As a small business owner, accurate financial reporting is an essential part of managing, organizing, and understanding your company’s finances. While this concept may seem complicated and overwhelming, we’re here to help define and simplify the process for you. NorthOne’s small business bank accounts also integrate with your existing accounting tools to help make financial reporting a seamless part of your day-to-day management.
This article will cover financial reporting from the ground up including its definition, the financial information it usually includes, the benefits, and the importance behind a standard financial reporting system.
What is Financial Reporting?
Financial reporting is a standard accounting practice that uses financial statements to disclose a company’s financial information and performance over a particular period, usually on an annual or quarterly basis. In simple terms, a financial report is critical for understanding how much money you have, where the money is coming from, and where your money needs to go. Financial reporting is important for management to make informed business decisions based on facts of the company’s financial health. Potential investors and banks will also use your company’s financial reporting to decide if they want to invest or loan you money.
4 Types of Financial Statements
Before we dive into the most common types of financial statements, it’s important to define what a financial statement is and how it works in the grand scheme of a financial report.
A financial statement is a written record that discloses a company’s financial details and business activities. These statements are audited for accuracy by the government, accounting firms, or independent accountants.
The four key types of financial statements found within a financial report include income statements, balance sheets, a statement of retained earnings, and cash flow statements. Learn more about the significance of each statement and the value they provide to financial statement users below.
1. Income Statement
An income statement, also known as the profit and loss statement, summarizes a company’s revenue, expenses, and profits. The income statement essentially shows how much the business earned or lost during a period of time and ultimately determines a company’s net income or “bottom line.”
2. Balance Sheet
A balance sheet delivers a snapshot of a company’s assets, liabilities, and stockholders’ equity at a single point in time.
3. Statement of Retained Earnings
A statement of retained earnings reveals a company’s changes in equity during a standard accounting period.
4. Cash Flow Statement
A cash flow statement (CFS) shows the amount of cash coming in and out of a business. The CFS gives stakeholders an idea of how a business operates and manages cash to pay off debt and fund current expenses and future investments.
Other Financial Documents
Simply put, any financial communication, document, or information that’s shared with the public can be included in a company’s financial report.
Financial reports can include the following:
- Financial statements and related footnotes
- Any financial information featured on a company’s website
- Records surrounding common stock and additional securities
- Quarterly and annual reports to stockholders
- Financial reports issued to the Securities and Exchange Commission (SEC) and other regulatory agencies.
- Press releases covering quarterly earnings reports
Financial Reporting Requirements and Regulations
Financial reports for private and public companies based in the U.S. must follow the Generally Accepted Accounting Principles (GAAP), while most international companies report under the Internal Reporting Financial Standards (IRFS). While both accounting frameworks provide standard rules and guidelines, there are slight differences between the two financial reporting systems.
Although the IFRS is still in development, the general consensus is that it allows international companies to issue short, clean, and reader-friendly financial reports. The U.S. GAAP requires financial reports to be much more thorough and follow a unique set of rules and guidelines.
There are several initiatives to either merge the two frameworks or simply reduce their differences. Despite these distinctions, both systems provide a standard framework to make financial reports accurate and consistent across the board.
Understanding The Importance of Financial Reporting
Without financial reporting, it’s difficult to understand how well a company is performing from a financial standpoint. Not only are financial reports crucial for management or investors to assess a business’s financial stability, but they are required by law for taxes and standard accounting practices. Here are the top reasons financial reporting can benefit your small business:
Make Better Financial Decisions
Analyzing and understanding financial statements is key when a business needs to make an important decision. Financial reports allow management to identify trends, potential roadblocks, and actively track their financial performance in real-time. Staying on top of your financial statements will give you the foundation you need to make quick and sound economic decisions when the time comes.
Manage Debt
Financial statements provide business owners and management direct insight into their company’s current assets and liabilities. Also, on how they should effectively manage their company’s outstanding debt moving forward.
Simplify Your Taxes
Financial reports are required by law for tax purposes and the Internal Revenue Service (IRS) uses these reports to evaluate a company’s tax income. Accurate financial reporting mitigates the risk for error and saves an immense amount of time. It relieves the overall burden that comes along with filing your company’s taxes each year.
Compliance
It’s no secret that accurate financial reporting can improve your company’s financial performance but it also guarantees that your business is compliant with the law and regulations required by government agencies such as the IRS and SEC.
Financial Transparency
External stakeholders must research a company’s financial position before they decide to officially invest. Financial reporting is a great way to showcase a company’s financial integrity and build trust with potential investors and creditors.
Staff of the US Securities and Exchange Commission
The US Securities and Exchange Commission (SEC or ‘the Commission’) is the principal US federal agency that is responsible for administering the federal securities laws. Since the time of its establishment, in 1934, the federal securities laws have set forth the SEC’s broad authority and responsibility to prescribe the methods to be followed in the preparation of accounts and the form and content of financial statements to be filed under those laws, as well as the responsibility to ensure that investors are furnished with other information necessary for investment decisions. To assist it in meeting this responsibility the SEC historically has looked to private-sector standard-setting bodies to develop accounting principles and standards.
Since its formation in 1973, the Financial Accounting Standards Board (FASB) has established standards of financial accounting for the preparation of financial reports by nongovernmental entities. The FASB operates as part of the Financial Accounting Foundation (FAF), a private sector, not-for-profit organization. The FASB publishes its standards in the FASB Accounting Standards Codification™. The standards in this codification are collectively commonly referred to as ‘US GAAP’.
The SEC recognises the financial accounting and reporting standards of the FASB as “generally accepted” for purposes of the federal securities laws. As a result, registrants are required to comply with those standards in preparing financial statements filed with the Commission, unless the Commission directs otherwise. For purposes of the federal securities laws, the SEC or its staff will supplement or supersede FASB standards if it is appropriate to do so. This can come in the form of additional disclosure requirements or interpretive guidance, or may involve establishing accounting requirements in the absence of authoritative guidance. The SEC and its staff monitor the FASB’s procedures, qualifications, capabilities, activities and results with respect to its ability to continue to fulfil its role.
Has the jurisdiction made a public commitment in support of moving towards a single set of high quality global accounting standards?
Yes.
In their Commission Statement in Support of Convergence and Global Accounting Standards , dated 24 February 2010, the SEC stated:
“In addition to reaffirming the Commission’s strong commitment to a single set of global standards, the recognition that IFRS is best-positioned to be able to serve the role as that set of standards for the US market, and the convergence process ongoing between the Financial Accounting Standards Board (‘FASB’) and the International Accounting Standards Board (‘IASB’), this statement outlines certain of these factors that are of particular importance to the Commission as it continues to evaluate IFRS through 2011.”
Has the jurisdiction made a public commitment towards IFRS Standards as that single set of high quality global accounting standards?
See the excerpt from the 24 February 2010 Commission Statement, above.
What is the jurisdiction's status of adoption?
The SEC permits but does not require its foreign private issuers to use IFRS Standards as issued by the International Accounting Standards Board (Board) in preparing the issuer’s financial statements. As of September 2016, more than 500 foreign private issuers with a market capitalisation in excess of US$7 trillion file with the SEC financial statements prepared on the basis of IFRS Standards as issued by the Board.
The SEC does not permit its domestic issuers to use IFRS Standards in preparing their financial statements; rather, it requires them to use US GAAP. However, pursuant to the Sarbanes-Oxley Act, the SEC’s continued recognition of the standards of the FASB as ‘generally accepted’ is, among other things, contingent on whether the FASB “…considers, in adopting accounting principles, … the extent to which international convergence on high quality accounting standards is necessary or appropriate in the public interest and for the protection of investors.”
On 18 May 2008 the Council of the American Institute of Certified Public Accountants (AICPA) amended its member Code of Professional Conduct to designate the Board with respect to international financial accounting and reporting principles. Such a designation affects whether an AICPA member who prepares or audits financial statements prepared pursuant to IFRS may affirmatively state that those financial statements are in conformity with ‘generally accepted accounting principles’. This designation allows an AICPA member to do so. As part of this decision the AICPA Board agreed that the AICPA Council would reassess in three to five years whether this designation of the Board remains appropriate. On 19 May 2013 the AICPA Council readopted the designation of the Board with respect to international financial accounting and reporting principles and agreed that the AICPA Council would reassess the designation in another three to five years.
Additional comments provided on the adoption status?
See the information in the ‘Extent of IFRS Application’ section, below, with respect to work undertaken by the SEC staff as directed by the Commission in its 2010 Statement.
Convergence of IFRS Standards and US GAAP
In September 2002 the Board and the FASB agreed to work together, in consultation with other national and regional bodies, to remove differences between IFRS Standards and US GAAP. This decision was embodied in a Memorandum of Understanding (MoU) between the boards known as the Norwalk Agreement.
In 2006 the Board and FASB set milestones for work through 2008.
- A roadmap for convergence 2006-2008.
- In 2008 the two boards issued an update to the MoU, which identified a series of priorities and milestones.
- In 2009, the Group of 20 Leaders (G20) called for standard-setters to re-double their efforts to complete convergence in global accounting standards. Following that request, in November 2009 the Board and the FASB published a progress report describing an intensification of their work programme, including joint board meetings; the boards provided updates to the G20 and subsequently to the Financial Stability Board (FSB) on their progress on convergence projects.
- In June 2010 the Board and the FASB published a quarterly progress report on their commitment to convergence of accounting standards.
- In April 2012 the Board and FASB published a joint progress report in which they describe the progress made on financial instruments.
- In February 2013 the Board and FASB published a high-level update on the status and timeline of the remaining convergence projects.
Work on the MoU project was completed when the Board and FASB issued their standards on lease accounting in 2016. The extent of convergence achieved varies across projects covered by the MoU. Some of the major IFRS Standards that were products of the MoU projects include a comparison with the parallel FASB project.
If the jurisdiction has NOT made a public statement supporting the move towards a single set of accounting standards and/or towards IFRS Standards as that set of standards, explain the jurisdiction's general position towards the adoption of IFRS Standards in the jurisdiction.
Are all or some domestic companies whose securities trade in a public market either required or permitted to use IFRS Standards in their consolidated financial statements?
If YES, are IFRS Standards REQUIRED or PERMITTED?
Does that apply to ALL domestic companies whose securities trade in a public market, or only SOME? If some, which ones?
Are IFRS Standards also required or permitted for more than the consolidated financial statements of companies whose securities trade in a public market?
For instance, are IFRS Standards required or permitted in separate company financial statements of companies whose securities trade in a public market?
For instance, are IFRS Standards required or permitted for companies whose securities do not trade in a public market?
In the United States there is no centralised determinant of the financial reporting framework to be used by companies whose capital market activities fall outside the perimeter of the SEC’s requirements. In practice however, many of these US ‘private’ companies have contractual requirements to prepare financial statements in accordance with US GAAP pursuant to credit agreements with either banks or others from whom they obtain financing. Other ‘private’ companies may choose to prepare general purpose financial statements for other purposes, in which case they are able to select the accounting framework that fits the purpose. In practice this means they mainly select either US GAAP or another comprehensive basis of accounting, such as the US income tax basis of accounting. They may, however, select IFRS Standards. For example, they may select IFRS Standards if they are subsidiaries of, or have significant ownership held by, an entity that prepares financial statements in accordance with IFRS Standards.
If the jurisdiction currently does NOT require or permit the use of IFRS Standards for domestic companies whose securities trade in a public market, are there any plans to permit or require IFRS Standards for such companies in the future?
As a follow up to its 24 February 2010 Commission Statement, the Commission directed the SEC staff to execute a work plan that was intended to aid the Commission in its evaluation of the impact that the use of IFRS Standards by US companies would have on the US securities markets. As a result of this work, on 13 July 2012 the staff of the SEC published a report entitled Work Plan for the Consideration of Incorporating International Financial Reporting Standards into the Financial Reporting System for U.S. Issuers: Final Staff Report (the SEC Staff Report).
The SEC Staff Report represented the culmination of over two years' work by the SEC staff to analyse the issues related to the possible incorporation of IFRS Standards into the US financial reporting system.
The SEC Staff Report was designed to inform the SEC Commissioners about various matters associated with their IFRS policy considerations. The SEC Staff Report did not make a recommendation on whether, how, or when IFRS Standards should be incorporated into the US financial reporting system for domestic issuers. The Commission has not made a determination about whether and, if so, how and when to incorporate IFRS Standards into the US financial reporting system.
On 23 October 2012, the IFRS Foundation produced a staff analysis of SEC Final Staff Report, for the benefit of both the Board and the international community.
Are all or some foreign companies whose securities trade in a public market either REQUIRED or PERMITTED to use IFRS Standards in their consolidated financial statements?
Yes. In 2007 the SEC issued its final rule that removed in 2007 the requirement for foreign private issuers to reconcile their financial reports with US GAAP if their financial statements are prepared using IFRS Standards as issued by the Board.
If YES, are IFRS Standards REQUIRED or PERMITTED in such cases?
IFRS Standards as issued by the Board are permitted.
Does that apply to ALL foreign companies whose securities trade in a public market, or only SOME? If some, which ones?
It applies to all foreign private issuers, as this term is defined in the SEC’s rules.
Which IFRS Standards are required or permitted for domestic companies?
The auditor's report and/or the basis of presentation footnote states that financial statements have been prepared in conformity with:
The financial statements of a foreign private issuer must include in both the auditor’s report and in the notes to the financial statements an explicit and unreserved statement that the financial statements have been prepared in accordance with IFRS Standards as issued by the Board. If these assertions are not provided, then the financial statements are required to be reconciled to US GAAP.
Does the auditor's report and/or the basis of preparation footnote allow for ‘dual reporting’ (conformity with both IFRS Standards and the jurisdiction’s GAAP)?
Yes. If the financial statements also comply with a jurisdictional GAAP in addition to compliance with IFRS Standards as issued by the Board, then compliance of the financial statements with the jurisdictional GAAP may also be stated in the notes to the financial statements. If this occurs, then the auditor will also opine on the compliance of the financial statements with the jurisdictional GAAP.
Are IFRS Standards incorporated into law or regulations?
No. While the body of standards composing ‘IFRS as issued by the IASB’ is invoked under the SEC regulations for the reporting by foreign private issuers, the text of IFRS Standards is not included in either the federal securities laws or the SEC rules and regulations.
If yes, how does that process work?
If no, how do IFRS Standards become a requirement in the jurisdiction?
Does the jurisdiction have a formal process for the 'endorsement' or 'adoption' of new or amended IFRS Standards (including Interpretations) in place?
If yes, what is the process?
If no, how do new or amended IFRS Standards become a requirement in the jurisdiction?
The SEC’s regulations that permit the preparation of financial statements of foreign private issuers in accordance with IFRS Standards as issued by the Board invoke the body of IFRS Standards as it is amended from time to time.
Has the jurisdiction eliminated any accounting policy options permitted by IFRS Standards and/or made any modifications to any IFRS Standards?
If yes, what are the changes?
Other comments regarding the use of IFRS Standards in the jurisdiction?
Are IFRS Standards translated into the local language?
Not applicable because English is the local language.
If they are translated, what is the translation process? In particular, does this process ensure an ongoing translation of the latest updates to IFRS Standards?
Has the jurisdiction adopted the IFRS for SMEs Standard for at least some SMEs?
Not applicable.
As stated above in the ‘Extent of IFRS Application’ section, in the US there is no centralised determinant of the financial reporting framework that these companies are either required or permitted to use for preparing their general purpose financial statements. Accordingly, there is no organisation that would make a centralised ‘adoption’ decision for the use of the IFRS for SMEs Standard in the United States.
If no, is the adoption of the IFRS for SMEs Standard under consideration?
Did the jurisdiction make any modifications to the IFRS for SMEs Standard?
If the jurisdiction has made any modifications, what are those modifications?
Which SMEs use the IFRS for SMEs Standard in the jurisdiction, and are they required or permitted to do so?
Not available. Information about whether US ‘private’ companies have decided, in practice, to prepare their financial statements in accordance with the IFRS for SMEs Standard is not accumulated.
For those SMEs that are not required to use the IFRS for SMEs Standard, what other accounting framework do they use?
‘SMEs’ in the United States are part of the broader group of ‘private companies’. If not specified in its contractual commitments, a US private company is able to select the accounting framework that fits the purpose of its financial statements. These frameworks can include US GAAP, IFRS Standards as issued by the Board, or other bases of accounting such as the US income tax basis of accounting.
Other comments regarding use of the IFRS for SMEs Standard?
With respect to SMEs, the AICPA issued a financial reporting framework for privately held small- and medium-sized entities (called the ‘FRF for SMEs’). This framework is intended as a self-contained ‘other comprehensive basis of accounting’ for smaller-to medium-sized, owner-managed, for-profit, private companies that are not required to produce financial statements in accordance with US GAAP.
With respect to the broader group of all US ‘private’ companies, the FAF has established a body—the Private Company Council (PCC)—whose role is to contribute to the FASB’s process of setting accounting standards for private companies.
The PCC has the following two principal responsibilities:
- Determine whether exceptions or modifications to existing non-governmental US GAAP are required to address the needs of users of private company financial statements. Such exceptions or modifications are subject to FASB approval both at the exposure draft stage and at final adoption.
- Serve as the primary advisory body to the FASB on the appropriate treatment for private companies for items under active consideration on the FASB’s technical agenda.