Difference Between Financial Reporting and Financial Statements

Key Difference – Financial Reporting vs Financial Statements
 

A business conducts a number of transactions and has many interested parties. The activities of the business become more complicated as it grows, thus a proper mechanism is required to govern such activities. The importance and requirement for transparency in financial activities in companies have increased due to many investors losing confidence in financial markets as a result of massive corporate scandals such as Enron and Maxwell Group. Financial reporting is the process of providing information to company stakeholders to make decisions and the financial statement is the outcome of the process of financial reporting. This is the key difference between financial reporting and financial statements.

CONTENTS
1. Overview and Key Difference
2. What is Financial Reporting
3. What are Financial Statements
4. Side by Side Comparison – Financial Reporting vs Financial Statements

What is Financial Reporting

The main objective of financial reporting is to provide useful information for decision making. Businesses consist of a number of stakeholders that have different levels of power and interest in the organisation. They require information at regular intervals in order to make various decisions.

E.g. Investors require information to make decisions about acquiring or divesting shares. Governments require information to ensure that the company pays tax on time.

Figure 1: Stake Holders of a Company

Financial Reporting Governing Bodies

Basically, different countries may have local financial reporting bodies that govern and specify reporting requirements. However, the differences between investment markets are diminishing fast and a standardised approach to financial reporting is appreciated.

International Accounting Standards Committee (IASC) was established in 1973 and introduced International Accounting Standards (IAS) that cover many aspects of business reporting requirements. In 2001, IASC was restructured to become the International Accounting Standards Board (IASB) and the standards introduced after that were named International Financial Reporting Standards (IFRS). The global capital markets and the interdependent world economies have resulted in the development of IFRS standards and many countries have adopted them to conduct financial reporting.

The IFRS provides guidelines to be followed with regard to assets, liabilities, equity, incomes and expenses and how to recognise them and their relevant accounting treatment. This makes the reporting process transparent and more reliable.

E.g. IFRS 5- Noncurrent assets held for sale and discontinued operations

      IFRS 16- Accounting for Property, Plant and Equipment

What are Financial Statements

Financial Statements are prepared for an accounting period, generally for a year. This accounting period is referred to as a ‘fiscal year’ and differs from a calendar year since the accounting period may differ based on company needs or industry practices. For example, the fiscal year ends in January for many retail sector companies due to the high sales volumes experienced at the end of the calendar year.

There are 4 principal Financial Statements.

Financial Statements Preparation Process

Figure 2: Financial Statements Preparation Process

The preparation of financial statements is a lengthy, time-consuming and costly process. However, it is mandatory for all companies to prepare the financial statements for the benefit of the shareholders and other involved parties.

Auditing financial statements

The fundamental purpose of the audit is to provide independent assurance that management has, in its financial statements, presented a “true and fair” view of a company’s financial performance and position. Financial statements will not be ‘true and fair’ unless the information they contain is sufficient in terms of both quality and quantity to satisfy the expectations of users of the financial statements. Areas where management can improve internal controls can be identified by conducting a comprehensive audit.

What is the difference between Financial Reporting and Financial Statements?

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