International Financial Reporting

This project report aims to outline the context and purpose of financial reporting, provides benefits and methods of ensuring compliance and accountability as well as evaluate key principles. Also, different countries have been evaluated to account for deviations in Financial Reporting Practices. For this purpose, Grant Thornton Accountancy Firm's client Lloyds Banking Group has been taken into account which is an FTSE 100 retail banking company headquartered in UK (Representative Client List of Grant Thornton, 2019). It provides banking as well as financial services to its client on a global scale.

Task 1

P1. Evaluating regulatory frameworks and governance in the context of financial reporting

The term 'Financial Reporting' can be defined as the presentation as well as communication of financial records to the relevant key stakeholders. Usually financial reports are issued in the form of Income Statements, Balance Sheet and Cash Flow Statements among others, based on the policies and nature of business. Thus, there issuance may differ from organisation to organisation. Every organisation including Lloyd's Banking Group is required to comply with the conceptual as well as regulatory frameworks of financial reporting. These have been discussed as under:

• Conceptual framework:

These aim to define the objectives of financial reporting along with acting as a practical tool that helps in formulation of various Standards (Abeysekera, 2013). Hence, this framework is required to enables Lloyd's management to develop a strong theoretical foundation so that they are able to easily measure, present and communicate the various financial transactions undertaken by them to their key stakeholders. In the context of Financial Reporting, a conceptual framework can be mainly observed as a statement of Generally Accepted Accounting Principles (GAAP). These principles act as a measuring yardstick as well as point of references in order to compare and improvise current accounting practices of a company. Lack of such a framework can lead to a substantial increase in proliferation as well as number of accounting scandals through misappropriation of profits. Thus, conceptual framework assists in:

• Development of future standards;
• Promoting coherence between accounting regulations as well as standards;
• Preparation and Communication of Financial Statements to the identified key stakeholders.

• Regulatory Framework:

As the name suggests, the regulatory framework determines the manner in which reporting of financial information is carried out among organisation on a worldwide scale. For this purpose, International Financial Reporting Standards (IFRS) is one such body which aims to encourage collaboration, investor engagement and transparency in due process (Albu and Albu, 2012). This framework is necessary for ensuring that the communication of relevant information to Lloyd's key stakeholders is made in such a way that their needs are fulfilled adequately. Some of the most important IFRS are as follows:

• IFRS 1: First- time Adoption of International Financial Reporting Standards
• IFRS 10: Consolidated Financial Statements
• IFRS 12: Disclosure of Interest in Other Entities
• IFRS 13: Fair Value Measurement

The main purpose of conceptual framework is to facilitate understanding and revision of both GAAP as well as IFRS. On the other hand, the qualitative characteristics of financial information can be divided as:

Inclusion of such characteristics helps in the enhancement of reliability present in the financial information that is reported for a given period by Lloyd's Banking Group. Additionally, the governance of financial reporting process ensures integrity of organisations such as Lloyd is safeguarded at every stage, improves corporate performance as well as protects stakeholders' interests (Botzem, 2012). This is achieved through the compliance of various laws and legislations prevalent as well as applicable on the company. Ensuring strong corporate governance helps in enhancing the accuracy, reliability, materiality and other qualitative characteristics. Thus, ensuring that any kind of misappropriation or error is prevented from occurring and internal control is maintained in an effective manner.

P2. Analysis of Financial Reporting Purpose for meeting organisational goals, development and growth

The essential purpose of financial reporting is to present and communicate crucial information regarding corporate operations, performance, financial position and cash flows in a predefined format. Also, it aims to enable comparability and standardization of information across all industries so as to enhance strategic decision-making practices (Davies and Green, 2013). In the context of Lloyds Banking Group, this information is utilised by various stakeholders of the organisation for different purposes. The main stakeholders of Lloyds have been identified as under:

In order to ensure that such needs are met in full, Lloyds need to take care of all stakeholder requirements while preparing the financial reports. Additionally, the bank also needs to keep in mind that the communication of information is done with due diligence and transparently as it will enable them to seek investment or funding, formulate future plans or goals and achieve their vision in an organised manner.

Task 2

P3. Interpretation of Profit & Loss, Cash Flow and Balance Sheet Statements

(a) Income Statement:

The above statement indicates a detail break-up of revenue through matched costs so as to determine the Operating Profit, Net Profit as well as the Total Comprehensive Income earned by the Godwin PLC for the year ended December 31, 2018. From the above statement, it can be ascertained that £8,822,500 is the net profit earned by Godwin PLC during the year. Here, the cost of sales £403638.75 is inclusive of 50% depreciation on non-current assets as well as impact  incurred due to the sale of damaged goods.

(b) Statement of Retained Earnings:

The above statement indicates a detail break-up of equity changes by bifurcating Equity into Ordinary Share Capital, Revaluation Reserve as well as Retained Earnings. From the above statement, it can be ascertained that £8,822,500 is the net profit earned by Godwin PLC during the year which has been completely retained. Whereas the preferential as well as ordinary dividend worth £2,500 and £4,500 respectively have been paid to the investors from the retained earnings itself.

(c) Balance Sheet:

A financial position statement helps in giving an overall view of the business at a given point of time. The above statement shows a complete break-up of assets, liabilities as well as owner's equity in a detailed manner so as to enable the user of this information to understand key  short-term and long-term stances of Godwin PLC effectively. Utilising this statement, additional information can be derived in relation to liquidity, working capital requirements and capital structure of Godwin. For this purpose, current assets and liabilities, owner's equity and non-current liabilities will be considered.

Hence, the aforementioned statements help in communicating a specific type of financial information to key stakeholders as well as the management which enables them to make informed decisions from both short-term and long-term perspectives. Additionally, company may also undertake to prepare another financial statement known as 'Cash Flow Statement' (Eccles and et.al., 2012). This report communicates a detailed account on the applicability as well as sources of funds that are available to the business. Mainly, it includes cash flow from operating, investing and financial activities undertaken by the business for a given period. Thus, helping the users to know exactly where their money is being invested to increase the overall profitability and returns.

P4. Calculation of financial ratios and their presentation

Financial Ratios of any business enterprise facilitates the determination of corporate performance. They enhance comparability and give a quick view about how well the business did in comparison to previous or any other financial periods. In the context of given case scenario, key financial ratios for Lloyds Banking Group have been calculated and presented as follows:

 (a) Profitability:

The Net profitability ratio, as the names suggests, is related to the determination of bottom-line earnings after adjustment of depreciation, taxation and interest charge has been taken into account (Annual Report, 2018). One can clearly see that there has been a significant increase in the net profit of the business. With an increase in sales by 1.69% (=(17768-17472)/17472), the net profit increased by 24.04% (=(4400-3547)/3547) which is a significant rise from 2017. Thus, giving an overall improvement of 21.97% (=(24.76%-20.30%)/20.30%) in the net profitability of Lloyds Banking Group between 2017 and 2018.

 (b) Liquidity:

Another important financial ratio is the current ratio. As per Lloyds recent annual report, the current ratio rose from 0.66 to 1.46. This increase of 0.80 points in the current ratio can be attributed to the decrease in Current liabilities held by the Bank in the 2018. Thus, showing that the overall liquidity has increased significantly.

 (c) Gearing:

Debt-Equity Ratio is a type of gearing ratio which helps in seeking the capital structure of an organisation. In the context of Lloyds Banking Group, there has been an evident increase of 51.72% (=(27779-18309)/27779) in total liabilities. Thus, improving the Debt-Equity Ratio by 0.24 points for the Bank. This indicates that the company has become more reliant on external financing in comparison to 2017. Thus, increasing its overall financial leverage.

One can conclude that all these ratios are used to interpret and communicate financial performance of Lloyds Banking Group by addressing specific areas such as leverage, profitability and liquidity that are relevant in effective measurement of its overall corporate performance (Ikpefan and Akande, 2012).

Task 3

P5. Benefits of International Accounting Standards (IAS) and International Financial Reporting Standards (IFRS)

International Financial Reporting aims to inculcate standardization and create the communication of important financial information as a global language that can be understood by anyone all around the world. In this context, it is paramount to consider the Accounting Standards (IAS) that ensure generalization of treatment regarding financial items as well as Financial Reporting Standards (IFRS) which helps in their effective communication to various stakeholders.

The main difference between these two components has been depicted in the following table:

Both IAS and IFRS aim to make the process of financial reporting easier, however, IAS is a predecessor of IFRS which were introduced all around the world in 2001. Although, in present day scenario, both the components are combined and utilised by different organisations to enhance transparency and understandability within their financial statements. Keeping this mind, benefits of both IAS and IFRS have been explained as under:

• Benefits of IFRS:

One of the main advantages of adopting IFRS is that it eliminates the hassle of conforming to specific needs of different countries (Liu, 2013). For instance, Lloyds is a multinational organisation, conforming to all the rules and regulations of various countries would create a lot of confusion and disparity among its financial reports. Thus, adoption of IFRS would ensure that all the important aspects have been accounted for in its reports and enable Lloyds' stakeholders to understand its profitability and performance in a similar manner all around the world. Thus, reducing time, effort and expense incurred on preparation of such reports.

• Benefits of IAS:

The chief benefit of International Accounting Standards is that it ensures a unified code of ethics to be followed across all cultures of the world. Thus, enabling simplification of disputes  and enhancement of legal compliance as well as governance all around the world. Suppose Lloyds enters into a dispute in a country where bribery is a rule of thumb, hence, implementation of IAS would ensure that proper amount of transparency and internal control is prevalent in its financial reports. This would safeguard Bank's interest from the diverse legal structures of that particular country itself.

Thus, implementation of both IFRS and IAS is beneficial, specifically, for any organisation that has its operations spread on an international scale.

P6. Assessing the models of Financial Reporting and Auditing

Both Financial Reporting and Auditing include a wide variety of models that help in the assurance as well as communication of important financial information in a proper manner. These models have been assessed as under:

Task 4

P7. Evaluating the differences and importance of financial reporting in various countries

Financial Reporting is important for each and every stakeholder and business organisation alike. It acts as a support system in the process of planning, forecasting, organising, controlling and communicating necessary financial information to the stakeholders which require such insights to fulfil different purpose. Additionally, it also facilitates due compliance with various statutory bodies belonging to various countries. The main reason behind the differences occurring in the financial reporting across various economies is because the frameworks followed by them before IFRS introduction are quite complex (Zeff, 2013).

For this purpose, some countries have inserted IFRS by way of amendments without replacing the existing law with a new one. For instance, South Africa mandates adoption of IFRS procedures for listed companies, however, other companies are expected to comply with national GAAP guidelines that are developed on an IFRS Foundation. Additionally, United States of America follows GAAP implemented through FASB whereas countries such as UK and Australia follow a complete IFRS framework for financial reporting purposes (Variations in IFRS adoption and practice, 2011).

Thus, one can say that variations in IFRS adoption and reporting frameworks among various countries mainly arise due to the complexity, structural differences and time taken in adoption of such standards.

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Conclusion

From the above report it can be concluded that International Financial Reporting is an important part of every organisation irrespective of its size, nature and type. Through the adoption of proper accounting standards, the communication as well as presentation of key financial information can help the management in identification and evaluation of variations. It also ensures that any kind of misappropriation of profits, decline in overall corporate performance is resolved in an effective manner. Thus, adoption of financial reporting frameworks such as IFRS and IAS can improve ethical compliance as well as generalization of accounting language in an effective manner.

You may also like to read: 

• Financial Statement Analysis

References

• Abeysekera, I., 2013. A template for integrated reporting. Journal of Intellectual Capital. 14(2). pp.227-245.
• Albu, N. and Albu, C.N., 2012. International Financial Reporting Standards in an emerging economy: lessons from Romania. Australian accounting review. 22(4). pp.341-352.
• Botzem, S., 2012. The politics of accounting regulation: Organizing transnational standard setting in financial reporting. Edward Elgar Publishing.
• Davies, H. and Green, D., 2013. Global Financial Regulation: The Essential Guide (Now with a Revised Introduction). John Wiley & Sons.

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