Financial Reporting is the reporting of accounting information of a corporate entity to a user or groups of users. Financial Reporting is simply about communicating published financial statements and related information from a company to investors, creditors, government authorities and other external users.

Corporate Financial Reporting Has A Broader Scope

The term ‘financial reporting’ is not limited to information disseminated through financial statements. Corporate financial reporting is broader in scope than just the financial statements. Financial statements are one of the many mediums of communicating information about financial performance and financial position of the enterprise.

In fact, financial reporting includes not just financial statements but also other channels of communicating information. Management may communicate information to people who’re not internal to an enterprise by way of financial reporting aside from general purpose financial statements. Either, because the information is obligated to be disclosed by regulatory rule. Or, because the management feels it useful to those outside the enterprise and discloses it voluntarily.

Such information may take varied forms and pertain to various matters, like financial forecasts and new customers added in case of information technology companies. Also, budgets, capital expenditure plans, new products, restructuring, research and development initiatives, etc.

Need of Corporate Financial Reporting

Financial Reporting Specified by Law: According to American Accounting Association (AAA), “Accounting is the process of determining, measuring, and communicating economic information to facilitate informed judgment and decisions by users of information.”

The definition stresses the importance of communicating economic information so that the those using the information can take informed judgment and decisions. It is necessary to prepare and communicate general purpose financial statements to the users of accounting information, especially to the external users. Thus, businesses must disclose minimal bit of information specified by law and accounting standards.

Voluntary Disclosure: Many companies voluntarily disclose information in addition to those specified by law and accounting standards. Voluntary disclosure has become an important element of corporate financial reporting. The need for voluntary disclosure comes from the following:

Capital market forces: Investors and capital market analysts favor the firms which are more transparent, to companies that simply satisfy minimum disclosure requirements. Businesses that provide more disclosures enjoy a higher level of credibility with the investors and these companies attract more capital at proportionately lower costs.

High standard of corporate governance: Customers trust those suppliers more that follow high standards of corporate governance, alongside comprehensive voluntary disclosures. Companies generally disclose much earlier before new products are launched. For example, Microsoft follows a practice of announcing its new operating system well in advance. Similarly, Boeing always announces its new aircraft in advance so that the airport authorities can prepare the requisite infrastructure.

Maintenance and enhancement of reputation in managerial labor market: Managers earn their wages by offering their talent for managing businesses. They can keep up and improve their reputation by providing useful voluntary disclosures to the external world. In this way there is a need for better financial reporting.

Sum Up

The term ‘financial reporting’ is not just delivering information to the users through financial statements. Financial reporting encompasses more areas than just financial statements