Advanced Financial Reporting and Regulation - Interim Financial Reporting - Literature review Example

Advanced Financial Reporting and Regulation: INTERIM FINANCIAL REPORTING Inserts His/Her Inserts Grade InsertsTutor’s Name 11 April 2012 The IASB implements the IFRS, replacing the successful IAS, to improve comprehension and information transfer among the different users of the financial statements. The research centres on the IASB implemented of the IFRS. The research focuses on the IASB implementation of the objective and rationales (including characteristics) to heighten the professional look of the financial statements in terms of usefulness to the financial statement users. The IASB plays a significant part in assuring the global financial information is sent and received vividly to improve the financial statement users’ decisions. Overview of the relevance international accounting standard (IASB) The International Accounting Standards Board (IASB) was established in London England on April 2001. The board replaces the former International Accounting Standards Committee (IASC). The board is mandated to come up with International Financial Reporting Standards (IFRS). The IFRS replaces the International Accounting Standards (IAS) starting in 2001. Objective. In terms of objectives in the preparation of the interim financial reports, Barry Epstein and Eva Jermakowicz (2010) emphasised the IASB’s International Financial Reporting Standard (IFRS) no. 1 mentions the objective of the preparation of the financial statements is to “provide information about the financial position, performance, and changes in financial position of an entity that is useful to a wide range of users in making economic decisions such as an investor deciding whether to sell or hold an investment in the entity, or employees assessing an entity’s ability to provide benefits to them.” There are many users of the financial reports. Some of the users are present and potential investors, community, management, employees, board of directors, lenders, banks, suppliers, other trade creditors, clients, governments, environmental protection agencies, and the public. Since the current and future investors offer risk capital, it is assumed that financial reports meeting the parties’ needs will likewise fill a majority of the needs of other financial statement users (Mehta et. al., 2010;11). Underlying rationales and relation with conceptual framework. Mirza, Orrell, and Holt insists (2008) the underlying rationales and relation with the IFRS conceptual framework in the preparation of the interim financial reports is discussed under the topic of qualitative characteristics. First, the understandability characteristic focuses on making ensuring the readers of the financial statements can easily comprehend the financial reports’ contents. Second, the relevance characteristic requires that all financial information must have the capacity to influence the financial statement readers. The information should be relevant to the financial statement users’ current decision making activities, not prior to or after the financial statement user’s expected decision making process. There are other characteristics involved in the preparation of the interim financial reports. The reliability characteristic requires that all financial statement amounts must be free from material error. In addition, the financial statements must be prepared on a neutral basis. Neutrality means the financial reports should not be prepared or presented to favor one financial statement user or two or more users. Preparing a biased financial statement report is detrimental to the individual or diverse interests of one user or more than one other financial statement users. A neutral financial report must be complete or nearly complete in terms of the actual costs or materiality of the accounts listed in the Statement of Financial Position, income statement, and statement of cash flows. In addition, the preparers and presenters of the financial reports must exercise prudence when implementing the reliability characteristic (Mehta, 2010). The International Financial Reporting Standards of the IASB is the guide used by over 100 countries in the preparation of their annual as well the interim financial reports. The financial reports are composed of the Statement of Financial Position, income statement, and statement of cash flows. The United States Securities and Exchange Commission (SEC) permits foreign private issuers to include their company’s stocks in the United States stock markets with their financial reports based on the IASB’s IFRS guidelines. By 2011, more than 150 countries will implement the IFRS rules in the preparation of their financial reports. In preparing and presenting the interim financial reports, the IFRS are a set of accounting standards promulgated by the IASB, located in London. Nandakumar, Mehta, Ghosh, and Alkafaji (2010) emphasised the IASB crafted the IFRS based on “sound, clearly stated principles, from which interpretation is necessary (sometimes referred to as principles-based standards). This contrasts with sets of standards, like U.S. generally accepted accounting principles (GAAP), the national accounting standards of the United States, which contain significantly more application guidance. These standards are sometimes referred to as rules-based standards, but that is really a misnomer as U.S. standards also are based on principles—they just contain more application guidance (or rules).” The authors explained IFRS normally do not offer bright lines when differentiating among diverse situations in which various accounting requisites are enumerated. The offering lessens the opportunities of structuring business activities to reach specific accounting effects. IASB’s IFRS no. 1 entitled I Framework for the Preparation and Presentation of Financial Statements focuses on the concepts the underlie the preparation as well as presentation of the financial reports, composed of the Statement of Financial Position, Income Statement, and Statement of Cash Flows (Mehta, 2010). Underlying Assumptions. There are two underlying assumptions in the preparation and presentation of the annual and interim financial reports. First, accrual basis is used in the preparation of the Statement of Financial Position, Income Statement, and Statement of Cash Flows. Under this assumption, the financial statements are prepared and presented on the accrual basis of accounting. Under accrual accounting, the transaction effects as well as other related events are recognized as they occur or happen, not when they are paid. Recording business transaction when they are paid is classified as cash basis accounting system. Under the accrual basis, accounts receivable, notes receivable, accounts payable, notes payable, unearned rent, prepaid supplies are recorded when the actual service is done, delivery is effected, or transfer of the goods has occurred. Under the accrual basis assumption, revenues, expenses, and other business activities are recognized or recorded in the book of original entry or journal book (Mehta, 2010). Second, the going concern assumption is used in the preparation and implementation of the financial statements are prepared on a going concern basis, there is a strong and valid presumption that the business enterprise, entity, or organization will continue to operation its business for the next two, five, ten, twenty or fifty years. Under the going concern assumption, the entity, organization, or business enterprise has no intention of closing shop in the foreseeable future. The foreseeable future, according to IFRS no. 1 is one year from the end of the financial reporting date (Mehta, 2010). On the other hand, the going concern assumption does not apply if there is recent information indicating the business will not be able to continue its daily operations of selling goods or offering services to current and prospective customers. When significant doubts creep into the minds of the financial statement users on the business entity’s capacity to continue its regular activities, such as selling or buying, the going concern assumption should not be used in the preparation of the financial reports. When this occurs, the entity, enterprise or organization must prepare and present the financial statements on a different basis and the new basis should be disclosed in the financial statement notes or other more appropriate part of the financial reports. Recognition, Measurement, presentation and disclosure details. Donald Kieso, Jerry Weygandt, Terry Warfied (Kieso et al, 2011) reiterated, in terms of IFRS no. 1, general requirements, the preparation and presenting the interim financial reports ensure that the financial statements shall be presented indicating fairly the financial position, financial performance, and cash flows of an entity. The preparers of the financial reports must comply with all guidelines established in the IFRS that includes making an explicit and unreserved statement of such compliance in the financial statement notes section. Further, the preparers of the financial reports shall comply with the materiality and aggregation concept where the business entity, organization, or unit must present separately each material class of similar items, including accounts grouped under the inventories, receivables, payables, and property section of the financial statements. Likewise, the business organization, unity, or entity must prepare and present separately financial statement accounts of dissimilar nature or function, except when such accounts are immaterial (will not influence the decisions of the financial statement users). As discussed in the prior section, the financial reports shall be made using the accrual basis of accounting. Under IFRS no. 1, preparation of the interim financial reports, the statement of financial position shall be segregated according to Assets. Assets include a section on property, plant, and equipment, investment property; intangible assets; financial assets; investments accounted for using the equity method; biological assets; deferred tax assets; current tax assets; inventories; trade and other receivables; and cash and cash equivalents. Another section is Equity. The equity section includes issued capital and reserves attributable to stockholders of the parent; as well as the no controlling interests. Another section, Liabilities, includes all payables of the entity, organization, or business unit such as deferred tax liabilities; current tax liabilities; financial liabilities; provisions; and trade and other payables (Kieso et al, 2011). There are procedures in the disclosure of the interim financial report. In terms of assets, the current assets includes cash and cash equivalents, accounts receivable, notes receivable, accrued receivables, and other receivable that are collectible within one year from the balance sheet date. In terms of current liabilities, the section includes all payables or obligations of the entity, business organization or unit such as accounts payable, notes payable, accrued expenses payable. The current liabilities represent obligations payable within one year from the financial statement date. The business entity, unit, or enterprise must report an interim Statement of Comprehensive Income (International Accounting Standards no. 1). The statement includes the revenue amounts finance costs, share profits or loss using equity method (IFRS no. 5), tax expense, profit or loss amount, each section of the other comprehensive income classified by nature, income share, and total comprehensive income. The comprehensive income shall incorporate the precipitating from no controlling interests and owners of the parent company disclosed separately to enhance the financial statement users’ decision making activities (Kieso et al, 2011). The interim financial reports shall also include other relevant reports. The statement of cash flows, International Accounting Standards 7, includes the sources of funds. The statement also includes the uses of the company’s available funds. The statement shall include a report on cash flows from operating activities. In addition, the statement of Changes in Equity, International Accounting Standard no. 8, Accounting Policies, Changes in Accounting Estimates and Errors. The entity, unit, or business enterprise must disclose the company’s accounting policies in the preparation and presentation of the interim financial reports. The policies include explanation for each business transaction, including the measurement method used. The policies include how the estimations for the accounts were arrived at such as the annual depreciation expense, allowance for uncollectible amounts, inventory valuation (lower of cost or market, cost, etc.). The business entity should disclose the amount of dividends proposed or declared for dividend distribution, the outstanding shares, and other information that will enhance the financial statement users’ decision making processes (Kieso et al, 2011). Comparison with the US GAAP. One group of experts reiterate, since IFRS are primarily principles-based standards, the same IFRS approach centres more on the business or the economic goals of any business activity and the underlying rights as well as obligations. This is a far cry from the United States’ Generally Accepted Accounting Standards principles (U.S. GAAP). The U.S. GAAP offers volumes of prescriptive rules (or guidance) for immediate compliance. The IASB’s IFRS guidelines offer procedures in the form of accounting principles. Based on such analysis, one of the significant differences between the approach to standard setting between IFRS and U.S. GAAP is based on the quantity of literature. The length of the text of the IFRS only covers an estimated 3,000 pages. On the other hand, the U.S. Generally Accepted Accounting Principles (GAAP) eats up more than 20,000 pages of accounting literature (Mehta, 2010). Example from Quarterly /relevant reports.               Comprehensive Income         QUARTER Apri -June         Revenue £ 1,000,000.00     Expenses 420,000.00     Profit before Tax £ 580,000.00     Income Tax 214,600.00     Profit after tax £ 365,400.00                             2nd Quarter Report (Apri - June)     INVENTORIES     Raw Materials £ 200,000.00     Work in Process 100,000.00     Finished Goods 350,000.00     Merchandise 400,000.00     Consumable Stores 150,000.00     Other inventories. 10,000.00     TOTAL £ 1,210,000.00               Discussion The financial statement users need understandable financial statements. The IASB issued the IFRS in order to facilitate understanding and communication. Using only one set of accounting standards, information transfer is hastened between investors and the business entity, unit, or enterprise. The investors form Japan, Germany, Russia, India, Scotland, California, Hongkong, and North Korea can easily comprehend the financial statements of Morrissons Plc if the IFRS guidelines are used in the preparation and presentation of the company’s statement of financial position and statement of comprehensive income. The investor from Brazil, Mexico, Guatemala, Spain, Netherlands, or Pakistan will automatically withdraw one’s investment in Tesco Plc upon reading the latest IFRS-based statement of comprehensive income showing a net loss of £ 250,000 for the 1st quarter of 2012. Based on the above discussion, the IASB implements the IFRS, replacement of the IAS, to enhance understanding and communication among the different users of the financial statements. The IASB implemented the IFRS, based on IAS, to ensure understanding will enhance the decision making process. The IASB implements the objective and rationales (including characteristics) to ensure all users of the financial statements are receiving the intended financial statement message sent by the financial statement preparers and presenters. The IASB plays an important role in ensuring the global financial information is sent and received without doubt, bias, or vagueness to enhance the financial statement users’ decision making activities. REFERENCES: Epstein B., Jermakowicz E. (2010). Interpretation of 2010 International Financial Reporting Standards. London: J Wiley & Sons Press. Kieso, D., Weygandt, J., Warfield, T., (2011). Intermediate Accounting. London: J Wiley & Sons Press. Mehta et. al.. (2010). Understanding International Financial Reporting Standards. London: J. Wiley & Sons Press . Mirza A., Orrell, M., Holt, G.,. (2008). IFRS Practical Implementation. London: J Wiley & Sons Press. Read More