Understanding Financial Reporting and its Standards
International Standards in Financial Reporting
Financial reporting refers to the presentation format in which firms present their financial performance for a specified period to their various stake holders i.e. investors, creditors and other interested parties by preparing and presenting financial statements.
As per International Accounting Standards Board (IASB) guidelines, the role of financial reporting is defined as
"The objective of financial statements is to provide information about the financial position. Performance and changes in financial position of an entity that is useful to a wide range of users in making economic decisions."
The standard forms of reporting include preparation of the following:
- Balance Sheet
- P&L Statement / Income Statement
- Cash Flow Statement
- Statement of change in owner’s equity
- Notes to Account and Schedules
The balance sheet reports the firm’s financial position at a given point in time (typically end of financial year). The balance sheet consists of three elements:
- Assets are probable current and future economic benefits obtained or controlled by a particular entity as a result of past transactions. Assets are a firm's economic resources.
- Liabilities are probable future economic costs of an entity. They arise from present obligations of a particular entity to transfer assets or provide services to other entities in the future as a result or past transactions or events.
- Owners' equity is the residual interest in the net assets of an entity that remains after netting off its liabilities.
P&L Statement / Income Statement
The P&L Statement/ Income Statement summarize the financial performance of the company over a specified period of time. The elements of the income statement include revenues, fixed/ variable expenses, EBIDTA, PAT etc.
- Revenues are inflows from selling manufactured goods, rendering services or other activities that constitute the company’s day-to-day operations.
- Expenses are outflows from manufacturing goods or services that constitute the company’s day-to-day operations.
- Gains and losses are increases and decreases in equity or net assets from peripheral or incidental transitions
- EBIDTA refers to earnings before depreciation, interest and taxes and PAT refers to profit before taxes
Cash Flow Statement:
The cash flow statement reports the company’s cash receipts and pavements. These cash flows may be classified as follows:
- Operating cash flows include the cash effects of transactions that involve the normal business of the firm i.e. investment in inventory, increase in current assets etc.
- Investing cash flows are those resulting from the acquisition or sale of property, plant, and equipment, of a subsidiary or segment, of securities, and of investments in other firms.
- Financing cash flows are those resulting from issuance or retirement of the firm's debt and equity securities, and include dividends paid to stockholders.
Statement of Changes in Owner’s Equity
The statement of changes in owners' equity reports the amounts and sources of changes in equity investors' investment in the firm over a period of time i.e. increase in shareholder’s capital, changes in authorized, issued and paid-up capital, split in face value of shares etc.
Notes to Financial Statements
- Notes to financial statements include disclosures that provide further details about the information summarized in the financial statements.
- Notes to account provide information about accounting methods, assumptions, and estimates used by management.
- Notes provide additional information on items such as business acquisitions or disposals, legal actions, employee benefit plans, contingencies and commitments, sales to related parties and segments of the firm etc.
Schedules and Supplementary Schedules:
- Schedules to account provide detailed information on the elements of various financial statements i.e. balance sheet, income statement and cash flow statement.
- Supplementary schedules provide additional information such as operating income or sales by region or business segment, reserves for a mining company, information about hedging strategies of a company etc.
Management's Discussion and Analysis
- Management's Discussion and Analysis provides an assessment of the financial performance and condition of a company from the perspective of its management.
- In general it involves discussion on general business overview and trend, results from operations, sales and expenses, trend in cash flows, discontinued operations, strategy of firm going forward etc.
- Management Discussions may also include disclosures to a specific segment’s cash flow, debt requirement and plans of raising debt, strategy and timelines for approaching capital markets for raising equity, unsecured loans, debentures etc.
- It may also hint towards growth strategy of the firm via organic or inorganic route, possible merger & acquisitions in the sector, target companies etc.
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