| | |
Share

Financial Reporting

Principles

Financial reporting is of use because it gives some information on stewardship and because it can help predict future performance. 

Financial reporting includes periodic financial statements require by law or regulation, but also extends to other communications with investors and other users of financial information.

Financial reporting should be:

  • Understandable;
  • Reliable;
  • Relevant to the identified users; and
  • Comparable across industries and nations.

The financial reporting framework should be based on principles, not on detailed rules, allowing the use of judgement to reflect commercial substance.

Comment

The annual financial report is diminishing in use as a medium to communicate with investors.

Presentations to analysts and press releases largely drive investor perception.  These contain widespread use of non-GAAP measures.

At the same time regulation and more complex accounting rules have made the financial statement preparation process largely compliance-driven.

There is therefore significant divergence between information being used for decision making and formal financial reporting.  This two track approach is encouraged by distrust of the results of reporting under IFRS.

The fair value model, whilst conceptually sound, breaks down in practice when it moves outside active markets.

There is an increasing emphasis on relevant information rather than reliable information, on the assumption that users will interpret input data themselves.  This is rarely likely to be the case.

The introduction of multiple GAAPs into the UK market is regrettable.  The introduction of IFRS for SMEs undermines any idea of a consistent conceptual framework.  The retention of the FRSSE undermines this further.

Accountants and Business Advisers © 2012 BDO LLP. All rights reserved. BDO LLP, a UK limited liability partnership registered in England and Wales under number OC305127, is a member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms. A list of members' names is open to inspection at our registered office, 55 Baker Street, London W1U 7EU. BDO LLP is authorised and regulated by the Financial Services Authority to conduct investment business. BDO is the brand name for the BDO network and for each of the BDO Member Firms.