Financial Reporting

Executive Summary

Financial reporting is an intricate part and parcel of a corporation. It is the only means of communicating the progress, challenges, and merits of an entity to the interested parties. There are principles, concepts, and guidelines for financial reporting to ensure that there is standard reporting by different entities. There are users of financial information apart from the entity itself hence the efficacy of financial reporting has to be upheld at all times. Parties like investors, creditors, suppliers, employees, management, government, and other regulatory agencies are principal consumers of financial information. Consequently, preparers of financial statements have the duty to ensure that there is a correct recognition and measurement of elements of financial statement. Additionally, the concepts of faithful representation, relevance, understandability, and comparability of financial information are key considerations during the preparation of financial reports. Ultimately, all these concepts have to be given equal treatment when approaching financial reporting.

Financial Reporting

Importance of correct recognition and measurement of the elements of financial statements

Financial reporting is a crucial aspect of the running of a company. Financial reports contain bits of information affecting and arising from the concerned company. The information contained in financial reports is useful to present and potential investors and creditors in their capacity as funds providers to make sound conclusions. The target of a financial report is a wide field of interested parties including investors, employees, lenders, suppliers and other trade creditors, customers, government and regulatory agencies and the public (Ritchi, et al., 2016). These are the primary users of financial information provided in financial reports. It is very important for the users of financial information to be aware of the status of the business in question. Therefore, they need to know whether the business in making profits or losses. Knowledge of such issues informs the various players in the sector decisions on the next step to take. More importantly, information contained in financial statements need to be accurate and capable of representing the actual position of the business in question (Mora & Walker, 2015).

Recognition of the elements of financial statements involves comprising in the balance sheet items that fits the definition of an element, there is a chance that economic benefit will flow from it and the cost or value can be measured with consistency. Similarly, measurement of elements of financial statements encompasses the assignment of monetary amount at which the elements are to be recognized and reported. Subsequently, the measurements of elements of financial statements should be correct at all times since it contains synthesized and specific information regarding the position of the concerned business (Lys et al., 2015).

Evaluation of tax liability

Profits of companies are in many instances realized before or after tax. Companies that make huge profits equally pay a large amount of tax to the government. In fact, businesses have been implementing policies for a long time, to reduce the tax burden as much as possible (Crowther, 2018). Hence correct measurements and recognition of financial elements need to be is of great importance to various players in the sector. To realize a lower tax burden, the directors and owners will require precision in the financial statements. Equally, the government and the relevant regulatory bodies need to realize the actual amount of tax.

Financial transparency

The management and shareholders take the issue of numbers very seriously because it is the difference between embezzlement of funds and an accountable business (Davies, 2016). It is important to know the actual cash available and the amount receivable into the companies accounts. Investors treat this kind of information with a lot of importance because they would want to know where their capital is going and the subsequent outputs. Creditors also want to realize what an entity owes them hence this is an important piece of information to them. Regulatory agencies will be concerned about an entity that lacks financial transparency and might be slapped with sanctions.

Decision making planning and forecasting

It becomes easy for the management to make decisions regarding matters regarding capital output if they have the correct information regarding the entity’s financial statements. Plans for the entity can be mooted once the management and investors have the accurate rate information, however the vice versa will slow down any decision making progress, plans and forecasts.

Trust

For investors to inject their money into any entity, they need a sign that the entity has a positive performance. However, there have been instances of companies going down because of fudging financial statements. The owners take seriously the veracity of the measurements and recognition since they do not want to lose money. In short, accuracy instils confidence in the existing and prospective investors. Government and regulatory bodies have thus put up strong measures to ensure that entities in the territories portray correct measurement and recognition of financial statement elements (Robinson et al., 2015).

Reduced Errors

Internal accounting records have been a big concern for regulators especially in the sector of investment banking. This has been attributed to the illegal activities involving manipulation of books to cover business losses (Leuz & Wysocki, 2016). Entities have to be vigilant in ensuring that there is reconciliation of the entries made in its books to avoid costly mistakes. Simple errors may result from overlooking of the measurement of a certain element hence giving a false representation in the final reports and this can be bad for business in the long run.

Review of the 2018 annual report of Greene King

Qualitative characteristics of useful financial information are necessary for users of financial information in making decisions about the report. The fundamental qualitative characteristics shall be thus be discussed as follows:

Faithful representation

The information provided should not be misleading and free from any bias or material errors. Thus, it should faithfully represent transactions and prudently exemplify any uncertainties by disclosure and also denote estimates. It means a faithful representation of the substance of the economic event as opposed to a representation of the same in its legal form (Nobes and Stadler, 2016). Simply put, this principle prefers substance to form. Therefore, as a requirement, Green King’s financial report should present financial information in its substance and economic reality in a true and fair view.

Reliability of financial information is a concept that is recognized in the International Financial Reporting Standards. Preparers of financial information are required to take into account the substance of lease agreements when deciding the nature of lease for accounting purposes (Montabon et al., 2007). Similarly, sale agreements are to be treated with caution especially where there is a buy back or return clause. This is because a seller may return the goods at any time and by that time, payment has not been mad. Hence, an accountant is required to only enter as sale what has been received. For example, trade receivables for Green King noted in the financial statements should and probably is a reflection of the actual cash in their accounts by the end of 29th April 2018. This is one of the ways of faithfully representing transactions.

Understandability

Users of financial statements should be in a position to readily understand the information contained therein (Mbobo and Ekpo, 2016). Therefore, the information should clearly be presented with other explanatory data to aid in further explanation. A user in this scenario is taken to be a reasonably knowledgeable person in the field of business, general accounting, and economic activities. If financial information is wrapped in a complex format then the users will fail to understand the disclosures within will subsequently rely on undependable information leading to losses (The Importance of Financial Reporting and Analysis, 2019).

In the current scenario, Green King has strived to improve the understandability and quality of its financial statements by including non-financial disclosures. There are additional notes to the accounts and company accounts, which provide more information to the users of its financial information to aid them make informed investment moves. The report also provides for risk and uncertainties in the business, which is crucial information for investors looking to inject capital in the entity in the hope of good returns. Such information helps users make decisions while appreciating all the highs and lows of the business they are planning to invest in or do business. Additionally, the study report has laid out information regarding its environmental concern areas and the mitigation factors they have taken.

Relevance

Financial information should be aligned to the decision-making desires of the user. Information is relevant if it provides predictive value, where users of the information are able to project future performances of an entity (DeFranco, et al., 2011). Alternatively, information can be of confirmatory value if it provides the users with the opportunity to confirm their past predictions. Therefore, a relevant financial information is like a double-edged sword, sharp on both sides. Materiality of information impacts on the relevance of financial information since investors and creditors will only consider material information in reaching decisions. There are certain material information that whose omission or inclusion in an entity’s financial information would greatly sway the decisions of the present and potential users.

From the Green King financial report, it is notable that there was an increase in profit after tax and a decrease in revenue when comparison is made between the year 2017 and 2018. This information is relevant because it touches on two material issues, that is, the company witnessed increased profits despite a reduction in the amount of sales. The net assets and equity also increased by a small margin between the year 2017 and 2018. Hence, in this report it can be seen that Green King has used the revaluation method for its fixed assets, in order to provide a predictive value for its assets, as opposed to the historical method.

Comparability

The financial statements of a given accounting period must be capable of comparison with another different period so that users of the information can glean meaningful conclusions (Nobes and Stadler, 2015). An application of standard or similar accounting methods can ensure consistent information, which can easily be compared, even with other entities for competition purposes. A change in accounting policies is strongly discouraged unless it has been decreed by law or by a shift in accounting standards. Moreover, if there is such change, it will be a requirement that the new method of accounting be applied retroactively so that users of financial information can make conclusions from consistent data.

Accordingly, income statements of Green King have been prepared in such a way that a potential investor of interested party can easily compare the entries for the previous year and the current. They have also used a standard income statement that can be compared with other companies to find out how competitive the company is against other entities in the same or different trade. Hence, companies in the same sector are advised to use similar accounting principles to create consistency when any average user undertakes the comparison.

Understandability as a key concept

A financial report and statements are as good as they can be understood. Users of financial information cannot therefore make use of information that is too complex to be comprehended (Maines and McDaniels, 2000). Entities must thus take into account the average user’s ability to synthesize and understand the aspects of its reports. Again, financial reports are released to the public so that interested users may gain access, read, understand, and show interest in the entity. If this be, the purpose, then preparation of complex financial information incapable of comprehension by a user with average knowledge in business and accounting, beats logic.

To successfully present information in a manner that encourages understanding, explanations in the form of notes may be added to the report to help users easily comprehend the contents (Vincent et al., 2019). While presentation of information in an understandable format is encouraged, this does not mean that complex information of material importance is not to be included in the report. Further, financial information can be relevant, reliable, and comparable but if it is not understandable then all the others attribute lose their meaning since the information becomes incomprehensible to many users. Therefore, understandability still remains a key aspect above all the others that are “equally” essential.

Conclusion

The upshot of the above discussion is that all the four characteristics of financial statements are interrelated and if one is applied without the other then there is bound to be a problem in the reporting. For instance, an entity that favours faithful representation will use complex financial information, in order to achieve reliability at the expense of the aspect of understandability. Of all the four basic tenets of financial information, relevance and faithfulness of the information are considered to be the fundamental concepts when reporting financial statements. Green King has struck a balance between the four characteristics of financial reporting and the result is a reliable, comprehensible, comparable, and relevant financial report. In the end, it is the responsibility of the concerned entity to ensure that there is an optimum application of all the four qualitative attributes financial statements.

References

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