2. Meaning
⢠Financial reporting is presentation of the formal record
of the financial activities of a business, person, or other
entries.
⢠It is primarily an accounting function.
⢠Financial reports are prepared for external as well as
internal users. Various external users are â (1) present
and prospective shareholders ( owners) (2) Lenders (3)
Suppliers , (4) Customers (5) Government and its
agencies (6) Financial analysts (7) Employees and their
organisations
⢠Internal user is the management.
3. Corporate Financial Reporting for
External Users
⢠Main component of the financial reports for external
users is Annual Report .
⢠Annual report contains inter alia:
-Directorsâ report ( which is also termed as management
commentary) and
- Financial statements
Before we proceed further you would need to go beyond
financial reporting. You should understand how a
company is formed , manages its capital , commences
functioning.
4. Company form of business
⢠Four important forms of business organisation
are -
(i) Sole Proprietorship,
(ii) Partnership,
(iii) Cooperative Society, and
(iv) Joint Stock company
Know yourself about first three forms of business in
details.
5. Joint Stock Company : Features
⢠A company is formed under the Companies Act
⢠Artificial person : It is an artificial person created by
law, having a separate legal entity, with a perpetual
succession
⢠Separate Legal Entity: Being an artificial person, a
company exists independent of its members.
It can make contracts, purchase and sell things,
employ people and conduct any lawful business
in its own name. It can sue and can be sued in the
court of law. A shareholder cannot be held
responsible for the acts of the company.
6. Joint Stock Company
⢠No physical existence : A company has no physical
existence ,it must act through its Board of Directors.
⢠Common Seal : But all contracts entered by them shall
have to be under the common seal of the company.
This common seal is the official signature of the
company.
Any document with the common seal and duly signed by
an officer of the company is binding on the company.
⢠Perpetual existence : It has perpetual existence. Since
it is created by law, it can only be dissolved by law.
7. Joint Stock Company : Features
⢠Membership: To form a joint stock company, a minimum of two
members are required incase it is private limited company and
seven members incase of public limited company. The maximum
limit is fifty incase of private limited company. There is no maximum
limit of membership for a public limited company.
⢠Limited Liability of Members: The company form of business is able
to attract large number of people to invest their money in shares
because it offers them the facility of limited risk and liability. The
liability of a member is limited to the extent of the amount of
shares he holds.
⢠In other words, a shareholder can be held liable only to the extent
of the face value of the shares he holds, and if he has already paid
it, which is normally the case, he cannot be asked to pay any further
amount. For example, if âAâ holds one share of Rs. 100 and has paid
Rs. 75 on that share, his liability would be limited only upto Rs. 25.
8. Joint Stock Company : Features
⢠Transferability of Shares: The members of the
company (Public company) are free to transfer the
shares held by them to others as and when they like.
They do not need the consent of other shareholders to
transfer their shares.
⢠Elected Management: You know that people of
different categories and areas contribute towards the
capital of a company. So, it is not possible for them to
look after the day-to-day management of the company.
They may take part in deciding the general policies of
the company but the day-to-day affairs of the company
are managed by their elected representatives, called
Directors.
9. Company Shareholders
⢠Number of
shareholders of
a joint stock
company vary
depending upon
the size of its
share capital.
A view of the shareholders
meeting
12. Financing
Activities
Shareholders
provide Share
capital and also
money is
borrowed
which is called
borrowed
capital
Investment
activities
Capital is invested
in various types of
assets â long lived
assets like plant ,
machinery,
equipment and
short lived assets
like inventories ,
trade receivables
Operating activities
Operating activities of
business are
manufacturing ,
rendering services ,
trading or financial
services
Revenues are generated
from operations .
Expenses are incurred
for generating such
revenue . There can be
other income .
Long lived assets are
consumed in the
revenue generation
process . They get
depreciated
Business Activities â At a Glance
13. Objective of Financial Reporting
⢠The objective of general purpose financial reporting is to provide
financial information about the reporting entity that is useful to
existing and potential investors, lenders and other creditors in
making decisions about providing resources to the entity.
⢠Those decisions involve buying, selling or holding equity and debt
instruments, and providing or settling loans and other forms of
credit.
⢠Many existing and potential investors, lenders and other creditors
cannot require reporting entities to provide information directly to
them and must rely on general purpose financial reports for much
of the financial information they need.
⢠Consequently, they are the primary users to whom general
purpose financial reports are directed.
Source : IFRS Conceptual Framework 2011
14. Limitations of Financial Reporting
⢠General purpose financial reports do not and
cannot provide all of the information that existing
and potential investors, lenders and other
creditors need.
⢠Therefore those users need to consider pertinent
information from other sources.
⢠Other parties, such as regulators and members of
the public other than investors, lenders and other
creditors, may also find general purpose financial
reports useful. However, those reports are not
primarily directed to these other groups.
15. Five Elements of Financial Statements
⢠An asset is a resource controlled by the entity as
a result of past events and from which future
economic benefits are expected to flow to the
entity.
⢠A liability is a present obligation of the entity
arising from past events, the settlement of which
is expected to result in an outflow from the entity
of resources embodying economic benefits.
⢠Equity is the residual interest in the assets of the
entity after deducting all its liabilities.
16. Five Elements of Financial Statements
⢠Income is increases in economic benefits during
the accounting period in the form of inflows or
enhancements of assets or decreases of liabilities
that result in increases in equity, other than those
relating to contributions from equity participants.
⢠Expenses are decreases in economic benefits
during the accounting period in the form of
outflows or depletions of assets or incurrences of
liabilities that result in decreases in equity, other
than those relating to distributions to equity
participants.
18. Money measurement concept
⢠In financial accounting , measurement is the
process of determining the monetary amounts
at which the elements of the financial
statements are to be recognised and carried in
the balance sheet and income statement. This
involves the selection of the particular basis of
measurement.
19. Going Concern
An important accounting assumption
⢠The enterprise is normally viewed as a going
concern, that is, as continuing in operation for
the foreseeable future. It is assumed that the
enterprise has neither the intention nor the
necessity of liquidation or of curtailing
materially the scale of the operations.
⢠We shall discuss in a subsequent class the
purpose of this assumption
20. Accrual Basis
⢠Corporate financial reports are prepared on
accrual basis
⢠Accrual - Revenues and costs are accrued, that is,
recognised as they are earned or incurred (and
not as money is received or paid) and recorded in
the financial statements of the periods to which
they relate. (The considerations affecting the
process of matching costs with revenues under
the accrual assumption are not dealt with in this
Statement.)
21. Accrual âŚ
⢠Two principal methods of keeping track of a business's
income and expenses: cash method and accrual
method (sometimes called cash basis and accrual
basis).
⢠These methods differ only in the timing of when
income and expenses are recognised in the accounts.
⢠In cash method, income is recognised when cash is
actually received, and expenses are recognised when
actually paid.
⢠In general all transactions are recognised when they
occur regardless of when the money is actually
received or paid.
22. Annual Financial Reporting
⢠Annual Accounts and Balance Sheet
At every annual general meeting of a company held in
pursuance of section
166, the Board of directors of the company shall lay before
the companyâ
(a) a balance-sheet as at the end of the period specified in
sub-section (3); and
(b) a profit and loss account for that period.
⢠In the case of a company not carrying on business for
profit, an income and expenditure account shall be laid
before the company at its annual general meeting instead
of a profit and loss account.
23. Standalone versus Consolidated Financial
Statements
⢠Standalone : Financial statements of a reporting
company alone
⢠Consolidated : Financial statements of a
reporting company and its subsidiaries
⢠Listed companies internationally present
consolidated financial statements as the main
reporting format
⢠Whereas in India standalone financial statements
is the main reporting format. Listed Indian
companies present consolidated financial
statements as supplementary .
24. Quarterly Financial Information
⢠In addition , listed companies present
quarterly financial information in the format
prescribed by the SEBI.