Explain the nature (content, format, and regulation) of the financial statement.
It is important to understand what types, formats, and the companies prepare the contents of the financial statements. The financial statements are the last outcomes of the accounting process and are prepared in an order which is followed through consistent principles, concepts, and processes in which the company operates. These financial statements are the source of information for the analysts and users of the financial information for evaluating the profitability of the company. It is the reason these statements need to be organized in a specific order with suitable contents to aid the users to understand the economic decisions in a significant way easily.
Tesco’ Financial Statement 2018 Telling the Story of Organization
The content of the financial reports of Tesco can be discussed to elaborate this further. The 10K report of Tesco is organized in 4 parts in which the first part yields information on the general business description of Tesco, its risk factors, legal proceedings, properties, and main safety disclosures. The second part of the report is dedicated in providing information on Equity, financial data, Discussion and analysis of the financial operations and conditions by management, market risk disclosures, financial statements, controls and proceedings, and changes in the accounting and financial disclosures. The third part shows the information of executive officers, directors, corporate governance, executive compensation, ownership information, and principal accountant services and fees. The fourth part is dedicated to exhibiting and schedules for financial data.
Financial statements are the essential annual reports that the management presents to its external parties to communicate the financial position of the company. These include the statement of profit and loss and the position statement. Now the cash flow statement is also considered as an important statement of the company (Collings, 2016).
The form and content of the financial statement of the company are to be prepared as per the generally accepted accounting principles, has to be audited and needs to include the notes in the statement and all related schedules as well (Cornell Law School, 2018).
The financial statement is used by the shareholders, creditors, investors, management, government, employees, public and bankers. The uses of the financial statement include reporting on the stewardship function, which means that it shows the performance of the management to its owners against their expectations. It acts as the basis of fiscal policies. It also gives the basis for credit granting, and banks and other financial institutions used to grant credit. It helps in the stock exchanges, and aids in the trade associations for aiding their members. It acts as the basis for prospective investors and guides the value of the investment that has been already made.
Accounting Standards and its implications on the Form and content of the statement
The financial reporting measurements of financial position and performance, directly and indirectly, impact everyone. Therefore, any changes in the reporting practices or accounting measurement would be far-reaching. Financial reporting is done to measure the abstract and detachable practices and concepts like net assets and income and its features make it to some extent subjective. Financial accounting measurement is therefore considered a measure which is constantly evolving and changing.
It is argued that the purposes of the financial reporting are based on the institutional context, and the benefits and costs of various measurement bases are affected by this context. Five of the principal measurement bases include historical costing, the value in use, value to the business, fair value, and realizable value. Except for the historical cost, all four are types of the current value measurement. While each of the measurements has its strengths and weaknesses, each also poses legitimate doubts for its relevance and reliability in various circumstances.
The facts are recorded in chronological order of the events which are represented in financial terms for a specific time. It is the basis of the preparation of the financial statements that show the financial position of a company on a date and the results generated for a period. The nature of financial statements is explained by the facts that these are recorded facts, in which certain accounting conventions are followed and are based on certain assumptions, known as the postulates including the going concern postulate, or the realization postulate. Its nature is also defined by the personal judgments, opinions, and estimates which are specified in the details of the statements. Wal-Mart has made many estimates as well. The company has, for example, estimated interest payments which are based on the principal amount and also on the expected maturities of the debt outstanding in January 2018. The company is assuming that the interest rates would remain at the current level for the variable rate of the debt. For Tesco, the interest expense is recorded, and payments are not estimated (Tesco, 2018).
Differences in the Tesco and Wal-Mart 10K Reports and its Explanation
The standard, which is the responsibility of IFRS, is the collection of financial reporting practices. These are important as the number of companies complying with IFRS is increasing day by day. IFRS usually incorporate and build on the inconsistent, accumulated practical solutions which have been constructed by the standard setters to tackle financial reporting problems as it emerges. IFRS is the result of a long continuous process. As per IFRS, property, plant equipment, evaluation assets, intangible assets, and exploration can be carried out at fair value or historical cost. Assets to finance are to be carried at the lower of fair value. Pension scheme assets are to be used as a fair value method. Agricultural assets at net fair value and biological assets at fair value as well. The Tesco and Wal-Mart reports have reported their reports as per the GAAP regulations. However, Wal-Mart has reported some non-GAAP measures as well in its reports for the sake of better visibility of the financial position to the shareholders and investors. The ROI and ROA have been reported in the financial statements of Wal-Mart, which is not shown in TESCO. It is because of the reason that Wal-Mart might consider the better visibility of its operating measures to affect the understanding of the investors even if it is non-GAAP measure. While on the other hand, Tesco considers its conformity with US GAAP regulations as enough to better show its financial data to the investors (Walmart, 2018).
Limitations of the Financial Statements:
Some of the financial instruments are to be carried at historical cost while others are at fair value. Construction contracts are to be carried out at historical costs. Fair value can be calculated as the present value, market value, estimated value, current replacement cost, refer to an active market or by depreciated replacement cost, etc. (ICAEW, 2018).
It also shows the limitations of the financial statements as well. The users of the financial statement should be aware of these factors while using the financial statements as it can become misleading to some extent. Thus, users should not be reliant on financial statements to an excessive extent. The limitations of the financial statements for Wal-Mart and Tesco shows that the transactions are recorded at their costs, which are a concern while reviewing the balance sheet as the assets and liabilities value may change over time. Marketable securities are for example changed to be aligned with the changes in the market values, while fixing assets values do not change (Sherman & Young, 2016). It shows that the balance sheet of Tesco and Wal-mart can be misleading for the users of financial statements as it is based on historical costs. On the other hand, the value of assets can also be misleading at the time of inflation, as the value would appear lower if it is not adjusted for inflation. It is mostly for long-term assets. Furthermore, the users of the Tesco and Wal-Mart financial statements can get incorrect information on the financial performance of the companies if they are considering the results by looking at only one reporting period. As each year has its context of highs and lows, it would be better if the users evaluate the company performance by looking at consecutive years’ financial statements. Another major limitation is the lack of comparability of the performance of the companies. As not all operations of the companies are similar, and as different companies can use different accounting practices, it is not always wise to compare their results against each other. Another important limitation that this statement offers is its limitation regarding discussing non-financial items. A company reporting excellent financial results may have environmental or community problems (Higson, 2009).
It can be concluded that companies need to comply with the financial reporting standards as set by the regulatory bodies to not only improve the content, form, and the nature of their financial statements, but also to tell the story of their financial year with quality accounting and value relevance. It has been found by various studies that the use of accounting practices and measurement methods for financial reporting results in increased quality of the accounting practices, and value relevance of the financial information.
However, still, the user of Tesco and Wal-Mart’s financial reports cannot blindly reply on these without being aware of the limitations that it offers. It would not be wise to get overly dependent on the statements which are based on historical costs and do not represent the true value of the non-financial aspects of the business as well. Therefore, investors should look at the complete context to better comprehend the performance of the company.
References
Collings, S. (2016). UK GAAP Financial Statement Disclosures Manual. John Wiley & Sons.
Cornell Law School. (2018). 12 CFR 563c.1 – Form and content of financial statements. Retrieved from https://www.law.cornell.edu/cfr/text/12/563c.1
Higson, A. (2009). Effective financial reporting and Auditing: importance and limitations. Retrieved from Bloomsbury Publishing and Qatar Financial Centre Authority: https://dspace.lboro.ac.uk/dspace-jspui/bitstream/2134/10105/13/effective-financial-reporting-and-auditing-importance-and-limitations.pdf
ICAEW. (2018). Measurement in Financial Reporting. Retrieved from https://www.icaew.com/-/media/corporate/files/technical/financial-reporting/information-for-better-markets/ifbm/measurement-in-financial-reporting.ashx
Sherman, H. D., & Young, S. D. (2016). Where Financial Reporting Still Falls Short. Retrieved from Harvard Business Review: https://hbr.org/2016/07/where-financial-reporting-still-falls-short
Tesco. (2018). Tesco. Retrieved from Tesco: https://www.last10k.com/Search/LoadPDF?u=https://www.last10k.com/sec-filings/1022705/000102270517000011/teso-12312016x10kq4.htm.pdf
Walmart. (2018). Walmart 10K. Retrieved from Walmart: http://d18rn0p25nwr6d.cloudfront.net/CIK-0000104169/a25e7acb-aa07-49f3-8c0c-0c69e5a8d372.pdf
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