Free Essay On Financial Reporting & Analysis
Theoretically, reporting is an activity that prevails in an organization usually from lower to upper scale (Elliott and Elliott, 2006). The importance and utilization of reporting cannot be derailed by the organizations from any angle because it has a direct linkage with their financial performance and strategic well being. The real beauty of reporting lies in the fact that this activity involves or associated with almost every department of an organization. The reporting that specifically associated with the finance department termed as Financial Reporting. It is an important stance of reporting that delivers the best aspects for the entities in all over the world (Elliott and Elliott, 2008).
Financial reporting standards bifurcated into two different forms International Financial Reporting Standards (IFRS), formally known as International Accounting Standards (IAS) and Generally Accepted Accounting Principles (GAAP). It is important for the entities to comply with their prescribed financial standards to initiate their well being accordingly. The basic definition of financial reporting is to provide economic prosperity to the companies through objectivity and working independently. Conceptual Framework is the regulating body that provides a common but widely used definition of the financial reporting in which they claimed that financial reporting is nothing but a set of regulation that has the ability to manage the operations of the financials of an organization (Greuning, Scott and Terblanche, 2011).
It is observed from the aforementioned definition of financial reporting that objectivity, transparency and clearness’s are some of the major aspects of financial reporting. However, there are some aspects that go beyond from just objectivity and concreteness. The main theme of this assignment relates to the critical analysis of the basic definition of Financial Reporting, presented by the Conceptual Framework. It is likely to analyze the objectivity of the financial reporting as presented in the definition against its utilization as a practical exposure.
Analysis & Findings
There is a marginal difference found among the accounting and financial activities, as accounting activities are all about recording and interpreting the day to day transactions, while financial activities involve utilization and management of funds of a company in a perfect and reasonable manner. Though, there is a marginal difference among the methods of performing and computing accounting and financial activities, but there is a linkage found between their reporting stances. Accounting managers will be directly reporting to the Head of the Department, while finance managers will be directly reporting to the Director Finance or the Chief Financial Officer (CFO) of the companies (Greuning, Scott and Terblanche, 2011).
The concept of financial reporting is an important one for the organizations as far as maintaining and managing their long run productivity and efficacy is concerned. Reporting standards which have been divided into two different forms IFRS and GAAP, made and presented by International Accounting Standard Board (IASB). IASB, in collaboration with the companies as well as their shareholders made and executed such standards from which they can enhance the productivity of the companies. Before analyzing the mechanics of the financial reporting and standards, it is more than important to get an idea that why such standards have been made?
Upper management worth a lot for an organization, as they are the one directly associated with the decision making stance of the entities (Greuning, Scott and Terblanche, 2011). Upper management has a lot of motives behind the exceptional growth of an organization, because they will get the share of the profit as per the rules and regulations. One hand, the utilization of statistical concepts like forecasting and linear programming are getting their roots firm in terms of taking timely and powerful decisions for the organizations, and on the same concession, accounting techniques and programs also considered for the same applications. There are dominating concepts found specifically in the field of accounting and finance, which have been applying from number of years to let the management know about the feasibility of the project. In order to make tactful and powerful decisions for the company, the necessity of financial reporting reflected on the screen comprehensively (Pounder, 2009).
Without any doubt, the conceptual framework defined the basic definition of the financial reporting, its importance and effectiveness for the entities, but there are some points that completely miss from the discussion (Sandretto, 2011). Objectivity, clarity, concreteness and materiality are some of the basic characteristics of the financial reporting which were already mentioned and presented by the Conceptual Framework, but there are some other aspects as well that specifically defined by the Conceptual Framework like treatment of individual accounts and the accounting activities. The criticism on the definition of Conceptual Framework was absolutely right, because the framework was not designed in the favor of resolving accounting controversies and problems. After the current economic crisis, the thing that really made the things out of the favor of companies was the controversies created due to the manipulation in the accounting figures and numbers. There were number of companies that actually went bankrupted due to the infringements and breaching of laws and contracts, like Enron and others. While discussing the basic definition and the importance of financial reporting for the companies, the conceptual framework should focus on the functional objectives particularly (Sandretto, 2011).
Without any doubt, accounting standards have been made for the prevention of accounting activities of the companies and increasing the confidence level of their shareholders. Apart from that, the main focus of accounting standards and financial reporting is to identify every single loophole or problem that associated with the functional capability of the company that requires extensive improvement to direct the performance of the companies.
Financial Reporting usually comprises on three dominating things, income statement, balance sheet and management of cash flows. There are predefined standards and regulations associated with each of the element mentioned above (Wahlen et al., 2011). Accounting Standards enable an organization to give their cent percent efforts to value the things accordingly in the favor of the company, and treated every single transaction by keeping them in the circle of accounting standards and regulations. There are different accounting standards and principles associated with each type of analysis particularly, like there is an accounting standard that usually associated with the presentation of Income Statement, known as IAS-1. Every single treatment of the income statement and its head has been discussed in that same standard (Wahlen et al., 2011). The Conceptual Framework that introduced the basic definition of the financial reporting and stated it as a perfect combination of materiality and conciseness should focus on the functional capability of the standards as well due to which the stance of reporting and analysis will be initiated accordingly.
According to the arguments of lots of accounting officials and gurus, the time has passed in which we only focuses on the basic definition of the standards, and now there is a need to focus on the management of accounting problems, issues and controversies. Accounting and Financial Gurus respects the general definition provided by the Conceptual Framework, but they are now trying to mobilize the companies to move a step further in their functional capability. Accounting standards have now moved above from the basic and traditional formatting, as they are now seeking to determine the future financial and strategic growth of the companies.
The requirements of accounting standards and treatment have changed after the current economic crisis. The current global financial crisis (GFC) has been termed as the worst after the Great Depression of World War II in which hundreds of thousands of banks and companies went bankrupted. One of the major reasons behind those bankruptcies was the non-compliance behavior of the entities in terms of managing their needs. One of the basic requirements of accounting standards is to prevent the funds of the shareholders in such a manner that they will not withdraw their funds. Conceptual Framework should focus over the shareholders management and fulfilling their confidence accordingly (Dean and Clarke, 2003). There are number of standards and functions that specifically introduced by the IASB to prevent the shareholders from any sort of problem and controversies that should be introduced and presented by the conceptual framework in their definition. The current era is not to introduce the basic and traditional concept of accounting to the shareholders, but the time has come to give them the solutions of their problems (Dean and Clarke, 2003).
The functional capability of financial reporting is spectacular, and it has the ability to value the things in their own manner accordingly. Shareholders are the most important members related to an organization, in fact they referred as the actual owner of an organization, and therefore organizations cannot devalue their existence (Barker et al., 2014). The current economic crisis was a serious evidence of lots of problems and controversies for the shareholders in which the shareholders were reluctant to park their money in the stocks of the company. Fortunately, accounting standards and financial reporting enables an organization to value their shareholders in a perfect manner, but unfortunately there was no explanation has been given in the definition presented by the Conceptual Framework.
After a critical argument with lots of financial gurus, it is found that organizations have to focus now on resolving accounting controversies and problems in order to gain appreciation from the external shareholders. The entire economic productivity and efficacy of an organization depends entirely upon the fact that how effectively it manages its operations and prosperity. The real problem exists with an organization, when they started to value their shareholders, both internal and external shareholders (Barker et al., 2014). The lacking of information in terms of revealing the core mantra of accounting standards is not a perfect idea for the Conceptual Framework, as it will not bring any positive well being towards the company accordingly. Financial Reporting is a beautiful and perfect thing, and if it can be used with perfection and proper compliance then it will help out an organization to sustain in the industry for a long span of time. It can also overcome on the controversies relating to the shareholders and upper management. Goal and Objective Settings are very important for an organization, and with the help of powerful accounting standards and financial reporting, an organization can maintain and come up with effective goals that will contribute effectively in the future for the company (Barker et al., 2014).
It is important to include every single aspect of the functionality and functional objectives of financial reporting, as it not only empowers the upper management of the company to take timely decisions related to the company, but it also used by the external stakeholders and customers as well to get a thorough idea regarding the company. It is an important aspect related to the companies to comply with the same in their future in order to expel out any sort of controversies and problems from the companies.
A financial report is basically a set of document in which the information related to the financial position of the company duly presented. A financial report basically comprises on four things having fruitful information for different users. The four things or elements are income statement, balance sheet, cash flow and changes in equity. Every single user of the financial statement requires that the information presented in the financial report should be perfect and authentic, therefore proper audited financial statement is necessary for the presentation.
The information presented through the financial reports often termed as “Financial Reporting” that intends to provide the most concrete, powerful and materialize information to the users related to the company. The basic definition of Financial Reporting presented by Conceptual Framework was absolutely right, but the framework has completely forgotten to mention the idea of functionality of the financial reporting, or how it can overcome on the accounting manipulation and other escalating controversies. The controversy against this statement of conceptual framework was absolutely right, as the definition didn’t underpin some of the major concepts that can direct the performance of the companies by mitigating the level of controversies; therefore a perfect and thorough review is required from the Conceptual Framework’s personnel related to the definition of Financial Reporting.
Barker, R., Lennard, A., Nobes, C., Trombetta, M. and Walton, P. (2014). Response of the EAA Financial Reporting Standards Committee to the IASB Discussion Paper A Review of the Conceptual Framework for Financial Reporting. Accounting in Europe, 11(2), pp.149-184.
Dean, G. and Clarke, F. (2003). An Evolving Conceptual Framework?. Abacus, 39(3), pp.279-297.
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