Financial Reporting and Management


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Introduction to Financial Reporting and Management

Financial reporting should be in a way that can clearly show the position of the firm hence management and accountants of any firm should use some reliable measures that are scientific and logical so that they can clearly present the data which are also reliable that they can manage their business operations in an efficient manner which can provide better output to the company. This Report is explained by our experts of online assignment help services, which is based on the fact of whether to adopt historical values of assets held by the cited entity or to use the fair market value of those assets by the accountants of any firm. To remove the confusion in choosing either of these two is clarified through the below-mentioned facts and concepts so that users can get better relevant information in order to make any decision regarding their investments. This also enables the managers to ascertain the actual financial situation of the firm.

Task 1

1.1 Valuation techniques as per IASB with respect to financial reporting and international reporting standards

The International Accounting Standard Board (IASB) is a private institution that deals in the development and various other improvements of standards made for financial reporting i.e. International Financial Reporting Standards. Its main work is to oversight the IFRS in order to make the statements of finance more reliable and more credible so that healthier presentation can be made in front of its users.

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IFRS 13 Fair Value Measurement

This standard of IFRS was issued by the International Accounting Standard Board on the 12th day of May 2011 in which the use of the fair market in the valuation of assets of any enterprise has been mentioned so that they can value them on that amount which they can get as proceeds of such fixed as well as current assets on selling them in the open market. There are various other objectives which are behind issuing such standards. These are described below...

  • Define the fair value of any asset so that they can put that amount as their value which they can get through selling them in the open market.
  • Providing a single set of requirements for the measurement of techniques so that they can increase the scope of exclusions of such elements can make an unethical fluctuation.
  • To specifically describe the single set of requirements for the measurement of market valuation.

IFRS 13 does not contain those specific criteria in which it has been mentioned when such assets of any entity should be valued at market value. These criteria are described in some other standards.

On the other hand there are some particular IFRS that specify some assets that should valued only at fair market value(Armstrong, Guay, and Weber, 2010). This can be measured on each reporting date, which means that they should value such assets on each date so that they can get the amount of assets they can get as sale proceed selling them on the same date. In some other cases such as alteration in assets, it can be possible that these are quantified on a recurring basis.

The above-mentioned standard can be applied to the assets that meet the specific criteria that have been mentioned there in other standards as well as to those assets in which some assets are specifically described. IFRS 13 can be applied to both financial and non-financial data which are there in transactions of any company but these are guided through limited scope exclusion(Barth and Landsman, 2010). This provides guidance that is purely based on principles that are scientifically approved and universally accepted as through following this principle-based guidance of IFRS 13 an entity can easily and effectively quantify its available possessions. It does not attempt to exclude any judgment which is theirs in valuation as every enterprise can adopt its different and realistic methods of valuation. Rather than this, it mentions the framework through which it can remove the inconsistency that is there in quantifying the possessions of the entity. It can also enhance the comparison capability during fairly quantification measurements. Standard remains effective during the whole financial year so that there can be consistency in measurement as early adoption of such methods will continue till the end.

Scope exclusions

There are certain scope exclusions mentioned in IFRS 13, which are mentioned as under.

Share-based payments

There are certain asset amounts that are required to be paid on the basis of shares. IFRS 2 deals in such share-based valuation it can be noted here that the objectives of IFRS 2 are entirely different and inconsistent with International Financial Reporting Standard 13. so IASB has separated such share-based payment assets out of the scope of this standard.

Lease transactions

Certain assets are not owned by the company as management may decide to lease such assets rather than to own them as this can reduce the huge expenditure over the asset further there is another benefit available with them and that is they can easily return such assets which has been taken on lease to the lessor. IFRS 13 does not apply to transactions that have been made through a leasing agreement.

There are some other measurement techniques which are described below :

Present Value technique

This standard provides better guidance for using present value during the process of quantifying the assets held by any company. The company can use discounted cash flow techniques in which cash flow from assets is multiplied with discounting factors to get the amount that can be derived in the present period. However, it is not always possible to get a fair market amount by applying present value techniques. Some standards use this technique when they are not intended to value assets at fair market value.

1.2 Discussion over the reliability of using fair value techniques

If an enterprise is following IFRS then it should acknowledge the facts which are like whether the measurement done by by cited entity presents the actual amount that can be acquired from the buyers of such assets through selling them in the open market.

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As present value techniques define the assets should be valued by applying present value or discounting factors over the cash flow which can be generated through the sale of such possessions. Some other standards are using this technique but not to value the assets on market price(Charles, Glover, and Sharp, 2010). Fair market value as per IFRS 13 means the value that can be obtained through the sale of assets and transfer of a liability in some transactions which can be done between any firm and market participants as on the date of measurement.

Exit price and transaction price are two different terms as the concepts behind these two terms are entirely different. Entry price and exit price can be on the same level and at the same amount but transaction price has a different concept as this will not fetch the value of any possession and liability in the market.

The value which can be derived through sale proceeds can be helpful for any entity to record the exact amount which they can receive through sell of such possession and transfer of any liability. Historical cost is the cost at which the entity has purchased such asset from the vendor and in case they will use such historical value in decision making then it will lead to the wrong interpretation of data and miss guidance in the decision-making process of any entity. Hence they should use fair market value rather than using historical value of asset. Because of this factor numerical quantity of any possession decreases due to its regular use operating business activity. The depreciation factor is not there in historical value as it specifically ignores depreciation but as per standards issued by IASB it is mandatory to provide depreciation over the items classified as fixed assets and used in operating activities of business. If any firm does not provide depreciation through the straight-line method, diminishing value method, or any other methods mentioned there is IFRS. For making better decisions it is very important to consider the present by comparing it with the past and to assess the future through it. In this process present value of any possession can be helpful as it can provide better techniques and productive methods through which the entity can make efficient decisions in terms of achieving the objectives which have been decided by them earlier.

1.3 Disclosure requirements as per international reporting standards which govern the use of Fair market value

There are some disclosure requirements that are mentioned in IFRS 13 and these requirements are mandatory to comply with as ignorance of such disclosure requirements would lead to not following the standards as per the guidelines which are necessary to follow. Such guidelines related to disclosure requirements and objectives behind such disclosure requirements which are provided by IASB are as follows:

Objectives of Disclosure Requirements

  • The assets and liabilities are valued at market price through recurring and nonrecurring basis in the statements of finance, after the earlier recognition at the beginning to develop the techniques that are utilized for the valuation.
  • For recurring fair valuation and its measurement techniques and to implement unobservable inputs so that they can make impact over the income statement and the surplus or deficit which is opted from such statements.
  • For the achievement of these objectives, the entity is required to satisfy the level of detail that is exclusively required to meet the objectives of disclosure. They should also assess how much emphasis is to be given to each and every requirement. An entity should also acknowledge the accumulation and disaccumulation required to be undertaken by such an entity which has to follow an international financial reporting framework so that they can present the exact position of the entity. These objectives are to be followed so that they can ensure that the stakeholders like employees, shareholders, society government, etc. are demanding some more information so that they can evaluate the quantified data.

Types of disclosure

Disclosure for recognized fair market value measurement

  • In the case of recurring and nonrecurring market price criterion fair price at the terminal point of the financial year and in the case of non-revenue market value criterion reason should be disclosed properly.
  • Assets that are valued on the terminal point of year the transfer of assets and liability between level one and level two of their fair value hierarchy then the transfer date and reasons behind such transfers should be mentioned separately.

Disclosures for unrecognized fair value measurements

  • Disclosure should be made in a proper way if the organisation has made pricing of assets and liabilities through any unrecognised method then such method should be disclosed very specifically.
  • Further, the methods which are used by managers and accountants of enterprises on which IFRS 13 applies, should exclusively mention only those methods that are universally accepted and they are scientifically approved.

Disclosures regarding liabilities issued with an inseparable third-party credit enhancement

  • If any liability has been measured at fair value and is issued through a third-party credit enhancement then such issuer is required to disclose such fact that liability is attached to third-party credit enhancement(Iatridis, 2010). Such a fact should be reflected in the market price or fair value of that specific liability.
  • An extra disclosure is also required if such liability is attached to inseparable third-party credit enhancement.

Task 2

2.1 Discuss the key definition of a term used in clarifying the difference between debt and equity

International Financial Reporting Standard 9 has been issued by IASB which is a privately owned and managed institute that in fact deals with the development of standards that can act as a guide in reporting financial statements. This particular standard is specified for financial instruments and it deals with the concepts and facts that are related to such instruments. It mainly consists of three topics which are as follows:

  • Measurement of financial instruments as well as their classification.
  • Impairment of those assets which are related to finance.
  • Hedge accounting.

The above-mentioned standard will replace IAS 39 when it comes into existence in the year 2018. For enterprises on which this standard is applicable it is mandatory to comply with such standard as through its guidelines, accountants of entities can make exact calculations regarding the financial instruments which they have.

The term debt and equity is the financial instrument which includes the financial liabilities, assets, and many other instruments. It is an agreement that has risen from one organisation to another organisation and has given them financial liabilities or equities. Their objective is to create some principles to tell them how to present financial instruments as debt and equity and how to balance financial assets and liabilities. When these instruments are issued by an entity it shows them the difference between debt and equity.

These shows that it determines spontaneous and a perfect effect on the entity's results which are being reported and even their financial position. Equity ignores such impacts but it may have a negative impact on investors if it is seen as reducing existing equity interests. It includes financial assets, liabilities, and equity instruments which depend upon the variability which may be in a number of equity shares that are being delivered or changes in the amount of financial assets or cash that are received(Labelle, Gargouri and Francoeur, 2010). These financial instruments are classified as liability or as equity on the basis of substance which is over form. Some instruments are being formed with intentions to achieve tax, accounting, or any regulatory sources. With the impact that they have evaluated substances which are difficult. IAS 32 needs an entity to balance all the financial instruments like assets, liabilities, and equities in the affirmation of financial position only when these entities have a right of legal enforcement to balance or settle their net assets and liabilities simultaneously(Li, 2010). These instruments are made and are structured to maintain all the elements of both equities and liabilities in a single instrument.

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Difference between debt and equity

Debt and equity are formed to contain some element of both in a single instrument. It is not solely an equity instrument that may result in receipt of an entity's equity instrument, it depends on the variability of a number of equity shares which includes financial instruments. Equity is a contract that is settled by entities who are receiving or delivering a fixed number of their own equity or financial assets as an application. Sometimes both debt and equity contain an element that is in a single instrument, e.g. bonds that are convertible into equity shares and carry interest are addressed as equity components and separate liability(Maditinos and et. al., 2011). These liability components are measured as fair value at equal liability which do not have any conversion option. Equity in any contract can determine interest in any entity after redeeming all the liabilities. The debt is mainly for issuing or delivering either financial assets or cash to the holder. These are the written agreements that are responsible and require to repayment of interest dividends or principal. Such requirements occur indirectly but only through or in terms of agreement. These debts require making interest payments and lesser the bond for cash as debt. Financial instruments are equity instruments only when they include no agreements to deliver cash or any financial instruments or assets to any other entity.

2.2 Discussion of the key characteristics of the criteria which are used to make a differentiation between debt and equity

Under IAS 32 there are some criteria available that can used by any user to make any differentiation between debt and equity. Debts are in fact the liabilities of the company which are related to the outsiders but on the other hand, equity consists of that amount that is used by any enterprise for carrying out its activities.

  • It is the contract that provides evidence of some residual interest that is covered in any asset of the cited entity after making a deduction of all other outsider liabilities.
  • There are some financial instruments that are described in IAS 32 as puttable instruments which have to be put back to the person who has issued such instruments or any other financial instrument which have been put back to the issuer when any uncertain future event occurs such as death or retirement of the person who is holding the financial instrument.

Differentiation between equity and liability as per IAS 32

There is a basic principle that financial instruments must be differentiated into some categories. They should be classified either as a liability that is related to finance or as an equity instrument as per the conditions of the contract signed between the enterprise and the holder of that equity or liability. There are some exceptions to this prominent principle i.e. puttable instruments which are as per the specific measures mentioned in an agreement between the parties. Enterprises should maintain such a decision at the beginning time when such an instrument has been recognized by the managers but such classification should not be changed later on which are based on changes in situation or circumstances. Equity consists of the number of equity shares and preference shares, retained earnings of the company, etc. On the other hand, debt consists of outsider liabilities such as loans, debentures, and tax liabilities.

2.3 Discuss the issues that recognize convoluted financial instruments present in financial instruments.

There are some issues that can assist the users or stakeholders can recognize convoluted instruments of finance which are there in the financial statements of any enterprise:

Preference shares

These are the shares which have a preferential right over the dividend of the company. Only a company form of organisation can issue shares as per the rules mentioned in the Companies Act (Steve's Guide to complex financial instruments. 2017). They don't carry voting rights, as the preference shareholders cannot vote against or in favor of any agenda which is there in the shareholders' meeting.

Equity shares

This type of share possesses the preferential right in shareholders' meetings as they can vote in favor or against any agenda(Feng and et. al., 2014). There is an issue which is equity shareholders possess more risk as it is not confirmed to them whether they will get the dividend or not.


They are such debt instruments through which any business enterprise can raise funds from outsiders. They carry some fixed charges and it may be possible that they have been secured with some fixed assets.

These are the characteristics or issues which can assist the user of financial statements to recognise the financial instrument.

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As per the concepts mentioned therein the report which consists that, The International Accounting Standard Board has issued some guidelines through International Financial Reporting Standards through which the users of financial statements or financials can evaluate its elements in a better way so that they can frame a healthier and effective decision through which they can invest in right instruments of finance. The presented issue was whether to use historical value or to work as per fair market value of any asset or liability contained in statements has been resolved by defining the importance of fair value in decision-making by following the guidelines of IFRS 13.


  • Agoglia, C. P., Doupnik, T. S. and Tsakumis, G. T., 2011. Principles-based versus rules-based accounting standards: The influence of standard precision and audit committee strength on financial reporting decisions. The accounting review.
  • Altamuro, J. and Beatty, A., 2010. How does internal control regulation affect financial reporting? Journal of Accounting and Economics.
  • Armstrong, C. S., Guay, W. R. and Weber, J. P., 2010. The role of information and financial reporting in corporate governance and debt contracting. Journal of Accounting and Economics.
  • Barth, M. E. and Landsman, W. R., 2010. How did financial reporting contribute to the financial crisis? European accounting review.
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