International Financial Reporting: Purpose, Framework, and Analysis

This report provides a comprehensive overview of international financial reporting (IFRS). It begins by outlining the purpose of financial reporting, emphasizing its importance for stakeholders and companies in providing clear financial information for decision-making. The report then delves into the regulatory framework established by the IASB, discussing the characteristics of financial information, such as relevance, materiality, understandability, reliability, and comparability. Various types of stakeholders, including managers, investors, and creditors, are identified and their reliance on financial statements is explained. The report further explores the benefits of financial reporting to the company, the production and interpretation of financial statements, and the differentiation between IAS and IFRS bodies. It also discusses the degrees of compliance with IFRS by organizations and concludes with a summary of the key findings. The report highlights how financial reports are used by investors, lenders, and auditors for decision-making and ensuring financial transparency.

INTERNATIONAL
FINANCIAL REPORTING

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
TASK 1............................................................................................................................................1
1. Purpose of financial reporting............................................................................................1
2. Regulatory framework of financial reporting and characteristics of financial information3
3. Outlining various types of stakeholders in the organisation..............................................5
4. Discussing value of financial reporting to the company....................................................5
5. Producing various financial statements of the organisation...............................................6
6. Interpretation of financial ratios.........................................................................................8
7. Differentiating IAS and IFRS bodies.................................................................................9
8. Outline the benefits of IFRS body......................................................................................9
9. Degrees of compliance of IFRS by the organisations......................................................10
CONCLUSION..............................................................................................................................11
REFERNCES.................................................................................................................................11

INTRODUCTION
International financial reporting is quite helpful for stakeholders as well as company as
proper information is available to them regarding financial viability of the business. The present
report deals with importance of financial reporting to business as well as to users of financial
information. This provides clarity to stakeholders to take effective decisions with much ease. It is
useful for investors, lenders that provide funds to organisation for functioning effectively. As
such, financial information as provided financial reports are useful for them.
TASK 1
1. Purpose of financial reporting
Financial reporting is required to get prepare reports by the organisation. It is required so
that each and every transaction is being recorded perfectly in the books of accounts with much
ease by the company. This is not an simple task as it requires effective accounting professionals
so that transaction is properly recorded in the books of accounts and as such, financial reports
may be prepared and provided to users of financial information. Financial reporting is used for
many purpose and as such it is required that accountants should prepare such reports with full
effectiveness so that proper results about the financial health of the company may be reflected to
users of financial information so that they may take better and effective decisions by relying in
such information (Biddle and et.al, 2016 ).
Financial reports conveys about the business whether it is making profit or loss in the
current period and as such, clarity related to financial health of the organisation may be imparted
to all users in the best possible and productive way. This is used for the purpose for imparting
financial performance of the company to various stakeholders be it internal or external. The
investors uses financial reports so that funds are perfectly utilised by the firm. They keep close
watch towards company as whether it is using funds effectively or not. In addition to this,
company should perform well so that it may generate large profits with much ease.
In current scenario, scandals are prevailing not locally but internationally as well. As
such, to remove such defects, it is required to prepare financial reports as it provides clarity to
shareholders and other stakeholders as well (Rahman, 2018). Furthermore, adequate records are
maintained regarding day to day activities of the business. As such, financial reports are quite
1

useful so that scandals may be completely vanished and as a result, organisation is able to make
proper records which are then reflected or listed in financial reports. Liabilities and assets are
also listed in the separate in the financial reports. Moreover, it also reflects how efficiently
business is using capital and how it is producing profits by using such, capital provided by the
shareholders (Nobes, 2014).
In addition to this, financial reports also used for the purpose for providing information to
stakeholders whether may lead in future or not. It provides clarity whether capital given by the
stakeholders’ are adequate to carry out the future activities or not. Lenders and investors also
uses financial reports to come at conclusion whether funds to be provided to company or not and
whether it will repay loans within stipulated time or not. This report provide good summary of
all financial statements such as balance sheet, cash flow statement, income statement, changes in
stockholder’s' equity in quite effective manner to all users to take better and effective decisions
with much ease. Moreover, it also has notes to accounts or workings which supports financial
statements to provide clarity to information seekers in the best possible way. Annual reports are
described in it as well in the most productive way.
Statutory auditors are also benefited by such information as it provided them clarity
whether financial reports give true and fair information or not. As a result, this is used not only
for stakeholders but also by auditors so that true financial information may be exhibit by
financial reports. Thus, all the parties which requires much needed information of the company
are relaxed by seeking financial reports as it represents true and fair information about the
financial health and position of the company in effective way. The information related to
economic resources utilised in the organisation are also listed in the reports which is essential as
it provides information related to money being spent of the shareholders.
The financial reports exhibit each and every aspect of the company which is quite
effectively been utilised by the stakeholders to take vibrant and better decisions for them. In
addition to this, auditors are supported by such reports and it eases for them to check accuracy o
the financial statements in the easiest way (Lang and Stice-Lawrence, 2015). The authorities of
tax department is also benefited by financial reports as it highlights whether firm is paying tax
wisely or not. As such, financial reports are being utilised by every authority to check and test
the accuracy of the financial statements so prepared by the firm. The financial reports are being
utilised for numerous stakeholders and by taxation authorities as well.
2

Financial reporting is used by the shareholders and as such, if the performances of the
company is better, then more and more of shareholders’ subscribe shares which is quite
beneficial for the company as it has abundant capital to function effectively in the best possible
way.
2. Regulatory framework of financial reporting and characteristics of financial information
The legal framework is used by the professional bodies so that firm may prepare adequate
reports which is utilised by users of financial information to make certain specific and better
decisions (Kim, Shi and Zhou, 2014). IASB (International Accounting Standards Board) has
given guidelines and framework within which financial reports are to be prepared by the
company so that true and fair information may be imparted to various stakeholders with much
ease. The guidelines are required to be followed by accountants so that proper financial
information may be provided to the shareholders as well. In respect to this, financial guidelines
are numerous which is provided by the professional body.
The principles provided by IASB are related to economic resources and claims must be
provided to users of such information that automatically reflects liquidity and profitability
position of the company to its shareholders to figure out financial health of the organisation in
the best possible way. The shareholders are able to assess and determine strengths and
weaknesses of the organisation in the easiest way. Accrual accounting must be described or
listed in the financial reports as per the guidelines of the professional body. This is essential as it
provides information related to cash flow generated in a particular period.
The body also requires that changes of economic resources may be reflected in statement
of income or profit and loss statement. Whereas, cash flows related information must be
furnished in the cash flow statement. This provides separate sections of certain adjustments
which is being separately shown in the income statement and provides meaningful information to
various stakeholders in the best possible way so that they may assess liquidity and efficiency of
the firm quite effectively (Chen and Li, 2015).
Moreover, information furnished in the financial reports must be by listing elements of
financial statements. In simple words, element so listed in the financial statements must be
directly linked to assets, liabilities and equity as well. In addition to this, income statement
should reflect revenues and expenditures so incurred in the current period as well. These various
elements are quite useful for stakeholders to easily ascertain financial information of the firm in
3

the best possible way. Furthermore, legal framework provided by professional bodies must be
fulfilled by the company so that accurate financial reports are prepared and provided to the
stakeholders for making decisions with much ease.
The attributes of financial information are listed below :
1. Relevance –
The underlying concept states that only that information may be recorded which might
affect shareholders perspective. In simple words, relevance concept makes clear that only that
financial information must be recorded which is relevant to users of accounting information to
take better and effective decisions (Ali, Akbar and Ormrod, 2016). Only that financial
information must be recorded which ultimately helps various stakeholders of the company.
2. Materiality -
This principle of financial information states that material information should be recorded
in the accounting books of the company. It simply means that immaterial information must be
ignored while recording information in the books of accounts. Accountants are abide by
professional bodies so that proper and meaningful information is recorded which might affect
decisions of stakeholders.
3. Understandability –
The understandability principle states that financial information presented to users of
accounting information must be easily understandable by them so that they may be able to take
better and effective decisions by relying on such financial information. Thus, to completely
assess organisation’s viability and efficiency position, it is required that information must be
presented in the easiest way which is understandable by various stakeholders.
4. Reliability –
Reliable information must be furnished which is helpful for various stakeholders’ to take
better and effective decisions with much ease. Reliable information means that company should
present financial information with accuracy and with no errors and mistakes related to omissions
of some records which hampers entire financial information (Dudin and et.al, 2015). As such,
this information is quite helpful to users of financial information to take better decisions.
5. Comparability –
The comparability principle states that information may be compared with one another
firm so that liquidity and profitability aspect of the companies may be attained quite easily. This
4

is used by users of accounting information to easily compare inter firm and intra firm
performances. Moreover, interpretations are also easily done by users of accounting information
and as such, it is required that financial information must be comparable. Thus, financial
reporting is required to be legally prepared by the company so that financial information may be
easily provided to users of it and they may take economic decisions with much ease
(Ahmetshina, Vagizova and Kaspina, 2018).
3. Outlining various types of stakeholders in the organisation
There are several types of stakeholders in the company. They are described below :
1. Managers –
Managers are essential stakeholders of the company as they constantly looks at the
operational activities of the organisation so that it may perform well. They also require that
accurate accounting records are maintained by accounting professionals so that true position of
the company may be furnished quite effectively. The financial reports are then provided to users
to take effective decisions.
2. Investors –
Without capital in the company, it may not run smoothly. As such, investors invest their
savings or money in the company in return of getting some Return on Investment. Profitability
aspect is judged by them in the easiest way so that they may assess the efficiency of the firm
whether it will provide greater returns or not. As such, investors looks financial statements to
take decisions quite effectually.
3. Creditors –
The creditors are also important stakeholders of the company. They provide debt to
company for accomplishing operational activities and in return, they charge interest amount
along with the principal amount (O'Connell, AbuGhazaleh and Kintou, 2018). The creditors
ascertain financial statements to assess liquidity position of the company whether it will repay
loans on time or not. Thus, they reach at conclusion whether organisation has debt paying
capacity or not.
4. Discussing value of financial reporting to the company
The company is highly benefited by financial reporting as it helps organisation to pay
taxes and liabilities in the easiest way quite effectively. Moreover, it is essential for the company
to generate accurate financial reports to users of financial information so that better and effective
5

decisions are taken by them with much ease. The government also requires financial reports as it
assess financial position of the company quite easily. Moreover, government uses reports so that
taxes are being wisely paid by company. Thus, financial reporting creates value fot the company
as it reflects true and fair view of it in the best possible way. The financial reports creates value
for the organisation by forecasting future aspect as well. Thus, if organisation is planning to buy
stock, then looking at financial reports, plan may be made accordingly (Binnekade and et.al,
2018).
Furthermore, financial reports are used by the management to take better internal
decisions so that company may perform well with higher profitability. The strengths and
weaknesses are also highlighted by financial reports which are used by the management so that
weaknesses may be eradicated with much ease. This helps company to flourish in the market. By
going through financial reports, capital is analysed and company is able to assess how much
money is left after paying salaries to workers and other expenses.
5. Producing various financial statements of the organisation
Income statement of ROB Plc as on 31st December 2016
Particulars
Amount
(000)
Revenue 285100
less: Cost of sales 191700
less: Depreciation on fixed assets 4225 195925
Gross profit 89175
Operating income from rental property 1600
less: Operating Expenditures 39500
Interest of bank 1030
Valuation of investment 3300
Depreciation over assets 4225
Total operating expenditures 48055
Total operating income 42720
Less: Tax payable 12000
Net profit 30720
Working notes
Depreciation charge over assets Amount
Dep. On investment and property 5250
Dep. On equipments and plant 3200
6

Net depreciable value on assets 8450
less: Expenditures on sales 4225
Net operating expenditures 4225
Balance sheet of ROB Plc as on 31st December 2016
Particulars
Amount
(000)
Assets
Current Assets
Trade receivables 18000
inventories 14000
Total Current Assets 32000
Revaluation of plant and equipments 22400
Revaluation of Land and property 78750
Investments 18000
Total Assets 151150
Liabilities
Provision for taxation 12000
Bank overdraft (OD) 1200
Trade payables 15700
Total current liabilities 28900
Deferred tax liabilities 6900
Reserves on revaluation 28000
Non- current liabilities 34900
Equity capital
Ordinary shares 26700
Preference shares 13300
Retained earnings 47350
Total stockholder's equity 87350
Total liabilities and stockholder's equity 151150
Statement of changes in equity share capital
Retained
earnings
beginning balance 23300
Net profit 30720
less: Dividends paid to shareholders 6670
Issue of equity shares 40000
7

Total changes in the equity 40000 47350
Interpretation:
It can be interpreted that above calculations shows that ROB plc has adequate amount of
capital in the business. As it is reflected by changes in equity statement is 87350. Whereas,
current assets and liabilities are 32000, 28900 respectively. The net income is 30720, which
implies that overall financial position of the company is good.
6. Interpretation of financial ratios
Marks & Spencer (M & S) Plc
Particulars Formula 2016 2015
Profitability ratios
Net profit margin Net profit / net sales * 100 3.85 % 4.72 %
Liquidity ratio
Current ratio Current assets / Current
Liabilities 0.69:1 0.69:1
Efficiency Ratios
Asset turnover ratio Net sales / Average total
assets 1.27 % 1.28 %
Capital structure
ratios
Gearing ratio Company debt /
Shareholders' Equity 0.52 % 0.55 %
From the calculation of financial ratios, it may be interpreted that financial position of M
& S is overall good in the market. The company is engaged in retail business and is listed on
FTSE index in UK. The financial ratios such as profitability ratio shows that company has good
net profit margin, which is reflected by ratios. However, net profit is decreased in 2016 year
which implies that company need to control on expenses so that it may earn revenue (Ombati and
Shukla, 2018).
Current ratio shows that company has not good liquidity position as it is just 0.69 : 1
which is much lower than ideal ratio of 2 : 1. This implies that it will be unable to pay off
liabilities to the creditors. M & S should improve upon liquidity so that it can make timely
payments. Asset turnover ratio is good in both the years, which shows that company is
8

effectively using assets to generate sales and as such, profits are garnered by it. Coming to
gearing ratio which is 0.52 and 0.55 in both the years which is not bad as lower gearing ratio is
generally preferable. It shows that firm is using debt in adequate amount.
7. Differentiating IAS and IFRS bodies
IAS IFRS
1. IAS stands for International Accounting
Standards. This scope of this body is not much
wider than IFRS. This is because when any
contradictions is observed than IAS principles
are usually dropped which are then forwarded
to IFRS.
2. IASC (International Accounting Standards
Committee) has issued IAS principles, which
regulates entire accounting system. IASC is
replaced by IASB (International Accounting
Standards Board).
3. The guidelines provided by the body helps
accountants to carry out tasks in effective
manner. This helps them to follow such
guidelines so that accuracy may be achieved.
4. The main of IAS is to work for the internal
control of the organisation so that accurate and
proper accounting records are maintained
effectively by the firm.
1. IFRS stands for International Financial
Reporting Standards. In event of
contradictions, this body is approached to solve
problems and as such, scope of IFRS is much
wider than IAS.
2. On the other hand, principles of IFRS is
issued by IASB as well.
3. The guidelines provided by it completely
differs from IAS. The financial reporting
standards are provided which facilitates legal
framework, which are to be followed by
accountants (Lin, Wu and Lo, 2018).
4. IFRS work for providing legal framework so
that organisation may follow such rules and
laws related to accounting. This is usually done
so that proper accounting records are
maintained by the organisation.
8. Outline the benefits of IFRS body
The benefits of IFRS body is listed below :
1. IFRS usually provide legal framework, which helps company to prepare financial reports with
much ease. Moreover, companies universally accept IFRS guidelines. Various stakeholders are
9

benefited by such guidelines and as such they are able to take effective decisions in the best
possible way.
2. The benefits are also to creditors and investors as they are able to take better decisions with
much ease (El Guindy and Basuony, 2018). IFRS provides legal framework and as such,
accurate and true financial information is imparted to investors and creditors and they rely on
such financial statements to take reliable decisions whether to provide funds to company or not.
3. Shareholders are also benefited by IRFS as dividend policies and other related information are
to be provided to them and as a result, they may assess the financial health of firm. This helps
company also as shareholders subscribe more shares and new subscribers evolve as well. As a
result, capital is being garnered by the company, which helps to perform quite well in the future.
4. Qualitative financial information is being provided to shareholders and other stakeholders,
which is used by them to take effective decisions with much ease. IFRS provides benefits to
stakeholders as company provides accurate information about the financial health. The
qualitative information is provided with elements such as comparability, understandability and
reliability.
5. Various rules are provided by IFRS which provides transparency and clarity to users of
accounting information and as a result, they are able to take enhanced decision in the best
possible way. Thus, stakeholders are provided by company and as such, proper accounting
records are maintained effectively.
9. Degrees of compliance of IFRS by the organisations
The above examples of companies such as M & S and other companies, it may be
conveyed that they are using effective framework which is provided by IFRS. As such, financial
reports are prepared in stake of guidelines provided by the professional body (Manes Rossi,
Brusca and Aversano, 2018). This is essential as true and fair view of financial position of
company is reflected which is quite useful for stakeholders to take enhanced decisions. In
accordance of IAS 38, it states that customers’ lists, published titles are restricted by such
professional body. As a result, firm has to abide by such rule and cannot do anything
contradictory to such rule.
Moreover, IAS 29 A also states that financial statements are required to be prepared by
complying legal framework so that reliable information may be provided to users of financial
information with much ease. As such, business is highly affected by such rules and regulations
10