Financial Reporting is the provision (Disclosure) of financial information produced by Financial Accounting activities of a Reporting Entity. The purpose of that Reporting is to provide useful (e.g., actionable) information to existing and potential investors, lenders and/or other creditors and stakeholders of the organization.
The focus of financial reporting is primarily on clarifying the context of past, current and potential future financial returns for any external parties that hold claims on the entity. This is achieved by:
- disclosing (selectively) some aspects of the management of the entity’s economic Resources
- explaining the amount, timing and uncertainty of Cash Flow linked to the entity's operations and (more generally) explaining the effects of transactions and other events that change a reporting entity’s economic resources and claims
Relation with Risk Management
Financial reporting is an important tool towards assessing Risk but it is not designed with this explicit purpose. An example where financial reporting integrates risk information (and the associated complexity) is IFRS 9.
Issues and Challenges
- Financial reports are, to a large extent, based on estimates, judgments and models of an entity's activity rather than exact depictions
- Financial reports impose a fundamental distinction between assets (economic resources) and liabilities (claims) which in many cases is far from being so clear-cut
- There is a variety of reporting standards and interpretation of standards that hinders comparison between entities
- There is limited information about general economic, sectoral or political conditions
- There is no information addressing Sustainability issues beyond economic performance