Financial Management Theory and Practice

Question: Discuss about the Financial Management for Theory and Practice. Answer: Introduction: It is better to disclose things that may affect the decision of the shareholders than to keep relevant information from them (Libby et. al, 2011). Therefore, we would say that it would be beneficial for the companies to provide additional voluntary disclosures in the financial statements. The prepares of the report need to make decision as to what is to be reported, how much is to be reported, how is it to be reported in order to make the disclosures useful. The report below will provide us more detailed information on disclosures; there requirement, importance, and other factors in the financial report (Melville, 2013). The concept of encouraging a transparent and straightforward communication between the preparers of financial statements and users are already a worn idea. The stakeholders require information in the footnote that helps them in making decisions, less needless and is organised in a better manner. Many professionals including the investor Advisory Committee of FASB recommend that the directors should focus on overloaded disclosures and important matters. There are a lot of difference of opinions that arise among the investors and the management of the company over certain matters mentioned in the financial report. In order to remove this ambiguity and confusion, the accounting boards all the world have to take steps, in order to simplify the content of the financial reports. The main objectives of financial reporting include the following: To provide information required to the users of the financial report. The information available in the financial reports is used for a number of purposes. These reports are used to make important decisions such as if to or not to provide credit to a buyer, the liquidity of the borrower, invest in the company or not, etc. As said by Deggan (2011) there is plenty of utilization of the financial report. Not only it helps in taking a correct decision but also help in various other tasks like ratio analysis, fundamental analysis, etc. When information is available, it helps to provide concrete information and leads to a strong decision-making. The plain language should be understood by a layman. Simple language ensures that the user of the financial statement can understand it with ease and flexibility. The reports also provide information about the cash flow of the entity like the timing and the sources of these cash flows (Mark Michael, 2016). This information is crucial when it comes to taking of decision for long term or investment. This information about the cash flow is important in order to determine the liquidity of the company, which can also be used to analyse the going concern assumption of the entity (Bence Nadine, 2012). Reports display important data such as the resources, assets owned by the entity. The changes in these assets and liabilities affect the working of the entity as a whole. Therefore, the report helps to keep a check and helps in knowing the differences and pattern of disclosures. This information related to an entity is required in order for it to operate efficiently in the capital markets. In addition, the Financial Accounting Standards Board realised that the creditors and the investors are the main users of these reports, so the information should be available in them in a comprehensive manner such that it assists them in making the required decision. In the absence of any information, the company might be neglected and hence absence of disclosure can be seen as a major block in the operation of the company. These decisions are highly based on the company performance and cash flows, which is available in these financial reports. Therefore, the disclosures play a very important role, in explain, and provide details to the users regarding the financial status of the company. In order to maintain the financial stability, three authorities were formed by the UK regulatory system. These were Bank of England, (FSA) Financial Services Authority, and the Treasury. Due to the prevalence of poor zones, the motive behind the formation of these authorities proved to be a failure and as a result, these had to be reformed. For better maintenance of financial stability, FPC (Financial Policy Committee) was incorporated in the Bank of England. This reform was very essential because the previous authorities not effectively and internationally coor dinated macro-prudential activities and FPC collectively worked with authorities like the European Systematic Board for achieving this motive. A fresh subsidiary of Bank of England that is the Prudential Regulation Authority (PRA) was also formed by the UK regulatory system for macro-prudential management of firms. PRA also works for the better promotion of UKs voice by being liable for the management and control of every individual firm in UK. With GFRR (Global Financial Reporting Requirements), third parties can be advocated about the environmental effects of a company. Countries like UK adhere to such reporting despite several criticisms. GRI guidelines purposes to provide better information to stakeholders about the ethical attributes of a company, thereby resulting in the companys growth. It also aims in achieving a target audience together with a proper support in decentralization that confirms to the fact that it is very effective for future developments. UK regulatory system aims to enhance the financial markets of UK so that the public can be benefitted. The provisions of GFRR has developed the working environment of the regulatory system and provided various benefits to the firms. The guidelines in GRI have effectively proven to portray the opportunities for the companies. Although there is an absence of virtues in these guidelines, yet several companies from the whole world adhere to it. According to various stud ies, GFRR and sustainability reporting are not beneficial in the current scenario but the most accurate information can be provided with such sustainability reports that prove to very effective taking future expectations into consideration. If these reporting structures are not adopted, then companies will surely have to encounter various complexities in future. To get a clear-cut idea, two famous companies BP Plc and Next Plc has been selected. In fact, BP Plc considers international reporting guidelines that come from IPIECA and GRI that helps the company the sustainable performance and be connected to Global Impact of UN (BP Plc, 2015). BP uses the Global Reporting Initiative G3.1 rules in preparing the report in tune with a well-defined pair of indicators that encompasses the dimension of sustainable development. GRI enables a strong framework that helps an organization to report, as well as tracks their environmental and economic performance. The voluntary disclosure theme has provided BP Plc significant developments because the problem of the industry is well addressed through it (BP Plc, 2015). With reference to Next Plc, it can be observed that the company purposes to provide long-term returns to all its shareholders through combination of cash dividend payment and sustainable enhancement in earnings per share. The company has not ad opted GRI guidelines for financial reporting and instead it has adhered to the accounting manual and its prescribed reporting requirements. As a result, the company has witnessed fluctuations in the share prices in the past years. Such Global reporting requirements are very effective in enhancing the goodwill of a company as more information can be provided to the users of financial statements. Nevertheless, it must also be observed that in relation to emissions of greenhouse gas, the company has followed Environmental Reporting Guidelines including compulsory reporting guidance on such emissions and factors for conversion. This has enabled the company to maintain the stability of share prices in 2015. The company takes voluntary disclosure so that the trust in the public is maintained on a strong note (Volkswagen, 2015). Disclosures should provide a basis and add meaning to the information provided on the face of financial statements, and make the users understand the relevant area of attention in those statements (Brigham Daves, 2012). What should and should not be reported in the footnote statement is a relevant decision. Going as per the existing rules the disclosures should have limited information on the companys history, financial position, estimate, assumptions that are the part of financial statements (Northington, 2011). The information to be reported is subject to accounting standards and they are to be reported under the rules under those standards. The information to be reported should be precise and effective; also, the disclosures should include limited data on the contingencies, which are the predictions about future events, as they are not appropriate for the foot note disclosures (Fields, 2011). The company has voluntarily disclosed the emissions of greenhouse gases in its annual report. It has provided details on the increase in GHG emissions in comparison with 2014. For instance, in 2015, the total emissions from heat, electricity, cooling and combustion of fuel was 178,238 tons of Co2 while in 2014, it was 165,714 only. With this disclosure, the company aims to gain trust from the public and it assures to minimize energy consumption throughout its functioning. For this purpose, it adopts an operational control strategy that means it includes emissions from every part of its business that can be regulated and controlled by it. This voluntary disclosure has enabled the company to obtain a profit of 782 million in 2015 that is significantly more than 682million in 2014. It also voluntarily reports about certain disclosures regarding directors remuneration if in its opinion they are specified by law but not made. Furthermore, it also voluntar y discloses on matters when compliance with the IFRS requirements of the company is incomplete to enable users of financial statements understand about the impact of specific transactions, conditions and events on the financial performance and position of the company. Similarly, in the case of BP Plc, it can be seen that the company has voluntary disclosed many uncooperative activities adopted by it together with their negative results. With reference to these companies, the contrast between influence of GFRR and UKs regulatory system is critically analyzed. As the stakeholders of a company depend on relevant information for decision-making, the level of disclosures assist in providing a firm balance to companies. Companies must avoid disguising of information because it is regarded as an immoral activity. Therefore, it can concluded that companies must comply to the global financial reporting requirements and must provide an effective disclosure level in their reports so that it can lead to a better practice, thereby developing the standard level of companies. The decision to disclose the information is merely based on the fact that how relevant the information will be to the investors and other users. The relevance refers to the potential of such information to affect the opinion of the users on the future cash flows of the company. The company should also disclose relevant litigations and lawsuits pending against which could affect the financials of the company. As per Samaaha Dahaway (2010) the note of contingent liability is a good example on relevance of information since, the liability has need been created and still in the near future there exists probability of it affecting the financials of the company. This means that, while applying certain standard, the preparers should disclose all information as required by the standard, irrespective of its relevance to the users of the statements (Horngren, 2013). Thus, therefore few companies, which consider these footnotes as a part of the structure of statements, irrespective of they, are relevant or not, in all the cases these are reported along with other information. Sticking to this checklist of all the footnotes reduces the chances of auditors being questioned on their work, so they go for all-checklist when it comes to making a judgement. Therefore, it is reason why some prepares get comfort in using all or none checklist, instead of applying their judgement and making the decision on relevance of data. Disclosure strengthens the status of the company and ensures that the decision-making is safeguarded (Ibrahim, 2013). Depending on the structure of the company, information should be reported in the financial statements, notes to the financial statements or any other supplements to these statements. There are many lawsuits against the CPAs and their clients on the grounds of providing inadequate or misleading information in the financial report. The safe rule to abide by is, if you are in doubt then reports it. In addition, another rule states that if the policies are not consistent then, mentions such facts and their effect on the income of the company. It helps in bringing a level of clarity and provides a strong message to the users of the financial statements. It builds a level of trust and the interested parties can ascertain or predict the level of influence that the non- disclosure can do (Horngren, 2013). The disclosure of information by the way of footnote has accumulated ov er the years due to increase in regulations and standards. This has resulted in increased number of disclosures that has become cumbersome and has harmed the presentation of financial report. This has also raised question and affected the relevancy of certain data, resulting is erasing the usefulness of that data (Choi Meek, 2011). In order to be impartial, the information should be relatively complete so that the actual events and the conditions are reported. Completeness of the report refers to disclosure of all important facts and information such that they create understanding and do not mislead the users (Carol et. al, 2016). The companies sometimes conceal relevant data that would affect the investors decision. The disclosures in the financial reports are mainly guided the accounting standards. The rules laid in these standards give the auditors and their clients a limited power to exercise their own judgement on the relevancy and materiality of the data available. The accounting standards should be amended and reformed in such a manner that it gives the preparers of the financial report the authority and freedom to make judgement on the relevant information (Williams, 2012). These standards are the basis of preparation of financial reports and these should be drafted in the most comprehensive way possibl e. As per Brigham Ehrhardt (2011), disclosing more information is always a good thing, but if we go the pattern then we will find that any new disclosure required will not be any different from what we have currently. There are few proposals that require giving more information on the front page of the report, but this will result only in more words and less information. Disclaimers in the report serve their purpose the best if they are written in KISS format, which stands for Keep it Simple, Silly. Voluntary disclosures that are clear and precise just like in the statements above helps the investor understand relevant data and also regains the confidence they place in the preparers and the company. In short, disclosure tends to provide transparency and helps the investor in taking a correct stand that is not possible otherwise (Albrecht et. al, 2011). Moreover, the notes and other relevant details must be presented in a fair manner that helps the prospective parties to understand it with ease. Jargon and other high-flown languages must be avoided because it tends to disrupt the purpose of reporting (Brealey et. al, 2011). Therefore, we see that not just what is inside the footnote, but also how it is presented matters a lot while disclosing relevant data. The presentation needs to be done in a clear manner otherwise; the target audience might not be reached. Disclosures pattern is vital because it helps in focussing on the availability. If it s done properly it helps in better display and quality projecting of the information (Melville, 2013). The method of disclosure plays a very important role for everyone including the preparers, auditors, users and the company itself. Hence, it would be beneficial for the companies to provide additional voluntary disclosures within their financial statements (Spiceland et. al, 2011). Additional disclosures enhance the goodwill and the position of the company because it projects the duty and the role of the company. Once it is done, it strengthens the position of the company. References Albrecht, W., Stice, E. and Stice, J 2011, Financial accounting, Mason, OH: Thomson/South-Western. 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