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Importance of Financial Information to Stakeholders

Info: 2174 words (9 pages) Essay
Published: 25th Apr 2018 in Accounting

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Financial information contain in annual reports that the companies are published in periodically. That period is identified as reporting period. Company obligates to provide financial information to their various stakeholders during the past reporting period.

Annual report is a report the company report their comprehensive transactions and events to publish and provide for required parties. There are few reasons to publish annual reports by companies generally as follows.

Because companies have legal obligation between companies and the government act implemented for companies is known as company act 2007 No 7. The company act’s section 150, 151, 152 and 153 has mention the obligation to prepare financial statements, content and form of financial statements, obligation to prepare group financial statements and content and form of group financial statements accordingly.

Stakeholders of the company require the financial information for following reasons.

  • To know how well the company is doing.
  • To find company has earned more money than they spent.
  • To get an idea about strategic and tactical plans of the management.
  • To provide information to make decisions who make decisions about organisatoin.
  • Avoid dissimulations and corruptions of the organisation.

Through the audit process, organisations will be able to identify weaknesses of their control of procedures and corruptions occurred due to them.

To obtain and fulfill the financial requirements from monitory markets via financial equipments such as shares, debentures, bank loans and etc.

1.1. Importance of Financial Information to Stakeholders

However the financial information require by stakeholders of the organisation. Stakeholder of the organisation can divide into two. The bellow chart represents the stakeholders of the organisation according to the environment they belongs to.

Stakeholders of the Organisation

External stakeholders

a). Suppliers and Trade creditors

b). Government

c). Consumers

d). Public

e). Medias

Internal Stakeholders

a).Directors & Managers

b). Shareholders

c). Employees

(Diagram 01)

Above chart shows the deviation of stakeholders of the organisation and they require financial information due to various purposes.

1.1.1. Directors and Managers

To make decisions about the organisation in different time and in different level. Directors and managers of the organisation are taking different types of decisions as follows.

  • About new investment and project appreciation decision.
  • About continued and discontinued operations.
  • Dividend decisions.
  • Diversified business decision.
  • Winding up decision.
  • To establish overall objectives and periodical targets.
  • To avoid dissimulations and corruptions.
  • To establish squired systems and strengthens control of procedures.
  • To increase the productivity level of the organisation.

1.1.2. Shareholders

  • To determine whether their investment will be sold, Holt or bought more shares of the organization.
  • To decided the fairness of the returned for their investments.
  • To determine the going concern of the organisation.
  • To obtain wide knowledge about the organizational activities.
  • To compare their investments and their benefits with other competitive organizations and industries.

1.1.3. Employees

  • To know about the stability and profitability of the employer.
  • To know about remuneration, retirement benefits, and employment opportunities are in organisation
  • To ensure the job security with the current employer.
  • To ensure the fairness of the salaries and wages they obtain from the organization according to their earnings.
  • To have a clear view about other operations of the organisation.

1.1.4. Suppliers

  • To ensure their payments of supplies will be received on due.
  • To ensure the stability of their customers.
  • To have knowledge about other products and their suppliers of the organisation.
  • To compare their transaction with existing and other companies
  • To find other competitive suppliers and their contribution towards the organisation.
  • To find opportunities to supply more.

1.1.5. Government

  • To collect accurate taxes and amounts from organizations on due dates.
  • To provide government benefaction to improve their business.
  • To obtain financial and non-financial assistance for government development projects.
  • To ensure the organizations oversee their employees in reasonable way.
  • To ensure the organizations compliance with government rules, regulations and acts that established by the government.

1.1.6. Consumers

  • To have knowledge about the cost structure of the products that the organisation is producing.
  • To ensure the stability of the organisation.
  • To know about the organization’s profitability, because profitability is a shed light to know about products impossible growth, improvements, best customer service and low price strategic implications.
  • To know about CSR programs conducted by the organisation.

1.1.7. Public

  • To conscious about organization’s substantial contribution towards the society.
  • To know about the opportunities to link with the organisation.
  • To know about CSR contribution towards the country.
  • To conscious their activities which can be affected to interest of the nature and the country.

2. Standards requirement for published Financial Statements

The entire organizations specially registered in Sri Lanka need to prepare their financial statements according to the requirements of the accounting standard issued by the Institute of Chartered Accountants of Sri Lanka (ICASL). ICASL is responsible for prepare and issue all accounting standard which are relative and necessary to prepare financial statements.

The entire organizations need to be adopted and compliance with the accounting standard which issued by the ICASL and need to mentioned under the notes to the financial statements of their annual report. This note can identify as Note of Compliance. As an example Richard Pearis PLC has mentioned their note of compliance as follows.

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“The Financial Statements of the Company and the Group, comprising the Balance Sheet, Income Statement, Statement of Changes in Equity, the Cash Flow Statement, Accounting Policies and Notes to the Financial Statements are prepared on the basis of the historical cost conventions, and in conformity with Generally Accepted Accounting Principles and Accounting Standards laid down by the Institute of Chartered Accountants of Sri Lanka. These principles and standards have been applied consistently with that of the previous year. No adjustments are made for inflationary factors affecting these Financial Statements.”

There is a list of accounting standards. It’s consisting with 28 LKASs and 8 SLFRSs. (See appendix 01).

2.1. LKAS 8: – Accounting Policies, Changes in Accounting Estimates and Errors

As per the requirement of LKAS 8 all of the companies need to mention their accounting policies estimates that they have used to prepare their financial statements during the reporting period. Because due to the change of any policy of the company will be affected retrospectively and caused to restated of comparative information unless it is impracticable to do so. Appendix 02 represents significant accounting policies and estimates that use by Richard Pearis PLC.

2.2. SLFRS 8: – Operating Segments

As per the above standard company may have some operating segments. Operating segment can define as follows;

Operating segment is a component of an entity,

It may earns revenue and incur expenses to the organisation,

Operating results are revived by board of directors and

Discrete financial information is available.

Bellow table shows the segmental operations of Richard Pearis PLC.

(Table 01) (Richard Pearis PLC, (2012). ‘Financial Statements’ In: (ed), Arpico Annual Report. 2012: Sri Lanka pp.41.)

2.3. LKAS 34: – Interim Financial Reporting.

LKAS 34 requires preparing interim financial reports due to timely and reliable interim financial reporting improves the ability of investors, creditors, and other to understand an enterprise’s capacity to generate earnings and cash flows and its financial conditions and liquidity. Richard Pearis PLC prepares their interim financial reports according to the following financial colander.

2.4. SLFRS 4: – Insurance Contracts

This standard is applied virtually all insurance contracts that an entity issues and to reinsurance contracts that it hold. This is not applied to other assets and liabilities such as covering under the scope of LKAS 39 financial instruments recognition and measurement. Therefore company need to disclosure following information as requirement of this standard.

Accounting policies for insurance contracts and related assets, liabilities, income and expenses.

The recognized assets, liabilities, income, expenses and cash flows arising from insurance contracts.

If the insurer is a cedant, certain additional disclosures are required.

Information about assumptions that have the greatest effect on the measurement of assets, liabilities, income and expenses including, if practicable, quantified disclosures of those assumptions.

The effect of changes of assumptions.

Reconciliations of changes in insurance liabilities, reinsurance assets and if any related deferred acquisition cost.

2.5. SLFRS 6: – Exploration for and Evaluation of Mineral Resources

Under this standard affected activities such as;

The search for mineral ,

Determination of the technical feasibility and commercial viability of extracting those resources.

Following are specially excluded from the scope of the SLFRS 6;

Expenditures incurred before the entity has obtained legal rights to explore in a specific area and

Expenditure incurred after the technical feasibility and commercial viability of extracting a mineral resource are demonstrable.

The accounting policy that entity can apply for mineral resources are;

All expenditures related to exploration and evaluation assets need to incur to profit and loss and first recognition of the asset required to measure at cost, subsequently whether cost or revaluation model.

Exploration and evaluation assets need represent in balance sheet, if its satisfy LKAS 16 requirements under property plants and equipments or if its satisfy LKAS 38 requirements under intangible assets.

2.6. LKAS 16: – Property Plant and Equipments

Property, Plants and Equipments (PPE) are tangible items that;

Are held for use in the production or supply of goods or services, for rental to others, or for administrative purposes and

Are expected to be use during more than one accounting period.

(Mapitiya, (2011). ‘Definitions of Standard’ In: Gayan (ed), LKAS 16 Property plant and Equipment. 1st ed. 2011: Sri Lanka pp.4.)

The cost of assets of an item of PPE shall be recognized as assets if and only if;

It is probable that future economic benefits generate with the item will flow to the entity.

The cost of the item can be measured reliably.

All property, plant and equipments require to represent in balance sheet under non-current assets and need to be valued whether cost or revaluation model.

Every property, plant and equipment need depreciate. Depreciation can define as systematic allocation of the depreciable amount of an asset over its useful life.

Depreciable Amount = Cost-Residual Value

Useful life of the asset is the period the entity is expected to use. It will be vary from each and every asset. Company can use different types of depreciation methods that mentioned in the standard. They are;

Straight line method.

Reducing Balance method.

Units of production method.


2.7. LKAS 38: – Intangible Assets

Intangible Assets are that identifiable non-monitory assets without any physical substance.

(Jayasigha, (2011). ‘Intangibla Assets’ In: Dimuthu (ed), LKAS 38. 1st ed. 2011: Sri Lanka pp.2.)

There are three critical features of intangible assets. They are


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