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As a professional accountant, accurate financial reporting is an essential part of understanding a company’s finances. While you may already know of International Financial Reporting Standards (IFRS) or International Accounting Standards (IAS) in financial reporting, you may not understand the significance of its untapped power and potential.
In fact, the IFRS and IAS form the bedrock of modern financial reporting. They offer a level of insight that significantly accelerates the transparency of businesses while streamlining their accounting and finance activities, indirectly boosting their income and expenditure management.
Moreover, these standards are principle based – meaning that an entity is provided a framework for reporting and is expected to explain their stand in case of deviations rather than just following a tick-box approach of complying with rules and regulations.
By utilising such a conceptual framework for financial reporting, many professional accountants have overcome the problems of historical accounting to a large extent and are able to produce better and more useful financial reports, thereby improving the company’s business reporting for all its stakeholders.
To help you understand the nuances of financial reporting, ACCA has produced a Financial Reporting course (FR) that helps develop knowledge and skills in understanding, applying the same quality to modus operandi and the theoretical framework when it comes to the preparation of financial statements, in accordance with the IASB’s standards and regulatory guidelines. It also covers the analysis and interpretation of information from financial reports for single companies, large groups and other modern entities.
Here we look at the overview of financial reporting in India, and discuss what is the real purpose of financial reporting for modern directors and investors alike.
The International Accounting Standards Board was established in 2001 as a successor to the International Accounting Standards Committee – both these bodies aimed to develop a set of accounting standards that serve as a source of globally comparable information. These were earlier called International Accounting Standards while the recent standards are termed as International Financial Reporting standards.
The information reported through these standards help promote transparency, accountability, and efficiency in financial markets around the world. Additionally, it enables investors and stakeholders to make informed economic decisions about investment opportunities, risks and also improves capital allocation.
Currently, India follows a Convergence Model by which the Indian Accounting Standard (Ind-AS) is largely named and numbered the same way as the International Financial Reporting standards. Therefore it is safe to say that the IFRS is the go-to standard in India as well as one of the most widely accepted financial reporting models worldwide. Also, it is worth noting that as of 1 April 2016, if a company has a net worth of Rs. 500 crore or more, it will have to mandatorily follow the Indian Accounting Standard (Ind-AS).
This helps to establish a common accounting language and India’s economy benefits tremendously through an increase in the growth of its international business. Thus, with International Financial Reporting standards set to become the future standard of compliance globally that can best meet the community’s accounting needs, Indian companies should actively monitor and participate in the IASB’s governance of accounting standards.
Business financial statements are like a financial report card that many investors will want to see before they invest or loan to a business. Simultaneously, the same report card is used by company directors to gain powerful insights into the business’s performance, operations, cash flow, and overall financial health.
In addition, the top management (CXOs, Directors, Board etc.) use financial statements to make informed decisions about how to direct and oversee the amount and distribution of cash flow, internally and externally.
The government utilises such reports to ensure that companies are paying their fair share of taxes. Essentially, financial reporting is required by law for tax submission and is arguably the other biggest reason why companies have to do it.
These are just some of the reasons why key stakeholders use the information provided in the financial statements. Essentially, financial reporting serves to fully reveal the results of the activities of the organisation.
Business laws are different in every country hence financial statements are required to be independently reviewed by auditing firms before they can be considered valid. Eg. The Companies Act in India mandates the appointment of auditors to review the financial statements.
This has created an entire industry of auditing firms ranging from the Big 4 – namely KPMG, Ernst & Young, Deloitte, and PricewaterhouseCoopers (PWC) to independent small and medium practitioners.
In conclusion, accurate financial reporting is important for 2 reasons – to gain insights of a company’s overall business performance and report to the appropriate authorities on the compliance with the tax rules and other regulatory requirements.
By applying a transparent and effective financial reporting framework such as International Financial Reporting standards, a company will be able to ensure that its accounts and finances are in good order and help stakeholders make informed decisions about the business’s next direction and strategy.