Introduction to Financial Reporting
Financial Reporting is the reporting of financial position and result of the organization to the various stakeholders so that they can analyze about the safety and security of the investment they made in the organization and it is a very important and critical task for the organization as a single mistake in presentation leads to loss of investors by the organization.
Every Function of any business organization is related to the Accounts Department as for the presentation of financial statements the accounts play a vital role. It is nothing but the presentation of financial position and other details to the stakeholders and it is considered as a public document. Hence it is a work of responsibility as a single mistake can lead to huge losses. It consists of the following documents namely balance sheet, income statement, cash flow statement, equity statement, annual reports, director’s report, auditor’s report, etc. it is basically communication of the financial-related information to the public and the stakeholders at large. It is not only limited to the presentation of financial and other statements but it also includes financial communications like litigations to the company, major decisions at a board meeting, management letters and communications, etc.
Objectives of Financial Reporting
Following are the objectives are given below:
- Presentation of Financial Information: The main objective of Financial Reporting is to communicate the financial and other information to the public and the investors at large so as they can make the correct investment decisions and future investors can be attracted.
- Transparency: The other important objective of Financial Reporting is to maintain the transparency of the records so as to prevent from any miscommunications and try to present a clear picture before the stakeholders.
- Following Legal Framework: It is the demand of the legal framework also to present the financial statements and be more unambiguous to the public at large.
- Convery the financial information: As financial reporting is not limited to the presentation of financial statements. The objective is to present all financial related and important information to the public at large.
- Presentation of Future Path: The objective of financial reporting is also to attract future investors by presenting the future path and actions.
Example of Financial Reporting
ABC Ltd. presented the discussions about the Mergers and Acquisition that are to be initiated in the future. The report issued by management involves the current positions as well as the future actions and legal formalities are to be issued in merger and acquisition. The detail also includes the cost of the merger and how the organization is going to manage. What are the future actions after the merger, increment of income after the merger, etc.
What is Included in Financial Reporting?
Following things are included :
- Financial Statement: Financial reporting consists of details about the financial statement of the organization and consolidated financial statements if any.
- Future Actions and Forecasts: Financial Reporting consist of Future forecast and future actions that the organization is going to achieve in the near future.
- Legal Considerations: It also consists of Legal Considerations that are complied with and to be complied by the organization, the process, cost, and time involved also to be included.
- Pending Litigations: It also consists of Pending Litigations with the company and the chances of outcome of the litigations and the details about the claim involved.
- Pending Tax Issues: It also consists of all pending tax issues and refunds related to the organization, the amount involved, whether disputed or to be paid, etc.
Importance of Financial Reporting
Some of the importance is given below:
- Better Presentation: It helps to present all the information in a better way. The presentation also includes financial statements and financial related communications.
- Transparent Records: It gives more transparent records so as to maintain transparency in the presentation and present a clear picture before the organization.
- Comply with Accounting and Auditing Standards: Financial Reporting are presented in the legal framework hence it has to comply as per applicable reporting framework and as per accounting and auditing standards.
- Increases the Financial Stability and Credit Worthiness: As Financial Reporting Presents in a transparent manner it increases the financial stability as the creditors and lenders can analyze the position and security of their funds as well as can increase the credit worthiness of the organization due to proper and transparent presentation.
Benefits of Financial Reporting
Following are the benefits is:
- Helps in Ratio Analysis: It helps in ratio analysis so that the trends can be compared with the industry and can measure the performance.
- Better Transparency of Records: It helps the organization to present better so as to increase the transparency of records.
- Improved Legal Compliance: It improves legal compliance as the organization can comply more legal formalities due to public presentations.
- Better Decisions: It helps to make better decisions so as to safeguard the investments.
Limitations of Financial Reporting
Some of the limitations are:
- No Discussions of Non-Financial Data: Non-financial data is not presented and reported in the financial reporting framework. Hence the important non-financial data remains unaffected.
- Comparable Not Presented: In financial reporting presentation only current year’s data is presented. Comparison with the previous year is not reflected hence it becomes difficult for investors to compare.
- Presented for Specific Time Period: It is presented for the period mention instead of from beginning till the end of the period so as to make a better clear picture.
It is the presentation of financial information in a legal framework. Apart from the financial position, financial reporting also includes financial related communications so as to make a clear picture. With the better presentations, the compliance becomes more due to prevent from the remark of non-presentation by the auditors of the company. With proper presentation, it becomes easy for an analyst to analyse the data and compare with the industry framework and give advice about investment in a particular company. the major drawbacks of financial reporting are, it is presented for a specific period mention instead of a presentation from the beginning of the company till the end of the year so as to make the picture and wealth clearer.
This is a guide to Financial Reporting. Here we also discuss the definition to Financial Reporting along with respective objectives, benefits and limitations. You may also have a look at the following articles to learn more –