Tom Peters, author of In Search Of Excellence, observed that, “Management is about arranging and telling.” And, when it comes to good financial reporting, that’s certainly the case. Clients want to move past traditional accounting, where accountants only visit once a year. Instead, clients want the advisory accounting model, where numbers are turned into roadmaps for practical business success.
Sage’s 2020 Practice of Now report highlighted that 87% of clients want a wider range of services from their accountant. Of course, it’s nothing new for clients to rely on their accountants.
But now, clients want their accountant to do more than relay data and prepare taxes. Instead, clients want an accountant’s help with applying financial reports to real-world business decisions.
But, if you’re just getting started in accounting, you might have a few questions about financial reporting, such as…
What is financial reporting?
Before we dive into good financial reporting, let’s first define it.
Financial reporting is when an accountant examines a company’s financial statements and discloses its financial performance over a specific time period.
It’s important to note that generating financial statements is not financial reporting. Instead, financial reporting involves presenting and interpreting the financial data in these reports. The goal of financial reporting is to inform business decisions.
The four main financial statement types
If accounting is the language of business, financial statements are the books that describe a company’s financial position. There are four main financial statements that private and public companies use to record their past and current financial performance.
These statements include the following:
- Balance sheet
- Profit & loss statement (income statement)
- Cash flow statement
- Statement in changes in equity
The balance sheet records your company’s financial position at any moment. Within a balance sheet, you’ll find a list of your company’s assets, liabilities, and owner’s equity.
Profit and loss (P&L) report / income statement
A profit and loss statement, or income statement, shows your revenues, costs, and expenses within a specific time period. Income statements are used to gauge your company’s ability to generate revenue or reduce costs.
Cash flow statement
Your statement of cash flows shows the amount of money entering and leaving your company over a specific time period.
Statement of changes in equity
This financial report shows the opening and closing balance of shareholder’s equity within a specific time period. Activities involving retained earnings, changes in share capital, and new share issuance are included in this report.
The major financial reporting framework groups
Financial reporting frameworks guide and standardize reporting activities across industries. By adhering to financial reporting frameworks, companies are able to follow the best practices for measuring, recognizing, presenting, and disclosing a company’s financial information.
Generally Accepted Accounting Principles (GAAP)
The Generally Accepted Accounting Principles (GAAP) were formulated in response to the 1929 stock market crash and unscrupulous financial reporting practices. Using GAAP, accounting professionals can adhere to the accounting industry’s best practices while engaging in financial reporting activities.
The guidelines of GAAP are aligned with 10 core principles, including:
- Consistency: From period to period, financial reporting must follow consistent standards and processes.
- Permanent Methods: Accountants must follow consistent processes for comparability to work by peers.
- Non-Compensation: Financial reports must disclose a company’s true financial position, good or bad.
- Prudence: Financial reports must be based on sound reasoning and facts, not opinions.
- Regularity: It is expected that accountants will consistently adhere to GAAP principles in their financial reporting.
- Sincerity: Accounting professionals are to perform financial reporting activities with honesty and accuracy.
- Good Faith: It is assumed that those engaging in financial reporting are acting honestly.
- Materiality: Financial reports should clearly indicate a company’s financial position.
- Continuity: Asset valuations are made with the assumption that the entity will continue to operate in the future.
- Periodicity: Entities must abide by common financial reporting periods, like quarterly or annual segments.
International Financial Reporting Standards (IFRS)
The International Financial Reporting Standards were first established in 1973 by the International Accounting Standards Committee (IASC). These standards served as a reference for countries throughout the world as they established their own financial reporting frameworks and accounting standards.
In 2001, the International Accounting Standards Board (IASB) replaced the IASC. Following this transition, the IASB updated its accounting standards to better serve their purpose as a set of global accounting standards. These new financial reporting standards are now known as the International Financial Reporting Standards (IFRS).
The IFRS Conceptual Framework
The IFRS conceptual framework states that financial statements must help investors, creditors, and business leaders decide how to best allocate assets and resources.
According to the IFRS guidelines, a financial statement must be relevant to business activities and must accurately represent an entity’s financial position and performance.
Special-Purpose Frameworks (SPFs) For Financial Reporting
Special-purpose financial reporting frameworks were developed by the American Institute of Certified Public Accountants (AICPA). SPFs are more commonly referred to as other comprehensive bases of accounting (OCBOA). Special-purpose financial reporting frameworks are designed to provide efficient financial statements for any business that is not required to adhere to GAAP-based financial reports.
Special-purpose frameworks for financial reporting include:
- Cash basis
- Modified cash basis
- Tax basis
- Regulatory basis
- Contractual basis
Why is good financial reporting important?
Financial reporting is essential for gaining insight into the health and performance of any business.
For an investor and shareholder, financial reports offer valuable information about assets, revenue, expenses, profitability, debt, and financial obligations of a company. This allows an investor to make decisions regarding the wisdom of acquiring or investing in that company. For any public company, financial reporting is required on a quarterly and annual basis.
For a privately held company or business, internal financial reporting is an essential management tool. When a manager, executive, or investor routinely reviews financial reports, they can spot trends in spending, revenue, debt, and other financial metrics.
Not all financial reporting is good financial reporting, as a 2016 HBR article pointed out. After all, corporate financial statements can be manipulated to misrepresent the financial position of a business. And, standard accounting metrics sometimes can’t keep up with fast-moving innovators that require a modified set of key performance indicators.
That’s why it’s critical for accountants and other finance professionals involved in financial reporting activities to maintain sound reasoning and professional ethics.
Need good financial reporting? Call us!
At MBS Accountancy, we’re radically committed to being a better accounting firm for our clients and staff. For clients, we blend our accounting, bookkeeping, and tax services into a holistic accounting approach that lets us plan for your business success together.
We’re here to help you keep an eye on the financial health of your business, reduce wasted resources, and plan for growth. Our keen understanding and decades of experience mean that you’ll receive clean strategies and advice for all aspects of your business.