Qualification - Level 5 Higher National Diploma in Business

Unit Name - Financial Reporting

Unit Number - Unit 13

Unit level - Level 5

Assignment Title - Evaluation of financial reporting standards

Learning Outcome 1: Evaluate financial reporting standards and theoretical models andconcepts

Learning Outcome 2: Evaluate international differences in financial reporting


Accounting is aimed at communicating the financial status of an organisation to various stakeholders like management, shareholders, lenders, suppliers and Regulators. Accounting standards prescribe a set of rules and principles for creating the format and content of financial statements. This continuous and comprehensive reporting enables the management and shareholders can gauge the organization's financial soundness. Accounting standards have been set up to simplify and standardize the documentation & accounting for inventories, research and development costs, income taxes, investments, intangible assets, depreciation, and employee benefits. Banks and investors measure the profitability of investing in a firm and the possibility of returns in the long run with the help of financial statements.

Due to the regional and cultural diversities, in different countries, there are several social economic and cultural conditions which have led to the development of various economic practices, which have translated into the development of varying practices in accounting as well. However, in a rapidly globalizing world, these variations are not suitable for development of unhindered international business processes.

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Assignment Brief

Grain Milling Industry in Sultanate

Flour milling capacity in the Sultanate has soared to around 3,300 metric tonnes per day, as on January 2019, a significant uptick that bodes well for Oman's goals to be food-secure, according to figures released by mill-owners.

As many as five large flour mills are currently in operation in Suhar, Muscat and Salalah. The oldest of these is Muscat-based Oman Flour Mill, which is 51 per cent owned by the Government of Oman and boasts a flour production capacity of 800 metric tonnes per day.

Suhar is home to two large flour mills each of 500 MT per day capacity. Al Khaleej Flour Mill came into production in Sohar Industrial City in 2017. In early 2019, Sohar Flour Mill, a subsidiary of Oman Flour Mill, commenced operations within Sohar Port and Freezone as part of an integrated food cluster.

In the capacity of a Junior research analyst of a leading business school in the Sultanate, write a detailed report based on the published annual report of SMC for the year 2019, that critically evaluate the application of IFRS in application to specific countries and differences in financial reporting based on models and theories, given SMC's investment strategies, current market operations and the company's planned investments.

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The role of international accounting standards and international financial reporting standards

The international standardization of accounting practices

The International Accounting Standards Board (IASB) is the authority that issues accounting's various international standards. It is an organization that develops accounting standards known as International Financial Reporting Standards (IFRS). The IFRS Foundation is a non-profit institution formed for developing a comprehensive set of international accounting standards, known as IFRS.

Compliance with the IASB's standards is non-mandatory, however many nations have made use of IFRS mandatory by law. For instance, law make it mandatory for compliance with IFRS for those companies that are listed on stock exchanges in EU.

Benefits of IFRS and IAS

The advantages of a uniform and harmonised system of accounting principles at global level have been listed below:

1. The main reason behind standardizing accounting practices at global level is that, variations in standards makes it difficult and inconvenient for investors and shareholders to compare the wealth of various corporations they are investing.
2. Moreover, uniform accounting standards internationally mean that different firms having global presence wouldn't have to prepare separate reports for separate countries where they are based. Hence, it becomes increasingly convenient to compare between firms and aid in reducing investor risk and makes it convenient to perform cross border financing;

3. Since the compliance norms are uniform, all the financial statements and accounts will be created to agree with these accounting standards, therefore, increasing the credibility of the financial statements.

Models of financial activity and accounting

Undermentioned are several theories propounded for financial accounting. Proprietary Theory this theory states that all the liabilities together may be considered as the negative assets and when they are deducted from the assets, the result gives the proprietor's equity. Accounting equation according to this is generalised as:
Total assets -total liabilities= proprietor's equity

This theory is in accordance with calculation of a balance sheet and helps in preparing financial statements of the company. The main aim of this theory is to help prepare a balance sheet in such a way that it helps in calculation and analysis of the exact net worth of the proprietor/owner.

Another theory is the Entity Theory which distinguishes the entity from the owner, that is, they are considered on separate basis. According to this theory, total assets will be estimated to be equal to the liabilities and shareholders' equity. Accounting equation for this theory may be summarised as:
Total assets= total equities or total equities +liabilities

Residual Equity Theory is considered to be a moderation between entity theory and proprietary theory. This is represented as the following equation:
Total assets - specific equities = residual equities

This theory emphasizes the general rights and interests of shareholders as a true business owner. It helps in providing better insights into the income statements for making a better investment decision. This theory is represented in the earnings per share and general share price.

Also, there is another financialaccounting theory which is Legitimacy Theory. The legitimate theory throws a light on the behaviour of the organization in such a way that it abides by its corporate social responsibility. It is assumed in this theory that the company has to comply with its social responsibility criteria set by the society toavoid penalties and punitive measures imposed by the government. The standards set by different societies may vary according to the contexts and background on which they are founded. There are diverse bases on which it may be implemented like environmental crisis, labour exploitation, human rights , abolition of child labour, contribution of profits towards social causes like child education and awareness about diseases. These causes which the company abides by or adopts legitimises the existence of the company on the moral and social grounds.For example, Salalahmills company has to give a background to its work and not to endanger society and abide by moral and social values

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Audit Risk model

The process of comparison and examination of books of accounts so as to ensure their agreement with the inventory and other assets and liabilities in compliance with the accounting standards is known as auditing.

The audit risk model enables the auditor to determine the risk associated with the process of auditing and suggests the strategies for their management. The risk associated with auditing can be calculated as under:
Audit risk = Control risk x Detection risk x Inherent risk

The following are elements of the Audit Risk Model:

• Control risk: This risk owes its origin to the lack or complete absence of necessary controls. There maybe a corrupt employee whether in the accounting or administration who may tamper with the income statements and financial documents for cashing in the opportunity created due to lack of control Such employee may have a vested interest in distorting the information provided to his advantage. To do away with this risk, the organisation must hire the individual after putting his loyalty to test, delegation of responsibilities and tasks must be done vigilantly and an association of experts must be hired to review and audit the work done by the accounts department.

• Detection risk: the organisation is put to detection risk when one or misstatements of monetary transactions go unnoticed by the auditor.This may happen if the misstatement is efficiently hidden by a series of transactional misstatements which leads to inability of auditor to discover these. To avoid such mistakes auditors must be trained well and chosen accordingly for performance of their duties.

• Inherent risk: This risk is caused by mistakenly committing an error of commission or omission arising, provided they are not created by cashing on the loopholes in the controls. This risk is most likely to occur when due to lack of proper training or judgement of accounting transactions occurs during the course of recording transactions.

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Financial reporting in countries -differences and importance

Several countries have made laws in regard to adherence to IFRS, which makes complying with them legally mandatory. For example, the companies listed with stock exchange in EU, South Africa's Johannesburg Stock Exchange, and Turkey's Istanbul Stock Exchange have to comply with the IFRS mandatorily.

The United States hasn't made compliance with IFRS mandatory. Instead, the United States has a separate body i.e., Financial Accounting Standards Board (FASB), which proposes standards known as Generally Accepted Accounting Principles (GAAP).

Whereas, China's accounting rules do not comply witheither IFRS or GAAP, making it exhausting for investors to measure the actual price of an organization. These 2 standards upon application could produce different results for an identical corporate. Therefore, it is advisable to adopt single global standard for accounting and financial reporting.

For corporations having global presence, sticking to GAAP as well as IFRS create additional labour and work. For instance, a United States of America raising funds in FRG needs to prepare a report in line with IFRS, likewise as the United States of America GAAP rules. The different treatment of an accounting entry in accordance with differing accounting rules makes the comparing of financial reports extremely difficult.

In certain transactions the variations in US GAAP and IFRS are significant. For example, in LIFO method is allowed by GAAP but not by IFRS. Some corporations may receive tax benefit from using the same. Therefore, applicability of IFRS for all United States of America corporations, may result in excessive payments of cash-tax. These are the reasons for delay in complete adoption of IFRS in the United States of America and hence the FASB and IASB are working to harmonize the standards.

On the positive aspect, different corporationscould gain more significantly for moving towards IFRS. Liketransition to IFRS would build the potential for IBM to make a globally shared service center for accounting, instead of having accounting departments in numerous regions.

Adoption by USA of world accounting standards would help substantially to transnational corporations. Tyco International, for instance, is having 1200 entities out of which 900 are outside the USA. For Tyco, having to comply with IFRS solely would be a positive change; as a result of it might compel Tyco to organize financials on an identical basis defying all the geographical restrictions and to enable accounting employees to move smoothly from country to country and business to business.

However, companies not having global presence do not see any benefit in transition to IFRS. There are certain companies like Davey Tree Expert, having business presence in the United States and Canada, find it uneconomical as it is unlikely for it to get listed on any exchange andhence unified standards are insignificant for it.

Therefore, as an interim arrangementfor adopting IFRS is to allow US corporationshaving global presence is to file in accordance with IFRS, instead of under both GAAP and IFRS, to mitigate their compliance costs.

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Evaluation of the application of the IFRS in Oman: a case study of the Salalah mills corporation

Salalah Mills Company SAOG (the Company) is an Oman based joint-stock company incorporatedon September 25, 1995. It is listed with the Capital Market Authority, Oman. As per the IFRS jurisdictional profile of CMA, it complies with most of the standards.

Listed below are a few cases where the compliance may be observed:

1. The Company claims that its financial statements have been documented and presentedas per IFRS. The Company has adhered to all the requirements, associated with disclosure, prescribed by the Capital Market Authority (CMA) and the relevant provisions of the Commercial Companies Law of 2019. (IFRS 1)

2. The Company has undergone restructuring in 2018. The major decision of the merger of its subsidiary Salalah Macaroni Company SAOC (SMC SAOC), by transfer of its assets and liabilities. The Company held 64% equities in the subsidiary. The principal activities of the SMC SAOC were the production of macaroni, pasta, and related food products. SMC SAOC was incorporated on May 29, 2007, as a closed joint-stock company, under the Commercial Companies Law of 2019. It was engaged in the production of macaroni, pasta, and related food products. The merger was approved by the Board of Directors of SMC SOAC and the Company through resolutions dated December 27, 2017, and December 28, 2017, respectively. The shareholders approved the merger of SMC SAOC and the Company in their Extraordinary General Meetings held on March 26, 2018. The merger was sanctioned by ministry of commerce and industry vide its letter FVR/Q/231/2018 dated December 12, 2018. (IFRS 3)

In all other such transactions, the same legally befitting and IFRS compliant measures have been taken. Hence, it depends on the country's governance, the decision of financial administration of the Company, and whether the IFRS will be adopted.







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Learning Outcomes and Assessment Criteria

Learning Outcome




LO3: Evaluate financial reporting standards andtheoretical models and concepts.


P5 Explain the benefits of

International Accounting

Standards (IAS) and

International Financial

Reporting Standards






P6 Evaluate the models of

financial reporting and


M3 Critically evaluate

financial reporting and

auditing through the

coherent application oftheories and models tosupport judgements and conclusions.


D3 Critically evaluate the application of IFRS in application to specific countries and differences in financial reporting based on models and theories.


LO4: Evaluate international differences in financial


P7 Evaluate the differencesan importance of financial reporting across different countries.


M4 Critically evaluate the factors that influence international differences in financial reporting.

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