Understanding Financial Reporting

Financial reports allow the presidency to communicate information about their performance to the outside world. So, fiscal reports provide summarized information about an organizations transactions for outside decision makers. (e. g. Investors). Financial reports can be used by employees and commerce unions, government, creditors and lenders, customers, shareholders and investment analysts. All these users whitethorn wish diverse argumentations of fiscal accounts precisely the about important statements which they need is the rest period sheet, profit and loss account, notes flow account and the income statement.The two main regulatory bodies of fiscal insurance coverage are the Law and the explanation Profession with the Accounting Standards Board commonly known as ASB. In UK, most of the regulation related to the publication of accounts is embodied in the Companies Act 1985 and 1989 which are concerned with the accounts of the limited indebtedness companies only. The Companies Act 1989 is the main edit which the companies and accountants bewilder to follow. All the monetary statement drawn up under the act 1989 must present a true and fair view and its function is to protect all the users of the financial reports and statements.The second and the most important regulatory body is the accounting profession. The threadbare setters should be aware of the information needed by all users of financial reports and should know the impact and the outcome of a different accounting method on the needs of those users. The exemplification setters should also be able to finalise the conflicts which exist between the needs of different users. So, they have to find an alternate(a) way which best satisfy user needs and this could be achieved by choosing the improvement of the social welfare instead of welfare of individuals.We know that Accounting Standards Board is the main accounting standard setter. Because the ASB is composed of professional accoun tants, they may be unfamiliar with the user needs. So , when there is a need for a change in accounting standard the ASB prepare and propound a draft standard called the FRED (Financial Reporting Exposure Draft). After the create of these drafts the comments from the public is invited and in the light of these comments the FRED is changed (or unchanged). Now the FREDs are issued as federal official (Financial Reporting Standard).The main impairment of this system is the ASB members are unfamiliar with the different user needs and the comments from the general public may not be equally represented. There are four social occasions that standards in financial account cut people using it. The first one is Comparability financial statements must allow people to compare one partnership with another(prenominal) one and evaluate the managements performance without spending sentence and money adjusting them to a common format and common accounting treatments.It is all-important(a) t hat users of financial reports or investment decision makers be supplied with relevant and standard financial reports which have been regulated and hence standardized. The second thing that standards and regulations provision is called Credibility. Because all this standards and regulations exist accountants have to treat every company in the kindred way. If the accountancy profession permitted companies experiencing similar events to produce financial reports that disclosed markedly different results simply because of a freedom to recognize different accounting policies they would lose all of their credibility.So, the standards should be composed of frozen rules and should not be broken. The third thing is Influence that means, setting up the standards has encouraged a constructive appraisal of the policies being proposed for individual inform problems and has been a stimulus for the development of a conceptual framework. The last thing that the standards have to supply is disc ipline. Companies left to their own devises without the need to heed standards will eventually be disciplined by the financial markets. besides in the short run investors in such companies may tolerate loss. The Financial Reporting Council is aware of the need to impose discipline because most of the company failures in recent years are because of obscure financial reporting. Why should the Accounting Standards set? As we argued before, an important role of the regulations is to addition the comparability of accounts by limiting the choice of alternative accounting methods and to supply standardized accounts.This standardization can be achieved only by ordered accounting practice. If all accounting methods were standardized, two organizations which began the year with same balance sheets and which made the same transactions during the year, they would report the same balance sheets and the same profit and loss account at the end of the year. In addition to these advantages of r egulations in financial reporting, there are also some much useful functions.Regulations can help to reduce the influence of personal biases and governmental pressures on accounting judgments. They can increase the level of user trustingness in, and understanding of, financial reporting by clarifying the basis on which all accounts are prepared and presented. Finally, they can provide a frame of reference for resolving accounting problems which are not mentioned in legislation or accounting standards. As we argued earlier although the regulations in financial reports have very advantages it has many disadvantages tooOne if these disadvantages is the Adverse Allocative Effects, this could fall out if the ASB did not take into account of the economic consequences of the new standard or regulation they have issued. For example, additional costs could be imposed on preparers of accounts and suboptimal managerial decisions might be taken to avoid any decrease in earning or net asset s. Consensus-seeking can be another disadvantage and this means the issuing of standards that are over-influenced by those with easiest access to the standard-setters. Most of the date this could happen with complex subjects.