Preparation of Financial Statement – Is it too much regulation?
Preparation of Financial Statement – Is it too much regulation?
The financial statements are widely used for the benefits of investors that can understand the financial history of the firm as well as its activities. Accordingly, this can help the managers for the determination of the future of the company and if it is profitable. Part of the financial statement is the income statement that is used for the determination of the business earnings as well as the sustainable losses. This can communicate to the business’ financial performance. In spite of the structure of the business, it can communicate to the same as considering the factors which includes the sales and revenues, goods which had been sold, the expenses and the gross profit. On the other hand, the balance sheet statement can show the value for the assets of the business, the owner’s equity and the amount of the debts. The cash flow statement can be the material used to determine the changes of the actual price and working capital for the firm and to the sources for the given accounting period (Libby, et. al, 2007).
The law of Hong Kong is somewhat similar to those of China and UK regarding the operation of financial statement. On the other hand, to be globally competitive, the ordinances of Hong Kong were base primarily on English law which on the United States. The record of the company must be first to do in the Inland Revenue Department and the companies must keep the proper accounting records so that the preparation must be fair and true. These have to be followed by the independent auditor and to the accounting body in Hong Kong which is the Hong Kong Society of Accountants. This is for the accounting standards and for auditing which is called the Statements of Standard Accounting Practice (SSAPs). The disclosures are also required by the SSAPs and the Companies Ordinance (Cunningham, 2002, p.328).
These ordinance and legislations are all brought back by an argument regarding the issue of doing the financial statements. It had been suggested that it should be done or report to the only financial provider and immediately provide the information of these required providers. The arguments had also been tried to give solutions (Barth, n.d.).
Hong Kong Basic Law on Preparation of Financial Statements
For the requirements in the financial information, it is only restricted to the firm in the listed whether in the Main Board or the Stock Exchange of Hong Kong. The requirement for the interim report is required by the first six months for the financial year. This is also includes the condensed income statement, the statement of recognized losses and gains, balance sheet, and the cash flow statement. It must also comply in the requirements of the SSAP 25 and the complete Analysis and Discussion to the Management. In relation to this, the audit committee must first review the interim report before it is accepted. The other requirements for the interim reports are the comprehensive discussion as well as analysis for the performance of the enterprise for the given period. The other matters includes the interests of the directors which as the impact on the shareholders, to the enterprise, and the compliance. The disclosed financial conglomerates as well as the financial companies are all requirements in the company and the amendments are required for the preparation of the compliance. The five hundred (500) copies must also be submitted in the members of the company and to the SEHK with the address in Hong Kong. Accordingly, the financial statement of the company must also be required to have the taxation, the segment information and the cost of the goods being sold. The balance sheet must be provided by the credit policy, the account payable and the receivable. The financial statement preparation for the new regime had been required for the disciplined process for the resulting production and for the more robust information financially. This preparation of the financial statements has the objectives of reporting for the requirements in the accessible summary for the reporting. This can also be use for the clarification for the matters that can cause confusions and it is also for the guidance and interpretations of the issues for requirements being revised (Deloitte Touche Tohmatsu, 2000). In Hong Kong, the presentation of financial statement had been done for ensuring the comparison of financial statement of the own organization and to the other organization. Nowadays, the organization has the great impact on the process of choosing the alternative ways for the presentation of the financial position and performance. The application of the current financial reporting is costly and this can also outweigh the cost of the business. To follow this traditional way of financial reporting can be crucial and face many difficulties in implementation (Kwok, 2005, p.50).
The Proposed Presentation of Financial Statement in Hong Kong
Due to the increase of the business and the stakeholders are made to be sophisticated, the reporting of financial statement is also responded on the extensive changes in the disclosure and measurement rules. Some of the extensive use of the complex issue of accounting had evolved in the financial instrument and to the compensation of share-base as well as the fair values. The arguments on too much regulation for the presentations of the financial statement in Hong Kong had been recognized for many debates. This can also be hard for the company on its implementation of the proposed presentation. The arguments regarding the provision of financial statement in the finance providers while the data as they require is to be presented by the organization as it is needed is hard to determine. Since, the objectives of the financial statements is for the provisions of the financial position of the organization, then it is only important that the financial statement must be prepared in accordance to the high end standard and for the accuracy of the relevant information regarding the financial as it can use by the financial providers (Ministry of Finance, n.d.).
The Reasons behind Proposed Financial Statement Presentation
The adoption for the different reporting framework can be appropriate for most of the Small and Medium Enterprise (SMEs) and Public Listed Companies in Hong Kong. This is due to the fact that financial statement for the SMEs can have different information that they needs. Most of the literature recommended that the main uses of financial statements of SME are the determination of the capacity in repaying and assessing the security, the liquidity and the profitability. This preparation will simply determine and can emphasize onto the finance providers who are mainly in need of this statement. On the other hand, the owner utilizes the financial reports for the several functions which include dividend payout, the remuneration rewards, capital expenditure, and the monitoring of the performance. The other function includes the planning, budgeting, and the purpose which associates the financing and loans. The other factor for having the efficient financial statement for the provider of finance as the shareholders is to assess the performance of the investment they made as well as the effectiveness of the team that manages the organization. This scenario is something crucial for the large companies because of the diffused shareholdings, the shareholders are normally depends on the external financial reporting of the entity which is their only means for acquiring the financial information regarding the entity. The said argument is not that relevant in the case of SME that can give to the majority of the firm that managed by the owner. The owner manager is not only having the access regarding the information but has the ability in determining the content and form of the required information as well. This means that the purpose for the stewardship of the financial statement is consider being less significant as it is base on the accounting standards and to the separation of the management and the ownership. The application of the financial standards is also comes with the cost while there cannot be over emphasized on the comparable, transparent, and comprehensive financial reporting. This implies that the business is in need of the employment of the qualified personnel; train the personnel from the clerks of the account receivable and to implement the new controls and processes for the use of the clerks of account receivables, to the audit, committee members and to the CEO. Additionally, if the International Financial Reporting Standard (IFRS) are moving to the model of fair value, there are also requirements for the valuation of the financial instruments and to the valuation of the asset. The increase of the complexity can also be difficult for the small companies which can outweigh the benefits that arise in the IFRS (Ibid).
The Importance of the Proposed Financial Statement Presentation
The user or the finance providers needs the information of the financial statements as includes the potential and present investors, lenders, the other trade creditors and suppliers, the public and the customers. The use of the financial statement can be helpful for these financial providers because they can provide the risk capital and the advisers are primarily concerned to the return of investment. This can also have the direct contact by the shareholders regarding the ability the organization in paying for the bill as well as the profitability and stability. The public can also be affected as it provides the information regarding the recent trends in the prosperity of the enterprise. Since the management is interested as well in the information that contained the financial statement, it has also the ability for the determination of the content and form of the additional information so that it can meet the needs. This reporting of the said financial information is beyond to the scope of the standard and framework given to the organization (Hong Kong Society of Accountants, 2002).
This framework has the possibility to implement, whereas the Hong Kong Society of Accountant (HKSA) had issued on the Framework of Financial Accounting which can sets out the qualifying criteria and conceptual basis for the financial statement preparation. The SME-FRS of Hong Kong had set out for the measurement, recognition, disclosure, and presentation of the requirements for the preparation and presentation of the financial statement (Ministry of Finance, n.d.).
The proposed presentation of financial statement is also advantageous compared to the current framework. This proposed and revised framework can recognize the shareholders as merely being the one of the user and not only the primary users of the financial statements. For the proposed presentation, it can identify the certain uses for the information regarding the financial position, changes and performance of the enterprise. The proposed framework can also provide information to the many users in making the economic decision. The shareholders will have the direct access to the companies that needs to satisfy with the aide of the internal reporting. The finance providers can have evaluates and generates the cash equivalent and cash that can provide the prices information on the financial position, change and performance of the business. The managers and owners can require the financial statement in making the business to have the important decisions. The management also can perform the financial into more detailed. The employees must also need the financial report in doing the agreements of collective bargaining into the management for the use of labor unions, rankings, promotions, and compensations. The use of the proposed presentation in the investors can have its availability in business investment as they can use it in decisions. The financial institutions can have the chance in extend their debt securities and the significant expenditures (Price Water House Coopers, 2008).
The Disadvantage of the Proposed Preparation of Financial Statement
Changing the traditional way of preparation of financial statement will have to change the approach to be followed which includes the needs to comply in the only finance provider for the listed company. Following the approach for the accounting treatment cannot be recognized or known by the country. In relation to this, the use of the said approach can become hard to follow by the legal authorities in charging the law through the basis of the superior treatment of accounting as it prescribed by the International Financial Reporting Standard. In relation to this, it is not commonly followed in the recent standard of accounting rather; it is followed scanty when the legal position is entrenched through giving this kind of treatment and different practices are considered to be unacceptable. According to the standard approach of accounting, if the accounting treatment is higher that the IFRS then it lays down the approach of the recommended IFRS (United Nations Conference of Trade and Development, 2007, p.51).
For the listed companies in Hong Kong, it is still important that they must comply with the reporting and accounting requirements of the SEHK. This compliance can have the ability to relate in the segmental information and to the real property of the enterprise. This means that the standards of the financial reporting in Hong Kong are considered to be in lined to the major financial centers of the other country. The proposed had its advantages but still, the use and presentation of the financial statements in public with the aide of the accounting standards must be properly done. With the filing of the financial statements, the listed companies so that it can offer securities in the public so that it can be readily use for making decisions. The shareholders can have information which can be part for their decision whether it can be preferred or share stocks. This can also help the investors to the expected return and risk from owe of company. Whether using the proposed or the traditional way of presenting financial statement, it is indeed important for the shareholders to use the financial reporting in deciding for the development of the company as in mergers and acquisition. In doing the argument regarding presentation of the financial statement the potential investors can have the references in the return, risk, yield, dividend and the liquidity. On the other hand, the financial is useful to managers so that they can carry out their responsibilities as determining the per share, return on equity and capital employed. This can also be helpful for the suppliers on the potential customers in determining the credit which can be paid to materials, products, and to the services.
Hong Kong Society of Accountants 2002, ‘Exposure Draft (ED) of a Proposed Revised Framework for the Preparation and the Presentation of Financial Statement 2002’, ’Financial Accounting Standard Committee’, pp. 4-10.
Ministry of Finance n.d., ‘Public Consultation of Proposed Framework for Differential Reporting n.d., Ministry of Finance’, Government of the Republic of Singapore, pp. 1-6.
Price Watch House Cooper 2008, ‘Financial Reporting for SMEs – A Case for Simplification?’, ‘International Accounting Standard Board’, p. 2.
Tohmatsu, D 2000, ‘A Guide for the Preparation of Interim Reports 2000’, Hong Kong GAAP, Second Edition, pp. 7-15.
Libby et. al. 2007, ‘Preparation of Income Statement, Balance Sheet and Cash Flow Statements 2007’, ‘Revised Financial Analysis’, pp. 4-6.
Barth, M n.d., Fair Values and Financial Statement Volatility’, ‘Graduate School of Business, Stanford University’, p.326.
Kwok, B 2005, Accounting Irregularities in Financial Statement, Gower Publishing, United Kingdom.
Cunningham, D 2002, Financial Statements Demystified, Australia.
United Nations Conference on Trade & Development 2007, International Accounting and Reporting Issues: 2006 Review, United Nations Publications. New York.