Financial Reporting: Expectations

By Irene Peter Atolo

When Nigeria adopted the global accounting standards called IFRS (International Financial Reporting Standards) in 2012 I was at the verge of retirement from my job as the Executive Director, Finance & Administration in an insurance ompany. Having given a year’s notice to my employer indicating to retire in February 2013, in January 2012, I honestly did not pay much attention to the implementation of IFRS in my company and in the group, which was made up of an old generation bank as the parent company, and many subsidiaries then called a financial supermarket.

My fence-sitting changed dramatically when I was co-opted into an ad-hoc implementation committee for the group, with a mandate to convert Nigeria GAAP (Generally Accepted Accounting Principles) Financial Reports to IFRS.

The first meeting was started with a review of the procedure on the project by a consultant from one of the big audit firms. I was highly impressed not only by the clinical presentation of a young beanpole of a girl but by the new accounting terminologies I had hitherto ignored: terms like; Other Comprehensive Income (OCI), Other Components of Equity (OCE), Comprehensive Income (CI), Profit or Loss from continuing or discontinued operations and many others.

There and then I decided to take my destiny in my hands and study IFRS seriously. The next morning I bought a study pack on all the Standards already covered. When I found that it was boring repeating what I had thought I knew already; I decided to enrol for the ACCA Diploma in Financial Reporting. I ignored the online certification; went back to the class, satfor the examination and passed. Since then I have been a high priest of IFRS and follow diligently developments in this regard.  I wish to spread this gospel to help some of my colleagues who could not follow up because of ‘age’ and non-Accountants alike, including investors.

Financial reporting simply means the provision of information that is useful in making business and economic decisions. It is based on theoretical framework which determines which events should be accounted for, how it should be measured (what is the monetary value?), and how it should be presented. The theory of the framework is fairly large as I will deal with it in future in this column.

What is the objective and usefulness of financial statements? The main objective is to provide financial information about the reporting entity that is useful to existing and potential investors, lenders and other creditors in making decisions relating to providing resources to the entity. These decisions include but not limited to: buying, selling or holding equity (shares) and debt instruments (lending); providing or settling loans; exercising rights to vote on, or otherwise influence, management’s actions that affect the use of the entity’s economic resources.

Financial statements are useful to stakeholders such as management and board of the entity, staff, shareholders, investors, government, suppliers, members of the public etc., in various ways. But generally they are useful in assessing the entity’s financial position, performance, cash flows and predictions, etc.

What information do stakeholders need?

Stakeholders need information about the economic resources of an entity and the use made of them, claims against the entity, and changes in resources and claims. These can be broken down into the Balance Sheet or the Statement of Financial Position. Note that Balance Sheet and Statement of Financial Position can be used interchangeably.

The second is the Statement of Financial performance known also as Profit or Loss. Before the introduction of IFRS it was known as Profit and Loss Account but the IFRS board realised that you cannot simultaneously make a profit and a loss. You either make a profit or a loss, which makes sense.

The third is the Statement of Changes in Equity, which shows the movement in equity between the opening period and the closing period. When later in the column I start dealing with presentation of Financial Statements I will talk more on all the components of Financial Statements and what they represent. Note that ‘Financial Statements’ must  be plural as they are made up of many components namely: Statement of Financial Position, Statement of profit or Loss, Statement of Cash Flows and Notes, comprising significant accounting policies and other explanatory information. Finally, an opening Statement of Financial Position is required in certain circumstances.

What are the limitations of Financial Statements? The conceptual framework acknowledges that the financial reports cannot provide all the information needed by producers of capital. Information users must of necessity consider pertinent information; such as general economic and political conditions, and industry and company outlooks. They are not designed to show the value of the reporting entity but to provide information to allow users to estimate it for themselves. They are focused on meeting the needs of numerous users who may have different and conflicting needs and cannot therefore meet adequately the needs of all. Financial reports are based on estimates, judgements and models rather than exact depiction. There is therefore some elements of subjectivity as preparers have different estimates and judgements but this can be mitigated by the use of experts in valuations and others.

What should you expect from this column, weekly? I will review Financial Reports especially those of publicly listed entities. Talk about important IASs and IFRSs already in use and new IFRSs and other releases from the Board of IFRS. I will write on general economic condition globally and internally, especially those that may impact the financial reports of entities. Government taxes, budgets, changes in government policies will be dealt with from time to time. Not forgetting the impact of technology on accounting as this is even more important.

I can assure you that all will benefit from this column but must not be relied upon in committing capital to investments. Thank you all as you follow this column on a weekly basis.