Accounting and Finance – Corporate Reporting | My Assignment Tutor

Unit 6 Accounting and Finance – Corporate ReportingModule: Corporate ReportingUnit ref No: D/615/3241Submission Date: 15th August 2017Word count: 4500Unit 6 Accounting and Finance – Corporate ReportingContents PagesIntroduction 31. An indication of the main sources for regulatory frameworks,Accounting and corporate, Principles and Theories 32. An Explanation of the Impact of the Accounting and FinanceFrameworks on Business Organisations in General and yourChosen Company 63. Identify, Review and Assess Specific Policies, Practices andRegulations for your Business and the Business Sector it operatesWithin 84. An Assessment of the Areas of Abuse and Exploitation inAccounting and Financial Reporting 105. An Assessment of the Importance of Accounting Concepts,Principles and Theories 136. An Interpretation and Assessment of the PublishedAccounting Information of your chosen company; you should analyseand assess the following Financial Statements 15References 18Unit 6 Accounting and Finance – Corporate ReportingIntroductionThis unit’ (6) assignment is an integral fulfilment of the Diploma in Accounting andFinance level 7. Its remit is to answer six related questions needed to pass themodule and they are as follows:1. An indication of the main sources for regulatory frameworks, Accountingand corporate, Principles and TheoriesThere are numerous sources for information gathering relating to this sub-questionbut, the main relevant avenues for the profession and business is as follows:Financial Service AuthorityOne of the main sources is the Financial Service Acts. Investor confidence in theworking of the stock market for example, is paramount if it is to operate effectively.The mechanism for regulating the whole UK financial market system was establishedby the Financial Service Act (1986), which has been progressive and content ofwhich provides guidance to institutions and professionals on measures to mitigatefinancial crisis. It aims to provide a structure based on self-regulation within astatutory framework. In 1997, statutory powers were vested in a supervisory body;the Financial Service Authority responsible to the Treasury. Its objectives are tosustain compliance in the UK’s financial service industry; monitor, direct and preventfinancial crime. The FSA takes on additional responsibilities to monitoring the Bankof England and money markets, building societies and insurance market. The hopeis that by having a single regulator covering all financial sectors, there will be greaterefficiency, lower costs, clearer accountability and a single point of service forcustomers and complaints.Unit 6 Accounting and Finance – Corporate ReportingProfessional BodiesEqually, professional bodies such as; the Association of Certified CharteredAccountants (ACCA) and the Chartered Institute of Management Accountants(CIMA) and host of others who plays a key role in developing and regulating theaccounting profession, practice and standards and theories. These professionalbodies are amongst the sources for regulatory frameworks; governing the professionand practice. In as much as they publish and draw the professional code of conduct,they are also having powers to regulate the professional qualifications, admissionand dismissal of members who violate the regulations. The professional bodies arekey contributors in developing accounting theories and concepts such as thefinancial statements reporting; that form the basis of the format andcontent/disclosures in the financial statements. Therefore, financial statements mustbe presented with fair, accurate and relevant information that will be useful for theusers of financial statements. It also directs the professional accountants to observerules and regulations set by the “International Accounting Bodies” such as; theInternational Financial Regulation Standards (IFRS) and International AccountingStandards (IAS).Published Committee’ ReportsAnother source is the Published Committee’s Reports such as the Cadbury Reportand Hample Committee Report. For example the Cadbury Report had recommendedthat firm’s directors must be committed to upholding the effectiveness of thecompany’s internal control systems. However, the Hample Report recommendedthat the word “effectiveness” be omitted and that the company directors merelyreport that they have conducted a review of the “effectiveness” of the company’sinternal control systems with the auditors reporting to the directors on those controls.This recommendation reflects in practice organisation had intended to report onUnit 6 Accounting and Finance – Corporate Reportinginternal control systems generally; rather than on their effectiveness. Also, CadburyReport pointed out that the directors of a company should report their opinion that,the company is a going concern with supporting assumptions and qualification whennecessary and that the auditors should review and comment whether that statementis satisfactorily.The Company ActsThe Company Acts (1986, 2006) in the UK has been one of the main sources forregulatory frameworks, controls and setting and modifying standards for professionalaccountants, auditors’ practice and corporate governance. For example, the auditingprofession in the UK plays a major role in regulating auditing. This role wasenhanced by certain provisions contained in the company Acts. Until the passing ofthese Acts, the auditing profession had considerable autonomy in the way itregulated it members and practice. The Acts gave legitimacy to this by establishingin law two bodies; Recognised Supervisory Bodies and Recognised QualifyingBodies. The role of the former is to maintain and enforce rules such as the eligibilityof persons to seek appointment as company auditors and to conduct audit work.Recognised Qualification Bodies was to enforce rules whether or not instituted by thebody such as those relating to; admission to or expulsion of members from a courseof study leading to a qualification.The regulatory frameworks, accounting and corporate, principles and theories areintertwined and have formed the central plank upon which, theory and practiceflourishes for the good of the profession and business in general. These concepthave created the opportunity for the accounting profession and business beregulated, reliable and trusted by investors and the general public (Gray and Manson2010; Pike and Neale 2010; Kothari and Barone 2015).Unit 6 Accounting and Finance – Corporate Reporting2. An Explanation of the Impact of the Accounting and Finance Frameworks onBusiness Organisations in General and your Chosen CompanyIn a well organised business each section should arrange it activates to maximise itscontribution towards the attainment of corporate goals. The accounting and financeframeworks, policies and theories are inter-connected and are all sharply focused itsactivities and directives being specific to financial aspects of management decisionsand wealth creation. It’s therefore, the responsibility of the management to design,raise and use resources in a proficient way to accomplish the company economicaims. However, changes in the wider society might have profound impact onplanning and organisation of resource to maximise potential of the company.Financial and business management are principally anxious with assets, fundingchoices and the connections amongst them. These tow broad areas lie at the heartof financial management theories and practice. The investment decision sometimesreferred to as the capital budgeting decision but constraints owing to financialframeworks, tend to under-mind the strategic vision. Thus, the basic problem relatingto strategic decision making are: How much should the firm invest to unrelatedbusiness line as part of diversification policy? In which project should the companycapitalise (secure or current, tangible or intangible)? Central to the whole financeand accounting frameworks, awareness of the market and industry indications areviewed as “blood life” of the business, which is essential part of the corporate body tominimise the impact of changes and regulatory framework, governing the industry.At the same time, technological progress in communication has led to globalisationand volatility in the market. This has generated a key impact in the corporateenvironment, given the fact that financial market is generally unhindered withinformation and financial movement. Advancement in information technology has notonly makes global finance possible, but also brings technical know-how in financedesigns and financial database within close proximity to major world markets.Complexity in taxation and the enormous growth in financial instruments for raisingmoney and managing risk have made some aspects of financial management highlyspecialised and complicated for some fund managers, management staff and theiremployees alike to cope. Also greater awareness of the need to view all decisionUnit 6 Accounting and Finance – Corporate Reportingmaking within a strategic framework is moving the focus away from purely technicalto more strategic issues.With regard to the accounting frameworks and measurement of the elements offinancial statements, the IFRS list a number of different measurement bases, whichare employed in different degrees and in varying combinations in financialstatements. However, the measurement bases most commonly adopted bycompanies in preparing their financial statements are historic cost. For example,stocks are usually carried at lower cost and net realisable value, and pensionliabilities are carried at their present values. Some companies use the current costbases as a response to the inability of the historical cost accounting model to dealwith the effect of changing price of non- monetary assets.A major feature of the IFRS is the extent to which they are in build with fair valueaccounting or mark – to – market accounting. As pointed out by Ball (2006), theremixed views of fair value accounting. Despite the advantages, fair valuemeasurement is not panacea. There are many potential problems with fair value inpractice, including market illiquidity as emerged during the 2008 to 2010 creditcrunch. Other concerns and impact on business organisations are lack of a cleardefinition of the fair value, lack of verification, the ability of the management todetermine fair value estimates and the potential circularity of reflecting fair value infinancial statements; when the objective is to provide financial statement users withinformation to make decisions that include assessing the value of the company.Despite their indispensable usefulness, accounting reporting, the income statementsand balance sheet do not stress the importance of liquidity. The accruals basenature of the income statements tends to obscure the question of how and where thebusiness is generating cash it needs to continue its operations and thereby generatemuch cash. People and organisations will not normally accept other financialinstruments rather than cash in settlement of their claims against a company. Theabove mentioned factors lead to cash being the pre-eminent business asset andtherefore, the one that analysts watch most carefully in trying to assess the ability ofa company to survive or to take advantage of commercial opportunities as they arise(Kothari and Barone 2015; Pike and Neale 2010).Unit 6 Accounting and Finance – Corporate Reporting3. Identify, Review and Assess Specific Policies Practices and Regulations foryour Business and the Business Sector it operates withinThe sub-questions of the module are constrained by word limit therefore, willconcentrate on few relevant captions such as the following:Finance and operating policy – internal control systemsInternal accounting control policy is a key to business sustainability as this has themechanism for checks and balances to mitigate financial fraud and misappropriationof resources in the wider organisational context. Therefore, it will be necessary toanalyse the firm’s financial and operating policies in details; to find out where controllies. The two significant financial and operating pollicises of the firm that will oftengive the best indications of who has control on the distribution and reinvestmentpolicy and approval of the business plan. Other important financial and operatingpolicies that are obvious include the firms’ strategic direction, ability to approvecapital expenditures and rasing of finance. The benefit of this policy in practice is thatit creates economic of scale and assurance of effective control systems. Thisminimises duplication of accounting entries, manipulation of expenditures, creativeaccounting and financial crime. Financial operating policy provides guidance for allsections of the organisation as it sets rules, procedures and regulations that facilitategood practice and maximisation of competitiveness and business competitiveadvantage.Financial StatementsNotes that accompany the financial statements such as; statements of financialposition and statement of cash flows are an integral part of the financial statements,the “ International Accounting Standards (IAS1) , states that the notes should provideUnit 6 Accounting and Finance – Corporate Reportinginformation about the bases of preparation of the financial statements and theaccounting policies, which have been used including:1. The measurement bases used in preparation of the financial statements2. Other accounting policies used that are relevant to the understanding of thefinancial statements3. Disclosures of information as required by the “IFRS” to the extent that this hasnot been presented somewhere else in the financial statement4. Provide any other information, which is pertinent to the understanding of anyof the financial statementsHowever, there is little guidance in the “IAS27” as to the specific policies on investorcontrolFair Presentation and Compliance with “IFRS”In practice, financial statements should present fairly financial position, financialperformance and cash flows of the company. Fair presentation requires the faithfulrepresentation of the effects of transactions, other events and conditions inaccordance with the definitions and regulation criteria for assets, liabilities, incomeand expenditures set out in the framework. The requirements of the IAS reflect thequalitative characteristics of financial statements, set out in “IFRS” framework.Consequently, a departure from the framework will be necessary only when thetreatment required by the IFRS is clearly inappropriate and thus, a fair presentationcannot be achieved either by applying an IFRS or through additional disclosuresalone.Laws and RegulationsThere are numerous laws and regulations with which a firm must comply with, someof which are directly related to items in the financial statements and others with onlyUnit 6 Accounting and Finance – Corporate Reportingan indirect bearing in financial statements. The main laws and regulations, whichbear directly in financial statements are, contend in certain sections of the CompanyActs such as the (2006) Act. Equally the Financial Service Acts (1986, 2014) haveprovided guidance to financial services industry; including behaviours andcompliance, operation and competitiveness and reserves. This guidance is aimed tominimise financial crisis and scandals such as what happened in the financial sectortowards the end of the last decade (2008 to 2010). These Acts and regulations haveprovided a legal framework and modify practice and behaviour with which financialservices industry and the wider business environment have composed themselves;and conduct its businesses. Therefore, this is central to the ability of the firm andindustry/sector to manage its affairs; and this has the propensity to enhance itsfinancial statement presentation and business competitive advantage (Kothari andBarone 2015; Gray and Manson 2010, 2000).4. An Assessment of the Areas of Abuse and Exploitation in Accounting andFinancial ReportingManagement has many incentives to perpetrate financial abuse. Where managersare trying to meet a number of legitimate corporate goals such as; sales targets, costtargets and earning expectations, they can find accounting rules and systems ahindrance. Therefore, some managers and employees may be tempted tocompromise the vital informational rules of accounting to manage the company’sprofitability. In this regard the focus of this essay will be on the following subtitles:Hidden LiabilitiesIn the accrual method of accounting; expenses must be recorded in the period whenthey are incurred, irrespective of when they are paid. Capitalization refers torecording expenditures as assets rather than expenses because expenditures addUnit 6 Accounting and Finance – Corporate Reportingthe value of assets which provides value and benefits into the future. Impropercapitalisation occurs when companies capitalise current cost that do not benefitfuture period. Improperly capitalising or deferring expenses generally cause acompany to underestimate reported expenses and overstate net income in theperiod of capitalisation or deferral. Typical example is WorldCom in the early 2000sthat was alleged to have overstated its cash flow by booking $3.8 billion of operatingexpenses as capital expenses. This transfer resulted in WorldCom materiallyunderstating expenses and overstating net income. It also enabled the company toreport earnings that met analyst estimate.Cookie Jar ReservesReserves are provisions for liabilities that are set up for a wide variety of futureexpenditures, including restructuring charges or expected litigation cost. Recording areserve on a company’s books generally involves recognising an expenses and arelated liability. From abuse perspective, this may be done in good year when thecompany makes profits so that it is able to incur large expenses. This provision iscalled cookie jar reserve because management can reach into the jar and reverse infuture years when the company deems it necessary to boost earnings. This isexactly what “Symbol Technologies” (in the US) did in 1998 to 2003. The companyengaged in a number of fraudulent accounting practices and other misconduct thathad a cumulative net impact of over $230m on Symbol’s reported revenue and over$530m on it pre-tax earnings. The company created cookie jar reserve by fabricatingrestructuring and other charges to artificially reduced operating expenses in order tomanage earning.Unit 6 Accounting and Finance – Corporate ReportingOff-balance Sheet TransactionsOff-balance sheet transactions are used to raise additional funding and liquidity.These activities may include the use of “Special Purpose Entities” to enable a firm’shandover of or entree to resources. Most of the times, the transferor of assets hassome obligations or on-going connection with the relocated properties. Subject to thenature of the commitments and the related accounting treatments, the firm’accounting reporting may not fully reflect the company’s debts with respect to the“Special Purpose Entity” of its arrangements. Dealings with “SPEs” commonly arestructured so the company that creates or promotes the “SPE” and involves indealings with it is not obligatory to combine the “SPE” into it financial statements. Atypical example, is “Enron” in the US, the company was engaged in a complexscheme to create an appearance that certain entities that they funded and controlledwere independent of the company. This allowed Enron to incorrectly move itsinterest in these companies off its balance sheet. Thus, some of directors wereconvicted for this reason.DisclosuresSome companies can commit financial statement abuse by misrepresenting theirfinancial condition through misstatements and omissions of facts and circumstancesin the public filings, such as the management and discussion analysis, non-financialsections of annual reports or footnotes to the financial statements. In this situation,management does not provide sufficient information to the users of financialstatements. As a result, the users cannot make informed decisions about financialconditions of the company. In accordance with the international accountingstandards’ frameworks as well as the Company Acts and accounting rules,companies must disclose related transactions in the financial statements. Moreover,a transaction with board members or beneficial owners; holding 5% or more of thecompany’s voting securities that exceed certain amounts. An example here isUnit 6 Accounting and Finance – Corporate Reporting“Adelphia” in the US, in 2002, who was alleged to have failed to disclose that over$300m of company’s funds were diverted to some senior management staff withoutadequate disclosure to investors and the directors were prosecuted for this failure(Kothari and Barone 2015; Kass-Shraibman et al 2010; Gray and Manson 2010;2000).5. An Assessment of the Importance of Accounting Concepts, Principles andTheoriesThese frameworks are paramount for business sustainability hence they provideguidance to competitiveness and maximises its potential for wealth creation andcompetitive advantage. Their presence provides anchoring and adjustmentopportunities for the management of a company. In reaching decisions, managersoften place undue weight on the first information received. The assessment madefrom the initial information then acts as a data anchor therefore, subsequentinformation are used to make minor adjustments. Traditional budgeting is a goodexample of this approach, where the current year’s budget, or the actualperformance from the basis upon which incremental adjustments are made toproduce next year’s budgets.Furthermore, the frameworks create efficiency and directives to maximise resourcesand minimise wastage. The economics talks about “allocate efficiency”, which meansthat resources are allocated to the most productive uses, thus satisfying societyneeds to the maximum. The most important concept of efficiency for businesspurposes is pricing or information efficiency. This refers to the extent to whichavailable information is built into the structure of share prices or business contacts. Ifinformation relevant for assessing a company’s future earnings prospects is widelyand cheaply available then this will be impounded in pricing by an efficient market.As a result, the market should allow all participants to compete on equal bases.Equally, some of the theories such as “the Fisher theory” arbitrage and financialbehaviour provides knowledge and understanding of how the market behaveUnit 6 Accounting and Finance – Corporate Reportingtherefore, guide managers on how to mitigate unforeseeable losses. For example,the Fisher’s theory claims that the difference between the interest rates offered onidentical bonds in different currency represents the market estimate of the futurecharges in the exchange rates over a period of the bond. The theory is particularlyimportant in the case of fixed rate bonds that have a long life of maturity. Also, shortterm forecast may be needed to hedge debtors or creditors for settlement in a monthor for as long as possible.In consideration to unsystematic risks, arbitrage theory explains the importance ofdiversification of investment as it assumes the return on an investment dependspartly on macroeconomic factors and partly on events specific to the company.Instead of specifying an investment’ returns as a function of one factor it specifiesthe returns as a function of multiple macroeconomic factors upon which the return onthe market portfolio depends. Diversification is designed to even out bumps in theprofile of profits and cash flows; the ideal form of diversification is to engage inactivities that behave in exactly opposite ways. For internationally diversified firm thefactors affecting domestic operations may be different for those affecting overseasoperations. Also, to generate an appreciable impact on overall returns, diversificationmust usually be substantial in relation to the whole enterpriseDiversification eliminates the specific risk associated with a security, living only themacroeconomic risks as the determination of required security returns. A rationalfund manager will arbitrage between different investments if the current marketprices do not give sufficient compensation for variation in one or more factors in thearbitrage pricing theory.On reflection, some of the concepts or theories such as behavioural finance playsimportant role, for which it help to relax the tight assumptions of financial economics;to incorporate model based on observable, systematic and human departing fromrationality. Behavioural finance has examined how investors react to newinformation. The stock prices appear under-react to financial news such earnings’announcements, but over-reacts to a series of good or bad news. The proponents ofthe efficient market hypotheses argue that: it helps investors and fund managers tounderstand the market anomalies, including stock market over-reactions/underreaction, bubbles and irrational pessimism; investors in the main, value securityUnit 6 Accounting and Finance – Corporate Reportingrationally; even if some investors do not act irrationally, their irrational behaviour israndom and therefore cancels out. Consistent with the market efficiency hypothesesthat the anomalies are chance results, apparent overreaction to information is aboutas common as under-reaction and post-event continuation of pre-event returns isabout as frequent as post-event reversal (Pike and Neale 2010; Berks and DeMarzo2010).6. An Interpretation and Assessment of the Published Accounting Informationof your chosen company. You should analyse and assess the followingFinancial Statements: The chosen firm in this respect is “JEIS Construction andMaintenance Services Ltd”A). Income StatementThis presents the statement of revenues and expenses of a particular period oftrading, leading to determination of net income or net profit for the company. To gainan impression of how well the company performed over the past year. The users offinancial statements need to turn to the profit and loss account or income statement.This shows the sales income less the cost of trading. The shareholders are primarilyinterested in the profit after taxes; available for distribution to them in the form ofdividends. For example, the company has made a profit after taxes of £10m ofwhich; half has or will be paid to shareholders in the form of dividends, the remainderbeing retained profit, reinvested in the business, with anticipation to earn a higherprofit next year.Income statement provides ample opportunities for investors to evaluate theprofitability of the company in which they have invested into. Therefore, they want toknow how much profit has been made from the company’s trading, before the cost offinancing is deducted i.e. earnings before interest and taxes including depreciation(EBIT). For example, EBIT less operating cost equal net profit, which is available toshareholders,Unit 6 Accounting and Finance – Corporate ReportingEBIT £150mOperating Cost including depreciation and tax (£100m)Net Profit £50mHowever, profit is not the sole consideration for investors. They are perhaps moreinterested in how much cash has been created through the successful trading by thecompany. This can be estimated by adding back depreciation previously deducted incalculating earnings before interest and taxes. This then helps them to makedecision about their investment and potential future investment in the company.B). Statement of Financial PositionThis represents a statement of the assets, liabilities and capital of the company as ata given date, during a trading period; usually at the end of an account period asdistinct from income statement, which presents transactions for a period. Statementof financial position (Balance sheet) shows the assets and liabilities of the company.The assets of the company (property, receivable incomes and cash in hand/bank)are equal to the claims or liabilities of the company (shareholders, creditors, shortand long-term debt). This is the bases of double entry book-keeping. According tothe basic accounting equation, asset equal liabilities plus equity, which means assetsminus liabilities equals’ equity. For example;Assets £250mLiabilities + equity £250mEquity £100MAlthough the “International Accounting Standards” does not prescribe a format forthe balance sheet that accompanies the standard. Financial statement portrays thefinancial effects of transactions and other events by grouping them into broadclassification according to their economic characteristics. The broad classes; thereare two main groups; for example assets and liabilities which is classified by theirUnit 6 Accounting and Finance – Corporate Reportingeconomic activities or functions in the business of the company in order to displayinformation in the manner most useful to users for the purpose of making economicdecisions.Equally, statement of financial position reveals the company’s strengths andweaknesses in relation to its position in the market and ability to maximisecompetiveness and sustainable future trading. Assets thus, are a resource controlledby the firm as a result of past events and from which future economic benefits areexpected to flow to the company. Therefore, in assessing whether an item meets thedefinition of an asset or a liability or equity, attention needs to be given to itsunderlying substances and economic reality and not merely its legal form. In effectasset and liabilities have to be employed to maximise its potential to reposition thecompany’s profitability and wealth creation for stakeholders. On the other hand, aliability is a present obligation of the company arising from past events, thesettlement of which is expected to result in and out flow from the company; ofresources embodying economic benefits.C). Cash Flow StatementThis embodies the flow of money entering or leaving the firm during the period oftrading. Information about the cash flow of the company is useful in providing usersof financial statements with a basis of assessing the company’s ability to generatecash and its needs to utilise those cash flows. For example:Sales £300mExpenses + depreciation £250mNet profit £50mThe economic decision that are taken by users require an evaluation of thecompany’s ability to generate cash, the timing and certainty of it generation. Cashflow statement, when used in conjunction with the rest of financial statements;provides information that enables users to determine the following:Unit 6 Accounting and Finance – Corporate Reporting The ability of the company to generate cash from its operations The cash consequences of investing and financial decisions The sustainability of the company’s cash generating ability Information about the liquidity and long-term solvency of the companyCash flow shows the relationship of net profit to changes in cash balances; cashbalance can decline despite net profit. It explains where the case came from during atrading period and where it went (Kothari and Barone 2015; Pike and Neale 2010).ReferencesBall, R (2006) International Finance Reporting Standards: pro and cons for theinvestors’ Accounting and Business Research, International Accounting PolicyForumBerk, J and Demarzo, P (2010) Corporate Finance – Pearson international edition;Addison WesleyGray, I, Manson, S (2000, 2010) The Audit Process; principles, Practice & Cases(2nd & 4th Edn) ThomsonHayes, R, Dassen, R, Schilder, A, Wallage, P (2010) Principles of Auditing; AnIntroduction to International Standards of Auditing (2nd Edn); Prentice HallKass-Shraibman, F and Sampath, V. S (2010) Forensic Accounting for Dummies;Wiley Publishing IncKothari, J, Barone, E (2015) Advanced Financial Accounting; An InternationalApproach, Prentice HallPike, R and Neale, B (2007); Corporate finance and investment – decision andstrategies; Prentice Hall

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