Understanding the Concept of Financial Reporting

Financial reporting is the process used by companies and investors to assess business performance over time. Anyone involved in making strategic decisions about business operations uses financial reporting to understand the financial health of the business. Through this article on financial reporting, you will be able to learn about the concept, uses, and standards used in this process.

Table of Contents

• About Financial Reporting
• Importance
• Reporting Standards

What is financial reporting?

Financial reporting is the comprehensive review of business data that indicates the financial situation of the business. This review may be done on a monthly, quarterly, or annual basis. Public companies are required to release quarterly and annual reports. Monthly reports are important for the internal purposes of the company.   

It has the following objectives:

• Measuring profitability of the business
• Evaluating the assets and liabilities
• Tracking the cash flow of the business
• Analyzing the shareholder equity in the business

Who Uses Financial Reporting?

Management uses financial reporting for making financially sound business decisions. Since they have the insights into company’s expenses, profits, revenues, cash flow, and capital, they can make better decisions. 

Investors can use financial reporting to assess if the company is worth their money and if they should invest in it. 

Financial institutions also use financial reporting to ensure if they want to finance the company. 

Regulatory authorities such as the IRS and SEC use financial reporting. Through these reports, they can monitor the compliance of the financial reporting activities for revenue and tax documentation. 

Important Documents for Financial Reporting

There are several documents used for comprehensive reporting. Let us take a look at these documents:

• Financial statements include a Balance sheet, income statement /profit or loss statement, cash flow statement, and statement of retained earnings.
• Reports issued to regulatory agencies such as the Securities and Exchange Commission (SEC) 
• Quarterly earning reports

Importance of Financial Reporting

It is the process of documenting financial activities in a specific time period. Financial reporting helps in the following:

• Organizing accounting data and understanding the current financial status.
• Improving business agility and visibility into detailed information of revenues, expenses, capital, and cash flow.
• Identifying areas of spending to create and manage the budget in the coming financial years.
• Tracking the historical performance of the business. 

Who establishes standards of financial reporting?

Several regulatory bodies including the IRS, SEC, and Financial Accounting Standards Board (FASB) establish financial reporting standards. These standards outline the protocols and guidelines related to documentation and financial activities.

SEC sets regulations for investment activities in the stock market. As per the SEC, market participants must disclose their financial information on a regular basis to investors. FASB establishes the GAAP and monitors this reporting standard. IRS ensures compliance related to taxation. 

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Standards for Financial Reporting

There are three main globally used reporting standards adopted by organizations. 

1. International Financial Reporting Standards (IFRS)

IFRS is the set of different accounting rules for the financial statements of public companies. These guidelines ensure that the company is globally comparable in terms of accounting standards and practices. Over years, IFRS maintains accountability, transparency, and efficiency in financial markets.  

These are the sustainable disclosure standards that govern how the company is preparing its financial statements. IFRS reduces the information gap between capital providers and people who are going to utilize this potential. These standards hold management accountable. 

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2. Generally Accepted Accounting Principles (GAAP)

GAAP are the accounting standards used for financial reporting. These standards are adopted by public companies in the US. GAAP ensures that there is consistent reporting which makes businesses comparable.  

These are the procedure issued by the FASB and accountants have to follow these while compiling financial statements. It is a rules-based set of standards that ensures that financial statements are complete and consistent. It is based on 10 key principles. 

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3. General Data Protection Regulation (GDPR)

GDPR is a data protection regulation. It is adopted in the European Union and the European Economic Area. The aim of this privacy law is to strengthen individual control over their personal data. 

If an organization violates GDPR, they have two pay either of the two penalty tiers. Either they will pay up to €20 million or 4% of their global revenue (whichever is higher). This will be based on the compensation for charges. GDPR allows the use of personal data under the following conditions:

1. The data owner has given consent to the use of the personal data
2. There is a need to fulfill contractual obligations based on the data
3. To comply with the legal obligations of the data controller
4. For the national and public interest 
5. In case, the data poses a threat to other individuals

We hope that this article has been able to help you understand the concept of financial reporting. It is an important concept that ensures that the business operates smoothly while being compliant with legal standards. Through reporting, one can look at projections for making wiser business decisions.