Restatement Of Financial Statements And Its Impact On Shareholders: An Analysis Of Pearson

Evidence from the distributional properties of financial statement numbers

In today’s world with increasing advertisements on benefits of investing your money in the stock market and continuous motivation from government people of every country have finally been able to shed their apprehensions regarding investing in the stock market. For the listed company it has come as a boon as they are able to raise money according to their needs and invest in any venture that provides a venue for earning profit. But, as it has always been said that with great power comes great responsibility, the company mjust endeavour in making correct information available to the general public so that they are equipped enough to make an informed analysis about the financial position and performance of the company. When the company releases its audited annual report, it is assumed by the shareholders that the company’s financial statement is showing true and fair view and they can make their economic decisions based on the information laid down in the financial reports of the company.

In the following project, we will be giving out the reflection of the restated financial statements produced by us.  The company under our analysis is PEARSON. The financial statements of the company include or rather the financial statements which have been restated by us are its income statement, balance sheet and statement of changes in equity. Our analysis as mentioned earlier is based on the assumption and belief that the financial statements are showing true and fair view and are free from material and pervasive material misstatement that can affect or influence the decisions of the shareholders. The purpose of restatement of the financial statements was to make the understanding of the financial statements more easy and effective while maintaining its comprehensiveness. If we are able to simplify the financial statements it will be much easier for the shareholders to frame their analysis and will give a picture of the business entity to them.

The statement of movements in equity tells us about the changes that have taken place in the shareholders equity over the last year. In the original statement of movement of equity as given out in the annual report of the company the presentation is such that the shareholder is getting the information about every item that has affected the movement of the shareholding of the shareholders. However there is no distinction been made between the items based on whether they are of operating nature or involve direct transaction with the shareholders. If a distinction is being made between the items based on their nature or manner of transacting it will be easier for the shareholders to comprehend the statement in an even better way. Kin pursuance of this we made a clear distinction based upon the nature of the items and their way of transacting and divided the statement of movement of equity in two parts.  First part gives us the total comprehensive income while the other part gives us the transactions that have been directly entered with the shareholders. It was very important for us to make the distinction because   we wanted to show the shareholders clearly how much value has been created for them by the company via daily operating activities of the company and how much value or changes have been made by directly transacting with the shareholders. From the restated statement it is clear that the company’s shareholders lost their value due to losses booked in the year 2016 to the tune of $2335000. The division is another step taken by us towards improving the readability and understandability of the statement showing movement in equity.

Accelerated filing deadlines, internal controls, and financial statement quality

The income statement of a company shows the sources of its income and the way in which the company expends it. While calculating the income all the income accrued to the company is taken and not only the income that has been received by the company in cash. Similarly in case of expenses all the expenses of the company are taken into consideration and not only the expense in whose respect the company has made the payment in cash. In our restated Income Statement we have made a clear distinction between the net operating income earned by the Company and the net financial income earned by it for the year 2016.  This classification enabled us to factor in or show evidently many items that have an impact on the taxable or net income of any company. For instance, one of the item whose effect is present in the financial statements but not clearly shown or evident is the tax benefit the company is availing due to the negative financial income. In the original income statement there is a distinction made between the financial and operating activities of the company but the difference is not very clear for the shareholders. The distinction between the two is so crucial from the view point of the shareholders because they need to understand the position the company in respect of the way in which it is carrying out its daily activities and the value that is being created for the shareholders by the daily activities of the company. Also the value created for the company thereby for the shareholders by the way of investment is also very important information that must be made available to the shareholders very clearly. In pursuance of this we made sure that we make the distinction between the income generated from the operating activities and from that of financial activities very clear. In the effort of making the restated income of the company we had to first understand the business of the organisation in details. The understanding we developed helped us to gauge the type of activities the company is supposed to enter into on daily basis. After getting to know the various operating activities of the company it was easy to make the distinction. We grouped the operating activities and the revenue generated from them together and the rest of the income and expense was definitely attributable to the financial activities of the company.

Relationship between Restatement of Financial Statements and Information Asymmetry

The balance sheet of any company states or shows the position of the company with respect of assets held by it and its financial obligations towards the entities or persons it has borrowed the funds from. The classification made in the original annual report is based upon the time period they are going to be held for and in case of liabilities the time period of their due date of payment. The distinction is not made on the basis of the role the assets or liability plays in the activities of the organisation or how they affect the process of value creation for the shareholders. In pursuance of increasing the understandability of their specific role in the organisation we made a distinction between them as operating assets or financial assets and operating liabilities or financial liabilities. In order to make the distinction we had to understand the nature of individual asset held and reported by the company in its annual report. The understanding we developed about the role or importance of the assets helped us to separate the operating assets or the assets required or utilised by the company in carrying out its daily operations and the remaining assets will definitely be categorised as financial assets. Then we took on the task of deciding the sources or requirements of funds required for carrying out the routine business operation of the company and the remaining obligations definitely were of financial nature. After dividing the assets and liabilities on the basis of their usage or implication in the business we were able to draw an equation which is the net operating assets of the company will be equal to the net financial obligation and the equity of the company. This equation explains that the asset required by the company in carrying out its daily business operations is funded by the equity shareholders or by borrowing funds from other outside sources which leads to financial obligations and at the same time we have financial assets which give us financial benefits or returns. Deducting the financial assets from the financial obligations we get net financial obligation. So in this way we were able to differentiate and understand the ways in which the assets of the company are acquired.

The annual report provided us with the financial statements of the company. We took in our hands the task of restating them so as to make the analysis easier and increasing the understandability of the financial statements. There were many conclusions that could only be drawn because of the classification that we made in the statement showing movements of equity, income statement and balance sheet. The role of individual items on the daily operating activities of the company and in the process of value creation for the shareholders was made easy by the analysis done by virtue of differentiation made between the various assets, liabilities, incomes and expenditures of the company. It was done in pursuance of increasing the understandability of the financial statements.   

References

Amiram, D., Bozanic, Z., & Rouen, E. (2015). Financial statement errors: evidence from the distributional properties of financial statement numbers. Review of Accounting Studies, 20(4), 1540-1593.

Boland, C. M., Bronson, S. N., & Hogan, C. E. (2015). Accelerated filing deadlines, internal controls, and financial statement quality: the case of originating misstatements. Accounting Horizons, 29(3), 551-575.

Rahmanian, H., Rahmani, H., & Jafari, S. M. (2016). Relationship between Restatement of Financial Statements and Information Asymmetry. International Journal of Humanities and Cultural Studies (IJHCS)? ISSN 2356-5926, 3(1), 1721-1732.