Reporting Financial Statements - Essay Example

? Financial Reporting and Accountability exam questions Contents Contents Reporting Financial ments 4 Why is one of the elements of the financial statements useful to shareholders? 4 What is the purpose of one kind of disclosure e.g. discontinued activities, or expenses such as audit? 4 Earnings per Share 5 Basic and diluted EPS 5 Explain why the regulators have been so concerned about the way the published EPS value is calculated? 5 Why should diluted EPS be calculated? 6 Why should comparative year EPS values be restated? 6 Explain what disclosures must be made. 6 Consolidations: Qualitative 7 Why do regulators require consolidations? 7 What is fair value and why is it an important concept in consolidation? 7 Why do regulators require inter-company profits to be removed from consolidations? 7 Corporate Governance 8 What is ‘the public interest’ and what is its relationship to accounting? 8 Do we need mandatory regulation of reporting? If so how should we regulate? Are there major problems? 8 IASB and due process – what are the stages of due process – why is convergence with the US important? 9 What is the ‘market for corporate takeovers’ and the ‘market for managers’ – and what impact have these on accounting disclosure? 10 Reporting Financial Statements Why is one of the elements of the financial statements useful to shareholders? Statement of the changes in position of equity for a company provides the movement of the holding position of the equity shareholders. This statement generally comprises of the net profits that can be attributed to the shareholders, the changes in the share capital reserves, the dividend that is paid to the shareholder, the effect of the accounting policy changes or the any kind of changes that has been done to correct any error in the previous period. This is an essential statement that needs to be disclosed to the shareholders because the factors that have an effect on the changes in the position can be known. This statement would be reflecting the nature of the changes that take place in the equity reserves which otherwise would not be available to the shareholders. For example the issue and redemption of the share capital can only be obtained from the statement of financial position. What is the purpose of one kind of disclosure e.g. discontinued activities, or expenses such as audit? Discontinued operations of an enterprise would entail those activities by which the company would be selling a component through any transaction or demerger or would be disposing off the assets or liabilities of the organisation or abandoning any component of the business. It is important for a company to make the disclosures of the discontinued operations because it would help in assessing the cash flows of the enterprise, the capacity to generate earnings and to make proper segregation of the information about the discontinuing operations form that of the continuing operations. Organisations should cite the evidence of auditing process in the annual statements. Thus the fees that are paid for the auditing as well as the non auditing services need to be paid. On the other hand it is considered that the independence of the auditors is essential for a sound and fair auditing process. Hence by the payment of the fees the quality of auditing in the organisation is ensured. Earnings per Share Basic and diluted EPS Basic EPS is the earnings of the company that accrues to the shareholders of the organisation. Basic EPS is derived by dividing the net profit of the company by the total amount of outstanding shares. The amount net profit is calculated after distribution of the dividends to the preference shareholders. This may be explained with the example of the following example. Suppose the Net Profit available for a company is $ 40000. And the number of equity shares outstanding is 2000. Then the EPS of the company would be $50. Diluted EPS on the other hand is the net profit of the company divided by the number of equity shares that are adjusted for dilution in the future period. There are a number of issues that needs to be considered while the calculation of the EPS. At the time of accounting the convertible bonds, the after tax interest expense is to be excluded. Again the dividend paid out is considered as a part of the net profit in situations of considering convertible bonds. Explain why the regulators have been so concerned about the way the published EPS value is calculated? The companies in order to raise the price of the stocks try to maintain a high value of the EPS so that the investors are encouraged to purchase the stock. On the other hand the diluted EPS would provide the investors with the worst case situation that the company can face. Hence regulators try to ensure that the investors are receiving the right information about the value of the company. Why should diluted EPS be calculated? It is important to calculate the diluted EPS of a company. This is because if the company issues convertible bonds instead of the plain vanilla bonds for getting finance then the cost of debt becomes low. On the other hand the company can also decide to reward stock options to the employees instead of offering any cash bonus to the employees. In both of these cases the number of shares outstanding for the company would go up. As a result of this the present EPS would go down. Thus the diluted EPS of the company would be lower than the basic EPS because in case of the calculation of the diluted EPS, along with the ordinary shares, the convertible bonds, warrants as well as the stock options would be considered if they were converted into physical shares. Thus the investors in a company would have an actual idea about their quality of investment in the organisation. Why should comparative year EPS values be restated? The companies should provide a change in the EPS over the years to the shareholders so that the investors can have a proper idea about the growth of the company and the future trends of growth. Explain what disclosures must be made. It is mandatory for the companies to disclose the figures of the basic as well as the diluted EPS of the organisation and it should be done on the face of the income statement. Each of the items of the equity position needs to be disclosed in the annual report that would be made available to the shareholders. The values of the diluted as well as the basic EPS has to be provided for the consequent years to that the investors can judge the improvement or deterioration of the position of the organisation. Consolidations: Qualitative Why do regulators require consolidations? The regulators require the consolidated financial data of the organisations so that there is a common ground in the accounting structure and hence there is no inconsistency in the accounting process. It would also ensure flexibility in the various structures of hierarchy. The financial data would also be available for the future decision making. Along with that there would be a proper integration of the technological support in the accounting process. What is fair value and why is it an important concept in consolidation? Fair value is the value of the assets or the liability of a corporate considered in case of the arms’ length principle between knowledgeable parties as well as the unrelated willing parties. In the consolidated financial statements it is the duty of the accountants to provide a fair value for the assets as well as the liabilities. This would be true in case of the dilution or the merger and acquisition of the company when there would be a situation of settlement between two parties. At that time the determination of the fair value for the exchange would be necessary. Why do regulators require inter-company profits to be removed from consolidations? Intercompany data may lead to various kinds of risks. It would also force the managers to make manual corrections which may not provide a fair result. The entire process of reconciliation has to be extended which would make it more cumbersome and time consuming. Corporate Governance What is ‘the public interest’ and what is its relationship to accounting? Public interest in the context of accounting may be defined as the well-being of the group of people whom the accounting professionals cater to. The community of accountants have a responsibility towards the common people. Most of the professionals who deal with the accounting procedures have to present their work in the most transparent and honest manner. The integrity of the financial statements and their formulation lie on the hands of the accounting professionals. There may be cases of conflict that might arise while undertaking various accounting activities of companies and other institutions. The resolution of the conflicts has to be done keeping in mind the welfare of the public at large which includes the general public, the clients as well as the interest of the employers. This would include superior quality of service delivery and would entail high degree of professionalism among the accountants. Do we need mandatory regulation of reporting? If so how should we regulate? Are there major problems? Most of the countries of the world require a mandatory regulation for the reporting of their financial position. It is important to have a regulation so that the companies are bound by certain rules and no false information is provided to the stakeholders of the organisation. The regulation should be done by reviewing the accounting standards from time to time. Along with that a stringent monitoring and auditing process have to be undertaken by the regulatory bodies to ensure that proper execution of the reporting is taking place. Organisations that have operations in different countries may encounter problems like this because the legal and regulatory framework along with the accounting standards would vary across nations. There might also be problems due to unfair practices by the managers. IASB and due process – what are the stages of due process – why is convergence with the US important? The IASB tries to conduct the due process in a transparent manner. The countries and the organisation where IFRS is being adopted try to adopt a comprehensive and fair process of consultation. The board is also accountable to the parties to which it caters and owes them an explanation for the decisions that they make. In order to have a comprehensive due process the following steps are mandatory for the company. These steps are as follows. Proposals are left open for debate in the public meetings Exposure of the draft of the amended standard to the public for inviting their valuable comments Enough time should be provided for the invitation of the comments and the letter having the opinion have to be accepted Decision making on part of the broad whether the proposals should be once again made open for further discussion The Advisory council is to be reported regarding the various technical programmes IASB would be making certain interpretations which have to be ratified It is important for the organisations to converge to IFRS because in the time of globalisation business are having operations across countries and continents. So there is a necessity to have a standard which would rule out any chance of discrepancy in the accounting procedures across countries. What is the ‘market for corporate takeovers’ and the ‘market for managers’ – and what impact have these on accounting disclosure? Market for corporate takeovers refers to the markets for strategic alliances, takeover or mergers in which there is a competition that are carried on among the owners of both the parties to get a control over the rights over the governance of the organisation. This kind of control would also entail the rights to dismiss or employ any manager at the will of the board of directors. The organisations which do not perform up to the bench mark would be taken over by another company and thereby the management would be changed. The performance of a manager at a particular accounting period has an influence on the salary that they would demand at a future period. If there is no accounting regulation the managers of an organisation would try to interpret the value of the organisation in an inflated manner to portray the fact that their performance is good. Hence it is imperative that the managers provide an accurate value of the organisation so that there is neither undervaluation nor overvaluation of the company and the managers get a fair remuneration. Read More