Financial reporting refers to an assessment of the financial performance of an organization; the information in the financial reports or statements is not only used by the stakeholders of the organization but also the general public in making economic decisions. This should be done according to the international accounting and reporting standards.
Financial reports should be prepared from the entity’s perspective other than the proprietary perspective; a company is a separate person from the stakeholders or the proprietors, this compels an entity to prepare its financial statements to reflect a true and a fair position during any accounting period. The reports reflect the accounting policies and change in them, disclosure on- assets, liabilities, incomes, expenses, revenues and all the finances-,investments and commitments, post balance sheet events and contingent liabilities.
All this information is at the disposal of and is analyzed by the entity, further still, once interested parties invest in an entity, their interests in the investments shift from them to the entity. The rationale therefore is that financial statements reflect a genuine position and full disclosure of activities irregardless of what the proprietary interests are (Belkaoui, 2004).
The boards’ focus on the capital providers of the entity as the primary user group ignores the information needs of other user groups; their information needs may not be essentially the same. These reports are normally referred to as external documents, since external users are not in a position to access the internal documents; the reports need to meet the information needs of every user group-auditors, the government, financial institutions,creditors,employees,community groups, debtors and the general public.
The government uses reports to levy taxes on returns and to know if there is any deferred taxes, financial institutions on the other hand would like to asses the credit worthiness of the entity to know its ability to meet claims within the said duration, likewise creditors asses the liquidity position of the entity to know if it’s a good credit risk Auditors need reports to make an opinion on the financial statements that is if the reports reflect a true and a fair position of the entity. Overall, information needs are diverse depending on the user and all should be taken care of.
In as much as the entity’s management is accountable to the capital providers, the focus should not be solely on them, a company has got its goodwill to protect for instance. It’s important to safeguard the economic resources of the entity, this I agree with but, the neutrality concept demands that financial information meet the common needs of users other than particular needs of specific users. The government is in a position to demand a special purpose report on an entity, these are: cash flow statements, statements on the financial position (balance sheets) and profit and loss statements.
Reports should be prepared on a broader scope, to encompass things like: displaying the entity’s ability to meet its obligations, pay taxes, pay its employees and show the expected performance of the management or better said, keep the management on toes. An alternative objective perhaps should be: to prepare reports that are all inclusive and that take care of information needs of all users alongside being accountable to the capital providers. A company can not risk losing its goodwill in the eyes of the general public at the expense of accounting for equity providers (Dagwell, Wines&Lambert, 2007).
Qualitative characteristics of financial reports are those that ensure the needs of information users are met; it’s true that the distinctions help in understanding how the characteristics interact. Relevance and faithful representation are indeed fundamental characteristics, information is generally considered relevant if it meets the needs of the users to an extent that it can change their economic decisions. Relevant information must also be useful to predict- with a given degree of accuracy- the future financial performance of an entity, to asses the past performance and to help in providing feedbacks on earlier expectations.
Faithful representation means that records give a true and fair view of the position of the entity without either omissions and or fraudulent representations. Reports therefore if all inclusive and relevant aid a user in making make some form of judgment on the economy; this makes the two features fundamental (Gross, McCarthy&Shelmon 2005). Verifiability, timeliness, understandability and comparability are considered enhancing factors, these factors are appropriately identified and adequately defined, it’s also true in the sense that information without these factors may not be useful for decision making.
Timely information is that which is given during the right period before it loses its capacity or capability to influence decisions, this information can only be useful if it’s relevant. Understandability is the ability of a piece of information to easily be comprehended by the user, such information should not be complex in order to make it easier for the user to make decisions, however, it’s pretty obvious that any person who uses financial reports has a basic knowledge in accounting or a related field.
Comparability implies that similar activities and transactions should be accorded similar treatments; different financial treatments of activities and transactions should be due to difference in substance. Verifiability refers to the assurance that a piece of information is true and reflects what it actually asserts, this therefore is an enhancing factor to decision making (Weygandt. et al. 2008).
The boards’ conclusion that materiality and costs are pervasive constraints is true. The rationale behind this argument is that first, a cost benefit analysis has to be done even in financial reporting, reports therefore may not meet their intended objectives if finances are limited, this is in terms of costs of collecting information and presenting it finally. Costs therefore could compromise on timeliness, relevance or even faithful representation of financial reports.
Secondly, a transaction or an activity should only be reflected in financial statements if its inclusion or omission can affect the economic decisions of users of such documents: This means that the financial report will only contain items of material importance (Rutherford, 2001). In my opinion therefore, these changes have an impact on creative accounting in the sense that focusing on the needs of capital providers in financial reporting means ignoring the needs of other users, this in my view does not accomplish all the objectives of preparing these reports in the first place, again, an entity can ruin its goodwill.
In this case also, the neutrality theory is not adhered to and the information ends up not being relevant to every user. Bibliography Belkaoui, A. R (2004). Accounting theory. Cengage Learning EMEA. Dagwell, R, Wines, G, Lambert, C. (2007). Corporate Accounting in AustraliaUNSW Press, 491- 2007. Gross, M. J, McCarthy, J. H, Shelmon, N. E (2005). Financial and accounting guide for not-for-profit organizations. John Wiley and Sons Rutherford, B. A (2001). An introduction to modern financial reporting theory. SAGE, Weygandt, J. J, Kieso, D. E, KimmelP. D, Defranco, A. L (2008). Hospitality Financial Accounting. John Wiley and Sons,