Essay on Assessment of Current Issues of Financial Reporting

Introduction

Financial Statements can be defined as statements that represent the net results of the position of the company. They are used to ascertain whether the Company can pay its EMI’s on time. It helps to derive Liquidity, Solvency, and Financial ratios. Under auditing, whether the financial statements are made under international accounting policies (Popovic, 2015, p 2(3)). There are helpful for both internal as well as external users. Internal users include Management, employees and External include Govt, Creditors, etc. These statements play a vital role in determining the various financial factors such as Fixed Assets, Net worth, Capital, Net profit Margin, etc. Despite many advantages, there are some disadvantages, like it represents the information at a period. So, the users do get an overall picture of how the Company is doing. Some modifications are proposed for financial statements under IFRS.

Critical assessment of financial statement usefulness–

Financial Statements refer to the statements which tell about the financial position of the Business. It includes Trading, Income statement, Statement of affairs, Cash Flow Statements, Notes to Accounts, etc. These statements are intended to give an accurate picture of the Company’sCompany’s position in condensed form (Graham, 1937, p 1(1)). The purpose is to depict the actual view of the Company’sCompany’s position. It tells about the performance of the Management. Users use this Statement to make decisions such as optimum utilization of resources, achieve profit, etc. The purpose is to ascertain the liquidity, solvency position, cash receipts, and cash outflows. They are also used for making Investment Decisions, Credit, Taxation, and Bargaining Decisions. These statements help Creditors and Investors make better economic decisions (White, 2002, p 1(1)). These statements are also used for taking Amalgamation, Merger, Acquisition Decisions. Everyone who comes in contact with corporations has to read a Balance sheet and Income statements (Meredith, 1937, p 1(1)).

Financial Statements includes-

• Income Statement – It includes sales, purchase, income, expenses, net profits, or loss. It suggests that the market response to gains/losses is associated with their placement in the income statement (Bartov, 2014, p 1(1)).
• Cash Flow Statements – It includes activities such as Operating, Investing, and Financing. It tells about the cash that exists with the Company, and it depicts the cash inflows and outflows of the Business. It tells about the Business’sBusiness’s ability in both the short and long term (Cote, 2020, p 1(3)).
• The Balance Sheet includes shareholders’ funds, noncurrent and current liabilities, fixed assets, current assets, and marketable securities. It provides about the net position of the company.It provides an overview of a company’s financial health for a given period (Cote, 2020, p 1(2)).
• Other Comprehensive Income – It includes owner’s equity, retained earnings, realized and non realized incomes. This means that they are computed after net income on the income statement (Accounting Tools, 2021).
• Notes to Accounts – It includes explanation and disclosures of financial statements items.

The three financial statements (cash, income, financial position) are often referred to as the final accounts of the Business (Al-Zghool, 2020, p 2(1)). The statements have their significance, and many persons use them for knowing the factors such as net worth, profits, assets, cash and cash equivalents, etc.

The uses of Financial Statements are-

• Ascertain the financial position of the Business – The most important feature of these statements is to depict the Business’s financial situation. Various users use these statements to make effective decisions.
• To obtain Credit – The Financial Statements are demanded by banks for providing Loans. Banks review the Profit and Loss and Balance Sheet to determine whether the Business is making sufficient profits so that the Company can pay its installments on time.
• Helps Investors in Decision Making – Shareholders also use these statements for making decisions. Investors make decisions by reviewing how much theywant to invest in the Business. The investors also view the price per share before taking any effective decision in the organization.
• Helpful in making Policies – Companies use these statements to pay their corporate taxes, and the govt also uses them. For making various policies in the budget like how much tax rate should be charged, corporate social responsibility payments.
• Useful for stock Traders – Stock Traders review these Statements for determining the financial structure of the company. Traders invest in companies IPO, purchase or sell shares by analyzing the financial position. The result is that stock traders can make sufficient profits.
• It discusses the uses and limitations of ratio analysis (Abor, 2016, p 1(1)).
• Helpful for Management – They are essential to Management for determining the progress, growth prospects, etc. It helps them in day-to-day operations, and it also helps them in establishing adequate controls.
• Financial Institutions use these statements to know whether they should provide loans, issue debentures, and issue fresh working capital to expand their Business. For such purpose, the banks see the financial statements to know whether other loans exist in the balance sheet and the Company is repaying it on time.
• Management and owners use these statements for making crucial decisions that affect the smooth running of the Business. It provides a detailed view of the financial positions. These statements help in identifying the weaknesses in the company. So, that proper controls can be established.
• Employees need financial statements for mainly two reasons: current wage and future salary appraisals (Thakur, n.d., p 8(1)). They can demand more salary or incentives if the Company is doing well.
• Ratios like solvency, operating ratio, net profit margin, working capital, sales, etc. these ratios are calculated by the Company using the figures of the financial statements. So, for calculating various ratios, we need financial information.
• Financial statements also indicate the trend. Suppose if there is a loss in the current year while profit in the previous year then it helps the Business understand the reason so that a correct step can be taken to remove such a situation.
• These statements are also used in Tracking. These are summarised views of the whole position of the Business. This helps in making Decisions Quickly.
• It also helps in liability management. If the Company wants to take a loan, it can be quickly reviewed from the financial statements. The liability side is shown in the balance sheet, where we can view the credits taken.
• Shareholders of the Company do not come daily, and they are generally present at the AGM. So the Financial Statements helps them to judge how the Company is doing.

Evaluation of Current Flaws of Financial Statements–

Financial Statements are beneficial for many users. These statements are used for Equity Valuation (Abukari, 2000, p 1(1)). But there are some flaws which should be removed. Financial Statements users turn to other information sources to meet their needs (Thomas,1990, p 1(1)). Such Flaws are-

• These statements could be wrong due to fraud because sometimes there is pressure from the upper-level managers to show overvaluation of Assets, increasing profits, decreasing Liabilities, and reducing Losses, etc.
• Financial Statements of one Company with another cannot be compared because of the Company’sCompany’s different accounting policies and procedures. To some extent, these can be understood by disclosures.
• These statements cover a specific period that does not reflect the actual position becausegenerally, at the time season, there are high sales if any tragedy happens, etc. So there should be many consecutive financial statements that should be taken for analysis.
• It depicts only the data of Value Creation instead of the path of Value Creation (Yongkui, 2013, p 1(1)).
• These statements include only quantitative data. There is a lack of Qualitative Data such as Labour turnover, environmental attentiveness, workers absenteeism, etc.
• The figures of the statements are not changed by inflation and deflation. If there is increase in price, the fixed assets are still recorded at historical cost in the balance sheet. It does not depict an accurate picture of the Company’s Business.
• Lack of Core Information (Yongkui, 2013, p 1(1)).
• These statements do not record some Intangible Assets. So, it underestimates the value of the assets of the company. It is an obstacle, especially for start-ups when it launches a product, brand image, etc.
• Transactions are recorded at Cost at which they are purchased. Only Depreciation or amortization as the case may be gets adjusted. Thus, the statements could be misleading for the viewers of the Financial Statements.
• Some time financial statements are not audited. So they may be inaccurate or not according to policies and practices of the International Accounting Standards. It also depicts that the controls are not strong.
• Financial statements are based on historical costs or past time. And there is no provision for future happening.
• Failure to revise the procedures if any discrepancy in these statements is found. Typically, Management accounts for the disparity in reports but fails to take the corrective decision.
• The Statement could be misleading because moreamountsshown are based on historical costs (Accounting Tools, 2021, p 1(2)).
• The allocation of expenses and incomes will depend upon the personal judgment of the accountant (Mishra, n.d., p 1(2)).
• There has to be some periodic reporting, but the fact remains that reports covering only a year (Devore, 1967, p 2(5)).

Propose Modifications for Financial Statements under IFRS –

The important aspect of the Financial Statements doesn’t take the client’s requirements for data about the elements of the conventional fundamental plan of action adequately into thought. This prompts the absence of getting, clearness, and capacity to think about substances. Clients experience the ill effects of missing data and need to use an measure of time to research the essential financial reports. The characterizations in the assertion of benefit or misfortune, financial information, and incomes are neither uniform nor facilitated. As of now, there is so little spotlight on the standard principle plan of action that the elements’ genuine financial turn of events and status can be marked. There are many flaws in the statements; that’s why we propose an important classification of financial statement items (Baksaas, 2019, p 2(2)).Initially, we represented direct profits, but now we suggest that the profit or loss item “Operating profit or loss before depreciation from the main business in the company” (EBITDA) should be presented in the Statement to know about the depreciation, amortization clearly and that “Networking capital in business activities” which is calculated by deducting current assets from current liabilities. Users of financial statements can easily find out Net operating fixed costs. This helps to ascertain the capital invested in the Business.IFRS does not provide a better presentation. The proposed modifications in IFRS also include more disclosures requirements to understand the Company’s financial statements better. There are many compliances introduced under IFRS to bring Uniformity. Under it, Integrated Reporting also got. It refers to periodic integrated reports for value creation and resource utilization for maximizing output. IFRS 1 was proposed to bring many disclosures and additional changes for the presentation of financial statements. However firstly it becomes difficult for the company to apply such proposed changes. But now it’s become mandatory, these changes are not necessary only for the company they are also useful for the users. It gives an effective and sound presentation in the statements. The company can also interpret it quickly and takes business decision for its smooth running of the business. The current IFRS conceptual framework focuses on clear presentation and additional disclosures (Baksaas, 2019, p 2(5)).We expect that all these changes will results to more understandable, transparent, and more comparable primary financial statements.

Conclusion

International Financial Reporting Standards (IFRS) consist of many policies that govern how transactions and treatment of events must be shown in financial accounts. They are designed to maintain Uniformity and transparency in the financial world, which helps investors make business decisions. One of the IFRS discusses the presentation of financial statements and their usefulness, and it indicates proper disclosures should be made for a better understanding of statements. There are some drawbacks of IFRS and proposed modifications discussed above. Based on these statements, many persons such as Investors, Management, Govt., Debenture holders, etc. Takes decision. So, it’s the company’s responsibility to make the final accounts following the IFRS to show a clear and accurate picture to the users.

References

Thomas, W., (1990), The Changing Significance of financial Statements, https://www.proquest.com/openview/35b290226598ba9da8ae3f1ba31790eb/1.pdf?pq-origsite=gscholar&cbl=41065

Popovic, S., (2015), The Importance of continuous audit of Financial Statements of the Company of countries joining the EU, https://www.utgjiu.ro/revista/ec/pdf/2015-03%20Special/41_Popovic.pdf

White, G., (2002),The Analysis and Use of Financial Statements,https://www.google.co.in/books/edition/_/ZoIBv3HbCfAC?hl=en&gbpv=1&pg=PA1&dq=about+financial+statements+and+its+importance

Graham, B., (1937), The Interpretation of Financial Statements, http://1icz9g2sdfe31jz0lglwdu48.wpengine.netdna-cdn.com/wp-content/uploads/2011/11/interpretation-financial-statements.pdf

Meredith, S., (1937), The Interpretation of Financial Statements, http://1icz9g2sdfe31jz0lglwdu48.wpengine.netdna-cdn.com/wp-content/uploads/2011/11/interpretation-financial-statements.pdf

Abukari, K., (2000), The Role and the Relative Importance of Financial Statements in Equity Valuation, https://www.researchgate.net/profile/Bruce-Mcconomy/publication/228248434_Accounting_Information_and_Stock_Prices_in_Canada/links/5d5fef4192851c619d6f2900/Accounting-Information-and-Stock-Prices-in-Canada.pdf

Thakur, M., (n.d.), Importance of Financial Statements, https://www.wallstreetmojo.com/importance-of-financial-statements/

Bartov, E., (2014), Does Income Statement Placement Matter to Investors? The Case of Gains/Losses from Early Debt Extinguishment, https://meridian.allenpress.com/accounting-review/article-abstract/89/6/2021/54159/Does-Income-Statement-Placement-Matter-t

Accounting Tools, (2021), Other Comprehensive Income Definition, https://www.accountingtools.com/articles/what-is-other-comprehensive-income.html

Cote, C., (2020), HOW & WHY MANAGERS USE FINANCIAL STATEMENTS, https://online.hbs.edu/blog/post/how-managers-use-financial-statements

Cote, C., (2020), HOW & WHY MANAGERS USE FINANCIAL STATEMENTS, https://online.hbs.edu/blog/post/how-managers-use-financial-statements

Al-Zghool, M., (2020), Financial Statements: Uses, Purposes, Advantages and How they relate together?https://www.linkedin.com/pulse/financial-statements-uses-purposes-advantages-how-relate-al-zghool

Accounting Tools, (2021), Limitations of Financial Statements, https://www.accountingtools.com/articles/limitations-of-financial-statements.html

Mishra, S., (n.d.), Major Limitations of Financial Statements, https://www.yourarticlelibrary.com/accounting/financial-statements/limitations/5-major-limitations-of-financial-statements-accounting/66765

Yongkui, Z., (2013), Limitations of Financial Statements and Disclosure of Core Information,https://scialert.net/abstract/?doi=jas.2013.2505.2511

Yongkui, Z., (2013), Limitations of Financial Statements and Disclosure of Core Information, https://scialert.net/abstract/?doi=jas.2013.2505.2511

Abor, J., (2016), Understanding and Analysing Financial Statements, https://link.springer.com/chapter/10.1007/978-3-319-34021-0_8

Devore, M., (1967), The Meaning and Significance of Financial Statements, https://egrove.olemiss.edu/cgi/viewcontent.cgi?article=1146&context=dl_hs

Baksaas, K., (2019), Proposal for improved financial statements under IFRS, https://www.tandfonline.com/doi/full/10.1080/23311975.2019.1642982

Baksaas, K., (2019), Proposal for improved financial statements under IFRS, https://www.tandfonline.com/doi/full/10.1080/23311975.2019.1642982