In any industry, whether manufacturing or service, we have multiple departments, which function day in day out to achieve organizational goals. The functioning of these departments may or may not be interdependent, but at the end of the day, they are linked together by one common thread – The accounting and finance department. The accounting and financial aspects of every department are recorded and are reported to various stakeholders. There are two different types of reporting for an organization:
- Financial Reporting for various stakeholders
- Management Reporting for internal management
Both this reporting are important and are an integral part of the Accounting and reporting system of an organization. However, considering the number of stakeholders involved, and statutory and other regulatory requirements, Financial Reporting is an essential and critical task of an organization. It is a vital part of Corporate Governance. Let us discuss various aspects of Financial Reporting in the following paragraphs.
Definition of Financial Modelling
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. These stakeholders include – investors, creditors, public, debt providers, governments and government agencies. In the case of listed companies, the frequency of financial reporting is quarterly and annual.
Financial Reporting is usually considered an end product of Accounting. The typical components of financial reporting are:
- Financial statements – Balance Sheet, Profit & loss account, Cash flow statement and Statement of changes in stock holder’s equity
- Notes to financial statements
- Quarterly and annual reports (in case of listed companies)
- Prospectus (In case of companies going for IPOs)
- Management discussion and analysis (In the case of public companies)
The Government and the Institute of Chartered Accounts of India (ICAI) have issued various accounting standards and guidance notes which are applied for financial reporting. This ensures uniformity across various diversified industries when they prepare and present their financial statements.
Objectives of Financial Reporting
According to the International Accounting Standard Board (IASB), the objective of financial reporting is:
to provide information about the financial position, performance, and changes in the 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 and purposes of financial reporting:
- Providing information to the management of an organization that is used for planning, analysis, benchmarking and decision making.
- Providing information to investors, promoters, debt provider and creditors which is used to enable them to make rational and prudent decisions regarding investment, credit, etc.
- Providing information to shareholders and the public at large in case of listed companies about various aspects of an organization.
- Providing information about the economic resources of an organization claims to those resources (liabilities and owner’s equity) and how these resources and claims have changed over some time.
- Providing information as to how an organization is procuring and using various resources.
- Providing information to various stakeholders regarding performance management of an organization as to how diligently and ethically they are discharging their fiduciary duties and responsibilities.
- Providing information to the statutory auditors, which in turn facilitates audit.
- Enhancing social welfare by looking into the interest of employees, trade union and Government.
Importance of Financial Reporting
The importance of financial reporting cannot be overemphasized. Each stakeholder requires it for multiple reasons and purposes. The following points highlight why financial reporting framework is important:
- The organizations are required to file financial statements to ROC, Government Agencies. In the case of listed companies, quarterly as well as annual results are required to be filed to stock exchanges and published.
- It facilitates a statutory audit. The Statutory auditors are required to audit the financial statements of an organization to express their opinion.
- Financial Reports form the backbone for financial planning, analysis, benchmarking and decision making. These are used for the above purposes by various stakeholders.
- Financial reporting helps organizations to raise capital both domestic as well as overseas.
- Based on financials, the public in large can analyze the performance of the organization as well as its management.
- For bidding, labor contracts, government supplies, etc., organizations are required to furnish their financial reports and statements.
So we can conclude from the above points that financial reporting is critical from various stakeholder's points of view. At times for large organizations, it becomes very complicated but the benefits are far more than such complexities. We can say that financial reporting contains reliable and relevant information that is used by multiple stakeholders for various purposes. A sound and robust financial reporting system across industries promotes good competition and also facilitates capital inflows. This, in turn, helps in economic development.
Source Credit www.edupristine.com
For an insight into the concepts pertaining to financial accounting in the most simplified way, PHI Learning has brought a textbook Corporate Financial Reporting and Analysis by Bhattacharyya. It helps in developing a basic understanding of corporate financial reporting. The book is intended as the first course for the postgraduate students of management for their papers in Financial Reporting and Financial Statement Analysis.
Online Study Guide is available at :
It comprises the following:
- Solutions manual
- Key ideas and chapter review slides
- Additional assignments. However, additional assignments are accessible to the students as well.