What is Financial Reporting?
Financial reporting is the communication of important financial information & other activities of the organization to various stakeholders for helping them get the idea about the actual financial position of the organization at any point in time.
This is as important for Private companies as it is for listed Public companies. Various stakeholders interested in the financial reports of any organization are – investors, creditors/ bankers, public, regulatory agencies, and government.
- In today’s economy of the world, we have a well-developed banking ecosystem and capital markets, there is a separate ecosystem of investors, venture capital funds, etc. Let us call them Entities with Financial Resources.
- On the other hand, there are well-developed Financial reporting for business houses and also emerging businesses. Financial reporting for businesses may be in need of finance or investment at some point in their lifecycle or the other. Let us call them Entities in Need of Financial Resources.
The thread which brings these stakeholders on a common platform is – Financial Reports.
Objectives of Financial Reporting
- To highlight the achievements of the company on a periodic basis. The achievements can be financial in nature like the increase in sales, profit and market share, as well as achievements, can also be in form of awards and recognition received, the breakthrough in research and development, etc.
- To provide financial information about the company to investors, creditors, bankers, public, regulatory agencies, and government
- It is also used to market themselves by companies which depend on external funding. Investors depend heavily on this reporting for making their yes or no decisions. Thus it helps in capital raising.
- To convey a strategic roadmap for the future of the company.
- During trying times or loss-making phases, it is used to allay investor concerns and strategic plan for turning around the company.
- Helps customers keep informed about the status of the company thereby building confidence levels.
- Internal financial reporting in accounting on a periodic basis is used by some companies to keep employees well informed about own operations and financial position and as a tool to motivate them.
- To comply with statutory requirements. Organizations are required to file reports to various agencies like ROC, government, stock exchanges on the quarterly or annual basis.
- To provide information about how the company is utilizing various resources available at its disposal.
What Constitutes Financial Reporting?
As the name goes, financial reports typically constitute the overview of financial performance. Financial reports may be quarterly and annual or may be preliminary reports and prospectus in case of new starts ups.
Following are some key highlights:
#1 – Financial Statements
These include the balance sheet, profit and loss statement, cash flow statements. Some companies may have both standalone and consolidated financial statements if it is having two or more different units. These statements are purely the quantitative reflection of the performance of the organization.
#2 – Director’s Report
It provides an explanation of the financial statements. It provides information about operational performance and major highlights and achievements. During the bad performance period, it provides reasons for underperformance.
#3 – Management Discussion and Reporting
Management Discussion and Analysis provides information on the current position of the company vis-à-vis industry peers. One gets to know about industry trends. It also contains information about future strategies and opportunities.
#4 – Capital Structure
Informing stakeholders about the capital structure of the organization and changes therein if any.
#5 – Notes to Accounts
It incorporates methods and accounting policies company is using to record its transactions
#6 – Auditors Report
This provides the independent opinion of the statutory auditor about financials of the company as well as accounting policies used by the company.
#7 – Corporate Governance Report
It provides information on the composition of the board of directors and their profile. It also talks about remuneration paid to top management and compliance with other statutory requirements.
#8 – Prospectus
For a company going for IPO, the prospectus contains all the information about financials, operations, management, product mix, financial reporting for business goals of the organization.
#9 – Earnings Call
Earnings Calls are generally teleconferences where the financial performance of the company during a particular period is discussed with investors, financial reporting analyst.
In short, we can say that it creates an ecosystem of information which can be used by various stakeholders for multiple objectives of financial reporting in accounting. Good practices improve the efficiency of the markets as information is easily available to all the stakeholders.
Financial Reporting Video
This has been a guide to what is Financial Reporting? Here we discuss the objectives of Financial reporting in accounting along with the constituents of Financial Reporting. You may learn more about Accounting from the following articles –