The term ‘financial reporting’ means different things to different people – even accountants – so Student Accountant is seeking clarification
Financial reporting is a language, just like German or English. It is the language that companies use to talk to investors. It is the language that investors use to ascertain value. It is what people use everyday to decide where to invest their hard earned dollars for financial security and future opportunity. These decisions can be hard enough. But try it in a language you don’t understand, and it becomes all but impossible. Even worse, misleading.
The world has changed a lot since the (then) chairman of the United States Securities and Exchange Commission (SEC) Arthur Levitt, uttered these words during a speech in 1999, but they are no less true today than they were then. Like any profession, accountancy has its own collection of abbreviations, acronyms, and specialist words and phrases, which can confuse outsiders and newcomers, and the area of financial reporting is no exception.
Financial reporting is widely regarded as one of the most complex and challenging areas of the ACCA syllabus, and if you want to master it you will need to get to grips with a lexicon of concepts, principles, rules, words and expressions. These will range from accounting standards and regulatory frameworks to abbreviations and acronyms, via a collection of specialist terms of reference; some parts will seem easy to comprehend and remember, while others will seem mind-bogglingly complex and confusing.
Unfortunately, even the term of reference ‘financial reporting’ is not without challenges. In the broadest sense, this expression describes the process of preparing and distributing financial information, to users of that information; the devil is (as always) in the detail.
In a perfect world, the phrase financial reporting would always mean the same thing, no matter who is using it, and no matter what context it is being used in. But this is a deeply imperfect world, and the reality is less convenient and more confusing.
To some extent, this is due to the fact that financial reporting is inherently complex (as any student who has completed Paper F7 will appreciate). But it does not help that you will find the term ‘financial reporting’ used interchangeably (sometimes correctly and sometimes incorrectly) with ‘management reporting’ and ‘statutory reporting’, that all three can be used generically to describe a type of report (that may encompass various individual reports), as well as specific and individual reports, that they can all contain financial information, and that some of this can overlap.
As your professional studies progress and you acquire more practical experience of accountancy, the broader and deeper perspective you gain will help you to judge the most likely meanings of these terms of reference, no matter who is using them, and no matter which environment or scenario they are being used in. Many of the ACCA Fundamentals level papers help to provide invaluable context and clarification. But in the workplace, it is well to remember that most people outside the finance function do not have your advantages.
Arthur Levitt may have displayed an impressive understanding of what financial reporting is about (particularly for publicly listed companies), but most of the non‑accountants you encounter will not. For somebody in marketing or manufacturing, for example, any report involving numbers may be a ‘financial report’, all sorts of documents will be management reports, and the differences between the two will be regarded as insignificant. So when you are discussing a finance-related report with somebody who is not a finance professional, make sure that you are both talking about the same thing.
Even accountants sometimes need to clarify what they mean by financial reporting. In a professional context, the term may most often be used to refer to the financial reports that are required on dates and with contents that are determined by statute, or legally defined rules. But this does not eradicate the scope for confusion, because financial reports are also (equally validly) referred to as financial statements, or accounts, and a variety of non‑English language variations – such as cuentas in Spanish – though XBRL is helping to solve this problem.
These financial reports are usually prepared using guidelines provided in an approved set of accounting rules. Some countries mandate the use of national Generally Accepted Accounting Principles (GAAP), others require the use of International Financial Reporting Standards (IFRS), some countries allow the use of either (or apply IFRS to listed and national GAAP to unlisted companies), and there are many countries where national GAAP is gradually moving towards IFRS, in what may eventually be a global transition to international standards (see ‘From IAS to IFRS’).
If you were not studying to become an accountant, media coverage of financial reporting could mislead you into supposing that financial reporting standards apply only to entities with a public listing. But financial reporting rules also apply to small businesses, and some country jurisdictions have different financial reporting rules for them. In the UK for instance, there is a special Financial Reporting Standard for Smaller Entities (FRSSE), and in 2009, an IFRS for SMEs was issued by the International Accounting Standards Board (IASB).
In addition to these variations, in each country you will find a different set of organisations responsible for issuing these approved accounting standards (whether they are based on IFRS or national GAAP).
For example, in Argentina this is the Federación Argentina de Consejos Profesionales de Ciencias Económicas (FACPCE), in France it’s the Conseil National de la Comptabilité (CNC), in Norway it is Norsk RegnskapsStiftelse (NRS), in the UK, it is the Accounting Standards Board (ASB), in the US it’s the Financial Accounting Standards Board (FASB), and so on.
Variations also exist from country to country in the area of regulation. The UK, for example, has an independent regulator responsible for ‘promoting confidence in corporate reporting and governance’: the Financial Reporting Council (www.frc.org.uk). The FRC includes the Accounting Standards Board (mentioned above) plus various other standard-setting bodies, and also includes the Professional Oversight Board (POB), which (among other things) oversees the regulation of the accountancy profession by professional bodies such as the ACCA.
The frameworks for standard setting and regulation can be almost as complex as the standards and regulations themselves. Every country approaches this area in a different way, and the structures and powers of the regulatory national frameworks and bodies involved in standard setting and governance vary widely. So although developments such as IFRS and XBRL promise to simplify some aspects of financial reporting, learning the language of financial reporting is unlikely to become any less challenging and complex, any time soon – whether you are the ex-chairman of the SEC or a trainee accountant.
During your training and your career as an accountant you are probably going to encounter some confusion about the terms of reference of management reporting, statutory reporting and financial reporting – both inside and outside the finance profession.
When the profession refers to ‘management reporting’ it usually means the various finance-related reports that are associated with the management accounting function. As you learn when studying for Paper F2, Management Accounting, these management reports relate to the cost and quantitative information management required to support the planning and decision making in a variety of business contexts. But remember that management reports produced and used in various parts of an organisation will not always relate to management accounting.
When the profession refers to ‘statutory reporting’ it usually means the finance-related reports that are required by statute (the legally defined rules laid down by national and local governments). So statutory financial reports can be those produced in the process collectively termed ‘financial reporting’ (see below) or the very many tax-related reports that are required by various jurisdictions. But remember that the term statutory reporting is also used in a wider sense to encompass numerous types of non-finance related reports that are also a legal requirement.
When the profession refers to financial reporting it usually refers to the preparation of the financial statements (also called financial reports or accounts) of an entity or entities, within a framework of financial accounting concepts and standards. The resulting document set typically includes a balance sheet, statements of cash flows, income statement (also known as a profit and loss statement), a statement of retained earnings, along with supplementary notes, and may also include management comments such as a directors’ report, and (where appropriate) an auditor’s report.
There was a time when the countries of the world each had very different financial reporting rules, or no rules at all. But the world is slowly but surely moving towards global standards – and the comparability, simplification and transparency they promise.
The process began in 1973 when accountancy bodies in Australia, Canada, France, Germany, Japan, Mexico, Netherlands, United Kingdom, Ireland, and the United States, set up the International Accounting Standards Committee (IASC). It went on to issue a number of International Accounting Standards (IASs) until 2001, when it was restructured to create the International Accounting Standards Board (IASB). Since then, the IASB has been responsible for issuing the standards, which it called International Financial Reporting Standards (IFRS).
The Deloitte site www.iasplus.com offers useful related resources including free e-learning materials and the guide IFRS in your Pocket – which can be downloaded in various languages including Czech, English, and Russian – and links to more than 200 other IFRS related websites.
There was a time, in the not so dim and distant past, when accountancy was widely regarded as a rather dull profession. Accountants always knew better, of course, but this knowledge has been placed firmly in the public domain by some notorious financial scandals. From Enron in 2001 to the Saytam in 2009 – and not forgetting the ongoing banking crisis – financial reporting has played a leading role in some of the most significant and far-reaching business ‘happenings’ of the past decade.
These events have highlighted a widespread expectation that financial reports reveal some immutable truth about a company’s operations and financial health, and widespread incredulity when they don’t. The resulting calls for more clarity and transparency, and less complexity and obfuscation, have led to developments ranging from the Sarbanes–Oxley Act, to an increased focus on ‘fair value’ in IFRS – and made financial reporting one of the most dynamic areas of the profession.