What is Financial Reporting?
Financial reporting is the disclosure of important financial information & other activities of the organization to various stakeholders (investors, creditors/ bankers, public, regulatory agencies, and government) for helping them get the idea about the actual financial position of the organization at any point in time.
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. It may need 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.
Purpose of Financial Reporting
- To highlight the achievements of the company periodically. The achievements can be financial like the increase in sales, profit, and market share, as well as achievements, can also be in the 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 that depend on external funding. Investors rely 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.
- Internal financial reporting in accounting periodically is used by some companies to keep employees well informed about their 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 a quarterly or annual basis.
- To provide information about how the company is utilizing various resources available at its disposal. It helps customers keep informed about the status of the company, thereby building confidence levels.
What is Included in Financial Reporting?
As the name goes, financial reports typically constitute an overview of financial performance. Financial reports may be quarterly and annual or maybe preliminary reports and prospectus in case of new start-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 has two or more different units. These statements are purely the quantitative reflection of the performance of the organization.
#2 – Director’s Report
It explains the financial statements. It provides information about operational performance and significant highlights and achievements. During the lousy performance period, it gives 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
It provides an independent opinion of the statutory auditor; about the financials of the company and the accounting policies used.
#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 the 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 that 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 readily available to all the stakeholders.
Financial Reporting Video
This article has been a guide to what is Financial Reporting and its definition? Here we discuss the purpose of Financial reporting in accounting along with what it includes in Financial Reporting. You may learn more about Accounting from the following articles –