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Users of Financial Statements Paper

TASK 1: Financial statements are used by both internal and external users to make economic decisions. The information within the financial statement aims to provide information about the financial position, performance and any changes in financial position of an enterprise. Financial statements should be understandable, relevant, reliable and comparable. Reported assets, liabilities, equity, income and expenses are directly related to an organization’s financial position.

AstraZeneca is a global, innovative biopharmaceutical business whose mission is to make the most meaningful difference to the health of patients through great medicines and is focused on the discovery, development and commercialization of prescription medicine. In the case of AstraZeneca the user needs of the financial statements are to assist in making decisions. The information needs may vary for each user because they are used for different purposes.

The users of financial statements include present and potential investors, employees, lenders, suppliers and other trade creditors, customers, governments and their agencies and the public. They use financial statements in order to satisfy some of their different needs for information. Shareholders and Investors – The providers of risk capital and their advisers are concerned with the risk inherent in, and return provided by, their investments. They need information to help them determine whether they should buy, hold or sell.

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Shareholders are also interested in information which enables them to assess the ability of AstraZeneca to pay dividends. The Employees of AstraZeneca and their representative groups are interested in information about the stability and profitability of their employers. They are also interested in information which enables them to assess the ability of the company to provide remuneration, retirement benefits and employment opportunities. Employees also need these reports in making collective bargaining agreements with management, in the case of labor nions or for individuals in discussing their compensation (increases), promotion and rankings. Financial institutions (banks and other lending companies) use the financial statements of AstraZeneca to decide whether to grant them with fresh working capital or extend debt securities (such as a long-term bank loan or debentures) to finance expansion and other significant expenditures. Lenders are interested in information that enables them to determine whether their loans, and the interest attaching to them, will be paid when due.

AstraZeneca’s suppliers who extend credit to them require financial statements to assess the creditworthiness of the business to ensure that they can be paid amounts owing to them when due. As stated in the scenario, AstraZeneca developed innovative new products to meet medical needs of customers, therefore, the customers need for the financial statement is to determine whether AstraZeneca will continue to operate as they are dependent on the medicines that the develop. It is not feasible to have sole dependence on a product then to realize that it will not be accessible in the near future.

The Government and their agencies need AstraZeneca’s financial statements to ascertain the propriety and accuracy of taxes and other duties declared and paid by the company. It is also need to determine how the resources of the company are allocated, to regulate the activities of the company, and for national income and similar statistics. Because enterprises affect members of the public in a variety of ways the media and the general public are also interested in financial statements for a variety of reasons such as to assess the trends and recent developments in the prosperity of AstraZeneca and the range of its activities.

For example, enterprises may make a substantial contribution to the local economy in many ways including the number of people they employ and their patronage of local suppliers. While all of the information needs of these users cannot be met by financial statements, there are needs which are common to all users. As investors are providers of risk capital to the enterprise, the provision of financial statements that meet their needs will also meet most of the needs of other users.

Financial statements do not provide all the information that users may need to make economic decisions since they largely portray the financial effects of past events and do not necessarily provide non-financial information. Information on a financial statement should be accurate to assist in decision making because each user group information needs on the financial statement varies. As a result, financial statements that make false projections about future earnings as well as the use of creative accounting to inflate earnings may hence mislead the investor as far as his investment decisions are concerned.

With this in mind, the importance of accurate financial statements cannot be overstated as far as investment decisions are concerned. Bankers usually use an entity’s financial statements for a wide range of reasons. Such as, for purposes of determining whether or not to lend capital to a company; be it working capital or otherwise. To underscore the importance of accuracy as far as financial statements are concerned, banks demands that businesses in need of loans avail financial statements which are audited and prepared in conformity with the GAAP provisions.

Banks may then utilize such statements for analysis including the computation of current ratios, debt-to-tangible-net-worth ratios as well as a wide range of other loan ratios. Accurate financial statements are also critical to bankers for purposes of advising their clients on where to invest and which investment opportunities to avoid. In this regard, bankers’ source audited as well as GAAP compliant financial statements to avoid making investment analyses for their clients based on faulty financial information.

The legal provisions make it clear that companies should make annual submissions of all their financial statements on an annual basis. Tax authorities specifically need accurate financial statements so that they can come up with a tax analysis of the entities under consideration and ensure that the entities are paying tax as per their financial performance. The government finances its various activities through the collection of tax and as such must enhance the collection of taxes from businesses as well as individuals.

The government through its tax authorities hence needs a presentation of accurate financial statements so as to derive the figures for the taxes payable and hence avert instances of tax evasion and illegal tax avoidance schemes. To guarantee the safety of their sales delivered on credit terms, suppliers usually carry out an analysis of a business’ financial statements to deduce their ability to repay. It is hence prudent for suppliers to rely on financial statements that present a true picture of the firm s far as its staying power is concerned.

Other outside business interests interested in accurate financial statements include rating agencies for purposes of credit ratings assigning, labor unions to project pay increases a company can be able to handle in ongoing negotiations, major customers to establish whether a firm is a going concern etc. Financial statements are prepared in accordance with legal and regulatory guidelines. The legal guideline/framework comes from the jurisdiction in which the organization is operating. AstraZeneca prepared there financial statements within the legal framework of the United States of America.

What this means is that the auditing firm prepared its reports/statements in accordance with the United States law and guidelines. These would have been in the form of company acts/laws. The regulatory framework is set out by the different regulatory bodies. In the USA the CPA (Certified Public Accountants) body would have set out guidelines for its members to follow in the preparation of financial statements. There is also the International Accounting Standards Board (IASB). This board governs how reporting is done internationally.

Previously, there were separate boards, one in the USA and the other in the UK. Over the last decade there has been harmonization of the accounting standards. These standards are there to improve the transparency of accounting, and ensure that investors receive more accurate and consistent reports. The regulatory framework will aid in providing unbiased information as new standards will ensure that fraud and deception is exposed as it requires organisation to be more proactive in audits and accounting, whereby restoring the trust and confidence of the users of financial statements.

Accounting Standards are necessary in order to enable AstraZeneca to produce statements that are relatively consistent and these standards are set by the accounting bodies at the international level. Financial Statements produced for users must comply with IAS and should present a true and fair view of the company’s financial position. Accounting standards are rules or sets of rules prescribing the method(s) by which financial statements should be prepared and presented and these are ‘working regulations’ and are issued by a national or international body of the accountancy profession.

Accounting standards interact with the company law. Internationally, the International Standards on Auditing (ISA) issued by the International Auditing and Assurance Standards Board (IAASB) is considered as the benchmark for audit process. Almost all jurisdictions require auditors to follow the ISA or a local variation of the ISA. The following describes how AstraZeneca used the following accounting standards in the preparation of its financial statements: * ISA 18 – Revenue IAS 18 provides guidance on accounting for revenue from the sale of goods, provision of services and revenue in the form of interest, royalties and dividends.

The objective of IAS 18 is to prescribe the accounting treatment for revenue arising from certain types of transactions and events. AstraZeneca will be able to recognize its revenue when certain stipulated conditions are met. Revenue is the gross inflow of economic benefits (cash, receivables, other assets) arising from the ordinary operating activities of an entity (such as sales of goods, sales of services, interest, royalties, and dividends). These conditions are different depending on whether goods or services are provided. Sale of Goods Revenue arising from the sale of goods should be recognised when all criteria have been satisfied.

In 2009 AstraZeneca had sales of more than $1 billion each for 10 medicines. It also had sales of $15,981 million in North America, $12,471 million in Other Established Markets and $4,352 million in Emerging Markets. The costs incurred or to be incurred in respect of the transaction can be measured reliably * IAS 19 – Employee Benefits IAS19 is an accounting rule concerning employee benefits under the IFRS rules set by the International Accounting Standards Board. Employee benefits include wages and salaries as well as pensions, life insurance, and other perquisites.

The rule in IAS19 explains the accounting for longer term employee benefits and post employment plans such as defined benefit retirement plans. With a workforce of 62,700 employees worldwide (47% in Europe, 31% in the Americas and 22% in Asia, Africa and Australasia AstraZeneca is required to pay salaries their employees and contribute towards benefits such as pension and life insurance etc. Some employees will be on their pension plan. The pension plans will offer various types of benefit according to the mode by which the employee leaves the employer.

For example, if the employee remains in employment until the employee’s retirement age, the employee may be entitled to a pension, often calculated by reference to the employee’s average salary in the period running up to their exit. The pension might be payable for the remainder of the employee’s life, and when he dies, at a reduced rate to his spouse for the remainder of her life. But if the employee were to leave service before being entitled to a pension, he might receive a benefit such as a return of contributions, or a deferred pension payable from normal retirement age, depending on length of service.

In many cases, defined benefit pension plans are funded and hold assets in order to meet those promised benefits. A defined benefit pension plan is an example of a post-employment benefit plan. * IAS 21 – The Effects of Changes in Foreign Exchange Rates The objective of IAS 21 is to prescribe how to include foreign currency transactions and foreign operations in the financial statements of an entity and how to translate financial statements into a presentation currency. [IAS 21. 1] The principal issues are which exchange rate(s) to use and how to report the effects of changes in exchange rates in the financial statements. IAS 21. 2]. AstraZeneca have operations worldwide in countries such as Europe, Asia, Africa etc. , the currencies of these countries differs therefore, AstraZeneca needs to know the effects of changes in foreign exchange rates to reflect an accurate financial statement as possible. When accounting a foreign currency transaction should be recorded initially at the rate of exchange at the date of the transaction. * IAS 38 The objective of IAS 38 for AstraZeneca is to prescribe the accounting treatment for intangible assets that are not dealt with specifically in another Standard.

This Standard requires an entity to recognise an intangible asset if, and only if, specified criteria are met. The Standard also specifies how to measure the carrying amount of intangible assets and requires specified disclosures about intangible assets. An intangible asset is an identifiable non-monetary asset. It scenario states the firm as having: a. 16,000 persons working in Research and Development b. 17 principal R centres in eight countries, including Sweden, the US and the UK; and c. 0 major R collaborations in the last three years, 2006-2009 d. Invested $4. 4 billion in R in 2009 (2008: $5. 2 billion; 2007: $5. 2 billion) The intangible asset of AstraZeneca is it research and development of a pipeline of innovative new products to meet medical needs of customers and in turn bring in revenue and profit for AstraZeneca. The END. TASK 3 A financial audit, or more accurately, an audit of financial statements, is the verification of the financial statements of a legal entity, with a view to express an audit opinion.

The audit opinion is a reasonable assurance that the financial statements are presented fairly, in all material respects, or give a true and fair view in accordance with the financial reporting framework. The purpose of an audit is to enhance the degree of confidence of intended users in the financial statements. Financial audits are typically performed by firms of practising accountants who are experts in financial reporting. The financial audit is one of many assurance functions provided by accounting firms.

Many organisations separately employ or hire internal auditors, who do not attest to financial reports but focus mainly on the internal controls of the organization. It is headed by the chief internal auditor assisted by the internal audit staff in order to; ensure that the business is operating in an efficient and orderly manner; ensure adherence to management policies; safeguard the fixed assets of the company and control the current assets; determine the accuracy and reliability of the company records and accounts and ensure adherence to the company’s statutory requirements.

External auditors may choose to place limited reliance on the work of internal auditors. They look at the company’s financial performance; compliance with the laws, oberservance of auditing and accounting standards and rules and regulations set out by the regulator; balance sheet, income statement and the ability of the company to operate as a going concern; opinion lends credibility to the financial statements and promotes confidence in the system; should be independent and performs the ‘watchdog’s and the ‘whistleblowers’ roles in the financial system.

Accounting standards are rules or sets of rules prescribing the method(s) by which financial statements should be prepared and presented and these are ‘working regulations’ and are issued by a national or international body of the accountancy profession. Accounting standards interact with the company law. Internationally, the International Standards on Auditing (ISA) issued by the International Auditing and Assurance Standards Board (IAASB) is considered as the benchmark for audit process.

Almost all jurisdictions require auditors to follow the ISA or a local variation of the ISA. According to Needles et al. (2007) accurate financial statements are especially more useful to outside business interests other that internal users because external users lack the day to day interaction with the enterprise. Accurate financial statements are extremely important to investors who may want to invest in a business entity. Accurate financial records help such investors to make investment decisions which are logical based on the information contained therein.

It is important to note that investors need to come up with a detailed evaluation of the viability as well as financial stability and strength of a company before making an investment. THE END BIBLIOGRAPHY * http://academicwritingtips. org/component/k2/item/2864-financial-statements. html * http://answers. yahoo. com/question/index? qid=20070722111952AApFJ0v * http://www. iasplus. com/interps/ifric014. htm * http://www. mccombs. utexas. edu/dept/accounting/facultypages/Koonce/Kadous%20Ko

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