The Context and Purpose of Financial Reporting

Understanding Financial Reporting

• Financial Reporting involves the disclosure of financial information to the various stakeholders about the financial performance and financial position of the organisation over a specific period of time.

• The individuals or entities who have interest in the company’s financial performance are referred to as stakeholders. This includes employees, managers, investors, suppliers, customers, regulators, and others.

• Financial Reporting is essential to provide information that demonstrates if the company is making a profit or a loss, what is the company’s worth, where the funds are being allocated etc.

Purpose of Financial Reporting

• The primary objective of financial reporting is to provide high-quality financial reporting information concerning economic entities, primarily financial in nature, useful for economic decision making.

• To communicate financial information to stakeholders which helps them in decision making. Stakeholders decide on whether to keep on investing in the company based on the financial health of the company.

• To maintain transparency in financial reporting process. It is achieved through the disclosure of financial statements, annual reports etc.

• To make sure companies adhere to the relevant legislation and standards, like International Financial Reporting Standards (IFRS).

Components of Financial Statements

• Balance Sheet / Statement of Financial Position: Snapshot of what a company owns (assets), owes (liabilities), and the shareholder equity at a specific point in time.

• Income Statement: Shows the company's revenue and expenses over a period of time. It tells whether a company made profit or not during the reporting period.

• Cash Flow Statement: Outlines the inflows and outflows of cash and cash equivalents from various activities like operating, investing and financing activities.

• Statement of Changes in Equity: Also known as the statement of retained earnings, it gives a detailed report on the changes in the company's retained earnings during a period.

Role of Accounting Standards

• Accounting standards aim to provide a uniformity and consistency in the financial statements of a company.

• They safeguard the interest of the users who rely on such financial documents, instilling trust and confidence.

• The Accounting Standards Board issues and updates accounting standards. IFRS and UK GAAP are widely accepted standards.