Financial reporting in the corporate world is both a necessity and requirement. According to Woefel, financial reporting is done in the form of financial statements that in some cases are referred to as monetary statements (1994, p 48 ). Financial statements help investors to determine the health of a company and the status of their investments. The statements help them make informed decisions about their continued supported of a particular corporate entity. Financial reporting does also help regulation agencies to monitor investors’ funds and to ensure that they are safe. Besides, they also help regulatory agencies to determine if both private and public corporate entities are adhering to the laid codes of practice as far as financial discipline is concerned.
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A financial statement can therefore be described as a record of financial transactions of a corporate entity that quantitatively describes in detail the monetary and fiscal health of an institution or organization. Rutherford describes a financial statement or financial report as a recording of the sum total of financial activities of a company, organization, person or entity (2007 p. 56). The financial statement may also be referred to as an account especially in the UK. Thus, the terms “audited financial statements or audited financial accounts” by accountants.A set of documents describing various aspects of an organizations, monetary health are collectively called a financial statement. The statements are structured in a manner easy to read and follow for financial novices as well as experts.
It is typical for a financial statement to include a statement of financial position, statement of comprehensive income, a statement in changes in equity and a statement of cash flows.
Bandler says the statement on of financial position that can also be referred to as the balance sheet highlights a company’s total assets, liabilities, as well as ownership equity (1994 p. 258). Robinson et al says that the equity captured in the financial statement reflects the residual interests that assets have after the deduction of all the liabilities (2008 p.80). The balance sheet also gives a company’s net worth at a specified financial period. A statement of comprehensive income on the other hand gives information on a company’s income, expenditure and profits and/or loss within a specified financial year. It is also referred to as a Profit and Loss statement. All the operations of the enterprise entity are captured in the profit and loss statement. The statement shows in simple terms the revenues and expenses incurred by the company. The statement of the changes in equity highlights the company’s equity change during the period covered. Ma, says that the statement of cash flows, which may also be referred to as the upsurge statement, reports on the cash generating activities from various activities (2007 p. 45). This may be from investment, operation and financial activities that the company is engaged in. the above statements collectively make the financial statement of any company whether big or small. The statement in most cases is accompanied by a management discussion and analysis that gives in simple language in-depth insights into the company’s status financially.
According to Berry qualitative development, statement of accounts must have characteristics including understandability, relevance, and comparability. They must also exhibit reliability and fair and neutral presentation (1999 p. 79).
It is important to note that there are also financial statements for non-profit organization, government organizations, as well as personal financial statements. Each of the above provides information on the respective entity’s financial status in accordance with the law.
Many countries have different laws as governing the reporting of financial results. Despite the variance, many countries require auditing of a company’s financial dealings be done buy an independent accountant and/or auditing firms. According to Alexander et al, this auditing and reporting is subjected to further regulation by the territories where the companies operate ( 2007 p.345). International comparisons of these laws are ambiguous given each country’s unique needs. There are also new developments in the corporate world that conform the constant amendment of the laws and regulations governing accounting and financial reporting. In many countries including the UK, the Generally Accepted Accounting Principles (GAAP) applies besides other domestic laws. These principles provide a set of guidelines for companies on how to prepare financial statements to make international comparisons easier. The International Accounting Standards Board (IASB) has been pushing for the standardization of these regulations and has developed the International Financial Reporting Standards mechanism that has bee adopted by many countries including the UK through the European Union. These standards however apply to publicly quoted companies.
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International Financial Reporting Standards
Alexander & Archer say that these International Accounting Standards have governed financial reporting from 1973 to the beginning of the last decade (2008 p. 137). However since a new board took over in 2001, the new regulations they have issued and the modifications they have made to the International Accounting standards have largely regulated financial reporting in the last decade. The modifications have been motivated by the dynamics that have characterized the international financial markets and economies as well ass the business practices that have changed over time. The importance of the accuracy of these statements cannot be overstated especially in the post Enron and WorldCom era. It is important to note that the regulations are actively observed in the UK besides the domestic regulations. All European Union companies were required to use IFRS standards as from the year 2005.
Alexander & Nobes (2007) says that the system that is in use in the UK and many other countries in the world follows the IFRS standard (p. 45). According to the IFRS, a financial statement should incorporate a statement of financial position, a statement of comprehensive income, a statement of changes in equity and a cash flow statement. There is slight differentiation of the Statement of comprehensive income according to the IFRS. This should have the income statement and separate statement with information on comprehensive income. According to Fridson & Alvarez, the Comprehensive income statement helps in reconciling the profit and loss statement and the comprehensive income statement (2002 p. 49). Besides the above requirement, the IFRS requires financial statements to have management discussions and analysis as well as notes summarizing he significant accounting policies of the organization. Additionally, the IFRS introduced changes that new IFRS entities must comply with. Together with the requirements, the body introduced changes in the way of presentation of financial statements. The changes stipulate that a corporate entity must ensure all non-owner changes in equity are presented. This must be reflected on the comprehensive income statement. The new entity must present to the boar a statement of financial position in relation to the earliest comparative period. The presentation must be made in a set of complete financial statements. Additionally the entity must make all the necessary disclosures using a note. Besides, they should present a statement of the cash flow.
UK and Irish Reporting Standards
According to the Association of Chattered Certified Accountants (ACCA), the accounting standards in Ireland and the UK have largely remained static over the years preferring to use the UK accounting standards to the IFRS. Currently companies in the UK use the Financial Reporting Standards (FRS) as well as the Statements of Recommended Practice (SORP). The ACCA report adds that few companies have chosen to use the IFRS framework despite being mandated to do so from 2005. According to the ACCA the UK ASB board has for sometime dependent on the IASB to develop the international framework for accounting standards that they will would adopt and modify according to UK and Irish needs(2010, p.3).
After the release of IFRS, the UK ASB developed drafts : The application of Financial Standards and Financial Reporting Standards fro Medium-sized Entities meant to govern accounting and financial reporting for all companies operating in the UK. The adoption date was set at July 2013 while the early adoption may begin by the end of 2011.
There is s slight different however for small companies and their way of reporting. Given that a majority of corporate entities in the UK is classified as small, they are regulated under the Financial Reporting and Standard for Smaller Entities. These regulation are more or less the UK standards but with lesser stringent requirements on disclosure and exemption. The ACCA
concludes that the use of UK GAAP standards on financial reporting that have been in use in the last decade are likely to remain besides those of IFRS. That is not to say however that the standards used in the UK are outdated.
According to the ACCA, the improvements that UK GAAP has made over the years make the accounting and financial reporting standards in the country at par with those of IFRS (2010, p. 7). The developments reflect the relevance and reliability that the standards will bring to the accounting and financial reporting field in the UK.
Relevance of Developments
The ASB projects that the improvements have:
Enabled easy comparability of financial reports between companies in the UK an Ireland for both listed and unlisted corporations. Comparability is also now easy with many corporate entities in jurisdictions beyond the UK especially those that use the IFRS standards. The similarity in the preparation of the statements assures users of uniformity. The involved accounting bodies especially in the UK had projected increased cross border trade with these companies whose statements will be easily compared.
Enabled small and medium enterprises in the UK to easily report their financial results in a simplified manner. This need necessitated the development of the FRSSE. Initially SME’s complied with UK GAAP, which was too complicated and did reflect neither the nature nor the size of their businesses.
Enabled easy training of accountants given that the system that they use is more or less the same. The need to cut down on costs associated with training accountants for to familiarize themselves with different accounting environments mainly necessitated the uniform adoption.
According to Mackenzie et al, the changes that have the UK GAAP has envisaged together with those that have been implemented over the years will have significant impacts on financial statements and financial reporting (2011 p. 34).
An amortized cost will be used to measure items that financial statements consider basic such as debtors, creditors, and bank loans. On the other hand, fair value will be used to measure complicated instruments such as derivatives. Any changes that will affect the complicated instruments will only be recognized through profit and loss statements. It’s important to note that companies following the FRS will be required to disclose such items. Another item that will be stated at fair value will be investiments in quoted shares. Like the complicated instruments, their changes will be shown through the profit and loss statement. Taxation will be affected and complexity of the effect will depend on the nature of the instrument used.
Objectives of financial statements and financial reporting
Through financial statements, company performance, financial position and any changes that are likely to occur to the company are captured and clearly presented. The information as said earlier helps many stakeholders in making economic decisions concerning the direction and future of the company. Lee says that financial statements are prepared for stakeholders and other interested parties for easier comprehension of the financial status of the company (2007 p.72). They depending on the interested party may be used for various purposes.
According to Nobes, the most important objective of the statements is to help owners and managers of these companies to make informed decisions about the direction of the company (1997 p. 234). The decisions are crucial since they determine the continued operations of the company. The management of these companies makes the decisions from the financial analysis that is provided in a simpler version at the end of the statements. Besides helping in making decisions, companies use them as part of the annual reports that they present to the stakeholders of the company. These stockholders are critical to the survival of the company since they inject much needed capital injection for the running of the company. Satisfactory financial statements therefore help in boosting their confidence as well as the value of the shares they hold.
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Stolowy et al says that financial statements are also used by employees of a company and through their unions in making collective bargaining agreements with the company management (2006 p. 75). The statements project the income the company has made over a specified period. If the company is making profits, labor unions or individuals use it as a basis of making their case for compensation and promotion. The logic behind this is that the employees help the company make profits hence as a sign of appreciation, they have to get a higher pay package. The bargaining talks will not be possible without the information provided by the income statements.
According to Bucley, investors all over the world use financial statements in making decisions about investments plans (2000 p. 348). The prospective investors carefully analyze the financial statements of a company to determine if it’s a viable entity to invest in. well performing companies whose revenues grow and equity increases through increased inflows or enhancements of assets, reduction of liabilities are likely to attract investors. Investors will inject more capital and such companies are able to expand their operations. On the other hand companies who income statements show a decrease in economic benefit through rising expenses, falling inflows or increased outflows, asset depletion and liability incurrence, are shunned by investors..
According to Ashton credits lending financial institutions like banks use financial statements to assessment the capability of companies repaying loans (1983 p. 147). The banks analyze the financial statements to determine if a company is worth getting fresh working capital injection or an extension of debt security. Bank loans or debentures for long-term plans such as financial expansion or meeting expenditure can only be secured by a clean financial statement sheet. Creditors are reluctant to lend to loss making institutions or institutions whose financial statements depict a shaky financial base.
According to Weetman, governments use the audited financial statements to determine the accuracy and propriety of the financial dealings of a company (2006 p. 267). The tax authorities scrutinize from the financial statements if the companies fulfilled the legal obligations in paying taxes and other duties as stipulated by the law. They also ascertain if the payments done by the entity tally with the tax information that the companies submit regularly. From the income statements, government arms like the central banks assess the health of institutions especially financial institutions to ensure they do not collapse with investors’ money. Further, the authorities use the financial statements to for accountability purposes. Top managers are put to task over any irregularities that may be detected from the financial statements.
Gill & Chatton say that financial statements are also used by companies as a marketing tool (1999). Given that the media and the public are normally interested in financial news and statuses of various companies, companies use the chance to portray themselves as stable entities and worth corporate citizens.
Concisely, financial statements help fulfill objectives for the interested parties. These include the tax authorities, the owners, managers, stockholders, and creditors. The objectives presented form party of the traditional goals that financial statements have fulfilled over time. According to Cunningham, the developments that have characterized the regulation of financial and accounting practices over time were due to the changes that the financial sector has gone through (2007 p. 278). White-collar crime tactics have increasingly become more sophisticated among accounting professionals chief financial officers and chief executive officers. For instance, former WorldCom CEO was found guilty and sentences to twenty-five years in prison for the inaccuracies that the company financial statements reflected over the years. The company’s financial statements had over five years overstated the company’s profit by eleven billion dollars. The need to improve accuracy, transparency, and easiness through which accounting practices are carried out has inspired the developments.
Most of the objectives as outlined above are universal. They apply in the UK as they apply in many territories of the world. It’s safe to assume that they have proved their relevance over time and increased reliability of the companies involved. The challenge now lies with the IFRS to push many more countries besides the EU, Canada, Australia, and South Africa to adopting the standards. There is no doubt financial reporting is headed for major changes in future. However, it’s safe to assume that the system that is in place today adequately meets the financial statement reporting needs.
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