Reporting Period Meaning
A reporting period is a month, quarter or a year for which financial statement of an organization is prepared for the external use, uniformly over some time so that the financial statements are comparable and understandable by the general public or the user of the financial statements.
Types of the Reporting Period
A reporting period generally can be prepared for the following periods-
#1 – Monthly Reporting Period
For entities with a rapidly changing environment, it is necessary to prepare a control system that provided regular details of the financial results and financial position.
#2 – Quarterly Reporting Period
For industries having a seasonal nature, their market is generally for a specific quarter. Hence, once the quarter is over, it becomes necessary to evaluate the financial position and the results from the same. For such kind of industry, a quarterly financial statement is prepared to make the financial statements more relevant and understandable to the users.
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#3 – Yearly Reporting Period
Every industry prepares a yearly financial statement to know the financial results for the while year and financial positions as on that date. Hence yearly or annual financial statements are prepared by all the companies regardless of whether they prepare quarterly or monthly financial statements.
Yearly financial statements are prepared for the same period uniformly, which either is from 1st April to 31st march or from 1st January to 31st December.
Examples of Reporting Period
- A very famous company in New York called A ltd., listed on New York stock exchange with an annual sales growth of $150,000,000, board of directors of which had decided to issue financial statements having monthly reporting period exclusively for its internal purposes. So, in this case, the company has a monthly reporting period.
- As per the Securities exchange commission(SEC), every company listed and publicly traded on any stock exchanges is compulsorily required to issue a quarterly financial statement within the specified period, non-following of which may lead to huge penalties and fines. This is to ensure that the companies on whom the general public is dependent on generating their income should disclose its quarterly performance to the people so that they can make their investment decisions wisely.
- As per IFRS 1, preparation of financial statements states that for every company for which IFRS is compulsory, must issue their general purpose financial statements with an annual reporting period.
The various advantages are as follows:
- Most of the entities work on a calendar basis. Hence it required for knowing its financial results, i.e., Profit or loss for the period and financial position, i.e., assets and liabilities as on that date, for which an annual reporting period is useful.
- A uniform reporting period is advantageous for the users of the financial statements for the general public (as the case may be) for comparison.
- The comparison could be made either with the previous period of the same company or with the same period as another company, with the same reporting of the whole industry.
- It plays a vital role in determining the amounts in the profit and loss account, Balance sheet, cash flow statement set. Profit and loss account is prepared for the year ended on the reporting date and balance sheet, and cash flow statements are prepared as on the reporting date.
- There are two methods of accounting the financial statement, cash system, and mercantile systems. Where financial statements are prepared on a cash basis of accounting, it is taken as a base for determining the amounts of the various ledgers since only the cash which is received or paid up to the reporting date is taken into consideration. When financial statements are prepared on the accrual basis, it is taken as the base for determining all the relevant ledgers, have accrued up to the reporting period to be included in financial statements.
- It has been stated that if there is a change in the period as compared to the previous reporting period, specific procedures are to be followed, to be shown in the financial statements to make it understandable to the users of the financial statements.
Though it is useful in the ways mentioned above, there are certain disadvantages also. The various disadvantages are as follows:
- It brings us a sort of rigidity to the financial statements since it is highly arbitrary. Still, the business has to use the reporting period as per IAS1 as per an annual basis.
- Few countries follow this as per the calendar year, that is, from 1st January to 31st December, while others follow their reporting period starting from 1st April and ending on 31st. Hence the purpose of uniformity of reporting period breaks here.
- For companies in some countries, this period is not the calendar year. Hence, even though financial statements are prepared for the reporting period, it doesn’t solve the purpose of finding out the results for every calendar year. They need to re-compute their financial results.
- If there is a change in the reporting period, there are cumbersome and tedious procedures, as mentioned in IFRS1, to be followed, which involved huge time, labor, and money, which doesn’t make much sense.
To change the reporting period, any of the following reasons must be fulfilled.
- For better preparation and presentation of financial statements;
- Required by the specific statue or act;
Hence if any of the above reasons fulfill, along with its update in notes of the financial statements, specific reporting procedures, as mentioned in relevant IFRS is to be followed to make the financial statements understandable.
Hence, it concludes that even though there are a few disadvantages, it becomes beneficial for the general public at large to have a common reporting period to give the financial statements of every entity comparable, useful, uniform, and understandable.
This article has been a guide to the Reporting Period and its meaning. Here we discuss types of reporting period along with examples, advantages, and disadvantages. You can learn more from the following accounting articles –