1. Financial Reporting: Nature and objectives

2. Introduction
Globalisation has cut down the boundaries and made the world a global village.
It has also resulted in the expansion of business activity leading to the rapid growth of international capital markets, cross border mergers and acquisition and free flow of funds amongst different nations in the form of FDIs, direct investments, joint ventures etc.

3. Definition
Financial reports are the periodic financial communications from a business to those entitled to know about the financial performance and position of the entity.
Financial reporting is the process of producing statements that disclose an organisation`s financial status to management, investors and Govt to assist them in making informed decisions about allocating scarce resources.

4. Nature of Financial Reporting

5. 1. Recorded facts Can be expressed in monetary terms.
Based on evidences.
Books of accounts like journals, ledger and other books.

6. 2. Based on accounting conventions
Customs or traditions which guide the accountant while communicating information.
Also called doctrines.
Theses are guidelines that arise from practical applications.
It is not legally binding practice.
Rather based on customs , designed to help accountants.

7. 3. Based on concepts and postulates
Concepts are assumptions on which accounting is based.
Assumptions are foundation pillars on which structure of accounting is based.
Concepts provide framework for financial reporting.
Important concepts include going concern, matching, separate entity.
Concepts are also called postulates

8. 4.Personal judgements
Element of subjectivity is inherent in these reports as personal judgements also have an important bearing on preparation of reports.
Due to presence of more than one principle , choice depends on accountant while recording the facts.
Eg: LIFO and FIFO methods for inventory valuation

9. Purpose
Helps management to engage in effective decision making concerning company`s objectives and overall strategies.
The data disclosed in reports help management discern strengths and weaknesses and its overall financial health.

10. Financial reporting provides vital information about financial health and activities to its stakeholders including share holders, investors , consumers and Govt regulators.
It is a means of ensuring that the company is being run appropriately.

11. Objectives
Provide useful information to management for planning, controlling, analysing and decision making.
Provides information to prospective investors to attract them .
Demonstrate company`s creditworthiness to lenders and creditors.
Provide information to public about various aspects of an entity.

12. Disclose information about economic resources.
Disclose how organisation is procuring and using these resources.
Provide information about cash flows which is critical for determining liquidity of business.

13. To facilitate statutory audit.
To comply with various statutory and regulatory requirements.
The organisations are required to file financial statements with taxation department, stock exchanges etc.

14. Benefits 1. Permanent record
These reports facilitate to replace human memory.
2. Facilitates compliance of legal requirements
Law requires that business entities must get their accounts audited. Statutory acts like income tax Act, Companies act need these reports for scrutiny and verification purposes.

15. 3. Assist management. 4. Depicting earning capacity and financial position of an entity. 5. Facilitates comparison 6. Serves as Legal evidence

16. Limitations Different accounting policies and framework
Presence of different accounting frameworks like IFRS, GAAP and different standards result in variations.
It impairs level of comparability between financial reports.
Efforts are made for harmonisation and convergence of different accounting frameworks.

17. 2. Presence of subjectivity
Estimates are based on management thinking and judgement.
If these estimates are not based on objective and verifiable information, it defeats the purpose of these reports to provide fair and reliable information to the users.

18. 3. Record of monetary values
It contains information of only those transactions that can be measured in terms of money.
Non monetary items like efficiency of employees, qualification, skill which have an impact on the performance of entity are not depicted in these reports.

19. 4. Limited predictive value
Reports give an account of past performance so it offers very limited insight into future prospects of an enterprise and thus has very limited predictive value for the users.

20. 5. Frauds and errors
Various corporate frauds have undermined the reliability of these reports.
Window dressing makes these reports susceptible to frauds and errors.

21. 6. Scope of compromise
Generally reports are prepared subject to time and cost constraint.
While preparing reports, entities carry out cost benefit analysis i.e gains of providing the information with the costs associated with the same.
Sometimes it outplays the benefits, quality of information may be compromised.

22. Users of financial reports
internal
External

23. Internal users
management
owners/shareholders
employees

24. 1. Management Analysis of performance. Inter firm comparison
Planning and controlling future course of action.
Taking appropriate measure to improve the results.

25. 2. Employees of the Company
Concerned about financial health
Future financial incentives
Job security depends on company`s profitability.
Make use of reports for assessing the profitability

26. 3. Shareholders/Owners
Those who have invested want their investment to be safe.
They cannot participate in day to day activities of company , so for analysing the viability and profitability of company, they rely upon these reports.

27. External users
Creditors
Investors
Taxation authorities
competitors

28. Regulatory Authorities
Government
Stock Exchanges
Foreign Investors

29. 1. Creditors Include both short term and long term creditors.
Who supply raw material, goods etc are short term creditors.
Who give loans are long term creditors.
They need information to determine whether the amount owed to firm will be paid to them when due or not.

30. 2. Investors
Potential investors need information about profitability and sound financial position of entity before committing their scarce resources.
They want to assure themselves about safety of investment and rely upon these reports before reaching to any conclusion.

31. 3. Taxation authorities need reports to assess the tax liability of an entity as well as to authenticate the information provided by company while filling returns. 4. Competitors need information about earning and financial position of each other.

32. 5. Regulatory authorities
To protect interest of investors and safeguard them from malpractices, various regulatory agencies like SEBI use these reports to ensure that company is disclosing information as per set rules and regulations.

33. 6. Government
Compile statistics relating to the profitability of the industry.
Computation of national income.
To compile national accounts.
Determination of industrial growth rates.
Fixation of tax rates.
Making policies about allocation of scarce resources

34. 7. Stock exchanges
They use reports in connection with listing of securities and various other aspects of dealing in stock exchange.

35. 8. Foreign Investors
Globalisation has resulted in free flow of investment.
FDIs are being encouraged.
Foreign market players are interested in knowing the profitability and financial standing of certain enterprises in other countries before taking investment decisions.
So they resort to financial reports.

36. TYPES OF FINANCIAL REPORTS
GENERAL PURPOSE
SPECIAL PURPOSE

37. GENERAL PURPOSE FINANCIAL REPORTS
Cater to general decision making needs of:
INVESTORS
CREDITORS
EMPLOYEES etc.
Reports include:
Balance sheet
Income statement
Statement of owner’s equity / retained earnings
Statement of cash flow

38. Benefits:
Reports are prepared by following standardized conceptual framework, so they are transparent and reliable.
Facilitate comparison and decision making
Best source of information for outsiders
Serve interest of varied users
Demerits:
Involves more cost and time in comparison to special purpose report.

39. Special purpose report
Prepared for specific users to meet specific requirements and its availability is restricted to specific users:
Management
Government
Banks
Taxation authorities
Prepared virtually in any format.
Eg: Production flow processes and Market analyses can be prepared in any format

40. Benefit: Quicker and Cheaper as compared to general purpose financial report
Demerits:
Less financial information is disclosed which reduces the level of transparency and accountability
May not satisfy the needs of the users who depend on it.

41. Qualitative characteristics of accounting information
understandability
Relevance
comparability
reliability

42. Relevance :
Materiality of information: Materiality relates to significance of transaction, balances and errors contained in financial statements.
Timeliness of information: Timeliness means providing information to user well in time to influence its decision making.

43. Reliability Faithful representation Substance over legal form
neutrality
prudence
completeness
verifiability