Enhancing Social Welfare through Effective Financial Reporting

Financial reporting is a crucial aspect for every stakeholder, including employees, trade unions, government, and investors. It provides crucial information to help them make better business decisions. The importance of financial reporting lies in its ability to facilitate compliance with regulatory requirements, statutory audit, and decision-making by stakeholders. Financial reports also aid the general public in evaluating a company's performance and management. Furthermore, they enable companies to raise capital, restructure their operations, and expand globally. Despite having several advantages, financial reporting also has some limitations, such as relying on historical costs, omitting intangible assets, and not discussing non-financial issues. Nevertheless, the benefits of financial reporting far outweigh its drawbacks.

BLOG: FINANCIAL REPORTING
WHAT IS FINANCIAL REPORTING?

FINANCIAL REPORTING
2nd August 2019
In every industry, whether it is manufacturing, retailing, or service, it includes multiple
departments. All these departments work together on a daily basis in order to achieve
organisational goals and led a business organisation towards growth. The functions of these
organisational departments sometimes found interdependent or dependent, but at the day end, all
these departments are linked together by the Accounting and Finance department. For
conducting every single function related to business operation, each of the department needs
tangible and intangible resources like fund, manpower and more. The fund allocated to each
department for functioning needs to be accounted properly because the act of utilising fund
reflects in an organisation's profit generation which is computed and monitored by the
Accounting and Finance department. The accounting and financial aspects related to every single
department of a business organisation are recorded as well as reported to different types of
stakeholders of the organisation. The two different kinds of reporting are financial
reporting which is made for the stakeholders, and management reporting which is used by the
organisation’s internal management.
Both these two types of reporting are vital as well as an integral part of a business organisation’s
accounting and reporting system. Among these two corporate reporting systems, financial
reporting is the critical and most important task for every business organisation. It is vital due to
the presence of various stakeholders those who are involved in the organisation, and the existing
statutory and other business related regulatory requirements. Financial reporting is a very
important part of a company’s Corporate Governance. The system of financial reporting allows a
company to produce a number of statements which are able to disclose its financial status, future
as a corporate to its management board, shareholders, potential and existing investors, and other
external and internal stakeholders. Proper financial reporting practices led a company to ensure
its sustainable corporate growth and development by creating a long-lasting trustworthy
relationship with stakeholders and complying with the regulatory requirements.

Discussion on Financial Reporting along with Definition and Examples
Financial reporting is the process of communicating with the users of a company's financial
statements by providing them financial statements containing financial information of the
company. Here, the key users of financial statements of a company are its creditors and
investors. The financial reporting system is viewed as business organisations issuing their
financial statements to the public. A company’s financial statements that are prepared for
financial reporting purpose include the company’s income statement, balance sheet, statement of
owner’s equity, and cash flows statement. However, financial reporting is much broader than just
preparing and publishing the above mentioned four types of financial statements. Financial
reporting system involves the disclosure of a company’s financial information in fronts of the
management as well as to the public (if it is a publicly-traded company) about the way the
company is performing during a specific time period.
Usually, financial reports are issued on an annual and quarterly basis which is not same
as management reporting. Management reporting also includes financial information about a
company but that is only disclosed in front of the company’s management board to assist them in
making business decisions. Financial reports of a company are attached to the annual report of a
public company. Moreover, this kind of reporting includes every financial communication
between the business and outsiders. It includes press releases, management letters along with
their analysis, shareholder minutes, auditor reports, and required notes in relation to the four
different financial statements. In general term, anything that has the ability to convey financial
data and information about a company to the general public is treated as some kind of financial
reporting. The main aim of financial reporting is to reflect a company’s current financial
position.
As discussed above, financial reporting is not only reporting company's financial information to
the public. Other than annual financial statements, one of the common forms for a company's
financial reporting is management discussion and analysis i.e. MD&A which is issued by the
management board that discusses the company's current financial position and speculates on it
future performance along with discusses on the potential market opportunities. A company's
management also discusses the company's debt arrangements system, capital resource, and
liquidity position. MD&A stands as a great element for creditors and investors to get some

additional information, alongside the financial information, about a company which helps them
to predict the company's future performance. Financial statements, MD&A along with the other
financial reports available for public as listed above give creditors and potential investors enough
information which they can use in making their investment and other financial decisions
associated with the company.
Examples
Financial reporting of a company includes:
 Externally used financial statements like the statement of comprehensive income, income
statement, balance sheet, statement of stockholders' equity, and cash flow statement
 The associated notes to the above mentioned financial statements
 Interim reports or quarterly reports
 Annual reports
 Conference calls and press releases regarding the quarterly earnings of the company and
other related information
 Financial information disclosed on the official website of the company
 Financial reports to the government agencies along with the quarterly reports as well as
annual reports to the SEC (Securities and Exchange Commission) (for listed companies)
 Prospectuses related to the issue of shares and other long-term and short-term securities
 Management Discussion and Analysis i.e. MD&A (for public companies)
Purpose and Objectives of Financial Reporting
Financial reporting is aimed to serve two fundamental purposes. First purpose of financial
reporting is to help a company’s management in making effective decisions concerning the
overall strategies and objectives of the company. The data and information disclosed through the

reports help management understand the company’s weaknesses and strengths along with its
financial health. It also includes assisting the management to gauge the company’s financial
strength and current marketing position. The second purpose of this reporting system is to
provide relevant and reliable information regarding the company’s financial activities and health
to its internal and external stakeholders which include its shareholders, consumers, government
regulators, and potential investors. It is a means of assuring stakeholders about the company’s
appropriate business operations. The publicly traded companies are subject to a set of very strict
regulations of financial reporting that are enforced by the SEC and to continue business
operations and financial reporting ethically, the companies are responsible to comply with such
regulations.
Financial reports refer to the set of records and documents a company uses to put together for
tracking and reviewing how much revenue it is making by conducting regular business activities.
The central purpose of a company’s financial reporting is to deliver all kinds of business
operation related information to its lenders as well as shareowners. Financial reporting acts as an
essential part of the contract made between a company and its stakeholders. The investors and
lenders hold the right to get clear and understandable information about the utilisation of the
money they have invested in a company. They also have the right to know about whether the
company spending their invested money wisely and making their investment able to provide
monetary returns to them. Moreover, some other purposes of financial reporting are –
 measuring whether a company is generating profits or suffering from losses, as well as
the volume of such profit or loss
 evaluating the way the company has stacked-up its assets against liabilities
 monitoring and keeping a look on from where the business gets its capital, and
 focusing on whether a company is making the good use of its capital and fund invested
by investors
 measuring whether further investment in a company is profitable or not
 evaluating whether the company has enough fund or capital for ensuring its future
growth.
According to IASB (International Accounting Standard Board), the main objective of financial
reporting system is to deliver required information about a company’s financial position,

operational and financial performance as well as each and every change in its financial position
that are necessary to a large range of internal and external users in making financial decisions. In
support of the statement made by IASB on the
Objectives of financial reporting following points are summed up:
 Providing reliable information to a company’s management to make it able to use such
information in the process of corporate planning, organising, benchmarking, analysing,
and decision-making.
 Delivering the required amount of financial information to the debt providers, creditors,
investors, and promoters which could assist them to make prudent and rational decisions
regarding further credit, investment and more.
 Providing accurate information in relation to the company’s economic resources claims
on those resources (owner’s equity and liabilities) and the way these resources, as well as
claims, have experienced change (increased or decreased) over time.
 Providing material information to the shareholders and the general public about different
aspects of a company if the company operates as a listed company.
 Providing relevant information to all the internal and external stakeholders of a company
regarding the company’s performance management to inform them how ethically and
diligently the company and its management board are discharging their fiduciary duties
and responsibilities.
 Serving required information about the way a company is procuring and using different
kinds of resources.
 Providing detailed financial data and material information to the auditors (statutory
auditors) to facilitate them in performing the audit in an optimally effective and accurate
manner
 Enhancing the welfare of the society by keeping the interest of every employee, trade
union, the general public, and Government.

Importance of Financial Reporting
Financial reporting is needed by every stakeholder of a company for multiple purposes and
reasons and to them, the importance of financial reporting varies. For instance, financial
reporting is important to the management board of a company in a different way than its
importance towards potential investors, lenders, and existing investors. The basic importance of
a company's financial reporting includes its effectiveness in providing crucial information to the
internal and external stakeholders to assist them in making better business related monetary as
well as strategic decisions. The following points highlight why financial reporting framework is
important –
 It helps companies to act in compliance with various regulatory requirements and statues.
Every company is required to submit or file its annual financial statements to Registrar of
Companies (ROC), and relevant Government Agencies. Here, it is mentionable that if the
company is listed on any stock exchange then it needs to file its quarterly financial
statements, and annual results both to the SEC as well as it need to publish the same.
 Financial reporting facilitates a company’s statutory audit and assists auditors to prepare
an accurate audit report. Statutory auditor(s) are appointed by a company to audit its
annual financial statements and to express their opinion on the company’s corporate
financial performance.
 Financial reports of a company construct the backbone for its financial planning,
organising, analysis, benchmarking, as well as decision making which are used by
different stakeholders of the company for various purposes.
 It helps the general public in analysing the financial performance of a company and the
overall performance of the company’s management during a particular financial period.
 Financial reporting system helps companies to raise required capital from both domestic
and overseas companies and investors to restructure their capital and to expand their
business operations in national as well as in international level.

 In order to prepare labour contract, bidding, government supplies, and other business
related contract, a company is needed to furnish its financial reports and statements to the
relevant authorities.
 It helps the management to predict a company's corporate future, growth, and
development by assisting it in measuring and analysing its profitability, and practices of
managing assets and liabilities.
Advantages and Disadvantages of Financial Reporting
Financial reporting system includes a number of benefits for the organisations that are engaged
in preparing financial reports as well as for the parties related to the organisations due to their
monetary interests associated with those organisations. Besides having several advantages,
financial reporting also includes some limitations. The advantages and disadvantages of financial
reporting are discussed below.
Advantages
Assist in economic decisions making: Financial reporting system assists a company and its
management to make economic decisions. The two vital economic decisions which are
responsible for influencing resource allocation and which the external users of financial reports
generally make are security investment and credit decisions. The act of making sound economic
decisions accelerates a company by assisting it in designing an appropriate set of business
activities and in developing its earning power.
Helps in measuring Cost of Capital: In long-term, adequate disclosure of financial information
through annual reports enhances MP (market price) of shares of a company in the existing
investment market. At the time when a company uses to disclose its financial information clearly
and fully to the general public and SEC (if it is a public company) then its share price become
high that creates a favourable influence on the cost of capital of the company. Ethical financial
reporting enhances future marketability and value of the company's shares that are planned to be
issued subsequently.

Ensures equilibrium in share prices: An adequate disclosure of financial information in
financial reports helps a company to minimise fluctuations in its share price and ensures
equilibrium. Fluctuations in a company’s share price occur due to the ignorance in the
investment market and it acts as an element that causes uncertainty in a company’s investment
decisions. The more properly a company engages in financial reporting the great it becomes able
to reduce fluctuations in its share price.
Helps in employee and customer related decision making: Employee related decisions often
based on the perceptions of an organisation’s economic status as acquired through its financial
statements. More specifically, present and prospective employees often use a company’s
financial reports for assessing the risk as well as the growth potentials of an organisation and
therefore, future possibilities, and job security.
Facilitates in management level decision making: One of the key purposes of a company’s act
of adopting financial reporting system is helping its management board to make effective
business related decisions. The information disclosed in the financial reports provided required
helps to the management in developing appropriate decisions that could accelerate the
company’s operational and financial growth.
Disadvantages
 Financial reports are made by considering historical costs for which balance sheet of a
company could misrepresent its actual financial position if a huge part of its financial
information is based on the historical costs.
 Absence of intangible assets in financial reports also lead the users of such reports to
gauge the actual amount of total assets a company holds
 Financial reporting does not include any kind of discussion on a company's non-financial
issues like its collaboration with the local community, environmental attentiveness of its
operations and more
 Financial reports sometimes become incomparable across companies which reduces the
credibility of the financial reporting system.