This Blog is written by Mr. Agha Mudassar Khan, Manager Taxation Advisory Services. Please read this blog and provide your valued comments.
Basic Aspects of Financial Reporting
The purpose of this blog is to explain some very basic aspects surrounding the financial reporting process and the challenges faced by those involved in financial reporting process.
What is Financial Reporting?
A process by which historical financial information spanning over a defined period of time is recorded, disclosed and presented to its users, including but not limited to Investors, Management/ those charged with governance, regulatory bodies and various other key stakeholders;
Why Financial Reports are Prepared and Presented?
- To meet annual compliance/ regulatory requirement (such as tax and corporate reporting purposes), using the per the applicable financial reporting framework, within the business reporting jurisdiction;
- Reporting of financial information to existing and prospective investors/ lenders for cognizant and enhanced investment/ dis-investment related decision making, hence improving financial integrity and creditworthiness for such users; and
- For use by management/ those charged with governance for monitoring the pattern of financial progress, thus providing eloquent basis for future budgetary needs and in the identification of key trends through trend and financial analysis process.
Key Financial Reporting Assertions
- Existence and Occurrence (Financial Transaction took place in realism);
- Rights and Obligations (Financial transaction relates to or obliged by the entity);
- Completeness (Entire financial information is included);
- Cut off Procedures (Financial transactions only pertaining to the reporting period are included);
- Classification (Financial transaction is recorded and reported under the class of transactions, it belongs);
- Valuation (Financial transaction is recorded at appropriate amount, used to settle the transaction); and
- Presentation and Disclosure (Financial information is properly presented and fairly disclosed for appropriate understanding of its intended users).
Challenges in Financial Reporting/ Information Process
- Frequent changes in accounting standards/ accounting treatment and financial reporting framework;
- Consistency by which accounting policy/ principles are applied and adopted by business managers;
- Basis of measurement of financial information (such as historical cost, fair value, value in use, discounted future value etc.);
- Inclusion of relevant and necessary financial information;
- Accuracy and Completeness of financial information;
- Transparency of financial information reported (i.e., without management bias); and
- Behavioural implication of financial reporting.
How to Manage Challenges in Financial Reporting/ Information Process
- Continuous professional development and training of personnel involved in financial reporting process to keep them well versed with changing reporting guidelines;
- Presence of financial reporting manuals/ guidelines and their consistent use to ensure consistency, while updated on regular basis to respond to changing needs;
- Provision of data on timely basis to act upon and recording transactions in accounting system;
- Careful application of cut-off procedures to include financial information relevant to the reporting period;
- Timely reporting, so that information reported is relevant and can be used to enhance quality of future economic decisions based on historical data;
- Key disclosures are provided in notes to financial reports/ data, so as to enable user to make an informed decision and ensure transparency;
- Record keeping and retention process of all financial data for later cross verification and to ensure accuracy and completeness;
- Endorsement and review from personnel involved in financial decisions, financial recording and financial reporting process to amplify consistency, relevance, reliability and completeness for financial information;
- Establishment and operation of coherent internal control system, limiting access to financial information so that unauthenticated processing, modification or reporting cannot be made; and
- Participation in decision making process, of those, whose performance is going to be scrutinized/ debated, once financial information becomes available for analysis and accountability.
Agha Mudassar Khan