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Financial Reporting & Interpretation

The document discusses social and ethical issues in financial reporting, emphasizing corporate responsibility, community engagement, and labor relations, while also addressing confidentiality, objectivity, and integrity in financial statements. It examines the impact of inflation on asset values and alternatives to historical cost accounting, alongside guidelines for reporting contingencies and events after the reporting period. Additionally, it outlines key IFRS sections for SMEs, preparation of cash flow statements, ratio analysis, and the significance and limitations of financial statements, concluding with the regulatory framework for financial reporting in Jamaica and its adoption of IFRS.

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8 views11 pages

Financial Reporting & Interpretation

The document discusses social and ethical issues in financial reporting, emphasizing corporate responsibility, community engagement, and labor relations, while also addressing confidentiality, objectivity, and integrity in financial statements. It examines the impact of inflation on asset values and alternatives to historical cost accounting, alongside guidelines for reporting contingencies and events after the reporting period. Additionally, it outlines key IFRS sections for SMEs, preparation of cash flow statements, ratio analysis, and the significance and limitations of financial statements, concluding with the regulatory framework for financial reporting in Jamaica and its adoption of IFRS.

Uploaded by

Shaun Davis
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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1.

Social and Ethical Issues in Financial Reporting

(a) Social Issues

1.​ Social and Corporate Responsibility


○​ Companies are expected to disclose their environmental impact, sustainability
efforts, and ethical business practices.
○​ IFRS guidelines promote transparency through social responsibility reporting,
ensuring investors and stakeholders understand ethical business conduct.
2.​ Community Engagement/Involvement
○​ Businesses should report corporate social responsibility (CSR) efforts,
donations, and partnerships within the community.
○​ IFRS allows voluntary reporting on community investments and impact.
3.​ Labour Relations
○​ Companies must disclose policies on fair wages, diversity, employee welfare,
and labor disputes.
○​ IFRS encourages reporting employee-related benefits and costs under
financial statements.

(b) Ethical Issues

1.​ Confidentiality
○​ Companies must protect sensitive financial information and comply with data
security laws.
○​ IFRS emphasizes proper disclosure requirements while maintaining legal
confidentiality.
2.​ Objectivity
○​ Financial statements should remain unbiased and free from manipulation.
○​ IFRS mandates strict fair value reporting to reduce personal bias.
3.​ Integrity
○​ Accountants and management must ensure honesty and accuracy in financial
statements.
○​ IFRS Section 8 (Notes to Financial Statements) enhances transparency.
4.​ Window Dressing
○​ The misrepresentation of financial statements to make a company look more
profitable than it is.
○​ IFRS discourages aggressive revenue recognition and premature expense
capitalization

.
2. Inflation and Accounting

(a) Impact on Asset Values

●​ Historical Cost Accounting fails to reflect the real value of assets during inflation.
●​ Inflation causes understated asset values, misleading investors.

(b) Alternatives to Historical Cost Accounting

1.​ Current Cost Accounting


○​ Adjusts values based on the current market replacement costs.
○​ IFRS allows revaluation models under IFRS Section 17 (Property, Plant &
Equipment).
2.​ Fair Value Accounting
○​ Uses market prices rather than historical costs.
○​ IFRS Section 13 (Fair Value Measurement) governs this approach.
3. Contingencies and Events After the Reporting Period

●​ IFRS Section 21 (Provisions, Contingent Liabilities & Contingent Assets) defines


how companies should report uncertain financial obligations.
●​ Contingent Liabilities
○​ Recognise only if probable and can be estimated
○​ Disclose in notes if the amount is uncertain
○​ No recognition if the obligation is remote
●​ Contingent Assets
○​ Do not recognise unless realisation is virtually certain
○​ Disclose in notes if inflow of benefits is probable

Nature of Contingent Liabilities


●​ IFRS Section 32 (Events After the Reporting Period) states:
○​ Adjusting events: Require changes to financial statements if they impact the
existing financial condition.
○​ Non-adjusting events: Disclose major changes without modifying financial
statements.

4. Published Financial Statements

Key sections under IFRS for SMEs:

IFRS Section Description Notes

Section 3 Financial Statement Presentation Must present a true and fair view of
an SME’s financial position,
performance and cash flows.

Entities must retain the same


presentation and classification of
items unless a change improves
reliability.

Section 4 Statement of Financial Position The Statement must include assets,


liabilities, and equity

These items must be classified as


current and non-current

Section 5 Statement of Comprehensive SME’s can present one or two


Income statements, an income statement an
an statement of comprehensive
income.

Section 6 Statement of Changes in Equity Shows total comprehensive income


and changes in equity.
Includes share capital changes,
dividends and retained earnings

Section 8 Notes to Financial Statements Provides additional explanations and


breakdowns of financial statements
figures

Includes detail on critical


judgements

Section 22 Liabilities and Equity Defines Liabilities vs Equity

Disclose but do not recognise unless


problem

5. Preparation of Statement of Cash Flows (Indirect Method)

●​ IFRS Section 7 (Statement of Cash Flows) uses the indirect method:


1.​ Start with net income.
2.​ Adjust for non-cash transactions (depreciation, amortization).
3.​ Account for changes in working capital (receivables, payables).
4.​ Calculate operating, investing, and financing cash flows.

6. Ratio Analysis

Liquidity Ratios

●​ Current Ratio: Current assets ÷ Current liabilities


●​ Acid Test (Quick Ratio): (Current assets - Inventory) ÷ Current liabilities

Solvency Ratios

●​ Debt to Asset: Total debt ÷ Total assets


●​ Debt to Equity: Total liabilities ÷ Shareholders’ equity
●​ Interest Cover: EBIT ÷ Interest expense

Activity Ratios

●​ Inventory Turnover: Cost of goods sold ÷ Average inventory


●​ Receivables Collection Period: (Accounts receivable ÷ Annual sales) × 365 days
●​ Payables Period: (Accounts payable ÷ Purchases) × 365 days

Profitability Ratios

●​ Gross Margin %: Gross profit ÷ Revenue × 100


●​ Net Income %: Net profit ÷ Revenue × 100
●​ ROA (Return on Assets): Net income ÷ Total assets
●​ ROCE (Return on Capital Employed): EBIT ÷ Capital employed
●​ Earnings per Share (EPS): Net income ÷ Total shares outstanding

7. Significance and Limitations of Financial Statements

Significance:
●​ Used for decision-making and evaluating financial health.
●​ Enhances comparability across companies under IFRS.

Limitations:

●​ Inflation effects distort values.


●​ Estimates and aggregation can lead to inaccuracies.
●​ No predictive value—statements reflect historical events.

8. Analysis of Financial Performance

●​ Vertical Analysis: Expresses financial statement items as a percentage of total


sales/assets.
●​ Horizontal Analysis: Compares financial results over multiple periods.

9. Liquidation vs. Receivership

Liquidation

●​ Business ceases operations, assets sold to settle debts.


●​ Led by a liquidator appointed by the court.

Receivership

●​ A receiver manages assets to recover debts owed.


●​ The business may continue operations under supervision.
10. Director’s Report
11. Auditor’s Report
Bonus

The Companies Act of Jamaica governs corporate financial reporting and outlines the
requirements for preparing financial statements. It mandates an annual audit for all companies
and establishes regulations for incorporation, share capital, and financial disclosures.

Regarding accounting standards, Jamaica has adopted the International Financial


Reporting Standards (IFRS), which apply to publicly traded companies and entities holding
assets in a fiduciary capacity. The Institute of Chartered Accountants of Jamaica (ICAJ)
endorses IFRS for small and medium-sized enterprises (SMEs), providing a simplified
framework for financial reporting. Some government-owned entities follow the Public Bodies
Management and Accountability Act instead of IFRS

Jamaica follows IFRS under the Institute of Chartered Accountants of Jamaica (ICAJ).
Trinidad and Tobago applies IFRS under the Institute of Chartered Accountants of Trinidad
and Tobago (ICATT).
Barbados uses IFRS but has local guidance from the Institute of Chartered Accountants of
Barbados (ICAB).

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