Financial Reporting Quality on Business Performance in the UK Case Study

Financial Reporting Quality on Business Performance in the UK

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Introduction: Financial Reporting Quality on Business Performance in the UK

Financial Reporting Quality is the process through which the continuous mode where the information from the highest to the lowest is assessed. The primary objective of the assessment is to assess the financial reposting quality business performance in the UK and the critical analysis of the financial reporting quality. Moreover, there is the detection of business performance and also the link between financial reporting quality and business performance in the UK. This is an important element that is considered due to the top quality in reporting that can help in the decision-making process that is reliable and useful. This can help in denoting the future economic activities of the company that can be deemed to be beneficial for the determination of the performance and prospectus of the company.

This has contributed to the detection of the gaps that are extreme in nature where the investors can anticipate the losses and has no trust in the financial system. The information is used by the potential investors in the decision regarding investing in the company or in the project. This is vital as it can help denote the reality of the operational activities along with the financial condition for the end of the accounting year (cfainstitute.org , (2023). This is stated to be one of the most useful processes that are comprised of the historical information, present status and strategies that are used by the organization for the assessment. There is definitive contrast between the two decisions in the ability of the financial information that consists of estimation value and conformity value.

Financial Reporting Quality on Business Performance in the UK

A) Analysis of Financial Reporting Quality in the UK

The importance of the financial reporting quality is the daily assessment of approaches that can help in the overall judgement. This can help with the enhancement of the corporate report that denotes the quality that the "UK Financial Reporting Council (FRC)" follows under the regulations of IFRS. There is the detection of the enhancement on the latest modifications by the auditor that has been denoted reduction in the accruals and the estimation of the revenue (Reid et al. 2019). There is the transition of the previous member of the European Union to the IFRS that have been adopted from the year 2020. The application of EU laws has ceased in the UK and the use of the "Domestic UK law" has been implemented for the start of the preparation of the accounts. All the companies in the UK have adopted and amended the IFRS that has been stated by the IASB where which is considered to be a new UK Endorsement Board. There is also the implementation of the UK GAAP where the reporting standards are under the effectiveness of the "FRS 100,101,102 and 103" and have been replaced in place of the old reporting standard.

The qualitative characteristics of financial information are an important element that is used by the stakeholders of the business where there are a certain amount of modifications. There is a consideration for the fundamental qualitative characteristics comprised of "relevance" where the execution of the financial information denotes the ability where the decision is impacted (kfknowledgebank.kaplan.co.uk, 2023). Additionally, there is also the "trustworthy" that demonstrates the financial information that is required to be completed in a neutral and error-free form. Furthermore, there is also an improvement in the qualitative characteristics where the four elements are "comparability", "verification", "understanding" and "timeliness". The four elements are described where the comparability" is the comparison between the entity from over some time and also competitors in the same industry. On the other hand, "verification" where the credibility and reliability of the information are ensured and the "understanding" is the information is reviewed. This can understand with the help of the accurate division, features and information demonstration. Furthermore, there is the provision of information within a specific timescale that can help in the process of decision.

The quality of the financial report can be compared to the implication of the standard on the financial statements of the entities. This is not directly applied by IFRS, FRS 101 or FRS 105 and the standard motive regarding the financial statements and the financial report of the entities. The "IASB International Financial Reporting Standard" has helped develop the demand that is in the FRS 102 for small and medium-sized businesses (frc.org.uk, 2023). The adoption of the rules and regulations of "IFRS for SMEs standard" that are for the FRS 102 that denotes the standard of the quality of financial reporting in the UK. There should be development of the financial statements that are prepared by the companies that are as per the rules of UK GAAP through the specific restrictions regarding the stability that is concerned.

B) Analysis of the business financial performance in the UK

The measurement of the financial performance of a business can help review and investigate primary goals and plans that are used for the enhancement of the business. Some methods are used for the measurement through "cash flow", "working capital", "cost base", "borrowing" and "growth" that is carried out for the assessment. There is also the consideration of the profitability ratios where the financial performance of a company can be ascertained. Furthermore, there is also the consideration of other accounting ratios that can help in the measurement of the performance and position of the company for the accounting year. According to the opinion of Kyere and Ausloos, (2021), "corporate governance" can help monitor the productivity and selling of goods or services where the business financial performance in the UK.The reviewing of the ability to generate profit can help state the interpretation of the value of the ratio that is compared with the previous year's value and competitors in the same industry.

The analysis of the financial performance of the company is conducted based on revenues, expenses, profitability, assets and liabilities. The well-being in terms of the financial information of the company is also denoted through the data that has been collected and also the objectives are considered. For example, a retail company like Tesco uses 5 financial objectives that are based on "expenses, reliability, flexibility, speed and quality". The computation of the financial performance where the reviewing is conducted through "cash flow management" where the money that is going in or out of the business is monitored on a regular basis for estimation (nibusinessinfo.co.uk, 2023). There is also the comparison that can help measure the alterations that are conducted and aligned with the standard of the industry. The ratio that is considered for the financial performance is the margins and returns that determine the profitability ratio.

The "cost base" is where the price of the cost that is in the sale price that does not consider the willingness of the consumers to pay the price as stated for the product or service. The loans that are borrowed from the overdraft or loans on the establishment of the position or detection of the alternative means of finance for the company. There is a relation between the financial performance and the objectives of the company where there are variables that are considered for the comparison of the company with the industry (Atayah et al. 2022). The value of the profitability ratios calculated is compared with the value of the industry which can denote the efficiency level of the industry. This can help form a recommendation where the ratio denotes the specific gross profit or net profit that should be improved based on the calculation and comparison. The analysis of the ratio and financial statement that is compared with the past year can denote the growth or reduction in the financial performance. The performance of Tesco can be accessed through the profitability ratio where the business increases the efficiency in its operating activities.

C) Impact of the financial reporting quality on Firm Financial Performance in the UK

The profitability, liquidity, stock prices and efficiency are impacted by the financial performance that is due to the financial reporting quality. There is also a reduction in the transparency level that denotes the level of quality of information due to the effect of the report quality. The final value and the comparison through the various methods of the financial performance of the firm lead to the fulfilment of the requirements of the potential investors and stakeholders of a firm (Martínez-Ferrero, 2014). The discretionary behaviour and important decisions are taken based on the financial reporting quality that is usually conducted by the management. This can be seen through the corporate where the values can where the debt finance's performance denotes the growth of the company.

The management of Tesco has considered the value of the accounting ratio where the liquidity ratio denotes the capability to fulfill the debt obligations. As per the opinion of Lopes et al. (2012), the current ratio is less than 1 but more than zero which denotes the value to be neither low nor high performance for the firm. This states that the impact of the financial report quality on the financial performance makes certain modifications in the operation of the business. The financial performance where the growth in the financial report quality also increases the dependency of the investors on the financial statement. This has a certain amount of credibility where important financial decisions are taken that are required for further improvement. The impact is also on the decision that is related to the firm's financial and investment and also the stability in the holding of the quality of the report (lse.ac.uk , 2023). This also reflects on the economic performance of the company where the precision on the value of the financial statements and the investors have faith in the credibility of the reporting quality.

The asymmetry in the information is where the managers can practice discretionary behaviour on the accruals. This has resulted in a decrease in the relevance and reliability of the revenue that has been reported based on the financial statement impacting the quality of the financial report. The outcome of the value influences the managers where there is enthusiasm in denoting certain enhancements where the interest and demands of the shareholders are considered to increase the value of shareholders (Rathnayake et al. 2021). The report that is prepared is as per the accounting policies but does not ensure providing the "qualitative characteristics" that are based on trust and relevancy. There is a positive relation between the financial reporting quality and financial performance of the firms that have considered the corporate strategy and also detection of the causes in the performance of the firm.

This can be inferred from the study of the Tesco Company that the impact is stated to be positive and significant for the report quality and performance of the firm. This can be deemed that the higher the level of the financial report denotes the higher propensity where the net profit margins of the firm are considered. Moreover, the CSR investment and the level of efficiency can be stated to be the enhancement that also leads to the benefits of the stakeholders and investors where the future performance is considered for improvement.

Conclusion

The assessment can be concluded that the importance of financial reporting quality in the UK considers the UK GAAP and FRS. Various rules are stated based on the various assessments where the qualitative characteristics comprise trust and relevancy. There is also the consideration based on the financial performance that can help denote the position and the values. This is comprised of the profitability ratio where the return and margins along with the accounting ratios are denoted for assessment and comparison. The values are used for the ascertainment by comparing the value with the last year and industry value. Tesco has been taken as the example where the company has taken ratio and cash value along with the working capital. The effect of the financial report quality has a positive relationship with the financial performance of the business.

References

Atayah, O.F., Dhiaf, M.M., Najaf, K. and Frederico, G.F., 2022. Impact of COVID-19 on financial performance of logistics firms: evidence from G-20 countries.Journal of Global Operations and Strategic Sourcing,15(2), pp.172-196.

cfainstitute.org , (2023).Importance of financial reporting quality. Available at: https://www.cfainstitute.org/en/membership/professional-development/refresher-readings/financial-reporting-quality [Accessed on 16th March, 2023]

frc.org.uk, (2023). The quality of the financial report in the UK. Available at: https://www.frc.org.uk/accountants/accounting-and-reporting-policy/uk-accounting-standards/standards-in-issue/frs-102-the-financial-reporting-standard-applicabl [Accessed on 16th March, 2023]

kfknowledgebank.kaplan.co.uk, (2023). Qualitative characteristics of financial information. Available at: https://kfknowledgebank.kaplan.co.uk/the-qualitative-characteristics-of-financial-information- [Accessed on 16th March, 2023]

Kyere, M. and Ausloos, M., 2021. Corporate governance and firms financial performance in the United Kingdom.International Journal of Finance & Economics,26(2), pp.1871-1885.

Lopes, C., Cerqueira, A. and Brandão, E., 2012. The financial reporting quality effect on European firm performance. Available at SSRN 2179994

lse.ac.uk , (2023). Impact of the financial performance of the financial report quality. Available at: https://www.lse.ac.uk/accounting/assets/Documents/LSELUMSMBS-Conference/1-SHROFF-Real-Effects-of-Financial-Reporting-Quality-and-Credibility-PP.pdf [Accessed on 16th March, 2023]

Martínez-Ferrero, J., 2014. Consequences of financial reporting quality on corporate performance: Evidence at the international level. Estudios de economía, 41(1), pp.49-88.

nibusinessinfo.co.uk , (2023). Financial performance measured in a business. Available at: https://www.nibusinessinfo.co.uk/content/measure-your-financial-performance [Accessed on 16th March, 2023]

Rathnayake, R.M.S.S., Rajapakse, R.P.G.S.N. and Lasantha, S.A.R., 2021. The Impact of Financial Reporting Quality on Firm Performance.Journal of Business and Technology,5.

Reid, L.C., Carcello, J.V., Li, C., Neal, T.L. and Francis, J.R., 2019. Impact of auditor report changes on financial reporting quality and audit costs: Evidence from the United Kingdom.Contemporary Accounting Research,36(3), pp.1501-1539.