Time Constrained Assessment

Task 1

1. Accounting

(a) Elements of Definition

According to the definition of accounting, it is a useful method to communicate the financial information of a business to its various stakeholders (Lingenfelter and Brooks, 2015). It includes financial data, goals of the business, policies, and strategies implemented by the company. The main elements involved in the definition are as follows:

• It is a reporting system that communicates important information for the decision-making of investors (Malone, Tarca, and Wee, 2016).
• Method of bookkeeping should be used.
• Information should be in standardized formats.
• Identification of essential information and measuring them into monetary terms for the informed judgment of people.

(b) Comparison With Other Definitions

Accounting is a systematic process to record, analyse, summarise, and report financial information. There is a difference between the definitions and methods used in US and UK (Chen, Hu, Lin, and Xiao, 2015). UK's definition is more principle while the US's definition is more of rule-based. This is because of the different methods adopted by both the countries. IFRS which is used in UK allows the business to represent and capture economic transactions better than US. On the other hand, the US is more focused on recording the information.

2. IASB's Conceptual Framework

(a) Use of Conceptual Framework Approach

UK has IASB's conceptual framework which provides the accounting standards that have to be followed (Barniv and Myring, 2015). The usefulness of the conceptual framework approach are:

• Provides consistent approach in problem solving and standards.
• Helpful in the preparation and presentation of information and financial statements.
• Provides guidelines.
• Describes the concepts and objectives of financial reporting.
• Helps in interpreting the accounting standards.
• Assists the board in the development of IFRS standards.
• Provides assistance in decision-making.

(b) Key Issues in IASB's Conceptual Framework

Performance reporting and presentation of income and expenses are the major issues in financial reporting in IASB's Conceptual framework (Lee, 2015). Furthermore, the issue of measurement of assets and liabilities on a cost or value basis is also considered in the framework. Cost is associated with the past as such it has no relevance for the users. On the other hand, valuation can be useful for the users but it is not always reliable. This makes the framework indecisive. Furthermore, IAS 40 and IAS 16 allow the business to use their own accounting policy.

(c) Usefulness For Investors And Stakeholders

IASB's Conceptual framework allows investors and other stakeholders to get up-to-date data. It can be very useful for them in the decision making process (Henderson, 2015). It helps in enhancing the qualitative characteristics and understanding the financial information. It allows comparability which can be used to analyse the performance of business. Apart from that, all the material information is reflected in the statement which allows the investors to predict the future of the company.

Task 2

1. Consolidated Financial Statements

(a) Control in Preparation of Consolidated Financial Statements

Control refers to the power of an entity to influence the financial and operating policies of other companies (Krishnan and Zhang, 2015). Businesses can use it to generate benefits from these activities. Control can be direct or indirect. Direct control can be obtained if the parent company satisfies one of the below-mentioned conditions:

• Holds more than half of the voting rights.
• Has the power to change the administration or majority of board members.
• Has the power to cast more than half of the votes even holding less number of shares (Buchman, Harris, and Liu, 2016).
• Indirect control involves getting control by acquiring other controlled entities or related parties.

(b) Types of Investments

There can be three types of investments in consolidation and it defines the control of the subsidiary as well. 20% to 50 % share in associate companies can be accounted for with the use of the equity method. The majority of the investor's proportional share is kept in equity (Conceptual and Regulatory Framework, 2016). More than 50 % category allows the parent company to form consolidated financial statements. On the other hand, less than 20% is considered as an investment and marked on book value.

(c) Power to Govern

Power to govern is related to the financial and operational control of the parent company. A parent company that has a substantial interest in its subsidiary has the power to govern (Conceptual Framework and Financial Reporting, 2015). They can make decisions regarding all aspects of the company.

2. Group Structure

(a) Reasons for Group Structure

Group structure involves the formation of a group that can be useful for the business. It can be beneficial for the strategic development of the company. It can increase the capacity and efficiency of the business (Lee, 2015). It can open up opportunities for an organisation to access new markets and distribution channels. Formation of the group by the companies can be very time-consuming and it requires huge investment. But it can give long term benefits to an organization. It can provide more funds, better channels, technology, and management.

(b) Significant Influence Under IAS 28

According to the IAS 28 'Investment in Associates', a company is said to have significant influence as it has more than 20% voting rights in the business (Malone, Tarca, and Wee, 2016). It can be done directly or through any subsidiary. The evidence of significant influence can be proved by the following conditions:

• Entity and investee have material transactions between them.
• Managerial personnel interchange.
• Participation in policy-making, dividend, and other distribution decisions.
• Representation in the board of directors or any other governing body of the other company (Chen, Hu, Lin, and Xiao, 2015).
• Possession of essential technical skills and information.

(c) Joint Venture Under IAS 31

According to the IAS 31.3 of Interests in Joint Venture, a joint venture is a contractual agreement between two parties to perform a specific task or business activity together. It can be of different types: jointly controlled assets, entities, and operations.

Task3

1. Modern Annual reports

(a) Role of Annual Reports

Annual reports contain financial and non-financial information of a company regarding a year. It includes accounting policies, cash flow statements, P/L accounts, balance sheets, corporate information, etc. These days, modern annual reports also have various other information that can be used by the investor for decision-making (Barniv and Myring, 2015). For example, corporate social responsibility, socially sensitive operations, and environmental details. Apart from that, it also contains the director's report as well as the aims and objectives of the company.

(b) Information Contained in Modern Annual Reports

Modern annual reports are much more detailed than the traditional annual reports. These not only contain the financial information of the company but lots of other information are also included in the report. Social corporate responsibility, strategy, legal compliance, etc. are associated with the modern annual report. The main reason behind the creation of modern annual reports is that the company wants its investors to get all the material information related to the business (Henderson, 2015). Unlike the US, the main focus is given to the principles of accounting rather than the rules of accounting. Modern annual reports have been adopted by many companies.

2. Other Sources of Information

(a) Other Sources Useful in Decision Making

The users of annual reports also need non-financial information in order to make decisions. They need details about the management, litigations, growth opportunities, and future strategy of the company. Apart from this, environmental aspects and corporate social responsibility implemented by the company can be used to understand the business and its future aspects (Buchman, Harris, and Liu, 2016). Non-financial information can provide useful data about the future of the company. Some of the important factors that can be used are business model, competitive advantage, corporate governance, and environmental performance.

(b) Use of Non-Financial information to Assess Reasonableness

Non-financial information can be useful in ensuring reasonableness and in the identification of reporting frauds. It can help an investor evaluate whether the company has maintained good corporate governance (Conceptual Framework and Financial Reporting, 2015). It can highlight the performance of the company apart from its profitability. An investor can analyse the standards and policies of an organisation to see the risk factor in their activities. It can be helpful in assessing the reasonableness and fraud-related issues in the business.

Conclusion

It can be concluded from the report that the UK and the US both have different accounting standards and practices. The new chief executive has to understand the accounting standards of the UK which emphasize more on communication of all the information to the stakeholders.

References

• Barniv, R. R. and Myring, M., 2015. How would the differences between IFRS and US GAAP affect US analyst performance? Journal of Accounting and Public Policy.34(1). pp.28-51.
• Buchman, T. A., Harris, P. and Liu, M., 2016. GAAP vs. IFRS Treatment of Leases and the Impact on Financial Ratios.Review of Business & Finance Studies.7(1). pp.93-104.
• Chen, Y., Hu, G., Lin, L. and Xiao, M., 2015. GAAP Difference or Accounting Fraud? Evidence from Chinese Reverse Mergers Delisted from US Markets.Journal of Forensic and Investigative Accounting.7. pp.122-145.
• Henderson, R., 2015. Korea's Transition from K-GAAP to K-IFRS.
• Krishnan, G. V. and Zhang, J., 2015. Does Mandatory Adoption of IFRS Enhance Earnings Quality? Evidence from Closer to Home.Evidence from Closer to Home (September 1, 2015).
• Lee, P. J., 2015. Assessment of business subsidiary operations and consolidated financial statements through a common global accounting language, IFRS vs. GAAP.International Journal of Business and Social Research.5(7). pp.61-70.
• Lingenfelter, G. and Brooks, A., 2015. Profit and Inventory under IFRS and GAAP.Journal of Critical Incidents.8. p.81.
• Malone, L., Tarca, A. and Wee, M., 2016. IFRS nonGAAP earnings disclosures and fair value measurement.Accounting & Finance.56(1). pp.59-97.

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