V Sem BBA ADVANCED ACCOUNTING

MODULE 6

CORPORATE FINANCIAL REPORTING

INTRODUCTION

In any industry, whether manufacturing or service, we have multiple departments, which

function day in day out to achieve organizational goals. The functioning of these departments
may or may not be interdependent, but at the end of day they are linked together by one common
thread – the Accounting & Finance department. The accounting & financial aspects of each and
every department are recorded and are reported to various stakeholders. There are two different
types of reporting – Financial reporting for various stakeholders & Management Reporting for
internal Management of an organization. Both these types of reporting are important and are
integral part of Accounting & reporting system of an organization. But considering the number
of stakeholders involved and statutory & other regulatory requirements, Financial Reporting is
very important and critical task of an organization. It is a vital part of Corporate Governance.
According to the Committee on Accounting Concepts & Standards, American Accounting
Association “The primary function of accounting is to accumulate & communicate information
essential to an understanding of the activities of an enterprise, whether large or small, corporate
or non – corporate, profit or non – profit, public or private.”

NEED FOR REPORTING/USERS OF ACCOUNTING

The basic objective of corporate reporting is to provide information which is useful for persons
inside the organisations & for persons or group outside the organisation.

EXTERNAL

a) INVESTORS

Those who are interested in investing money in an organisation are interested in knowing the
financial health of the organisation to know safe the investment already made is & how safe their
proposed investment will be. To know the financial health, they need accounting information
which will help them in evaluating the past performance & future prospects of the organisation.
Thus, investors for their investment decisions are dependent upon accounting information
included in the financial statements.

b) CREDITORS

Strictly for Private Circulation only Compiled by Ms. Megha Kukreja and Dr. Priya Makhija
V Sem BBA ADVANCED ACCOUNTING

Creditors (i.e., supplier of goods & services on credit, bankers & other lenders of money) want to
know the financial position of a concern before giving loans or granting credit. They want to be
sure that the concern will not have difficulty in making their payment in time., liquid position of
the company is satisfactory. To know the liquid position, the need accounting information
relating to current assets, liquid assets & current liabilities which is available in the financial
statements.

c) MEMBERS OF NON – PROFIT ORGANISATIONS

Members of non – profit organisations, such as schools, colleges, hospitals, clubs, charitable
institutions, etc., need accounting information to know how their contributed funds are being
utilised & to ascertain if the organisation deserves continued support or support should be
withdrawn keeping in view the bad performance depicted by the accounting information &
diverted to another organisation. In knowing the performance of such organisations, criterions
will not be the profit but the chief criterion will be the service provided to society.

d) GOVERNMENT

Central & State governments are interested in the accounting information because they want to
know earnings or sales for a particular period for purposes of taxation. Income tax returns are
examples of financial reports which are prepared with information taken directly from
accounting records. The government also needs accounting information for compiling statistics
concerning business which in turn help in compiling national accounts.

e) CONSUMERS

Consumers need accounting information to establish good accounting control so that cost of
production may be reduced with the resultant reduction of the prices of goods they buy.
Sometimes, prices for some goods are fixed by the government so it needs accounting
information to fix reasonable prices so that consumers & manufacturers are not exploited. Prices
are fixed keeping in view the fair return to manufacturers on their investments shown in the
accounting records.

f) RESEARCH SCHOLARS

Accounting information, being a mirror of the financial performance of a business organisation,

is of immense value to the research scholar who wants to make a study into the financial
operations of a particular firm. To make a study into the financial operations of a particular firm,
the research scholar needs detailed accounting information relating to purchases, sales, expenses,
cost of materials used, current assets, current liabilities, fixed assets, long term liabilities &
shareholders’ funds which is available in the accounting records maintained by the firm.

INTERNAL

Strictly for Private Circulation only Compiled by Ms. Megha Kukreja and Dr. Priya Makhija
V Sem BBA ADVANCED ACCOUNTING

a) OWNERS

The owners provide funds for the operations of a business & they want to know whether their
funds are being properly used. They need accounting information to know the profitability & the
financial position of the concern in which they have invested their funds. The financial
statements prepared from time to time from accounting records tell them the profitability & the
financial position.

b) MANAGEMENT

Management is the art of getting things done through others, so the management ensures that the
sub – ordinates are doing work properly. Accounting information is an aid in this respect because
it helps a manager in appraising the performance of the subordinates.

c) EMPLOYEES

Employees are interested in the financial position of a concern they serve particularly when
payment of bonus depends upon the size of the profits earned. They seek accounting information
to know that the bonus being paid to them is correct.

OBJECTIVES OF CORPORATE FINANCIAL REPORTING

The following are the objectives of financial reporting:

• To provide information that is useful to present & potential investors, creditors & other users in
making rational investment, credit & similar decisions.

• To provide information about the economic resources of an enterprise, the claims to those
resources & effect of transactions, events & circumstances that change resources & claims to
those resources.

• To provide information about an enterprise’s financial performance during a period.

• To provide information that is useful to managers & directors in making decisions in the
interest of owners.

• Giving information primarily for those users who have limited liability, authority or resources
to obtain information & who rely on the annual report as their main source of information about
an enterprise’s economic activity.

• Giving information about the difficulties faced by the company during the year & steps taken
by the company to overcome the difficulties.

• Information about sources & applications of funds during the year.

• Information about the products of the company.

Strictly for Private Circulation only Compiled by Ms. Megha Kukreja and Dr. Priya Makhija
V Sem BBA ADVANCED ACCOUNTING

• Giving information about the research & development undertaken during the year & the
progress made thereof.

• Giving information about capital projects undertaken by the company in the past& projects
undertaken during the year.

• Giving information about employee management relations during the year.

REQUIREMENTS OF FINANCIAL REPORTS (DISCLOSURE REQUIREMENTS)

The subject of financial reporting has gained significance during the recent years because of
various compelling factors, such as the expansion and growth of the company form of
organization; shift in the emphasis from the concept of ‘shareholders’ to ‘stakeholders’ and
increase in their informational needs; the enactments and amendments in disclosure laws in
various countries; professionalism of management; emergence of accounting as a recognized
profession; and the pronouncements on disclosure made by various professional accounting
bodies in India and abroad (Chander,1992). A series of scandals that have rocked the financial
markets and shaken investor confidence have further increased the importance of financial
reporting.

COMPONENTS OF FINANCIAL REPORTING:

Financial Reporting involves the disclosure of financial information to the various stakeholders
about the financial performance and financial position of the organization over a specified period
of time. These stakeholders include – investors, creditors, public, debt providers, governments &
government agencies. In the case of listed companies, the frequency of financial reporting is
quarterly & annual. Financial Reporting is usually considered as end product of accounting. The
typical components of financial reporting are:

• The financial statements – Balance Sheet, Profit & loss account, Cash flow statement&
Statement of changes in stockholder’s equity

• The notes to financial statements

• Quarterly & Annual reports (in case of listed companies)

• Prospectus (In case of companies going for IPOs)

• Management Discussion & Analysis (In case of public companies)

The Government and the Institute of Chartered Accounts of India (ICAI) have issued various
accounting standards & guidance notes which are applied for the purpose of financial reporting.

Strictly for Private Circulation only Compiled by Ms. Megha Kukreja and Dr. Priya Makhija
V Sem BBA ADVANCED ACCOUNTING

This ensures uniformity across various diversified industries when they prepare & present their
financial statements.

DIFFERENT FORMS OF CORPORATE REPORTING

1) DIRECTORS’ REPORT

Directors’ report is written by the directors of a company & forms the part of company’s
financial statements. The report gives the details of the company’s state & its compliance with a
statement of financial, accounting & corporate social responsibility standards. It supports &
elaborates on the information contained in the Income Statement, Balance Sheet & Resources &
Application of funds/ Cash Statement. It is unique in the sense that it is direct communication
from the directors to the shareholders.

The information provided by the directors’ report helps shareholders understand:

• Whether the company’s finances are in good health.

• Whether the company has the capacity to expand and grow.

• How well the company is performing within its market, and how well the market is
performing in general.

• How well the company is complying with financial regulations, accounting standards and
social responsibility requirements.

As a minimum, a director’s report should always state:

• The names of each director who served during the reporting year.
• A summary of the company’s trading activities.
• A summary of future prospects.
• The principle activities of the company and, if relevant, the principle activities of its
subsidiaries;
• Recommendations for dividends for the reporting year.
• Any financial events that occurred after the date on the balance sheet, if these events
could affect the company’s finances.
• Significant changes to the company’s fixed assets.

2) CORPORATE SOCIAL RESPONSIBILITY REPORT

Section 135 of the Companies Act, 2013 provides as follows: Every company having net worth
of Rs 500 crores or more, or turnover of Rs 1,000 crore or more during any financial year shall
constitute a Corporate Social Responsibility Committee of the Board consisting of 3 or more

Strictly for Private Circulation only Compiled by Ms. Megha Kukreja and Dr. Priya Makhija
V Sem BBA ADVANCED ACCOUNTING

directors, out of which at least one director shall be an independent director. This Committee
shall formulate & recommend to the Board, a Corporate Social Responsibility Policy which shall
indicate the activities such as eradicating extreme hunger & poverty, promotion of education,
ensuring environmental sustainability, social business projects, etc. to be undertaken as specified
in Schedule VII.

3) AUDITORS’ REPORT

The auditors’ report is a formal opinion, or disclaimer thereof, issued by an internal auditor or
external auditor after the conduct of an internal or external audit. The internal audit is an
independent, objective assurance & consulting activity designed to add or improve organisation’s
operations. It helps the organisation to accomplish its objective by bringing a systematic &
disciplined approach to evaluate & ensure the compliance of rules & regulations.

A standard auditor’s report has got three parts or paragraphs. The auditor’s opinion is stated in
the third paragraph. The first/ introductory paragraph states the work done and the
responsibilities of the auditing firm and the audited company management, whereas the second
paragraph is the scope; states the set of accounting standard practices referenced to for
guidelines.

The auditor’s opinion on a company's internal controls and accounting records can either be
unqualified/clean, qualified, adverse, or a disclaimer opinion.

An Unqualified Opinion assumes that the generally accepted accounting principle (GAAP) has
been consistently applied in presenting or preparing the financial statements.

A qualified opinion bears no binding reflection on the operational efficiency or financial

integrity of the company but rather it infers non-compliance regarding the Financial Statements
as presented due to notable exceptions.

An adverse opinion is reported, if the financial records as audited are found to be misrepresented,
misstated and when considered as a whole does not conform to GAAP and therefore has a
pervasive effect on the financial statements presented.

A disclaimer states that no opinion over the financial statements was able to be determined by
the auditors. No auditing work was done on the company's financial records as well as internal
controls.

4) CORPORATE GOVERNANCE REPORT It is a system by which companies are directed &

controlled. Everyone who is a part of the system is contributing to corporate governance. The
imperatives of corporate governance flow from the concept of accountability for the safety &
performance of assets & resources entrusted. Corporate governance is linked with power &
accountability. Who exercises power on behalf of whom & how the exercise power is controlled.

Strictly for Private Circulation only Compiled by Ms. Megha Kukreja and Dr. Priya Makhija
V Sem BBA ADVANCED ACCOUNTING

IMPORTANCE OF FINANCIAL REPORTING

The importance of financial reporting cannot be over emphasized. It is required by each

stakeholder for multiple reasons & purposes.

The following points highlight why financial reporting framework is important –

• In helps and organization to comply with various statues and regulatory requirements. The
organizations are required to file financial statements to ROC, Government Agencies. In the case
of listed companies, quarterly as well as annual results are required to be filed to stock exchanges
and published.

• It facilitates statutory audit. The Statutory auditors are required to audit the financial
statements of an organization to express their opinion.

• Financial Reports form the backbone for financial planning, analysis, bench marking and
decision making. These are used for the above purposes by various stakeholders.

• Financial reporting helps organizations to raise capital both domestic as well as overseas.

• On the basis of financial reports, the public in large can analyze the performance of the
organization as well as of its management.

• For the purpose of bidding, labour contract, government supplies etc., organizations are
required to furnish their financial reports & statements.

RECENT TRENDS IN CORPORATE REPORTING

Accounting is the language employed for communicating financial information of a concern to

various parties who are interested in such information. Communication of financial information
& other information by published accounts serves its purpose only if it satisfies the needs of
persons well – versed in accounting language & laymen not familiar with accounting techniques
on the other.

• Statement of Profit & Loss & Balance Sheet drawn in a summarized manner in a columnar
form.
• Presentation of the ‘highlights’ of the information contained in the published accounts.
• Preparing cash flow statement.
• Preparing fund flow statement.
• Provision of important accounting ratios.

Strictly for Private Circulation only Compiled by Ms. Megha Kukreja and Dr. Priya Makhija
V Sem BBA ADVANCED ACCOUNTING

• Disclosure of accounting policies.

• Use of charts, graphs & diagrams.
• Use of schedules.
• Impact of price level changes
• Rounding – off of figures.
• Disclosure of post statement events.
• Segmental reporting.
• Social accounting.
• Human resource accounting.
• Corporate governance report

Strictly for Private Circulation only Compiled by Ms. Megha Kukreja and Dr. Priya Makhija