Financial reporting in the system of information support of marcet economy management

Lubomyr Pylypenko, Olena

Tyvonchuk

Financial reporting in the system of

information support of marcet

economy management

Annales Universitatis Mariae Curie-Skłodowska. Sectio H, Oeconomia 46/4,

733-741

L U B L I N - P O L O N I A

V O L . X L V I, 4 S E C T IO H 20 1 2 Lvov Polytechnic National University, Departm ent of Accounting and Analysis

LU B O M Y R PYLYPENKO, O LEN A TYVON CHUK

Financial reporting in the system o f information support

o f market economy management

Spraw ozdaw czość fin an so w a w system ie w sp arcia inform acyjnego za rz ą d z a n ia g o sp o d a rk ą rynkow ą

K e y w o r d s : fin a n c ia l s ta te m e n ts , sy ste m o f in d e x e s, u s e rs o f fin a n c ia l s ta te m e n ts , m e th o d o lo g ic a l b a sis o f ac c o u n tin g

S ło w a k lu c z o w e : sp ra w o z d a n ia fin a n so w e , sy stem w sk aźn ik ó w , u ż y tk o w n ic y sp ra w o z d a ń fin a n so w y c h , m e to d o lo g ic z n a b a z a ra c h u n k o w o śc i

Introduction

Financial and property status (market capitalization of assets) and the results of operation of most enterprises significantly worsened, which was partly caused by financial and economic crisis. During the last four years the sharp decrease of profits or losses, reduction of solvency and liquidity took place, as well as bankruptcy of large transnational corporations, etc. Worth noting is also the fall o f share prices not only of individual companies but a collapse o f investment, financial and stock markets as well.

Naturally the following questions arise:

1) Why did successful companies bankrupt that had obtained positive results? 2) Were the results, reflected in the financial statements (confirmed by audit),

and confirmed by the market mechanism o f equity valuation, expressed as the rate o f issued securities (stocks and corporate bonds), real?

These arguments indicate that the present dataware distorts real financial position and performance of businesses in the market economy. One of the important tools o f dataware o f business subjects in the market economy is the financial reporting.

734 LUBOMYR PYLYPENKO, OLENA TYVONCHUK

The purpose o f reporting is achieved not only by getting a full, impartial and reliable information on current financial position and results o f the business operation on it basis, but also, if it possible to predict the future potential o f business develop­ ment, on the basis of reporting. German scientists consider that the correct analysis of reporting using a system of indicators should allow to predict a crisis of the company three years before it starts1.

However, the fact of the modern financial and economic crisis undermines this statement: either the current financial statement does not provide the opportunity to achieve its purposes or this tool of management service has not been used timely and fully to predict the negative trends in the global economy.

Theoretical, methodological and organizational regulations of the formation, rep­ resentation and control of financial reporting and disclosure of financial information have been investigated by many scientists in their works. They have paid attention to the methodology of financial reporting and its harmonization and standardization, consolidation, auditing, information provision and so on. The evaluation of the role and qualitative characteristics of financial reporting in market economy, orientation o f the conceptual framework of its development differ among scientists.

It is worth to agree to the opinion of a Russian scientist K. Tsygankov, who notes that “they have failed to create a concept of accounting, which would determine its complex information creation and idea that would unite all items o f a statement”. He correctly notices that “instead of definitions there are only descriptions of reporting forms that have been formed historically, as well as lists of chapters and items to include in the literature (...) There are no generally accepted definitions o f certain accounting items such as equity, capital gains, intangible assets, reserves, etc., that is the information which should be reflected in financial statements2.

Despite a number o f proposed improvements by scientists, issues of adequacy of financial reporting, the level of objectivity and transparency remains unsolved, due to particular unclear conceptual and methodological basis. Conceptual Foundations o f International Financial Reporting Standards are presented in a very general and speculative way. It suffices to note that the own capital standard is not even formu­ lated in a theoretical sense, though this standard should be the basis for fixing the property between the various stakeholders (shareholders, including minority, inves­ tors, creditors, etc.).

1 Й. Бетге, Б алаисоведение; пер. с нем.: Н аучн. р едактор В.Д. Н оводворский. М.: И зд -во “ Бух­ га лт ер ск и й у ч е т ”, 2000, p. XIV.

2 К.Ю. Ц ы ганков, Теория и м ет одология бухгалт ерского у ч е т а капит ала: авт ореф. Дис. доктора экон. наук: спец. 08.00.12 - б у х гал тер ск и й учет, стати сти ка. Н овосибирск, 2009, pp. 3 -4 .

Coordination of the goals and principles of financial reporting

In our opinion the main purpose o f the public financial statements is to provide the information needs o f its external users concerning financial and property status of a company and the effectiveness o f its activity. Such basic information and its interpretation is needed for management decisions concerning the acquisition, pos­ session, sale of securities and the equity of the enterprise, assessment o f its liquidity and solvency, security commitments, profit distribution, regulation and so on.

There are different users o f financial statements such as owners and investors of the company, its management, workers and employees, business partners, the organs o f state and international regulation and control, financial analysts and advisors, civil organizations, trade unions and others.

From a single nonpublic company (even very large) viewpoint list o f users of its financial reporting is relatively limited, and their interests in this enterprise and related information needs are predictable. In this case, the financial reporting is “a mechanism for information exchange between interested users and the company”3. However, national or global financial reporting by business entities, especially im­ portant public companies or corporations, directly or indirectly obtains the society importance through various social organizations such as pension funds, insurance companies which are the largest investors and participants o f stock and other f i­ nancial markets, central and local governments, international organizations and others.

Thus, the financial statements are socially important form o f information pro­ vision o f the economic regulating. Its format should be determined by information needs of external users to enterprise data, not its management, which has other mechanisms for obtaining information. The paradigm of asymmetry o f information contained in financial statements and its reticence in these cases is not revealed sufficiently.

Public financial reporting format stipulates stringent requirements on its content and presentation. The Ukrainian regulations (standards) o f accounting requirements are set out in the following nine principles of financial reporting: autonomy of an enterprise, the continuity of its activity, periodicity, historical (actual) cost, charges and compliance with income and expenses, full coverage, consistency, diligence and prevailing of substance over a form, the only money measure. Moreover, they demand the following quality characteristics: understandability, relevance, reliability and comparability. In other conceptual frameworks (International Financial Report­ ing Standards, GAAP) similar requirements are prescribed as principles, qualitative characteristics, assumptions, constraints (requirements analysis of various conceptual

3 Я.В. Ш еверя, Ф т ансова з в ш ш с т ь y cucmeMi ш ф орм ацш ного за безп еченн я прийнят т я р ш е н ъ . А втореф. ди сер т ац и н а зд о б у т т я наук. сту п ен я канд. екон. наук: спец. 08.00.09 - б у х г а л т е р с к и й о блж , анал1з т а аудит. Ж итом ир, 2011, 21., p. 1.

736 LUBOMYR PYLYPENKO, OLENA TYVONCHUK

frameworks, that was held by Andrienko Y.V.4, shows no significant differences between them, except for names).

At first glance, the principles of financial reporting, components o f its qualita­ tive characteristics should provide a sufficient level of objectivity about the financial condition and results o f the enterprise. However, detailed analysis of the contents of conceptual and methodological bases of financial reporting standards, makes it possible to note the fundamental assumptions that allow to manipulate reporting indicators. According to national regulations (standards) o f accounting, the information is accurate (reliable), if there are no errors and distortions that can affect the decisions of users reporting. IFRS treats the accuracy o f the information as peculiarity of its complete­ ness, neutrality, prudence, the prevalence of a substance over a form and a true picture o f financial condition and performance. Given these definitions we can conclude that the accuracy is not an objective qualitative characteristics of financial reporting, but is “tied” to a format of conceptual basis of its formation. The financial statements o f the same company, formed according to different approaches to the conceptual framework, may differ significantly from each other (e.g. adherence to concepts of financial or physical capital in determining earnings). In addition, using o f alternative approaches to requirements (depreciation, evaluation o f materials, stockpiling, etc.) does not enhance the quality level of reporting, each report w ill meet certain quality specifications in terms of compliance with accounting regulations and w ill be consid­ ered reliable. But which one will really objectively reflect the financial condition and results o f business? Which one fully satisfies the information needs of users reporting?

Clarity (understandability) as another qualitative characteristics o f financial re­ porting, assumes that the user knows and understands the reporting rules which it is made according to. Thus, regardless o f accounting framework the user should clearly interpret its meaning and make appropriate conclusions. O f course, these facts do not confirm solving the problem o f objectivity and transparency o f financial reporting.

Different users of financial statements of an enterprise can have different informa­ tion needs, which are determined firstly by the character o f interest to the perform­ ance of functioning of such entity. Interests o f different users of financial statements may not only differ, but even be diametrically opposed. That is why a question is posed whether financial statements can satisfy the information needs o f all interested persons. In this connection, L.M. Kindratska notes: “(...) it is important to emphasize the existence of a large number of users with different interests. This gives grounds to consider the reporting information as a kind of accounting and economic goods produced in order to ensure demand for information”5.

4 B.O. Андр1енко, П ринципы ф о р м ува нн я фт ансовоХ 3eim nocm i на т д п р и е м с т ва х УкраХни та

за кордоном , в: Андр1енко В.О., Т ю тю н н и к П.C., BicHHK Ж итом и рського держ авн ого т е х н о л о п чн о го

у ш вер си тету , 2009, № 3 (49), С. 12-15, pp. 13-14.

5 Л.М . К ш д р а ц ьк а, 3 eim n icm b у загалъ нш облХковш сист ем ! господарю ван ня: р о зеи т о к та вдосконалення. B ic H H K Льв1всько1 ком ерц ш н о1 академи. Льв1в: В нд авннцтво Льв1всько1 ком ерц ш н о1

Along with it the financial statements as an economic category is presented in many perem ptory rules. It is the basis o f profit distribution, paying dividends, calcula­ tion bonuses to m anagem ent and so on. Thus, the reliability of indicators of financial statements of the enterprise implies the objectivity o f the distribution of social income, investment attractiveness of a particular subject and the national economy in general.

It should be noted that some users of financial statements m ay have an im pact on the process of its forming by some entities. In particular, the m anagem ent or owners of the company. Executives (top-management) may be interested, for example, in the reporting of significant gains (because of their size, usually dependent premium , the so-called bonuses) of managers at this level or indicators that would be indicative of high level of solvency (for credits or other financial loans) and corporate rights holders - to increase the value of their shares. It is in favour o f such users creativity can be applied in the accounting. Experts estim ate that about 150 multinational corporations control over 40% of global income. Creative accounting o f those corporations, any misrepresentation in their financial statements, in our opinion, can have significant negative consequences for the global economy.

However, the manipulation with users minds has place not only at the microlevel but globally as well. The process o f standardization of financial reporting is influenced by global corporate structures. We agree with the opinion that the dominance o f transna­ tional corporations and various political forces in a country affect the decisions in the accounting sphere. This factor is well observed on the basis o f development of balance sheet theories, expressed directly in the regulation o f international financial reporting standards, a combination of incoherent conditions, assumptions and principles, which are not incorporated in a hierarchical structure6. This certainly indicates the subjec­ tiveness of reliability as qualitative characteristics of financial reporting information.

The problems of adequacy of the financial statements to present information needs of management and regulation of market economies

A complete accounting system, based on a traditional methodological basis, is not able to effectively serve the m odern post-industrial (intellectual) economy, that is accounting m ethodology came into conflict with the realities of economic life7. This applies both to accounting of traditional registration items (assets, liabilities, revenues) and the requirements of m odern realities concerning reflection in the financial state­ ments, unusual at first glance items for accounting, such as goodwill of the enterprise and other kinds of intellectual capital, hidden and potential reserves, and so on.

6 1.Й. Яремко, Б а ла н со зна вст во у KonmeKcmi i (popMami м ет одологи економ1чно'1 науки, в: Яремко 1.Й., Ф едак Т.В., М енедж м ент та т д п р и ем н и ц т во в У к р а ш : em anu ст ановления i проблем и розвит ку. BicHHK Н ационального у ш в е р с и т е т у “Л ьв1вська п о л Н ех ш к а” 2009, № 647, pp. 548.

738 LUBOMYR PYLYPENKO, OLENA TYVONCHUK

Despite the rapid development of intellectual capital and its widespread use in business (just imagine the development of computers and information technology!), the methodology of accounting intangible objects suffered little change since 1861 when the monography by G.V. Simon in the theory o f accounting balance right was published, that was called by O. Shmalenbah the static balance theory. Concept 38 “Intangible assets” of International Accounting Standard is actually formed on the basis of static balance sheet theory. In particular, it concerns the principle of objec­ tification by displaying intangible objects in the balance: G. Simon believed that non-material objects can be reflected in the balance sheet only if they are purchased from third parties for a fee8, and paragraph 63 of IAS 38 states clearly ‘ internally generated brands, headings, publishing titles, customer lists and similar in substance items should not be recognized as intangible assets.” Clearly these regulations do not suit to subject of businesses of market economy. For example, the value of the trademark “Coca-Cola” is estimated at more than 60 billion U.S. dollars. Will it be correct not to display it in “The Coca-Cola Company” balance sheet?

The method of evaluation of intangible assets is also problematic: evaluation by historical cost may lead to the accumulation of so-called “toxic assets” and the fair value has inclination to the dramatic changes that would be experienced directly in the market position of the company which is reflected in its balance sheet.

Thus, on the one hand, there is the problem of defining the real value of intel­ lectual capital, on the other - the lack of sufficiently justified methodological base and principal approaches to the transfer of this value into the price o f the product (depreciation).

Applying in accounting of principle of conservatism is on the one hand aimed at the preservation of capital but on the other causes uprising of hidden reserves, the elimination of which leads to the formation o f profit in future periods. However, cur­ rent financial and property status of the entity may be underestimated. Certainly one can not abandon the principle o f conservatism, but the formation of hidden reserves once again proves the impossibility to satisfy the information needs of all users of financial statements.

A significant obstacle to the objectivity of financial reporting is a problem of acquiring of the methodological dualism as a result of evaluation o f assets o f the en­ terprise (for financial reporting purposes a lot o f methods o f evaluating the assets of tangible and intangible nature are stated). This problem is caused by the impossibil­ ity of simultaneous use of concepts of financial and physical preservation o f capital. The content of many accounting conventions is reduced to the fact that assessing the financial and property status of the company, one can objectively determine the value of its profits (if assets are measured by historical cost), or value of the property, close to the fair (if assets are measured by present value). According to some scientists,

8 Й. Б етге, Б а лансовед ение, пер. с нем.: Н аучн. редактор В.Д. Н оводворский. М.: И зд-во “ Бух­ га лт ер ск и й у ч е т ” 2000, pp. 11.

prevalence o f estimates by historical cost caused the occurrence of m ajor depression in 1929 and was the m ain reason o f defaults and recessions in 1990s. in post-socialist countries9. This fact also led to underestim ation of the cost of privatization o f national enterprises that enabled some persons or financial-industrial groups to buy corporate rights of privatized enterprises from citizens for a song. This is largely the truth for the present crisis.

All these circumstances led to a reorientation o f the inform ation support o f the m arket from the financial statements to other tools to assess the effectiveness o f its subjects, based on non-formalized information. These tools include a list o f individual for each company indicators defined, norm ally in an expert way and oriented to the expectations of future economic benefits. However, alternative to financial reporting mechanisms of evaluation of public companies results have a num ber o f defects that directly affect the quality of the inform ation formed, in particular:

• the use of informal indicators that are individual to each company, makes it impossible to compare the performance o f different companies, so information becomes not comparable;

• results o f evaluation of the effectiveness of the company for such alternative systems of indicators are not subject to independent m onitoring, including public audit that calls into question their objectiveness.

Uncontrolled use of alternative financial reporting systems o f perform ance as­ sessment of public companies led to manipulations with them. As a result there is a considerable overvalue of enterprises due to inflated estim ates o f expected future earnings and intellectual capital: “The financial and economic crisis has exposed the falsity o f inform al m easurem ent (assessment) o f intangible (vast) component of the m arket value o f capital, revealing in the m ajority o f well-known multinational companies in the world all sorts of ‘bad’, ‘toxic’ and ‘problem atic’ assets”10.

In the U krainian context the role of financial reporting in inform ation support of m anagem ent decision-making is less significant, due to the lack of developed stock market. Although formally m ost of the assets that were part o f total state property have been corporatized and privatized as joint stock companies and virtually all citizens of U kraine are (or at least were) holders o f securities actually, the full stock m arket does not exist. If you do not take into account the financial sector, there are not many public companies in Ukraine. Most companies prepare financial statements only because of their obligation to satisfy the statistics offices requirements. Much more im portant for companies is to fulfil the tax office requirem ents, because any distortion of it results in substantial penalties. As a result, the organization of account­ ing in such firm s is subjected to fiscal imperative, not financial reporting framework.

9 H.A. Бреславцева, В.И. Ткач, В.А. Кузьменко, Б алансоведение: учеб. пособие. М.: “И зд ательство П риор” 2001, 160 с, pp. 83.

10 1.И. Я рем ко, К а т т а л в методологп облжу., М I V н а у к . - п р а к т . конф. "Стан, проблемы т а перспект ивы р озвы т ку обл!ку, а н а л!зу i конт ролю у суч а сн и х у п р а

740 LUBOMYR PYLYPENKO, OLENA TYVONCHUK

Finally it is worth noting that the problem of the financial reporting adequacy to the information needs of society is not new. Already in 1910, Lvov scientist (the founder of accountancy econometric theory) P. Tsompa wrote: “Our balances are in­ comprehensible! Without a detailed examination of accounting books, in many cases it is impossible for the most versed specialists to determine immediately the value of all items only on the basis of balance, especially when there are reserve funds, reserves and accounts o f the so-called mutual credits”11.

Conclusions

The current financial and economic crisis demonstrated the importance of objec­ tive and transparent information provision with the state and efficiency of operation o f modern companies for purposes of government of market economies in general and especially in the financial and investment segments. Evaluation of the state and performance of the economic subjects by alternative instruments that include determination of the complex formal and informal indicators and indices, has led to a significant distortion o f financial information because such information is not subject to external control, and methods of use o f alternative instruments poorly governed by state institutions. Meanwhile, the financial statements are based on national or international regulations, subject to mandatory (especially for public companies) ex­ ternal control, i.e. audit. But to really reflect the financial and property status o f the company, it is necessary to improve the methodology of accounting as the basis for its formation, particularly in part of registration of intellectual capital, overcoming o f methodological dualism of assets evaluation, etc., and to take standardization of financial reporting out of the influence of transnational corporations.

B ib lio g ra p h y 1. А ндр1енко B.O., Т ю т ю н н и к П.С. Принципы формуеання фтансовог seimnocmi натдприсмстеах Украти та за кордоном, В ю н и к Ж и т о м и р с ь к о г о д е р ж а в н о г о т е х н о л о п ч н о г о у ш в е р с и т е т у . 2 009. № 3 (49). 2. Б е т ге И ., Н о в о д в о р с к и й В .Д ., Балансоведение, М .: И зд -в о , Б у х г а л т е р с к и й у ч е т, 2 0 0 0 . 3. Б р е с л а в ц е в а Н .А , Т к а ч В .И ., К у зь м е н к о В .А ., Балансоведение: учеб. Пособие, Б р е с л а в ц е в а , М.: “ И з д а т е л ь с т в о П р и о р ”, 2001. 4. Ц ь о м п а П ., Г о н ч а р у к Я ., К о п и ч I., Б а ш н я н и н Г., Я р е м к о I., Нариси економетрп i побудована на нащоналътй полтекономп meopin бухгалтерского обл1ку, Льв1в: К а м е н я р , 2001. 5. Ц ы г а н к о в К .Ю ., Теория и методология бухгалтерского учета капитала: автореф. б у х г а л ­ т е р с к и й у ч е т , с т а т и с т и к а , Н о в о с и б и р с к , 2009. 11 П. Ц ьом па, Я. Г ончарук, I. К опич, Г. Б аш н ян ин , I. Я рем ко, Н а р и си економ ет рп i побудована на на ц ю н а лът й п о л т е к о н о м п m eopin б у х г а л т е р с к о г о облт у. Пер. з ш м. Льв1в: К ам еняр, 2001, 223 с.

6. Я р е м к о 1.Й. Балансознаестеоу K o n m e K c m i i формат1 методологи економ1чноЧ науки, в: 1.Й. Я р е м к о , Ф е д а к Т.В., Менеджмент та тдприсмництео е УкраШ: e m a n u становления i про­ блема розвитку, В ю н и к Н а ц ю н а л ь н о г о у ш в е р с и т е т у Л ьв1 вська п о л й е х ш к а , № 647, 2009. 7. Я р е м к о 1.Й. Економ1чт категори в методологи обл1ку, Льв1в: К а м е н я р , 2002. 8. Я р е м к о 1.Й. Каттал в методологи облжу, М а тер 1 ал и IV М 1ж нар. н а у к .-п р а к т . конф . “ С т ан , п р о б л е м и т а п ер с п е к т и в и р о зв и т к у об л ж у , анал1зу i к о н т р о л ю у к он текст! с у ч а с н и х к о н ц еп ц ш у п р а в л ш н я ” . Льв1в: В и д а в н и ц т в о Льв1всько1 к о м ер ц ш н о !' а к а д е м п , 2011. 9. Ю н д р а ц ь к а Л .М . ЗвШтстъ у загалънт облжовш c u c m e M i c y ô ’e K m ie господарювання: розвиток та вдосконалення, BicHHK Льв1всько1 комерц1йно1 акад ем й ', Льв1в: В и д а в н и ц т в о Льв1всько1 к о м е р ц 1й н о 1 акад ем й ', 2011. 10. Ш еве р я Я.В . Фтансоеа звШтстъ у c u c m e M i тформацтного забезпечення прийняття рШенъ: автореф. Д и с е р т а ц п н а зд о б у т т я н а у к . с т у п е н я к а н д . екон . н аук: сп ец . 0 8 .0 0 .0 9 - б у х г а л - т е р с ь к и й обл1к, анал1з т а ау д и т , Ж и т о м и р , 2011.

F inancial repoting in the system o f inform ation support o f m arket econom y m anagem ent

T h e c o m p lia n c e o f e n te rp ris e fin a c ia l sta te m e n ts in d e x e s w ith th e m o d e rn in fo rm a tio n a l n e e d s o f in s titu tio n s th a t m a n a g e a n d re g u la te e co n o m y , m a rk e t a g e n ts a n d e x te rn a l u s e rs is re se a rc h e d . T he a d e q u a c y o f fin a c ia l a n d e c o n o m ic p o sitio n c h a ra c te ris tic s o f m a rk e t e c o n o m y su b je c t b y th e in d e x e s o f p u b lic sta te m e n ts a c c o rd in g to th e m e th o d o lo g y o f a c c o u n tin g is a n a ly z e d . T h e c o n c e p tu a l d ire c tio n o f fin a n c ia l sta te m e n ts a c c o rd in g to m u ltiv e c to r in fo rm a tio n a l n e e d s o f d iffe re n t u s e rs a n d th e in flu e n c e o f g lo b a l c o rp o ra tiv e s tru c tu r e s o n s ta n d a rd iz a tio n p ro c e s s e s are show n.

Spraw ozdaw czość finansow a w system ie w sparcia inform acyjnego zarządzania gospodarką rynkową

Z b a d a n o z g o d n o ś ć w s k a ź n ik ó w sp ra w o z d a ń f in a n s o w y c h p r z e d s ię b io rs tw a z e w s p ó łc z e sn y m i p o trz e b a m i in fo rm a c y jn y m i in sty tu c ji, k tó re z a rz ą d z a ją g o s p o d a rk ą i j ą re g u lu ją , p rz e d sta w ic ie la m i ry n k o w y m i o ra z z e w n ę trz n y m i u ż y tk o w n ik a m i. A n a liz ie p o d d a n o a d e k w a tn o ś ć c h a ra k te ry s ty c z n y c h c e c h p o z y c ji fin a n so w e j i ek o n o m ic z n e j p o d m io tu g o sp o d a rk i ry n k o w e j z a p o m o c ą w s k a ź n ik ó w sp ra ­ w o z d a ń p u b lic z n y c h w e d łu g m e to d o lo g ii ra c h u n k o w o śc i. U k a z a n o k o n c e p tu a ln y k ie r u n e k sp ra w o z d a ń fin a n so w y c h w e d łu g w ielo w e k to ro w y c h p o trz e b in fo rm a c y jn y c h ró żn y ch u ż y tk o w n ik ó w , a ta k ż e w p ły w g lo b a ln y c h s tr u k tu r k o rp o ra c y jn y c h n a p ro c e sy s ta n d a ry z a c y jn e .