University of Northampton: FINM008 Corporate Reporting Essay

This essay provides a comprehensive analysis of corporate reporting, addressing key aspects of the regulatory framework and its comparison with Generally Accepted Accounting Principles (GAAP). It delves into the components of the regulatory framework, including company law, conceptual frameworks, and international accounting standards like IFRS. The essay critically discusses the differences between the regulatory framework and GAAP, highlighting the impact of the Companies Act 2006 and the adoption of IFRS by listed entities in the UK. It also examines the need for regulation in financial reporting, emphasizing the importance of meeting user needs, ensuring comparability, and enhancing investor confidence. Furthermore, the essay explores the rationale and objectives of preparing consolidated financial statements, detailing the process of consolidation and the importance of these statements to shareholders. It discusses the benefits of consolidated financial statements, such as providing a complete picture of the entity and simplifying financial analysis. The essay also addresses the treatment of non-controlling interests and intra-group transactions, offering a detailed understanding of group financial reporting.

Running head: FINM008 CORPORATE REPORTING
FINM008 Corporate reporting
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Answer 1
Regulatory framework in accounting includes UK financial statements regulation. It is
considered as the set of regulations and rules for preparation of the financial statements.
Financial statements prepared as per these regulatory frameworks make it easy to compare. UK
has its own national authority for financial reporting named as Accounting Standards Board that
publishes financial reporting standards in UK (Zhang and Andrew 2014). Main legislation that
has its impact on the businesses of UK is Companies Act 2006. However, some other legislation
like EU, UK and US are also there that has impact on the accountability of UK. Number of UK
regulatory systems those are industry specific are also there to have its impact on the Main
components of this include company law, conceptual framework and international accounting
standards. Conceptual framework delivers set of the accounting principles to prepare and present
the financial statements that was introduced by IASB. It helps in generating accounting
information that satisfies the user’s needs and assists in taking decisions. It further helps in
identifying good practice at the time of preparing the accounting reports (Wagenhofer 2016).
Conceptual framework in addition points out importance of the term materiality while discussing
the qualitative characteristics. Qualitative characteristics help in making financial information
useful to the users. 2 major characteristics are faithful representation and relevance. The concept
of materiality is focused on determining importance of whether certain item is material or not.
Relevant information shall be material to have its impact on the decisions making, predicting the
future events and confirming past events. On the other hand, information represented faithfully is
useful to the users while they are free from error and misstatements (Jaggi et al. 2016). In
addition, as enhancing qualitative characteristics the accounts shall disclose the accounting
policies and must be prepared consistently that will enable the users to identify the similarities as

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well as differences and assists in understanding the same. Further, the information those are
recent as well as most up-to-date are only useful while making any decision. Different items are
considered in the financial statements and the major elements are assets, liabilities, equity,
revenues and expenses. Assets are the potential economic benefits for future period and the
entity has the right to use the same. On the other hand, liability is the potential outflow of
resources on account of past events (Leuz and Wysocki 2016).
Accounting standards had been introduced for providing the framework to generate the
accounts in fair manner. Standards of UK include IFRS (international financial reporting
standards). It is aimed for the consistency while producing reports for the entities. IASs and
IFRSs are produced for harmonizing reports of the bigger entities in European Union. True and
fair view is the legal requirements and the entities are obliged to follow procedures those are
outlined by the accounting standards for assuring that financial statements are of high quality and
are useful. Economic well-being of the entity depends on the sound infrastructure of financial
reporting. Single set of the standards enhances the comparability of financial information,
minimizes the compliance costs and enhances the audit consistency (Jessen et al. 2014).
Directors of the limited entities those are regulated by Companies Act are responsible for
using the accounting standards while preparing the accounts. Material departures shall be
explained in detail manner and reasons thereof shall be provided. Implementation of the
Companies Act 2006 has been completed in 2009 and it addressed the on-going issues those
were raised (Lueg, Punda and Burkert 2014).
Since the year 2005, listed entities in UK are required preparing the consolidated
financial statements in compliance with the IFRSs. However, all the other entities have the

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choice to choose among IFRSs and UK GAAP. In 2015, old financial standards as well as
guidance from financial reporting council have been replaced by the new UK GAAP. Accounts
for the period starting from 1st January 2015 shall be prepared applying the new standards and
existing FRSs, UITF abstracts, statements of principles for the financial reporting. Major
difference between GAAP and regulatory framework (RF) is that the RF is the principle of
standards based approach and is used on international basis while the GAAP is rule based
approach (Moscariello, Skerratt and Pizzo 2014). IASB is not responsible for setting up the
GAAP and it does not have legal authority over GAAP. It can be considered as an influential
group of various people those are involved in making up and debating the accounting rules.
While IASB sets the brand new accounting standards, various countries were tend to adopt the
same or at least interpret the same and fit the same into accounting standards of individual
country. The said standards are set by each of the accounting standard board of specific country
which in turn will influence to establish the GAAP of particular country. Although majority of
world are using IFRS standards, it is not the part of financial world. Some of the major
differences those are in existence among 2 sets of the accounting standards (Brown et al. 2017).
These are – (i) inventories – as per RF, LIFO method of inventory accounting is allowed whereas
as per GAAP, LIFO approach is allowed which is prohibited under RF (ii) development costs –
as per GAAP, development costs are accounted for as expenses whereas under IFRS these costs
are capitalized and in turn amortised over the multiple periods (iii) write-downs – under GAAP it
is specified that the amount of write-downs for inventories or for fixed assets cannot be reversed
if market value of the assets increases subsequently. On the contrary, RF allows reversal of
write-downs (Albu, Albu and Alexander 2014).

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There is a need for the regulation within the financial reporting to assure that (i) needs of
financial statements users shall meet at least the basic minimum information (ii) all information
delivered under relevant economic scope is comparable as well as consistent. Considering the
growth of multinational entities as well as global investments this scope is rising in the
international aspect (iii) for enhancing user’s confidence in the process of financial reporting (iv)
regulating the behaviour of the entities as well as directors towards the investors. Standards of
financial reporting on its own are snot adequate in achieving these objectives and hence, in
addition to these there shall be market based as well as legal regulation (Chen, Ding and Xu
2014). Different other elements to regulatory environment of accounting are there those include
– national standards for financial reporting, market regulations and national law and security
exchange rules. In addition, there are number of major users group for financial reporting
including groups of equity investors, groups of employees, government, groups of analyst
advisor, shareholders and public. These different groups of stakeholders required to be able to
interpret as well as using the financial information in systematic manner to take necessary
financial decisions. If these wide ranges of users generate the financial reports the same will be
prepared in the diverse manner for making necessary decisions related to finance. In such
scenario different groups of users will interpret the financial reports in different manner. Hence,
there is need for the regulation in the financial reporting (Coleman et al. 2014).

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Answer 2
Consolidated financial statements are merged financial statements of any entity and its
sub-organizations, divisions and subsidiaries. It combines all the financial statements of different
legal entities those are controlled by parent entity into single set of the financial statements for
entire group of the entities. Consolidated financial statements can be used to review the results
and financial position of entire group of the business commonly-owned. Hence, consolidated
financial statements are merged financial for parent entity and its subsidiaries. These statements
require the considerable amount of effort for construction as it shall exclude impact of any
transaction among the reported entities. Hence, if any sale is there between the parent company
and subsidiaries, the intercompany sales shall be removed from consolidated financial
statements. While the parent entity acquired 100% outstanding common stock of subsidiary,
process of consolidation is quite simple (Müller 2014). Steps followed for preparing the
consolidated financial statements are – (i) combining assets as well as liabilities of the subsidiary
at the fair value with assets and liabilities of the parent entity and determining additional
amortization and depreciation attributable to difference among the fair values on the date of
acquisition and the carrying value of historical cost for the assets and liabilities of the subsidiary
(ii) eliminating intra-group unrealized losses or gains, if any on fixed assets or inventory or any
intra-group balances (iii) removing shareholder’s equity amount of the subsidiary as they are
reported in financial statement of subsidiary with investment in the subsidiary balance that
reported in individual financial statement of the parent entity (iv) combining revenues as well as
expenses of parent with post-acquisition expenses and revenues of subsidiary for arriving under
consolidated net income (v) finally determining the consolidated retained earnings (Aletkin
2014).

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While parent does not hold 100% of subsidiary’s outstanding common stock that is some
proportion of subsidiary is held by the outside investors, interest accruing to the outstanding
investors is termed as non-controlling interest. While there is any non-controlling interest, steps
followed for preparing the consolidated financial statements are – (i) sum of purchase
consideration’s fair value and non-controlling interest’s fair value for identifiable assets if
exceeds is reported as goodwill and is allocated to parent and the non-controlling interest (ii) net
consolidated income is segregated among parent and non-controlling interest in the ratio of their
respective interest (iii) consolidated balance sheet includes amount of the non-controlling interest
that is shareholder’s equity that is attributable to outside investors (iv) finally consolidated
retained earnings is computed differently as now it will exclude retained earnings of the
subsidiary that is attributable to the minority interest (Biaek-Jaworska and Matusiewicz 2015).
Consolidated financial statements are particularly important for the shareholders of the
parent entity as they are required to know not only the financial results and position of the
entity’s operations but also the entire group. This is the reason why the financial statements are
prepared for presenting financial information of parent entity along with its subsidiaries as
whole. On the contrary the standalone financial statement considers financial performance of the
entity without considering subsidiary’s financial performances (Ruhnke and Schmidt 2014).
Major uses of consolidated financial statement to the shareholders of the parent entity are – (i)
single source for the document – it provides them with complete picture of the entity as a whole
along with the holding and subsidiaries (ii) evaluation of market position – overall financial
health of the parent entity can be analysed though the consolidated financial statements hence, if
the investors wants to invest in parent entity’s share it is required to analyse its financial
performance through the consolidated (iii) subsidiary acquisition – it contains data regarding the

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minority interest that indicates amount payable to outside shareholders of subsidiary entity at the
book values. Apart from these the consolidated financial statements help the shareholder various
ways like – (i) reduce paperwork – with the consolidated statements, less paperwork is involved
(Robinson et al. 2015). For instance, if the parent entity owns 4 subsidiaries there will be 20
separate and standalone financial reports to review or 4 basis financial statements for each of the
subsidiary in addition to the 4 reports for the parent entity. It will be tough to track down all the
records and will be considerably difficult to look over each of the reports. Hence, consolidated
statement minimizes the same into 4 consolidated reports. This in turn will result into less
paperwork as well as less effort (ii) simplification – consolidated statements eliminates all the
transactions that takes place among the parent entity and subsidiaries which in turn provides
simplified view of the business performance (iii) updates to the statement – over the time the
consolidated statement will continue evolving the process of analysing the parent company more
transparent. One major reason behind this is that in past some of the entities used the
consolidated reports for hiding liabilities and losses in the special subsidiaries those were
generated particularly to hide the financial issues. FASB and IASB revisit definitions as well as
requirements on regular basis for the consolidated statements for making them furthermore
reliable and easier for use (Osadchy et al. 2018).
Apart from that creditors and lenders do not receive direct information regarding the
performance of the entity and are required to depend on the GPFR for the information they
require. Hence, in this sense they are also considered as primary users to whom the GPFR are
provided. Other parties including members, regulators, public excluding the investors also
consider GPFR as useful. However, the GPFR are not directed primarily to any other users.

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