Financial Reporting Environment

2530 words - 11 pages

Introduction

The purpose of this report is to investigate the current financial reporting environment in Sri Lanka and its impact on the companies listed on the Colombo stock exchange. Hotel SIGIRIYA PLC has been chosen to study the financial reporting requirements, cultural impacts and the political influences on the Sri Lankan listed companies.

1. Financial Reporting Environment in Sri Lanka
2.1. Current financial reporting requirements for publically listed companies in Sri Lanka.
In August 2007, two stages were adopted by Sri Lankan accounting standards regulators to form the international Financial Reporting Standards (IFRS). They traversed from Stage I of IFRS Adoption ...view middle of the document...

(Colombo Stock Exchange Listing Rules s.7.5 pg.5)
The preparation of a financial statement under IFRS, requires the following IAS 1.8 considerations:
* A Statement of Financial Position as the end of the reporting period
* A Statement of Comprehensive Income Statement, involving a Income statement and a separate Statement of Comprehensive income
* A Statement of Change in Equity
* A Statement of Cash Flows
IFRS has recently undergone several modifications with the possibility of many more in the near future (IFRS -Application around the world p.4)

Recent modifications include:
* IFRS 10 Consolidated Financial Statements: in regard to control, decision will be made upon whether the consolidated financial statement of a parent company should be included within an entity.
* IFRS 11 Joint Arrangements.
* IFRS 12 Disclosure of Interests in Other Entities: disclosure will require other companies’ form of interest.
* IFRS 13 Fair Value Measurement: stipulate a more precise definition of fair value.
* IFRS 7 Financial Instruments: Disclosures and comparisons once required relating information but as of 1 January 2013 it no longer does.

2.2. Cultural influences on financial reporting in Sri Lanka.

According to oxford dictionary culture is defined as the ideas, customs and social behaviour of a particular people or society. Culture has become an important notion that would be expected to impact on legal systems, tax systems, and the way businesses are formed and financed, (Deegan2014, pp.136). In recent decades it has also been used to explain international differences in accounting systems. As we move towards the international accounting harmonisation it is vital to understand the influence that environmental factors such as culture have on the financial reporting.

The complexity of culture encouraged Hofstede to analyse and create four dimensions of national cultures such as Individualism, power distance, uncertainty avoidance and masculinity. However when countries are ranked on the basis of Hofstede’s five dimensions of national cultures a number of countries can be clustered together. Keeping this in view Gray developed the following accounting values:
1. Professionalism versus statutory control
2. Uniformity versus flexibility
3. Conservatism versus optimism
4. Secrecy versus transparency (deegan2014, pp.140)

The following chart, Hofstede’s ranking of Sri Lanka, will help us analyse the cultural influences on financial reporting in Sri Lanka:

Figure 1

Gray (1988) developed a number of hypotheses to relate Hofstede’s four societal cultural dimensions to his accounting values. Looking at the above chart, Sri Lanka’s ranking could be best described by Gray (1988, p.11) fourth hypothesis,” The higher a country ranks in terms of uncertainty avoidance and power distance and the lower it ranks in terms of individualism and masculinity, then the more likely it is to rank...

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