Financial reporting is a technique which is required for every company to formulate its financial statements like income statement, balance sheet and cash flow statements. All of them may help internal as well as external stakeholders to analyse actual position, financial health and evaluate performance of the organisation. The process of financial reporting guides the managers and investors to make strategic and investment decisions. They determine the organisational performance and then managers make decisions to make improvements and investors pass judgement to invest their money in the business or not. Shareholders evaluate financial information that are recorded in the statements to analyse than their money is used effectively or not. Company chosen for this report is Marks and Spencer which is based in UK. The assignments aims at context and purpose of financial reporting, requirement, purpose and key principles of conceptual and regulatory framework, main stakeholders of the company, value of financial statements to attain organisational objectives and growth, preparation of financial statements and comparison of two years statements, benefits of IFRS and difference between IFRS and IAS.
Context and purpose of financial accounting
It is the process of recording finance related business information in financial statements so that stakeholders may analyse organisational performance and financial strength. According to IASB organisations are required to formulate financial statements to present actual status of the company in front of its shareholders. Appropriate and transparent information may help the business entities to operate business effectively. It is very important to follow all the accounting related principles, rules and regulations while recording data in different statements so that it may help to depict actual position of the organisation. For Marks and Spencer it is also very important to keep appropriate financial statements so that its stakeholders may analyse it performance. Transparent records helps to achieve predetermined organisational goals that are required to execute business. Marks and Spencer is preparing its financial statements regularly that helps to operate business globally and to run all the activities effectively. Purpose and importance of financial reporting is as follows:
Purpose of financial reporting
- Financial reporting is done by Marks and Spencer to facilitate mangers while forming strategic decisions so that objectives can be achieved.
- It helps to evaluate market value, financial status and health of the company so that effective strategies can be formulated.
- General purpose of financial reporting is to analyse the outcomes of those actions which has been taken by the organisation in a particular period of time.
- To provide results of the operations to the external stakeholders to increase sales, profits and market share.
- Help managers of the company to make effective planning for future period.
Importance of financial reporting
- Financial reporting is very important for the organisations to analyse the financial performance.
- For stakeholders financial reporting is very important as it may help them to analyse that their money is effectively used or not.
- While organisations are willing to raise foreign capital and investment than appropriate financial reporting may help to attract international investors.
- Properly managed financial statements are very important fro bidding, government supplies and labour contracts because it provides overview of the company to external parties.
- It is very important to analyse actual performance and market position of the company.
Requirement, purpose and key principles of regulatory and conceptual framework
Regulatory and conceptual framework
Conceptual framework is a type of analytical element with few variable quantity and textual matter. It is applied by organisations when an overall performance and status of business is required. It is mainly used by companies to make abstract differentiation and arrange business ideas. Regulatory framework is the set of legal rules and regulations that are set by legal authorities of UK for all the companies who are executing business activities there. According to the rules every company is required to conduct financial reporting for their business because it is required to determine actual position and financial status of the organisations. Marks and Spencer is following all the regulations that are set by IASB because it may help the stakeholders to analyse organisational performance effectively. These regulations are imposed in the form of IFRS which is explained below:
IFRS: It is International Financial Reporting Standards that are introduced by IASB (International Accounting Standards Board). IFRS is the set of different principles that are set by regulatory authority. Few IFRS are explained below that are also known as principles of regulatory and conceptual framework:
- IFRS 1:It is related to first time implementation of international financial reporting standards in which companies adopt IFRS first time. It directs the organisations to formulate all the financial statements effectively and appropriately.
- IFRS 3:This is related to business combinations in which mergers and acquisitions are described. It help organisations to combine all their assets and liabilities so that debts can be paid to overcome from business crisis.
- IFRS 9: It is related to financial instruments in which direction for their treatment is provided. It mainly focuses on classification and measurement of financial instruments, impairment of financial assets and hedge accounting.
- IFRS 10:It directs business entities to form their financial statements in consolidated format so that all the transactions of parent and subsidiary company may be recorded in a single statement to determine performance of the entity.
Purpose of regulatory and conceptual frameworks
- Main purpose of regulatory framework is to guide organisations to prepare financial statements in appropriate manner.
- Purpose of conceptual frameworks is to analyse overall performance of a business entity so that stakeholders may take effective decisions about the company.
- Another purpose of regulatory and conceptual frameworks is to set a global language so that businesses can be execute at international level with the help of international capitals and investments.
- Both are formulated by the government to understand accounting practices and standards that are followed by companies while formulating final accounts.
Qualitative features of financial information
Following are the characteristics of financial information that helps to make the information more reliable. It can be understood with the help of following points:
- Relevance:It is very important for the companies to record relevant data in the financial statements so that it may help to analyse actual performance and financial status. If the information is not relevant than it cannot show the accurate performance and position of a business.
- Faithful representation:This feature may help to gain trust of stakeholders like investors and shareholders because this will help them to assure that organisation is in good condition and they may get long term benefits like higher returns on their investments.
All the rules and principles of regulatory and conceptual framework are followed by Marks and Spencer in order to expand their business with the help of increased investments and good market image.
Main Stakeholders of an organisation and their benefits from financial information
Stakeholders refers to the internal or external parties of an organisation who have right to get actual financial information of an organisation. Marks and Spencer is also having various stakeholders who help to operate business effectively. Financial statements are evaluated by them to make decisions that may affect the business execution ability of an enterprise. Marks and Spencer is having various stakeholders that are customers, investors, managers, government, shareholders and creditors. Benefits of financial information to the internal and stakeholders are described below:
All of them are directly related to the operations of the company. They analyse financial statements to make effective decisions:
- Shareholders:Shareholders of the company are the persons who provide funds to the organisation. In Marks and Spencer shareholders use financial information to analyse that their money is effectively used or not by the organisation.
- Managers:Managers of Marks and Spencer get benefited by financial information as it help them to make decisions by evaluating the organisational performance. If business is not in good condition than they may implement appropriate strategies so that business may overcome all the challenges.
They are not directly in touch of the company but they have right to gather financial information because they are a part of the organisation.
- Investors:These are the group of of persons who invest money in business for the purpose of acquiring higher profits. Financial information help them to determine exact position of Marks and Spencer to make investment or not because if the company is not in good condition than investors does not show interest in that business.
- Creditors:The persons who provide goods on credit to Marks and Spencer are creditors or suppliers. Financial information of the company is very beneficial for them as it may help them to analyse that organisation is able to pay back their amount or not which has been provided by them.
- Government:All the financial information of Marks and Spencer is determined by legal authorities of UK to insure that organisation is not performing any illegal activity. It also help the government to assure that company is paying tax appropriately.
- Customers:Financial information is also beneficial for the customers as they may get satisfied by analysing that market image of Marks and Spencer is good.
All the stakeholder of the Marks and Spencer get benefited with the help of financial information because it help them to analyse organisational performance and financial health.
Value of financial reporting for meeting organisational growth and objectives
Financial reporting help the organisations to achieve objectives and identify growth opportunity. Marks and Spencer is operating it business all around the world and for the company it is very important to formulate appropriate financial statements so that all the stakeholders of the company get satisfied and show more interest in the company. Objectives of Marks and Spencer are to attract investors, satisfy customers and maximise profits and sales. All the goals can be achieved with the help of transparent information in financial statements of Marks and Spencer. Investors get attracted toward those company who are performing good in the market and able to provide them higher return on their investments. As Marks and Spencer is keeping accurate records which will help investors to analyse its performance and than enhance their interest in the company.
Customer satisfaction is possible with the help of positive market image which can be determined by them with the help of financial statements that are generated by the company every year. If Marks and Spencer is having good image in the market than this may help customers to be satisfied because they will get assured that they are using products of a good company.
Profits can also be maximised with the help of financial statements because if Marks and Spencer is performing good in the market than it will help to be more competitive in the market and acquire higher profits. Effective and accurate financial statements can help an organisation to identify growth opportunities and than grab them to be more competitive in the market. Final accounts of Marks and Spencer help to analyse organisational efficiency and profits. This will guide the managers to determine the funds that are acquired by the organisation in a year and they may take decision to invest the money effectively to increase production that may help to enhance sales.
Financial statements also help to identify the business position in the market which will help to grow the business faster because having a good position in the market will attract large number of customers and help to expand the business by acquiring higher market share. Competitive advantage in the market can also be measured with the help of financial statements which will help to be the first choice of the customers. This will help to achieve growth in the market.
Use of financial statements of a company to interpret and communicate financial performance
As analysed from appendix, revenues of Marks and Spencer were 10622000 in year 2017 which has been increased up to 10698200 in year 2018. Cost of sales for the company was 6629300 in year 2017 which has been increased in year 2018 up to 6745600. it has affected the profits that are decreased in year 2018 as the cost of sales has been changed comparatively high from other prior year. Profits in year 2017 were 3992700 and for year 2018 profits were 3952600. Total operating expenses of the organisation have also been increased in current year. For current year expenses are 10020800 and for 2017 they were 9914700. operating income of Marks and Spencer has also been decreased up to 677400 in year 2018 from 707300 which is for year 2017. Net income or profits of Marks and Spencer have been decreased in year 2018 as compare to 2017. Profits for both the years are 117100 and 25700 respectively. Organisation's cash has decreased up to 207700 from 468600 which is for year 2017. Receivables of Marks and Spencer have been increased in year 2018 as compare to 2017. for 2018 and 2017 receivables are 137800 and 144800 respectively. Total current assets of the company have been declined in year 2018. In 2017 total current assets were 1723300 and for 2018 it is 1723300. Total assets of the company have been decreased in year 2018. In 2018 these are 7550200 and in 2017 they were 8292500. Accounts payable of Marks and Spencer have been decreased in year 2018 from 967500 which was for year 2017. Short term debts of the organisation have also been decreased in year 2018 from 517600 that is related to year 2017. Long term debts of Marks and Spencer have been decreased up to 1622900 in year 2018 as compare to year 2017 which is 1663400. Common stock of Marks and Spencer remain same in both the year which is 406200. retained earnings of the company has been decreased up to 6560400 in year 2018 as compare to year 2017. Treasury stock of the company are in negative for both the years. Capital surplus for the company are same for both 2018 and 2017 years. Total shareholder's equity of the company has been decreased in year 2018. For 2017 equities were 3156300 and for 2018 these are 2956700.
From the above project report it has been concluded that financial reporting is the process of preparing financial statements that are required to analyse organisational performance and financial status. It is very important for the companies to maintain their financial statements on regular basis so that stakeholders such as customers, investors, shareholders, government and managers can formulate their decisions according to financial health of the business. All the business entities are directed by IFRS while they are generating their financial statements as it may help them to formulate appropriate and accurate statements.