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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.
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:
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.
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:
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.
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.
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:
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.
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.
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.
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 conditions:
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.
Annual reports contain financial and non-financial information of a company regarding a year. It includes accounting policies, cash low statements, P/L account, balance sheet, corporate information etc. These days, modern annual reports also have various other information which can be used by the investor for decision making (Barniv and Myring, 2015). For example, corporate social responsibility, social sensitive operations and environmental details. Apart from that, it also contains the director's report as well as the aim and objectives of the company.
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 for their investors to get all the material information related to the business (Henderson, 2015). Unlike US, the main focus is given to the principles of accounting rather than rules of accounting. Modern annual reports have been adopted by many companies.
The users of annual reports also need non-financial information in order to take 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 for understanding 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 which can be used are business model, competitive advantage, corporate governance and environmental performance.
Non-financial information can be useful in ensuring reasonableness and in identification of reporting frauds. It can help an investor to 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.
It can be concluded from the report that UK and US both have different accounting standards and practices. The new chief executive has to understand the accounting standards of UK which emphasize more on communication of all the information to the stakeholders.
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