Financial Reporting
Definition of Financial Reporting
Financial Reporting involves the disclosure of financial information to the various stakeholders
about the financial performance and financial position of the organization over a specified period
of time. These stakeholders include – investors, creditors, public, debt providers, governments &
government agencies. In case of listed companies the frequency of financial reporting is
quarterly & annual.
There are two different types of reporting
– Financial reporting for various stakeholders
–Management reporting for internal Management of an organization.
Both these reporting are important and are integral part of Accounting & reporting system of an
organization. But considering the number of stakeholders involved and statutory & other
regulatory requirements, Financial Reporting is very important and critical task of an
organization. It is vital part of Corporate Governance. Let’s discuss about various aspects of
Financial Reporting in following paragraphs.
Financial Reporting is usually considered as end product of Accounting. The typical components
of financial reporting system are:
1. The financial statements – Balance Sheet, Profit & loss account, Cash flow
statement & Statement of changes in stock holder’s equity
2. The notes to financial statements
3. Quarterly & Annual reports (in case of listed companies)
4. Prospectus (In case of companies going for IPOs)
5. Management Discussion & Analysis (In case of public companies)
Various global accounting standards bodies have issued various accounting standards &
guidance notes which are applied for the purpose of financial reporting. This is meant to ensure
uniformity across various diversified industries when they prepare & present their financial
statements.
Now let’s discuss about the objectives & purposes of financial reporting.
Objectives of Financial Reporting
According to International Accounting Standard Board (IASB), the objective of financial
reporting is “to provide information about the financial position, performance and changes in
financial position of an enterprise that is useful to a wide range of users in making economic
decisions.”
The following points sum up the objectives & purposes of financial reporting –
1. Providing information to management of an organization which is used for the purpose of
planning, analysis, benchmarking and decision making.
2. Providing information to investors, promoters, debt provider and creditors which is used to
enable them to male rational and prudent decisions regarding investment, credit etc.
3. Providing information to shareholders & public at large in case of listed companies about various
aspects of an organization.
4. Providing information about the economic resources of an organization, claims to those
resources (liabilities & owner’s equity) and how these resources and claims have undergone
change over a period of time.
5. Providing information as to how an organization is procuring & using various resources.
6. Providing information to various stakeholders regarding performance management of an
organization as to how diligently & ethically they are discharging their fiduciary duties &
responsibilities.
7. Providing information to the statutory auditors which in turn facilitates audit.
8. Enhancing social welfare by looking into the interest of employees, trade union & Government.
Now let’s discuss few aspects about importance of financial reporting.
Importance of Financial Reporting
The importance of financial reporting cannot be over emphasized. It is required by each and
every stakeholder for multiple reasons & purposes. The following points highlights why
financial reporting framework is important –
1. In helps an organization to comply with various statues and regulatory requirements. The
organizations are required to file financial statements to ROC, Government Agencies. In case of
listed companies, quarterly as well as annual results are required to be filed to stock exchanges
and published.
2. It facilitates statutory audit. The Statutory auditors are required to audit the financial statements
of an organization to express their opinion.
3. Financial Reports forms backbone for financial planning, analysis, bench marking and decision
making. These are used for above purposes by various stakeholders.
4. Financial reporting helps organizations to raise capital both domestic as well as overseas.
5. On the basis of financials, the public in large can analyze the performance of the organization as
well as of its management.
6. For the purpose of bidding, labor contract, government supplies etc., organizations are required
to furnish their financial reports & statements.
Conclusion
So we can conclude from the above points that financial reporting is very important from various
stakeholders point of view. At times for large organizations it becomes very complex but the
benefits are far more than such complexities. We can say that financial reporting contains
reliable and relevant information which are used by multiple stakeholders for various purposes.
A sound & robust financial reporting system across industries promotes good competition and
also facilitates capital inflows. This in turn helps in economic development.
