The Context and Purpose of Financial Reporting

Overview

Financial reporting plays a vital role in world economies. Its primary purpose is to provide relevant and useful information to the owners of a company where there is a division between the ownership and control of that company. This occurs mainly in public limited companies, where share capital is sold to the public through a stock market/exchange system. The diverse and potentially geographically dispersed shareholders do not get involved in the management of their company; they appoint directors to do this on their behalf. The owners receive an annual statement summarising the performance and position of their company so that they can assess how well their investment has performed during the reporting period.

Without this reporting system investors would be less inclined to part with their capital as they would have no way of monitoring how effectively the company is being run by the directors, the appointed stewards of the company who are supposed to be operating in the best interests of the shareholders.

In order to meet the needs of the users of the financial statements companies have to implement accounting systems that provide the information needed. It is also important that this system is regulated to ensure that the information provided to the users is in an appropriate format and that it is useful to their informational requirements. This is achieved through a financial reporting framework, the basis of which is a conceptual framework.

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Tags:	financial reporting