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CONCEPT OF FINANCIAL REPORTING
Financial reporting may be defined as communication of published financial statements and
related information from a business enterprise to third parties (external users) including
shareholders, creditors, customers, government authorities and the public. It is the reporting of
accounting information of an entity (individual, firm, company, government enterprise) to a user
or group of users. Company financial reporting is a total communication system involving the
company as issuer preparer); the investors and creditors as primary users, other external users;
the accounting profession as measures and auditors; and the public. It is the reporting of
accounting information of an entity (individual, firm, company, government enterprise) to a user
or group of users. Company financial reporting is a total communication system involving the
company as issuer (preparer); the investors and creditors as primary users, other external users;
the accounting profession as measures and auditors; and the company law regulatory or
administrative authorities.
OBJECTIVE OF FINANCIAL REPORTING
An evaluation of company financial reporting requires some agreement on its objectives.
Financial reporting if not an end in itself but is a means to certain objectives. The objectives of
financial reporting and financial statements have been discussed for a long time. While there is
no final statement on objectives, to which all parties (of financial reporting) have agreed, some
consensus has been developing on the objectives of financial reporting. At present, the following
may be described as the primary objectives of financial reporting:
(a) Investment Decision-Making
(b) Management Accountability.
(a) Investment Decision-Making: The basic objective of financial reporting is to provide
information useful to investors, creditors and other users in making sound investment
decisions. These decisions concern the efficient allocation of investment funds and the
selection among investment opportunities.
(b) Management Accountability: A second basic objective of financial reporting is to
provide information on management accountability to judge management’s effectiveness
in utilizing the resources and running the enterprise.
GENERAL PURPOSE FINANCIAL REPORTING
Generally speaking, the term ‘financial reporting’ is used to mean general purpose external
financial reporting. Often it is said that the purpose of financial reporting is the preparation of
general purpose reports for external users. Despite the fact that financial reports are mainly
intended (legally) for share holders, they can be, and are, used by a number of other external
users.
SPECIFIC PURPOSE REPORT
Specific purpose reports to help them in their separately identifiable decision functions. For
instance, financial reports submitted to obtain credit or loans, or government, or financial reports
given to trade and industry, may not satisfy other users’ needs and expectations.
International Accounting Standards Board (IASB) has recognized the four principal qualitative
characteristics of accounting information.
1.
2.
3.
4.
Understandability
Relevance
Reliability
Comparability.
The other qualities suggested by IASB are materiality, faithful representation, substance over
form, neutrality, prudence, completeness, timeliness.
1. Relevance: Relevance is closely and directly related to the concept of useful information
Relevance implies that all those items of information should be reported that may aid the
users in making decisions and/or predictions.
2. Reliability: Reliability is described as one of the two primary qualities (relevance and
reliability) that make accounting information useful for decision-making.
3. Understandability: Understandability is the quality of information that enables users to
perceive its significance.
4. Comparability: Economic decision requires making choice among possible courses of
actions. In making decisions, the decision-maker will make comparisons among
alternatives, which is facilitated by financial information.
5. Consistency: Consistency of method over a period of time is a valuable quality that
makes accounting numbers more useful.
6. Neutrality: Neutrality is also known as the quality of ‘freedom from bias’ or objectivity.
7. Materiality: The concept of materiality permeates the entire field of accounting and
auditing.
8. Timeliness: Timeliness means having information available to decision-makers before it
loses its capacity to influence decisions.
9. Verifiability: The quality of verifiability contributes to the usefulness of accounting
information because the purpose of verification is to provide a significant degree of
assurance that accounting measures represent, what they purport to represent.
10. Conservatism: There is a place for a convention, such as conservatism – meaning
prudence in financial accounting and reporting, because business and economic activities
are surrounded by uncertainty, but it needs to be applied with care.
SEGMENT REPORTING
Concept of Segment Reporting
The concept of segment reporting is applicable to a diversified enterprise. A diversified
company may be defined as a company which has diversified operations, i.e., activity or
operations in different industries and/or foreign operations and sales where those activities (or
operations) are significant in terms of sales revenue, profit or losses generated or assets
employed. It is also true that segmentation along industry and geographical lines subject to
different profitability, different risks and different growth prospects are likely to be found in
most diversified companies.
What is Social Reporting?
Social reporting is defined as reporting of some meaningful, definable domain of a business
enterprise’s activities that have social impact. Put another way, social reporting implies the
measurement and reporting, internal or external, of information concerning the impact of a
business enterprise and its activities on society. The Trueblood Committee Report (AICPA,
USA, 1973) observes that “an objective of financial statements is to report on those activities of
the enterprise affecting society which can be determined and described or measured and which
are important to the role of the enterprise in its social environment.” Social reporting aims at
measuring (either in monetary or non-monetary units) adverse and beneficial effects of an
enterprise’s activities both on the firm and/or those affected by the firm; it measures social costs
and benefits.
VALUE-ADDED REPORTING
Value-added statement (VAS) or reporting is a modified version of the profit and loss account.
Like profit and loss account, the VAS reveals the operating performance of a company at a given
point in time, using both accrual and matching procedures. However, the VAS does not aim to
provide a profit (or loss) figure as in the case of profit and loss account but a figure or return to a
larger group of capital and labour providers (i.e. owners, employees), other claimants or
interested parties.
The term ‘value added’ means the market price of the output of an enterprise less cost of bought
in goods and services. The resulting balance money is known as the value added by an
enterprise and this money can be divided among the various parties who have contributed in the
production of goods and services of the enterprise in the form of factor inputs. Thus, the owners
(or share-holders), creditors and governments (through taxation) are recipients of the enterprise
income. Thus, the value-added income would include wages, rent, interest, taxes, dividends paid
the share holders and retained income of the company.
Concept and Need
Interim reporting is the financial reporting made by a company on a less than annual basis, such
as half yearly or quarterly financial reports.
Annual data are insufficient to evaluate developments in general economic, industry, and
company activities and making or revising projections of earnings and financial position as a
basis for investment decisions. Investment decisions are made on the basis of information
disclosed in company annual reports. These economic decisions are made throughout the year
rather than at year-end reporting dates. Although annual reporting has been accepted by
accountants and/or law, investment decisions based on financial data are made daily and require
current financial information. No doubt the annual report will continue as a report on
management’s stewardship for the full year and a benchmark of measurement of financial
progress over several years. But, neither the dynamics of the internal organization, nor outside
economic forces stop and start over at each new accounting year. Therefore, it is suggested that
company financial reporting should continuously measure and report on the firm’s progress and
provide information on a less than annual basis for the benefit of shareholders and other external
users.