Financial reporting is the proper record of the economic activities of a person, business, or other body. The accounting system came into existence in the Neolithic Middle East in about 8500 BC, which is just following the discovery of agriculture. When the people started storing and trading of the food they had produced. But they faced lots of problem in tracking the amount of food putted by which village member in the warehouse. So they started a new technique to track out the quantity of food by different people with the help of clay token, or bulla which represented each unit of food (sheep, wheat, oil). This clay token was placed inside an envelope and sealed by the warehouse keeper in presence of the farmer. When the farmer wanted to get his food back, the seal was broken in the presence of a witness by the keeper. (Atkinson, 2002)
Until 1494 bookkeeping didn't begin to develop into the more detailed system. After that Luca Pacioli wrote the first book about bookkeeping. In his book Pacioli went over through the detailed of accounting that is used, and today also that process is use. By this book Pacioli is known as the father of bookkeeping (Atkinson, 2002).
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Next change occurred in 18th century with the innovation of cost accounting. It is the calculation of the costs of the product and the labor in manufacturing process.
After the great loss in the 20th century the federal government established an organization to establish the standard accounting practices by public companies known as Securities and Exchange Commission (SEC). There was no governing body for the standard accounting, So, SEC pushed the public companies to provide the central organization which lead into the creation of American Institute of Certified Public Accountants (AICPA) and finally Financial Accounting Standard Boards (FASB), responsible for the standardization of accounting in financial statements: Generally Accepted Accounting Principles. In spite of this, the fact is that the private sector was responsible for setting GAPP but the SEC plays an important role in the formulation of the standardization of accounting. (Atkinson, 2002)
In US, 1939 the American Institute of Accountants (AIA) formed the committee on Accounting Procedure (CAP), which issued the 51 accounting bulletin, which tried to answer the accounting problem. But it could not create a standard accounting practice to resolve the accounting problems. In 1957, AIA was renamed as American Institute of Certified Public Accountants (AICPA), which formed the Accounting Principle Board (APB) with three goals: development of accounting principles, establish standard practice and to create a uniform standard for accounting practices. An APB published 31 opinion papers. In 1973, Financial Accounting standard Board (FASB) is formed which issued 168 statements of Financial Accounting Standards (SFAS).
In 1980's the challenges of globalization and deregulation comes into consideration and to raise the funds company's turn into complex bank loans and frequent risk in 2001, the reliability on auditing in accounting is decreased because of the use of computers for auditing. As the reporting started by computers the prices of the auditing decreased and the making the auditing less valuable. After that on July 1, 2009 Accounting Standards Codification (ASC) which integrates all previous sources of US GAAP and is the single source of authoritative US GAAP (Atkinson, 2002).
Overview of Financial Reporting
Financial statement is the presentation of all relevant fiscal information of the business enterprise, in a structure manner which is easy to understand by the end user. There are four basic financial statements:
Balance sheet is the financial report of the company's assets, liabilities and ownership equity at a desired point of time. Income Statement is a Profit & Loss statement (P&L) which tells company income, expense and profits at a desired point of time. Also provide the information of the organization on their operation, sale and various expenses. Statement of retained earning tells about the retained earnings of a company's over the period of reporting. Finally, Statement of cash flow accounts the cash flow activity of an organization, mainly investing, operating and financing activities.
A US company Enron with the market capital of 80 billion was bankrupted. So there was need to improve the financial reporting model. There was the need of more active and better reporting system to calculate the earnings per share, to present the real information to the investors to understand business model of the company and the risk associated with that business.
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According to Baker (2003) the heart of financial reporting is Income statement and primarily focus on announcing results. Also income statement is the focus of analyst's explanation of those results and the source for earning forecasts which determines the share prices. It is so important therefore The International Accounting Standardization Board (IASB) revise the format of the income statement in 2005 and used from 2006. The revision of this income statement occurred for increase volatility in the income statement, transparency in the income statement: A shareholder is able to know his profits and losses in the desired period of time also the gains and losses on the other financial assets of the company.
According to Damant (2003) the new format of income statement greatest revolution in the looks the financial reporting since five hundred years ago when the double entry bookkeeping was introduced and the try to make a division between appearance in the traditional loss and profit account and transfer items directly to reserves makes figment of the imagination in principle.
Internal auditing of the financial reporting is the success of internal control in any organization. The approach of internal auditing has become more practical and the external auditors depend on the papers of internal control. The important feature of internal control is the provide promise towards the reliability of financial reporting (D'Aquila, 1998).
Poor internal management can be the reason of occurrence of fraud with the financial report (KPMG, 1994). Federal Sentencing Guidelines for organizations (1991) tries to highlight the importance of internal control in organization. Financial Reporting & Internal control increased attention while Treadway commission (1985) identifies that senior management is responsible for the contribution of the reliability of the financial reporting process. In accumulation, Merchant (1987), whose study helped treadway commission said that the reporting is not sustained by huge bodies of proof.
Basu, (1992) gave that the attitude of management towards internal control is momentous when the accountant were inquired about the control environment of an organization. Whereas Brief at el (1996) and Rich at el (1990) wrap up that the ethical environment is more significant than accountants.
The fairly reported financial statement of an organization is very important. Also the control environment is an important part of internal control (Jill M. D'Aquila, 1998)
Change in Income Statement
In the Income statement the actual losses and gains should be reported and should not be hidden in an appendix (Baker, 1973) Secondly the income statement should be reformed in such a manner that actual profits and losses to be reported the reason of where they occurred. Finally Richard grey wants the total transparency in the financial statement so that the profits and losses are categorized in such a manner, that it can be easily understood by the analyst.
The financial reporting tries to resolve these problems in two different ways: Firstly, the company's total fiscal presentation is divided into two income statements: profit and loss account and the total recognized profit and losses. Secondly, classification of exceptional items reported below the operational profit line, i.e. reduction in cost of operations (Baker, 1973).
From finance theory it is clear that the wide information set is given to share prices when they are not in the figures in loss and profit account. The performance in total is very important to display, i.e. every change in the funds of shareholders and not cover the topic by artificial distinctions such as in traditional approach. After this argument the awareness began that there is no exceptional profit (Damant, 2003).
This proposal of income statement is self-effacing in comparison with new accounting standards. The difference in the format made was illogical and difference in relevant to financial analysis- reader can't understand the data will be displayed, in the possible clearest manner. This may not be accepted by many analysts due to the unfamiliarity and limited published documents (Damant, 2003).
Solving the Complexity of Income statement:
The approach of the statement of total recognized profit and losses and classification of exceptional items are exclusive. This would not help in solving the problem. So, IASB and ASB recommend that there should not any distinctions between the profit & loss statement and in the statement of total recognized gain or losses. Only a single financial performance statement is projected with all recognized losses and profit in the defined period, which is divided into finance, business, and tax and discontinuing activities. In accounting standard the term financing has been used but without clear explanation (Baker, 2003)
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There is only one positive advantage in the proposal was radical change from the well-known concept. In current years International Financial Reporting Standards (IFRS) have been moving penetratingly towards the fair value balance sheet. This move of IFRS is resisted in some places with the numbers of arguments (David Damant, 2003).
Importance of Financial Assets Reporting:
It was proposed that the business category is subdivided into financial income category and operational profit category. The financial category is because of the close relationship between the income from financing expenses & financial assets and the valuation of operating & financing activity. Another important characteristic of proposed layout is the matrix format.
The separate column of matrix resolved the problem. The profit in the long term debt of a company has its own place in the matrix. Also the central column has familiarity with historical account, even though made on more accurate principle, and forming an element rather than the performance reporting of the company. Also a non-professional observer or investor can see the operational flows separately and understand the division (Damant, 2003).
Another appreciation by Damant (2003) was the generations of cash-flows in future are the discounted present value of those upcoming cash-flows, which helps an analyst and capital marketers, the value of the company. Also they can analyze the future cash-flows which a company is going to generate and separately deal with the already valued assets on future cash-flows.
Corporate Financial Reporting via Internet:
In the globalised world the use of internet for communicating is increasing day by day with their some vital benefits like, low cost, time saving, easily access from any part of the world, need of fewer employees. (Gowthorpe, 2004)
Since there are lots of benefits in communicating the financial reporting for the stake holders but there are also lots of issues started build up (Lymer, 1999). After development of World Wide Web (WWW) in 1995, there were lots of researches conducted by different people stating about the incidence of Corporate Financial Reporting by the use of internet in the organization (Lymer and Tallberg, 1997)
Ashbaugh (1999) et al conducted their survey with the use of questionnaire about the examination of the website incident and provide the evidence of costs and other benefits for an organization by providing corporate reports on internet. The two stage research was done by the Institutes of Charted Accountant of Scotland (ICAS) to examine the opinion of users on corporate financial report. In Wetmann and Beattie (1999), the first stage of research is conducted on institutional investors and lenders and identifies the key features of an ideal information set: timely supply of information, the forward looking information and the opportunities by new development in technologies. In the second stage the need of other users of CFR is considered (Beattie, 1999).
Each company needs to discover their own way to an annual report that is timelier, appropriate for all the users, more general and less arduous (Desmond, 2000).
The communication for shareholders in the Annual General meeting is very and less formal for stakeholders. According to Clarke and Murray (2000), there is a requirement of chairman's statement to build relationship with shareholders. If there is a two way communication then the investor more easily trust the chairman and invest in the organization. Whereas Beattie says that the one-to-one meeting supposed to be major problem by many representatives of investors. (Beattie, 1999)
The use of internet for Corporate Financial Reporting is very important and the problems that are raised can be reduced firstly, by providing the information in easily understanding way on the internet by providing full report and the use of video and audio formats and also with the help of recorded television interview of the chairman or chief executive explaining recent results (Gowthorpe, 2004). Secondly, they can be reduced by assessing the needs of the stakeholders. In most of the cases the CFR on internet focuses on the specific group of stakeholders while the other groups are not addressed properly. In some cases, the organization gives unsymmetrical data on the website which is not the appropriate need of the end users. Limitation would identify and the improvement in the websites would be done is the best features (Jones et al, 2001).
Ethics in Financial Reporting:
The ability to appropriately examine an organization and to ensure the disclosure of accurate and complete financial report
Marchand (1998) saw advertisements by many organizations showing high ethical value growing from small business to enormity in provisions of hard work and power. The purpose was to get gain in the faith of the people and gain in presence from across the country. During the same period large organizations were gaining the place and position of actual entities. Also he noticed some lack of accuracy and attempting of hide unhealthy corporate financial reporting due to constant growth in the financial and corporate profits. It was the great change in the business operations and the technology advancement: use of computer, internet, telecommunication and the globalization with the acceleration rate of modification. Whereas the accounting firms have a momentous importance in financial data reporting, emphatically the corporate communication qualified had a huge part in the action as well. During this rapid change there is a continuous receiving of fully and proper reporting is very important for capital marketing. So, the financial reports become the basic for investment and stock price on the basis of corporate assessment. It is very important the risen of individual stock investors to all time high. For employee, organization and the government that depend on investment and taxes are need of confidence in capital market. Both the organization and the auditor of this organization must remember their responsibility of financial reporting (Atkinson, 2002).
As per Atkinson (2002) it is important to develop trust eventually as today's free marketplace is depends upon the trust and reliability. The ability of investors to invest is depending upon the giving of clear financial position and understandable format, to understand easily by the investors. This is the basic of the development of assessment of stock market. For an example, when the ENRON organization became bank-corrupt, they are not able to deliver the reason of bank corrupt and presented to cover up the problem with their Annual report, quarterly report and the speeches. So, Albert S. Atkinson is concerned about the ethics, corporate professional and the financial data reporting. (Albert S. Atkinson, 2002)
A survey by Morris (2001) discussed several concerns while the course is taught by business professor. These professors are trying to educate the people about the ethics and make them more ethical with exception of thinking that the students can be more educate when they will react more ethically (Morris, 2001)
The ethics of the financial reporting is seems the responsibility of accountants, whereas as the perception of the public towards an organization is more important than the accountant. In every organization the codes of conduct, ethics hot lines and other programs are implemented to establish ethical standards and also many scholars papers are helps in ethics and implementation of ethics in organization. The incorporation of corporate law or basic of corporate existence makes organization socially responsible or ethical (Atkinson, 2002).
International Accounting Standard:
In general, IAS is the standard of accounting stating that how the particular transaction and events should be displayed in the financial statement.
According to Demski (1973), the accounting standard-setting process is in not technical, also political in nature. The accounting standard decide by account standard-setting is making choices with conflicting interests of among the view of group or individual (Boritz, 1982). This certain groups of interest exercise the power of standard accounting (Hope and Gray, 1982)
The International Accounting Standard (IAS) is issued by International Accounting Standard Board (IASB) of the International Accounting Standard Committee (IASC) (Sharp, 2005).
The requirement of IAS occurred to minimize the problems occurred due to the problems in the financial statement with the stakeholders and the evaluation of the company's financial statement, after occurring of the bank-corrupt of many organizations due to hiding of the some financial data.
Reasons of the use of International Accounting Standards:
The objective of setting accounting standards is to bring uniformity in accounting practices and to ensure transparency, consistency and comparability (Unerman, 2000). Accounting standard are guidelines providing the framework so that credible financial statement can be produce. Accounting standards are prepared keeping in view the business environment in laws of the country. It, therefore, naturally means that the guidelines change with change in business environment and laws. It is because of this that accounting standards are being revised from time to time (Beechy, 2001). It may be noted that whenever the conflict arises between law and accounting standards, law will prevail. Accounting standard have also been made flexible in the sense that where alternative accounting practices is acceptable, and enterprise is free to adopt any of the practices with the suitable disclosure and Accounting standard are mandatory in nature (Grewal, 2003).
Objective of IAS:
To formulate and publish in public interest, accounting standards to be observed in the presentation of financial statement and its worldwide accepted and the improvement and harmonization of regulation of accounting standard and procedures relating to presentation of financial transactions (Grewal, 2003).