders have different interest as per their interest groups. They are
internal & external to an entity. KPMG too has various interest groups which form a consortium
of stakeholders for it.
There are two kinds of stakeholders in a business unit :
Internal stakeholders
These are internal members of an organisation who gets directly affected by any outcome
of the business actions.
Board of directors: They are concerned about the governance of the company. They take
strategic decisions about the functioning of the entity (Gao and Jia, 2016). They are directly
affected by the corporate position of the business. In KPMG they are the first line of defence. Its
Bod's ensure employee engagement, compliances, regulatory norms, and formulation of policies.
Employees: They are concerned about their employment security, monetary benefits as
well as non monetary benefits. Employees in KPMG are engaged at various hierarchical levels
hence have different kinds of affiliations with outcomes.
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External stakeholders
They are external to an organisation and have no interest with the day to day activities of
the entity but in a way or another gets duly affected by the actions taken by the organisation.
KPMG is also composed of a wide fraternity of external stakeholders consisting majorly of
investors, government and creditors.
Investors: They invest money in the business and consist of shareholders and debt
holders. They expect good rate of return on their invested capital. Their expectations are totally
dependant on the market value of the organisation. KPMG investors are in proportionate ratio of
debt to equity (Johnston and Petacchi, 2017). KPMG has performed great till date to satisfy its
owners in the form of shareholders.
Creditors : They are the one's who provide loans, goods, services and other benefits to
the company. They expect timely return of the debt along with the interest. They wish good
financial health to the concerned client company because their stakes are totally dependant on
how much profits the said organisation is making.
Government : Government is a stakeholder in any business because it receives corporate
taxes, payroll taxes, and other taxes like GST. Every organisation is a contributory in the GDP
growth rate and reduction of unemployment which concerns any government the most.
4. Value of financial reporting to meet objective and growth.
The financial statements are very useful in meeting the objectives of the organisation.
This is why because with the use of financial reports organisations can find out about actual
financial position and accordingly make their plans and policies. As well as financial reports
interprets the business activities in an effective manner that shows that financial reports are
linked with the objectives (Lin, Wang and Pan, 2016). Such as in the KPMG company, they
prepare various kind of financial statements for the purpose of achievement of their goals and
objectives. This is so because financial accounting helps in getting the objectives of company.
Financial reporting and development of organisation-
Along with the financial reports are helpful in the development of the businesses. This is
so because financial statements reflects the actual financial position of the companies and on the
basis of organisations take further decision. Like if a company wants to expand their business
then they will evaluate the financial documents and if there is profit then they may expand. So
overall the financial reporting helps in development of the companies. Such as in the above
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respective company, they take the decision on the development of their venture on the basis of
financial reports. Eventually, in the absence of these financial reports it can be difficult to the
companies to take decision about the development. Hence the financial reports help in the
development of the organisation.
Financial reporting and growth of business-
Apart from it, the financial statements also play an important role in the context of
growth of business. This is so because if companies will prepare and present the financial
statements in front of external stakeholders. Due to this goodwill will increase as well as there
will be more investor who will show their interest to make invest. As well as company's
efficiency will also increase if they are adopting the financial accounting and presenting the
financial statements on time (Lisowsky and Minnis, 2018). Same as in the KPMG limited
company they prepare the financial statements that help them in growth.
5. Main Financial statements.
A) Profit and Loss statement
31.12.18
(£'000)
Continuing operations
Particulars Amount
Revenue from Operations (A) 585100
Cost of goods sold (391700)
Cost of providing services -
Gross profit 193400
Less: Operating expenses 80500
Less: Depreciation (W.N. 1) 26715
Less: Other Income (9600)
Operating profit 95785
Less: Bank interest 1200
Profit before exceptional items and tax 94585
Exceptional Items Nil
Profit before tax 94585
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Less: Income tax expense 9500
Profit after tax 85085
Add: Other Comprehensive income -
Total Comprehensive income 85085
Working Note:
Calculation of depreciation expenses:
Land and machinery: 150000/16 = £9375
Plant and equipment: 148000-32400 = £115600
115600*15/100 = £17340
Total depreciation = 9375+17340 = £26715
B) Statement of changes in equity for the year ended 31 December 2018
Particular
Ordinary
share capital
Revaluation
reserve
Retained
earnings Total
As per trial balance 86700 40000 45500 172200
Total Comprehensive income - 85085 85085
Preference dividend -2500 -2500
Ordinary dividend -4500 -4500
86700 40000 123585 250285
C) Statement of financial Position.
Balance Sheet as at 31.12.18
(£'000)
Particulars Amount
ASSETS:
1. Non-current assets:
(a) Property, Plant and equipment 298000
Less: Accumulated Depreciation 32400
Less: Current Year Depreciation 26715 238885
(b) Investment Property 28000
(e) Deferred tax assets(net) 10000
(f) Other non current assets -
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2. Current assets:
(a) Inventories 25200
(b) Trade receivables 78000
(c) Other current assets 10900
Total 390985
EQUITY AND LIABILITIES:
1. Equity:
(a) Ordinary share capital 86700
(b) Other equity (Note) 205585
(b) Preference share capital 26500
2. Non current liabilities:
(a) Deferred Taxation -
3. Current Liabilities:
(a) Trade payables 62700
(b) Bank OD -
(c) Provision for current tax 9500
Total 355985
6. Interpretation and communication of financial performance.
Profitability ratios
These ratios are used by an organisation to evaluate its operating performance. Basically they are
financial metrics used to calculate the ability of a company to generate revenue during a specific
period of time. Mark and Spencer analysts calculate periodic profitability ratios to present its
profitability position for its shareholders.
Gross profit ratio : Gross profit / sales * 100 GBP in Million
Particulars 2018-03 2017-03
Gross profit 4047 4088
Sales 10698 10622
Gross profit ratio % 37.82 38.48
Interpretation : Higher the GP ratio means more profitable the company is. Comparison
between the above two years Gross profit ratios it can be concluded that mark and spencer
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performed well in 2017 compared to the year 2018. It has better GP ratio in the previous year
than the current year.
Net profit margin ratio : Net profit / sales * 100 GBP in million
Particulars 2018-03 2017-03
Net profit 26 117
Sales 10698 10622
Net profit ratio % 0.24 1.10
Interpretation : Higher net profit margin ratio says that a company is more efficient in
converting sales into profits. Comparing the above years data it can be interpreted that year 2017
was more profitable compared to year 2018.
Liquidity ratios
These ratios signify the liquidity position of the company. An analysis of liquidity ratios of Mark
and Spencer is done to determine whether it has enough liquid funds to meet it short term
obligations.
Current ratio : Current assets / current liabilities GBP in million
Particulars 2018-03 2017-03
Current assets 1318 1723
Current liabilities 1826 2368
Current ratio 0.72 0.72
Interpretation : The ideal current ratio is 2:1. Current assets should be two times of
current liabilities to maintain liquid position. Here ratio for both years is 0.72 which signifies
liquidity at Mark and Spencer.
Quick ratio : Quick assets / current liabilities GBP in million
Particulars 2018-03 2017-03
Quick assets 537 964
Current liabilities 1826 2368
Quick ratio 0.29 0.4
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Interpretation : Quick ratio of 1 is considered as ideal ratio which signifies companies
assets fully liquid to realise its liabilities but the above ratio shows lower than 1 quick ratio
which means the companies quick assets are not enough to meet its current liabilities.
7. Difference among IAS and IFRS
The most authorised frameworks that gives essential rules and principle that are relevant
to financial structured for any organisation that are mainly developed by international accounting
standard and committee (IASC).
IFRS is one of the most primary used accounting standard that help in examining and
calculating the valuable outcome within organisation (Omar, Johari and Smith, 2017). These are
globally accepted which support in developing faithful situation and culture for company to
attain profit.
IAS IFRS
It is referred as the most significant type of
arrangement that provide proper guidance so
that company can perform activities easily at
international accounting council (Mio, 2016).
The main purpose of establishing IFRS is that
to make more accurate financial reporting over
a period. It might further benefit in processing
the report which can be used for both managers
and accountants.
The main concept behind developing is to
create a display of IFRS. It was developed in
1973 that was further completely used in and
2001.
IFRS can be formulated to set the essential rule
set so that accounting process can be
completed at exact time within concerning any
error in statements.
8. Benefits of International financial reporting system.
International financial reporting standards or IFRS are most beneficial to those
companies who are engaged in overseas business. They emerged as a consequence to growing
international shareholdings and bilateral trade practices. They provide a common universal
language to business affairs to support company accounts making them understandable and
differentiable with various reporting standards. IFRS bring transparency, accountability and high
quality to the financials of a firm. They also contribute to the economic development by assisting
investors in identifying opportunities and perils around the world, resulting in capital allocation.
They create a universal set of principles which is to be followed by all businesses in various parts
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of the world which paves a way for standardised reporting (Tang, Chen and Lin, 2016). IASB,
the body responsible for preparation of IFRS works with regulatory bodies of different countries
to determine the global needs of kinds of users and assimilate the information in the form of
principles.
Investors as major stakeholders will be the one's who will be mostly benefited by the
information provided by financial statements prepared on the paths of IFRS, because it will
empower them with the proper information. This will help them in comparing between the
companies to cement their investing decision with rock solid benchmark information. Specific
evaluation of IFRS benefits includes :
 Under IFRS, companies will produce standardised and articulate set of financial reports
for complying with statutory requirements which will help them in tax planning decisions
and conducting analysis of financial reporting (Leung, 2016).
 As more diverse and profound financial information will be available to the company it
can devise scientific methods to improve its operations .
 By standardising the reporting mechanism companies will be able to put all resources in a
streamlined framework to further benefit with cost reduction for auditing and reporting.
 Utilising IFRS would reduce the possibility of compliance penalties and fines which
would save the extra cost to the organisation.
 Implementing standard IFRS would reduce the cost of capital to the organisation because
it would not require external consultants, auditors, accountants once IFRS been
implemented in the processing and formulation of financial statements. Basically it will
automate the whole gamut of reporting from lowest level to the highest (Williams and
Dobelman, 2017).
9. Degree of compliance with IFRS.
According to the recent data provided by IFRS foundation , 87% of jurisdictions in
various countries require IFRS standards for domestic companies. 15 out of 20 G-20 economies
require IFRS standards as mandatory. Smaller Organisations in Germany for example still prefer
to use older practices compared to larger organisations. For the purpose of classification between
the equity outsider systems the organisations have been classified between class A and class B
depending highly on the factors like their market size, their country, their scale of operations etc.
For e.g. New Zealand is a class A country which has a colonial prejudice of British and
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