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Introduction

In UK, most of the companies use International Financial Reporting Standards (IFRS) to prepare their financial statement. The present report is based on case studies under restraint time conditions. The present report is based on Haversham plc which is an established manufacturing company in the UK. Their chief executive is about to retire and he is replaced by J Gargery. He has been working in USA for many years. The accounting standards in UK are different from US. Therefore, it is required for the Director of finance, P Pirrin to provide guidance notes to the new chief executive of Haversham plc.

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 the important information for the decision making of the investors (Malone, Tarca and Wee, 2016).
  • Method of book keeping should be used.
  • Information should be standardized formats.
  • Identification of essential information and measuring them into monetary terms for the informed judgement of people.

(b) Comparison with other definitions

Accounting is a systematic process to record, analyse, summarise and report the financial information. There is difference between the definitions and methods used in US and UK (Chen, Hu, Lin and Xiao, 2015). UK’s definition is more principle based while US’s definition is more of rule based. This is because of 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, US is more focused on recording of the information.

2. IASB's Conceptual framework

(a) Use of conceptual framework approach

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

  • Provides consistent approach in problem solving and standards.
  • Helpful in preparation and presentation of information and financial statements.
  • Provides guidelines.
  • Descries 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 issue in financial reporting in IASB's Conceptual framework (Lee, 2015). Furthermore, the issue of measurement of assets and liabilities on 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 are 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 company (Krishnan and Zhang, 2015). Business 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 share (Buchman, Harris and Liu, 2016).
  • Indirect control involves getting the 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 with the use of 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 which has substantial interest in its subsidiary has the power to govern (Conceptual Framework and Financial Reporting, 2015). They can take decisions regarding all the aspects of the company.

2. Group structure

(a) Reasons for group structure

Group structure involves formation of a group which 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 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 directly or through any subsidiary. The evidence of significant influence can be proved by the following c