Chapter 3.

0 Areas of Business Reporting, Sessions 3-4 2-4 August,2011

Financial reporting is the process of preparing and distributing financial information to users of such information in various forms. Financial reporting is the process of preparing the corporation's financial statement in accordance with generally accepted accounting principles.(GAAP). Set of documents prepared usually by Corporations at the end of an accounting period. It generally contains summary of accounting data for that period, with background notes, forms, and other information. Financial Reporting is the process of presenting financial data of a company's position, operating performance, and funds flow for an accounting period.

ICC-International Chamber of Commerce

ICC based in France, is the world business organization, a representative body that speaks with authority on behalf of enterprises from all sectors in every part of the world. ICC promotes an open international trade and investment system and the market economy. Business leaders and experts drawn from the ICC membership establish the business stance on broad trade and investment policy as well as on vital technical and sectoral subjects. ICC was founded in 1919 and today it groups thousands of member companies and associations from over 130 countries

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Information is the lifeblood of global capital markets. High-quality, consistent, comparable and understandable reporting by business enterprises enhances investor confidence and market efficiency, and thereby contributes to the depth and liquidity of capital markets. ICC noted that there is a substantial gap between the quality of financial information available in many countries and the Reasonable expectations of the users of this information. The potential benefits of a worldwide framework for financial reporting are significant: Greater comparability and comprehension of financial information for investors, especially those engaging in cross-border transactions, Increased availability of capital and lower costs, More efficient allocation of resources, Higher economic growth.

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International Financial Reporting Standards (IFRS) is a set of accounting standards developed by an independent, not-for-profit organization called the International Accounting Standards Board (IASB). The goal of IFRS is to provide a global framework for how public companies prepare and disclose their financial statements. IFRS provides general guidance for the preparation of financial statements, rather than setting rules for industryspecific reporting. Having an international standard is especially important for large companies that have subsidiaries in different countries. Adopting a single set of world-wide standards will simplify accounting procedures by allowing a company to use one reporting language throughout. A single standard will also provide investors and auditors with a cohesive view of finances. Currently, over 100 countries permit or require IFRS for public companies, with more countries expected to transition to IFRS by 2015. IFRS is sometimes confused with IAS (International Accounting Standards), which are older standards that IFRS has replaced.

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GAAP is a collection of commonly followed accounting rules and standards for financial reporting. GAAP specifications include definitions of concepts and principles, as well as industry-specific rules. The purpose of GAAP is to ensure that financial reporting is transparent and consistent from one organization to another. There is no universal GAAP standard and the specifics vary from one geographic location or industry to another. In the United States, the Securities and Exchange Commission (SEC) mandates that financial reports adhere to GAAP requirements. Many countries around the world have adopted the International Financial Reporting Standards (IFRS). The SEC has released a proposed roadmap for conversion from GAAP to IFRS by 2015.

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EBR-Enhanced Business Reporting: ICC thru Enhanced Business Reporting (EBR) Consortium ,contemplates a reporting model that goes beyond financial performance to encompass information on a companys markets, operating environment, strategy, capabilities and resources, execution and non-financial performance. The goal is to develop a reporting framework that adds value to the information supply chain; that is comparable across companies, geographies and time-frames; and the content of which can be measured with an acceptable degree of accuracy. XBRL-eXtensible Business Reporting Language: Looking to the future, companies, investors and other stakeholders will need to take into account new technologies that can contribute to the timeliness and efficiency of financial and business reporting and analysis. XBRL is an open, global information standard that allows users to exchange data between different software applications in the real time using the internet. This facilitates access to information from multiple sources and allows downloading directly into spreadsheets and models for analysis. The use of XBRL permits accurate and quick research of financial and business information.

Financial reporting helps organizations safeguard their assets, report accurate accounting data and ensure that personnel comply with regulations. Financial reporting should provide information that is useful to present and potential investors and creditors and other users in making rational investment, credit, and similar decisions. Financial reporting should provide information about the economic resources of an enterprise; the claims to those resources (obligations); and the effects of transactions, events, and circumstances that cause changes in resources and claims to those resources.

The balance sheet shows a companys financial position at a specific date. In annual reports, that date is the last day of the companys fiscal year. One side of the balance sheet (often the left side) shows what the company owns and what is owing to it. These items are called assets. The other side of the balance sheet shows (1) what the company owes (called liabilities) and (2) the shareholders equity or net worth of the company which represents the shareholders interest in the company.

Shareholders equity represents the excess of the companys assets over its liabilities. Accordingly, the companys total assets are equal to the sum of the companys liabilities plus the shareholders equity. Assets = Liabilities + Shareholders Equity

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Current assets are cash and assets which can be turned into cash right away or which, in the normal course of business, will be turned into cash in the near future, i.e., normally within one year. Current assets are the most important group of assets because they largely determine a firms ability to pay its day-to-day operating expenses. On the balance sheet, current assets are usually listed in order of liquidity, i.e., those which can be converted into cash most quickly are listed first, followed by the others. There are five broad groups of current assets: Cash, Temporary investments, Accounts receivables, Prepaid expenses, Inventories.

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PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment (also called capital assets) consist of land, buildings, machinery, tools and equipment of all kinds, trucks, furnishings and so on used in the day-to-day operations of a business. Unlike current assets, which are converted by successive steps into cash, the value of capital assets to a company lies in their use in producing goods and services for sale, rather than in their sale value. They are not intended to be sold.

CAPITALIZATION :Capitalizing refers to the recording of an expenditure as an asset rather than as an expense. This is done to allow for the spreading of an expense over more than one accounting period. DEFERRED CHARGES :Deferred charges are another type of asset frequently shown on the balance sheet. These charges represent payments made by the company for which the benefit will extend to the company over a period of years.

Intangible assets are assets that cannot be touched, weighed or measured. They are not available for the payment of debts of a going business and they usually decline greatly in value in the event of liquidation. Some common examples are goodwill, patents, copyrights, franchises and trademarks. Intangible assets, which may be grouped on the balance sheet under the headings miscellaneous assets or other assets, comprise valuable legal rights essential to the operations of the company.

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CURRENT LIABILITIES: Bank advances, Accounts payable, Dividends payable, Income taxes payable Other Liabilities: Deferred revenue results when a company receives payment for goods or services that it has not yet provided. LONG-TERM DEBT :As distinct from current debts, which have to be paid within a year, the long-term debt of a company is usually due in monthly or annual installments over a period of years or in a lump sum in a future year.

This statement also called the Income Statement or Profit and Loss Statement shows how much revenue a company received during the year from the sale of its products or services and the expenses the company incurred for wages, materials, operating costs, taxes and other expense items. The difference between the two is the companys profit or loss for the year. The amount left over, after payment of income taxes, is net earnings, out of which dividends may be paid to the shareholders.

SHARE CAPITAL :This item is the amount received by the company for its shares at the time they were issued. CONTRIBUTED SURPLUS :Contributed surplus originates from sources other than earnings. It may originate when a company sells its stock for more than the stocks par value. RETAINED EARNINGS :Retained earnings is the portion of annual earnings retained by the company after payment of all expenses and the distribution of dividends. The earnings retained each year are reinvested in the business.

The profit or loss in a companys most recent year is determined in the earnings statement and then transferred to the Retained Earnings Statement. Retained earnings are profits earned over the years that have not been paid out to shareholders as dividends. These retained profits accrue to the shareholders, but the directors have decided for the present time to reinvest them in the business. The retained earnings statement provides a record of the profits kept in the business year after year. Profit for the current year is added to, or the loss is subtracted from, the balance of retained earnings shown in the statement from the previous year. Dividends declared during the year are subtracted in this statement.

While the balance sheet shows a companys financial position at a specific point in time and the earnings statement summarizes the companys operating activities for the year, neither statement shows how the companys financial position changed from one period to the next. The cash flow statement fills this gap between the balance sheet and the earnings statement by providing information about how the company generated and spent its cash during the year.

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A cash flow statement shows the companys cash flows for the period under the following three headings: Operating Activities :Cash generated and spent for main direct activities of the Company. Financing Activities : If the company has issued new shares or debt , cash flows into the company. Investing Activities : Investing activities highlight what the company did with any money not used in the direct operation of the company. It includes any investments that the company made in itself, such as the purchase of new capital assets or disposal of such assets . As well, in this section you will find any dividends actually received from an investment in another company.

The raw data that an accounting system collects is too detailed to be practical for most potential users. Financial reporting summarizes the detailed data produced by the accounting system and then presents the data in a format that facilitates use by decision makers.

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Internal Financial Reporting : To effectively and efficiently handle operations, managers need reliable financial data. These managers use financial reports prepared for their specific use referred to as internal financial reports.

Internal financial reports are designed to accomplish two goals: Enable the management to monitor compliance with legal and contractual provisions of the district / company (for example, budget analysis and grant activity). Provide district/company management with information on current performance needed to make future financial plans (for example preparing next years budget).

Because internal financial reporting is designed expressly to meet the needs of the districts /companys management, the format and content depends entirely on what management finds most suitable. Timeliness is a critical consideration in internal financial reporting. As a result, internal financial reports are issued periodically (daily, weekly, bi-weekly, monthly, or quarterly) rather than annually, as is often the case for external reporting

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Special-Purpose External Financial Reporting: There are a variety of parties outside the district/company that need financial data to meet their specific needs. Such reports are referred to as special-purpose external financial reports. The contents, format, and timing of these reports depend on the outside party that imposes the requirement.

General-Purpose External Reporting There are three groups of users of Companys general-purpose external financial reports:
1. Those to whom the Company is primarily accountable (Stakeholders,Investors,Promoters). 2. Those who directly represent the Investors (BOD). 3. Those who lend to the Company or participate in the lending process. (Banks and Financial Institutions)

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Obviously the managers probably use general-purpose external financial reporting as they have access to the underlying data. The Company Managers have to report the available data in a certain format, acceptable to the stakeholders/bankers, based on their (stakeholders) information needs. The criteria used to determine those common information needs are known as generally accepted accounting principles (GAAP).

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General-Purpose External Financial Reports 1.Government-Wide Financial Statements 2. Fund Financial Statements 3.Notes to the Financial Statements 4.Required Supplementary Information (RSI) / Management discussion & analysis (MD&A) intended to provide a narrative introduction and overview that users need to interpret the basic financial statements. This information is presented before the basic financial statements. 5.Comprehensive Annual Financial Report (CAFR) . A CAFR has three major sections: Introductory, Financial , Statistical .

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It helps Investors/Govt. to understand following: Ownership details: Nature and structure of Capital and shareholding pattern. Creditors-Names of banks and other Lenders. Preparation of Balance sheet ,P& L,Cashflow & Retained Earnings. Details of Debtors-Companies or Individuals Details of Purchasing policies and payment or credit facilities Pending Orders on hand and status of order execution. Existing employees and their salary details. Insurance amount for the Company and other Risk management details. Delayed payments, if any and their details. Overall account of the Financial situation or status of the Company.

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C h a i r m a n s Message l Corporate Information l Board of Directors & Officers Customer Profile l Employee Profile l Financial highlights l Directors Report Management Discussion & Analysis (MD&A) Auditors Report Balance Sheet, Profit and loss account ,Income Statement Cash flow statement l Schedules / Notes to accounts Statement of shareholders equity Risk Management Report Corporate Governance Report.

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It helps in Company analysis. It provides vital information about the assets and liabilities of the company. It helps to know the share capital and shareholding pattern. It helps in understanding the standard accounting practices and policies (GAAP/IFRS) of the company. It helps the Investors and / or Creditors (Banks and FI) to decide, if they should invest in OR lend money to the company. It helps the top management, for monitoring, control and enhancing the overall company performance. It helps in improving the financial analytical and interpretation skills.

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It helps in providing accurate and correct information of the financial health/status of the company to all the stakeholders. It contains letters,charts,facts and fugures,statistical analysis, forward looking statements and MDA. It provides all the answers to any questions, raised by the Investors or any other stakeholders. It gives details of the company objectives, financial data, statistical analysis and conclusions on the current status and also makes recommendation for future actions. It draws certain plan of action, for approval of the stakeholders, thru AGM Resolutions. It helps create goodwill amongst the community thru providing details of CSR activities.