Comprehensive Analysis of Financial Reporting in the UK Context

This report provides a comprehensive analysis of financial reporting in the UK context. It begins by examining the purpose and context of financial reporting, followed by an exploration of the conceptual and regulatory frameworks, including governance aspects. The report identifies and assesses the needs of various organizational stakeholders regarding financial reports. It then analyzes the value of financial reporting for achieving organizational growth and objectives. The report also explains International Accounting Standards (IAS) and International Financial Reporting Standards (IFRS), evaluating their benefits and critically assessing financial reporting within organizations using models and theories. Furthermore, it identifies differences in financial reporting globally and evaluates factors influencing these differences, concluding with a discussion on the degree of compliance with IFRS worldwide.

FINANCIAL REPORTING

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
1. Analyzing the context and purpose of financial reporting in UK...........................................1
2. Examining conceptual and regulatory framework and governance of financial reporting
with key principles and assessing requirement and purpose.......................................................2
3. Determining stakeholders of organizations along with critical assess about need of financial
reports..........................................................................................................................................3
4. Analyzing value of financial reporting for attaining organizational growth and objectives...6
5. Explaining International Accounting Standards (IAS) and International Financial Reporting
Standards (IFRS) along with evaluation of benefits...................................................................7
6. Critical evaluation of financial reporting in organization with application of models and
theories for supporting conclusions and judgments....................................................................8
7. Identifying differences in financial reporting throughout world and evaluating factors
which influence these differences.............................................................................................10
8. Degree of compliance of International Financial Reporting Standards................................10
CONCLUSION..............................................................................................................................11
REFERENCES..............................................................................................................................12

INTRODUCTION
Financial reporting is referred as disclosure of financial outcome and related information
to external stakeholders and management on basis of company which is performing over specific
duration. The present report will discuss about context and purpose of financial reporting in UK
and then conceptual and regulatory framework along with governance. In the same series, it will
articulate key stakeholders of organization with their need for financial reporting. Furthermore, it
will analyse value of financial reporting for attaining organizational growth and objectives. This
report will state International Accounting Standards and International financial reporting
standards with its benefits. It will critically evaluate about financial reporting in organization
with application of various models and theories for supporting conclusions and judgements.
Henceforth, it will state variations in financial reporting throughout world and evaluation of
factors which influence these variations. Thus, it will reflect about degree of compliance with
IFRS throughout the world.
1. Analyzing the context and purpose of financial reporting in UK
Financial reporting has very crucial role throughout the world economies its main
purpose is to give useful and relevant information to company owners where is presence of
division among control and ownership of that particular company. Usually, it occurs in public
limited companies where share capital is sold to public via stock market or exchange system. The
potentially and diverse geographically shareholders does not engage in company's management
as they appoint directors with this behalf (Financial Reporting, 2019). The owners retain annual
statement which briefs about position and performance of organization so that it could assess
about investment performance in this reporting period. With absence of reporting system,
investors would be less inclined as contributing to capital without monitoring effectively that
how organization is operated through directors along with company's stewards who are supposed
for operating in shareholder's best interests.
The United Kingdom is an EU member stated as UK companies are listed ion EEA and
EU securities market follow IFRS and periodically issue document which briefs about use of
options of IAS regulation through EU member states. The key aim of corporate governance is for
safeguarding integrity of process of financial reporting to give reasonable assurance about
financial statements provide true and fair aspect of operations and finances of companies. The
good corporate governance protects interest of key stakeholders and corporate performance is
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enhanced and its important pillar is board of directors where they have fiduciary and legal
responsibility for purpose of managing governance risks. In nutshell, purpose of financial
reporting is to meet user legislation and expectations and ensuring about organizations to comply
with similar standards and rules and to seek investment and funding (Mao and Wu, 2019). It
helps in predicting future financial positions along with cash flow.
2. Examining conceptual and regulatory framework and governance of financial reporting with
key principles and assessing requirement and purpose
The conceptual framework of financial reporting is referred as theory of accounting
prepared through standard setting body against where practical problems could be tested
objectively. It deals with fundamental issues of financial reporting like users and objectives of
financial statements along with features which create accounting information very useful along
with basic elements of financial statements like assets, equity, liabilities, expenses and income
along with concepts for measuring and recognizing elements in financial statements. In simple
words, conceptual framework is coherent system related to interrelated objectives along with
fundamental principles and framework prescribes about nature, limits and functions of financial
statements and accounting (Dou, Wong and Xin, 2019).
Conceptual framework helps in enabling accounting standards and generally accepted
accounting practice must be developed as per agreed principles. This will avoid fire fighting
where is development of accounting standards in piecemeal aspect for responding about specific
abuses and problems. Fire fighting could lead to inconsistency among different standards among
accounting legislation and standards. There is lack of conceptual framework might mean certain
critical problems were not addressed. In this aspect, transactions are more complex and
businesses are highly sophisticated and helps in auditors for dealing with transaction as they are
not subjected to accounting standard.
With context to attain requirements of financial statement's users the organization has to
implement accounting systems which give need information. It is significant system which is
regulated for ensuring about information given to users in proper format which is useful with
context of informational requirement which is attained via framework of financial reporting on
basis of conceptual framework. The European Union has adopted regulation of IAS with
requirement of listed European companies in EU securities market which considers about
insurance and bank companies for preparing consolidated financial statements as per IFRS
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initiating with financial statements as in UK, it has requirement or permitting IFRSs for unlisted
organization and in parent company as well.
Illustration 1: Regulatory and conceptual
framework
(Source: A Conceptual and regulatory
framework, 2019)
The regulatory framework of financial reporting helps in ensuring users of financial
statements to gain minimum amount of information which helps in enabling and to make
meaning decisions on basis of interest of reporting entity. The principles based framework as on
basis of conceptual framework like IASBs framework and accounting standards are set with
context to conceptual framework. The accounting standards are set of rules which organization
must follow (Ge and et.al., 2018).
3. Determining stakeholders of organizations along with critical assess about need of financial
reports
The objective of financial statements is to give information related to financial
performance, position and alterations of enterprise which is useful to wide range of users to make
economic decisions as IASB framework. The financial statements give useful information to
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wide range of users which are classified in two categories such as internal and external users.
The primary users of accounting are known as internal users which are of three types stated
below:
Owners: Financial statements gives information to owners on basis of profitability of
overall business along with geographic segments and individual products. It helps for assessing
level of stability in business with extent to have alterations in economic factors impacted
business;s bottom line. It helps owners for taking decision about investment related to business
and application of financial resources for purpose of promising business ventures (Amiram and
et.al., 2018).
Managers: Accounting information is required for planning, monitoring and to make
business decisions. There is requirement of allocating human, financial and capital resources
towards competing need of business via process of budgeting by management. The budgets are
prepared and monitored with need of reliable accounting data on basis of multiple activities,
products, processes, segments and business department.
Employees: They review about accounting information in annual report for getting
appropriate understanding of their organization's business. The potential employees are keen to
get information about financial health of business to aspire about joining in the future.
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Illustration 2: Users of accounting information
(Source: Users of Accounting Information, 2017)
External users of accounting
The secondary users of accounting are known as external users which are stated below:
Investors: They primarily rely on financial statements for investment perspective as it
helps in assessing profitability, risk and valuation of investment.
Lenders: The accounting information is used for assessing credit worthiness of borrowers
such as ability for repaying any loan. Usually, they offer loans along with facilities of credits on
basis of assessing financial health of borrowers.
Suppliers: Similarly to lenders, suppliers requires accounting information for purpose of
assessing credit worthiness of customers prior to offering services and goods on credit (Chen,
Zhang and Zhou, 2018).
Customers: Not every customer is in need of financial information of its suppliers but
industrial consumers require accounting information related to suppliers for assessing that
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required resources are necessary with context of steady supply of services and goods in the
future.
Auditors: External auditors examines the financial statement along with underlying
accounting record of business with context to audit opinion. In the similar aspect, investors along
with other stakeholders highly rely on independent opinion related to these auditors on basis of
accuracy of financial statements.
4. Analyzing value of financial reporting for attaining organizational growth and objectives
Financial reporting has high involvement of disclosure of financial information to its
multiple stakeholders on basis of financial position and performance of organization over
specified duration. As per International accounting standards board, it gives information relate to
financial performance, position and alterations in business's financial position which is useful for
broad range of users with perspective of making economic decisions (Wang, Cao and Ye, 2018).
It helps and business for complying with different statues and regulatory requirements as they are
need of filing financial statements to government agencies. With context to listed organizations,
there is requirement of filing stock exchanges and published on quarterly and annual outcomes.
In the similar aspect, this facilitates statutory audit where these statutory auditors were required
for auditing company's financial statements with context to express opinion.
The backbone of financial planning, bench marking, analysis and decision making are
formed through financial reports. These are applicable with above purposes through multiple
stakeholders and capital could be raised both overseas and domestic as well. While considering
financial, public in large could analyze the company's performance along with management as
well. The most important is with objective of biding, government supplies, labor contracts etc.
business are in need or furnishing financial statements and reports.
Simultaneously, published accounting data in financial reports might have economic
effects via impact on manager's behavior of corporate enterprises. The consideration of
accounting numbers on compensation of management schemes of fear or market along with
misinterpretation of accounting reports would directly influence of operating and financing
decisions of managers. The accounting procedures are preferred through shareholders which
mirror the micro economic events in detailed aspect. On the other hand, they must be fully
concerned that managers might be able for reporting and manipulating data to raise their
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compensation. The information contributed towards better decision making related to investment
and for promoting understanding along with creating environment for cooperating perspective.
Financial reporting produces confidence along with favorable impact on cost of capital of
organization. This helps in retaining credibility and provide society with reliable and relevant
information with economic transactions and events and with absence of attempt for move
economy in single direction instead of another (Liu and et.al., 2018).
5. Explaining International Accounting Standards (IAS) and International Financial Reporting
Standards (IFRS) along with evaluation of benefits
International Accounting standards were issued through antecedent International
Accounting Standards Council and amended and endorsed through International Accounting
Standard Board. This set of accounting standards developed and supervised through UK-based
International Accounting Standards Board where it has no authority with need of countries for
complying with standards along with jurisdictions through world (Satsuk and et.al., 2018). The
globally comparable accounting standards promotes accountability, transparency along with
efficiency in financial markets throughout the world. It helps in enabling investors other than
other participants of market to make informed about economic decisions related to opportunities
of investment along with risk. Universal standards significantly decreases reporting and
regulatory cost, especially with context to companies through international operations with
subsidiaries in various countries.
The different regions and countries throughout world boast with various norms and
cultures as they manifest themselves with prevailing business culture in country. The major
benefit of these standards is consideration of input through professionals along with legal
authorities throughout the world. This could create set of ethical guidelines which does not favor
single culture where foreign company adheres its own domestic ethical values.
International financial accounting standards are set of international accounting standards
which states about specific type of transactions along with other events must be reported in
financial statements. These standards are issued through International Accounting standards
board and specify exactly that accountants should maintain and report its accounts. IFRS was
established for having common accounting language so accounts and business could understand
through country to country and company to company. It allows business for great comparability
with application of similar standards for preparing financial statements could be very accurate
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for comparison perspective. It is on basis of principles instead of philosophy of rules based
(Bassemir and Novotny‐Farkas, 2018). The principles based philosophy signifies that objective
of every standard is to reach reasonable valuation. In the similar aspect, it provides freedom for
adapting IFRS at specific situation which leads to useful statements and easily read. This
standard is highly beneficial to small and new investors by making reporting standards with
better quality and simpler and putting investors at same position with context to professional
investors as they are not feasible through previous standards. It helps in entailing decreased risk
for investors with context to trade and professionals would be not able for undertaking advantage
due to nature of financial statements.
6. Critical evaluation of financial reporting in organization with application of models and
theories for supporting conclusions and judgments
The basic theories of accounting are held through conceptual framework of accounting as
in this context, there are basic accounting theories which directly fits in this conceptual
framework which are stated below: Equity theory: It is also referred as Residuals equity theory with objective of striking
balance among input and output of employee in a workplace. In case any employee is
capable to extract right balance then it would lead for highly productive relationship
within management. In this aspect, residual equity theory is concept which is in between
entity and proprietary theory. In this aspect, equation is specified as Assets minus specific
equities is equals to residual equity. The specific equities consider claims of creditors
along with equities of preferred shareholders. On the contrary, in various cases with large
losses along with proceedings in bankruptcy along with equity of common shareholders
might disappear along with preferred shareholders or bondholders might become residual
equity holders.
 Legitimacy theory: Legitimacy is referred as generalized perception and assumption
which action of any entity is desirable, appropriate and proper within socially constructed
system of values, norms and beliefs. This theory posits organization which continually
seek for ensuring about operations within norms and bounds with their respective
societies. With adoption of legitimacy theory, organization would voluntarily report on
its activities when management perceived amount activities expected through
communities where it operates. Generally, this theory is used for explaining disclosure of
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social and environmental reports with accountability reporting framework for
communicating it with stakeholders along with clarifying importance of their
relationships.
Illustration 3: Balance sheet of Sainsbury
(Source: Annual report of Sainsbury, 2018)
On basis of Sainsbury, it gives better information to its equity shareholders for taking
decision as in this organization with indefinite continuity and its current value of equity share is
highly dependent on expectations of future dividends. The equity of common shareholders is
reflected in balance sheet is presented separately through equities if preferred shareholders along
with other specific equity holders (Palea, 2018).
Illustration 4
(Source: Annual report of Sainsbury, 2018)
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In the similar aspect, Sainsbury has also disclosed its social and environmental issues in
corporate responsibility and sustainability committee report where they have reduced emissions,
water use along with waste across value chain and many more.
7. Identifying differences in financial reporting throughout world and evaluating factors which
influence these differences
The factors which has evaluated theses differences are rule and principles, inventory
methods and inventory reversal. International financial reporting standards is accounting method
which is used in various countries throughout the world as Generally Accepted Accounting
Principles implemented in United States. The first factor is methodology used for assessing
process of accounting where GAAP lays special emphasis on research and in based on rules.
However, IFRS observes overall patterns and is fully based on principle. On basis of GAAP
accounting, there are exceptions or interpretation as every transaction should abide through
specific set of rules and IFRS says about potential for various interpretations of similar tax
related situations (Liu and et.al., 2018).
With context to GAAP, organization is allowed with application of LIFO and FIFO
method for estimate of inventory. Conversely, under IFRS, the LIFO method is not allowed for
inventory. In addition to this, with different methods of tracking inventory the accounting
standards differ as GAAP specifies that there is increment in market value of asset then amount
of write down could not be reversed. In similar situation in IFRS, amount of write down could be
reversed.
8. Degree of compliance of International Financial Reporting Standards
IFRS helps different country to set out accounting system because of every country has
different culture for instance – in the south pacific reign, headquarter of company keeps close
their eyes on organization branches, therefore they imply homogeneous accounting practice as
well. Countries who have low education level are not able to meet accounting standard set out by
IFRS , so they required accounting training for novice.
Apart from these national culture also impact the implementation of international
standard. Countries of south pacific inland try to adopt accounting system of developed
countries, even when these standards not suit their business (Ge and et.al., 2018). Developing
and developed country has different accounting judgments but their accounting system has
similarity with each other. Australia and Fiji has same standards for financial report even after
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different national culture. Australia is a low uncertainty avoidance society and Fiji is just
opposite to it. It can be seen that common law countries prefer to implement the international
standard to ensure fairness in accounting system, where non common law countries prefer to
imply prudent options. For instance revaluation model applied by South Africa Australia. On the
other hand cost model is chose by countries like Germany and Brazil (Wang, Cao and Ye,
2018). Australia Make its own Australian Accounting Standards based upon international
accounting standard . Same Financial Reporting Standards (FRSs) are made up upon these set of
principle. It is mandatory for European listed firm to use IFRS in their organization because it
helps in achieve the global comparability.
CONCLUSION
From the above report it could be concluded that financial reporting plays very important
role for attaining success and it offers information on basis of financial performance and position
along with changes in financial position of enterprise which is significant for broad range of
users to take economic decisions. In the similar aspect, it had shown that almost every
stakeholders of organisation has need of financial statements for obtaining financial performance
and position of business. Furthermore, it had shown that Sainsbury has effectively implied with
equity and legitimacy theory of financial reporting for gaining competitive edge and to follow
appropriate rules and principles.
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REFERENCES
Books and Journals
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reporting quality in private firms. Journal of Business Finance & Accounting. 45(7-8).
pp.759-796.
Chen, T. Y., Zhang, G. and Zhou, Y., 2018. Enforceability of non-compete covenants,
discretionary investments, and financial reporting practices: Evidence from a natural
experiment. Journal of Accounting and Economics. 65(1). pp.41-60.
Dou, Y., Wong, M. F. and Xin, B., 2019. The effect of financial reporting quality on corporate
investment efficiency: Evidence from the adoption of SFAS No. 123R. Management
Science.
Ge, W. and et.al., 2018. When does internal control over financial reporting curb resource
extraction? Evidence from China. Evidence from China (March 30, 2018).
Liu, R. and et.al., 2018. Audited financial reporting and voluntary disclosure: International
evidence on management earnings forecasts. International Journal of Auditing. 22(2).
pp.249-267.
Mao, C. W. and Wu, W. C., 2019. Does the government-mandated adoption of international
financial reporting standards reduce income tax revenue?. International Tax and Public
Finance, pp.1-22.
Palea, V., 2018, September. Financial reporting for sustainable development: Critical insights
into IFRS implementation in the European Union. In Accounting forum (Vol. 42, No. 3,
pp. 248-260). Elsevier.
Satsuk, T. P. and et.al., 2018. International standards of the public sector financial reporting in
ensuring economic security. Revista Publicando. 5(18). pp.330-340.
Wang, X., Cao, F. and Ye, K., 2018. Mandatory corporate social responsibility (CSR) reporting
and financial reporting quality: evidence from a quasi-natural experiment. Journal of
Business Ethics. 152(1). pp.253-274.
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