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| Category | ATHE Level 7 Assignments | Subject | Business |
|---|---|---|---|
| University | _ | Module Title | Unit 1 – Corporate Reporting for Strategic Business |
This unit aims to make you learn all the concepts of financial reporting, applications of accounting standards and ethical practices that are carried out in the business environment. Here you will learn how information related to finance is prepared, then analysed and then how it is used for the decision-making process by stakeholders. Here you will also learn about sustainability, professional behaviour and corporate governance in the field of accounting.
Additionally, students will gain practical skills in understanding financial statements and in preparing group accounts, which includes treatment of subsidiaries, consolidation and related associates, which makes them apply the technical and theoretical knowledge of accounting that they have learned in this unit in real-world scenarios.
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Order Assignment on WhatsAppProfessional behaviour is important in the field of accounting as financial reports are used by various users, including shareholders, lenders, regulators and customers. This information is used by them to make decisions, and so they must be presented with accurate information. For Tesco plc, professional behaviour is important to ensure all financial reporting is accurate and takes place in accordance with the standards.
A fundamental requirement for professional accountants is compliance with accounting standards. Tesco uses International Financial Reporting Standards (IFRS) to prepare its financial statements. These standards set out how financial transactions should be accounted for, measured and reported. This helps make financial statements comparable with those of other firms, particularly as Tesco is global.
Professional conduct also involves adhering to several ethical principles, including:
For instance, Tesco should record its turnover accurately and not overstate it to improve its performance. It must not conceal expenses and liabilities. Failure to practice professional ethics can lead to severe consequences, including fines, financial loss and loss of reputation.
The financial statements of Tesco are also checked by external auditors to make sure that they comply with accounting standards. This provides an extra layer of confidence that the organisation is adhering to professional behaviour.
Ethics is an important component of corporate reporting as firms must report a true and fair view of their financial performance and position. Ethical reporting means that the company does not fudge financial information for its own or individual benefit.
Ethical reporting is especially important for Tesco plc as a large organisation with multiple stakeholders. The company needs to have transparency in its reporting to ensure that users can rely on the information.
Key ethical requirements include:
Tesco has had problems with its accounting, which shows the need for a high degree of ethics. So, Tesco is now more concerned with internal controls, governance, and audit processes to avoid such problems.
Another important aspect is corporate governance. Tesco is governed by a board of directors and an audit committee. They oversee management and ensure they are acting ethically and in the best interests of shareholders.
The external auditors also play an important role. They audit the financial reports and report on whether they give a true and fair view. This enhances the information's reliability.
In summary, ethical financial reporting increases stakeholder trust and contributes to the company's ongoing success.
Tesco plc uses the International Financial Reporting Standards (IFRS) framework for its financial reporting. This is a set of standards that governs the recognition, measurement and disclosure of financial information.
The use of IFRS means that the financial statements of Tesco include:
A major benefit of using IFRS is that it is comparable. This means that investors can compare Tesco with other retailers, regardless of where they are located.
The other important characteristic is consistency. Tesco uses the same framework year-on-year, which allows for comparisons of its performance.
But the framework isn't always easy to apply. It can involve making judgements, particularly in the following areas:
This can sometimes result in varying interpretations, impacting the financial statements' accuracy.
However, the suitability of IFRS for Tesco is justified as it is an international company, and needs to comply with international reporting standards.
Comparability is a key strength of the IFRS framework. The many companies worldwide that follow IFRS standards make it easier for investors to compare financial results. This is an advantage for a multinational company like Tesco plc.
Another strength is transparency. IFRS demands comprehensive disclosures, giving financial report users a good picture of the firm's financial standing. This reduces information asymmetry between the management and stakeholders.
It also enhances credibility and confidence. By having financial statements prepared in accordance with the standards and audited by independent auditors, stakeholders can trust the information.
Furthermore, IFRS facilitates decision-making by providing reliable and relevant information to users.
However, the IFRS framework has its weaknesses.
An important limitation is the reliance on estimates and judgment. For instance, the value of assets and provisions relies on management judgment. This can lead to the reliability of financial statements being compromised, and can open the door to abuse.
Another issue is complexity. IFRS standards can be complex, particularly for laypersons. This can reduce the financial statements' value to some users.
Creative accounting is also a risk, as firms could adhere to the principles but still be able to report a better financial position. This may limit the effectiveness of the standards.
Finally, IFRS may not always reflect the economic reality due to its focus on financial information, and possibly failing to consider non-financial matters such as environmental and social aspects.
This report assesses the financial health of Tesco plc to determine whether the company's current shareholders should further invest in the company. The client has an interest in companies that operate sustainably, and so we've taken financial and non-financial considerations into account.
The report uses financial analysis techniques like ratio analysis, cash flow analysis and trend analysis for the past few years.
These ratios provide insights into the company's ability to generate profits. The company has maintained fairly consistent revenue growth over the past few years, with good growth in its home market of the UK. The operating profit margin is a measure of the company's cost efficiency. Tesco's margin is relatively low, but this is not uncommon in the retail sector, where competition is intense, and margins are low.
The return on capital employed (ROCE) is also an important indicator, which measures the efficiency with which the company invests in capital to earn profits. Tesco's
ROCE is at a moderate level, showing that the company is using its resources efficiently.
But profits can be affected by:
Overall, Tesco has a consistent profitability, although it is not very high for a retailer.
Liquidity ratios indicate how well the company can service its short-term debt.
Tesco has a current ratio of less than 1, which could imply low liquidity. But this is normal for large retailers as they have high cash flows and manage their inventories well.
Tesco benefits from:
Therefore, although the current ratio is low, the company is likely able to settle its short-term obligations without significant problems.
This implies that while Tesco's liquidity ratios may not be impressive, in reality, it is manageable given its business model.
Efficiency ratios measure the effectiveness of the company in using its resources.
Tesco, being a retailer, is particularly concerned with the inventory turnover ratio. The inventory turnover ratio shows how fast the company's products are sold, which means less of a need for wastage and storage. Tesco does very well in this regard with its efficient supply chain and forecasts.
The asset turnover ratio indicates the efficiency of the company's asset utilisation. Tesco has a fair utilisation of its assets, which is indicative of efficient operations.
This enables Tesco to be competitive in a pricing and cost-sensitive environment.
Cash flow is a key element in financial analysis as it provides information about the cash inflows from business operations.
Tesco plc has good operating cash flows, which shows that the company's operating activities are sound. This is good news for shareholders since it demonstrates the company is able to operate and invest for the future.
There are three components to the company’s cash flow:
Operating Activities
Investing Activities
Financing Activities
In summary, Tesco has a healthy cash flow, increasing its stability and confidence.
Trend Analysis
Trend analysis is a comparison of financial data over several years.
Tesco has shown:
But future results may be affected by factors such as inflation, economic outlook and consumer trends.
However, Tesco has been able to keep its financial performance relatively steady, and this is a testament to good governance and efficiency.
Sustainability is becoming an increasingly important issue for investors. Tesco plc has endeavoured to be more environmentally and socially sustainable.
Double materiality takes into account:
1. Financial materiality: the impact of sustainability on the company's financials
2. Environmental and social materiality - how the company affects the environment and society
Tesco focuses on:
These measures not only enhance the company's brand but also have long-term financial benefits by minimising risks and enhancing efficiencies.
But sustainability reporting may not always be standardised, making it hard to compare with others.
Although financial analysis is beneficial, it has limitations:
So, investment decisions should not be based purely on financial ratios but also take other factors into account.
From the analysis, Tesco plc seems to be a safe investment.
Why Invest:
Areas of Concern:
Final Advice
The client should maintain their investment in Tesco as it is financially stable and has growth potential. Moreover, its sustainability efforts are in line with the client's values of ethical investment.
But the client should continue to monitor the stock and its performance, along with market trends, before making any further investments.
This case study describes how group financial statements are prepared in a situation where one entity (a parent entity) has one or more subsidiaries. The group financial statements show the financial position of the group as if it were one entity.
In this case, we will take:
This example facilitates the illustration of consolidation, non-controlling interest and associates.
If a company has more than 50% shareholding in another company, it is considered a subsidiary and must be fully consolidated.
Key Steps in Consolidation:
Goodwill Calculation:
Goodwill = 100,000 – 80,000 = ₹20,000
The goodwill is reported as an intangible asset in the consolidated statement.
4. Non-Controlling Interest (NCI): There are 80% shareholders (P Ltd) and 20% other shareholders (NCI).
NCI Calculation:
This is reflected in the equity of the consolidated statement.
|
Particulars |
Amount (₹) |
|
Total Assets |
300,000 |
|
Goodwill |
20,000 |
|
Liabilities |
120,000 |
|
Net Assets |
200,000 |
|
Equity (Parent) |
184,000 |
|
NCI |
16,000 |
Cash flow statements display cash flows within the group.
Key Adjustments:
Structure:
1. Operating Activities
• Cash from operating activities
2. Investing Activities
• Purchase of a subsidiary
• Investment in assets
3. Financing Activities
• Loans, dividends, share capital
An associate is a company where the parent has significant influence (20% - 50%), but not control.
P Ltd has 30% of A Ltd.
Method Used: Equity Method
Under this method:
• Investment is initially recorded at cost
• Then adjusted for the share of profit/loss
Example:
• Investment in A Ltd = ₹50,000
• Share of profit (30% of ₹10,000) = ₹3,000
New value of investment = ₹53,000
This is one line item in the statement of financial position.
Joint Arrangements
Joint arrangements are arrangements where there are two or more controllers.
There are two types:
• Joint operations → record assets/liabilities directly
• Joint ventures → equity method
Accounting is generally the same as associates.
Changes in Group Structure
Ownership changes can have a major impact on group financial statements.
Examples:
1. Buy New Subsidiary
• Leads to recognition of goodwill
• Full consolidation required
2. Disposal of Subsidiary
• Remove assets and liabilities
• Recognise gain or loss
3. Change in Ownership Percentage
• May affect control
• Impacts NCI and the consolidation method
An international group's foreign subsidiaries need to be translated into the reporting currency of the parent company.
Key Issues:
The gains or losses on foreign exchange transactions are generally recognised in other comprehensive income.
Group financial statements are important because they:
• Present an overview of the whole business
• Provide investors with a full performance picture
• Improve transparency and decision-making
Failure to consolidate financial statements may distort the financial results, as transactions between group companies can lead to inaccurate results.
With group structure changes, detailed financial reporting is crucial.
Reasons:
• To reflect true ownership and control
• To provide transparency to investors
• To avoid double-counting of transactions
• To avoid double-counting of transactions
But group accounting can be complicated as a result of:
• Multiple entities
• Different accounting policies
• International operations
Despite this, reporting allows stakeholders to have access to accurate and relevant information.
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