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12 views

KCL Week 1

Uploaded by

sukeying4182
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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7SSMM600

FINANCIAL REPORTING AND ANALYSIS

ACCOUNTING INFORMATION AND ITS USERS


Learning outcomes:

1. Explain the nature and role of accounting

2. Describe the main users of accounting information

3. Discuss the fundamental qualities of accounting


information

4. Explain the purpose and structure of a business


Accounting

Concerned with collecting, analysing and


communicating financial information.

Financial accounting – largely for external users


Management accounting – largely for internal users

The ultimate aim is to help users make more


informed decisions.
Financial vs. Management accounting

The major differences are as follows:

• Nature of the reports produced


• Level of detail
• Regulations
• Reporting interval
• Time orientation
• Range and quality of information
Business types

• Sole trader

• Partnership

• Limited company (Private or Public)


Accounting regulation in the UK
UK legislation
• The Companies Act 2006

Stock exchange rules:


• Applicable to all listed companies
• Listed companies must publish financial information on a
half-yearly basis (within 3 months of period end), and
annually (within 4 months of year-end)

Accounting standards
• UK – Financial Reporting Standards (FRSs) - issued by the
FRC
• International financial reporting standards (IFRSs) – issued
by the IASB
[Previously IASs – issued by IASC)
Main users of financial information relating
to a business

Owners Customers Competitors

Employees
Managers and their
representatives

Business

Lenders Government

Investment Community
Suppliers representatives
analysts
Other sources of financial information

• Meetings with managers and directors


• Public announcements made by the business
• Newspaper and magazine articles
• Websites
• Radio and TV reports
• Information gathering agencies
• Industry reports
• Economy-wide reports
The qualities that influence the usefulness
of accounting information
COST
CONSTRAINT Qualities

Fundamental Enhancing

Faithful
Relevance
representation

Predictive Confirmatory Freedom


Completeness Neutrality
value value from error

Materiality
threshold

Understand-
Comparability Timeliness Verifiability
ability
Accounting conventions
Applied when preparing the financial statements in order to
enhance the financial information

• Entity

• Going concern

• Consistency

• Prudence

• Matching

• Accruals
Accounting regulation in the UK
UK legislation
• The Companies Act 2006

Stock exchange rules:


• Applicable to all listed companies
• Listed companies must publish financial information on a
half-yearly basis (within 3 months of period end), and
annually (within 4 months of year-end)

Accounting standards
• UK – Financial Reporting Standards (FRSs) - issued by the
FRC
• International financial reporting standards (IFRSs) – issued
by the IASB. Must be used by PLCs.
[Previously IASs – issued by IASC)
Sources of external accounting rules for a UK public
limited company listed on the London Stock Exchange

External International
Company Financial
accounting
law Reporting
rules
Standards

Stock Exchange rules


imposed by FCA
International Financial Reporting
Standards

SCOPE:
• What information should be disclosed
• How information should be presented
• How assets should be valued
• How profit should be measured
Problems with standards

• May inhibit change


• May impose false conformity
• Involve consensus seeking
• Can be costly
• Can be complex
Financial statements required under IAS 1

• Statement of comprehensive income


• Statement of financial position
• Statement of cashflows
• Statement of changes in equity
• Notes (accounting policies and explanatory notes)7
Management commentary

• Directors’ report

• Strategic report
Directors’ report – contents
• The names of all directors
• Any recommended dividend
• The acquisition of a PLC of its own shares
• The involvement of employees in the affairs of the
company
• The employment and training of disabled persons
• Important events affecting the company since the
year end (events after the reporting period)
• Financial risk management objectives and policies
• Greenhouse gas emissions (Plcs only)
• Likely future developments
• Research and development activities
Strategic report - contents

• Objectives, strategy and business model


• Business environment and principal risks
• Non-financial information
• Analysis of past performance
• Directors’ regard for other stakeholders
Company Directors

• Appointed by the shareholders and act as


agents of the company

• Responsible for the strategic and operational


decisions of a company

• Ensure that the company meets its statutory


obligations

• Communicate with shareholders and other


stakeholders
The relationship between the shareholders,
the directors and the auditors

Directors

review
account
elect

report

Shareholders elect Auditors


Directors’ duty to account

The law requires that directors:

• Prepare annual financial statements and the


directors’ report and make these available to
shareholders and the public

• Maintain appropriate internal control systems


Corporate governance
The system by which businesses are directed and controlled.
Regulated by the FRC in the UK
(https://www.frc.org.uk/getattachment/88bd8c45-50ea-4841-95b0-d2f4f48069a2/2018-UK-
Corporate-Governance-Code-FINAL.pdf)

Core principles of good corporate governance:


• Fairness – equal treatment for all shareholders and fair treatment
for other stakeholders

• Accountability – The board has an obligation and responsibility to


give an explanation for actions and conduct

• Responsibility – The board must accept full responsibility for its


powers and authority and must act within the company’s best
interests

• Transparency – Stakeholders must be kept informed of the


company’s activities

UK premium listed companies must comply with the UK corporate


governance code and report to shareholders on this
Premium Listed companies comply with the UK’s highest standards of regulation and corporate
governance, as a consequence they may enjoy a lower cost of capital through greater
transparency and through building investor confidence. (https://www.lseg.com)
Business objectives

A traditionally held view is that the key financial


objective of a business is to enhance
shareholder wealth

But:
Over the past few years there has been a
significant increase in ethical investors and
demand for stakeholder capitalism and focus on
ESG principles

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