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Chapter 3.0Areas of Business Reporting, Sessions 3-4

2-4 August,2011

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` Financial reporting is the process of preparing anddistributing financial information to users of suchinformation in various forms.

` Financial reporting is the process of preparing thecorporation's financial statement in accordance with

generally accepted accounting principles.(GAAP).` Set ofdocuments prepared usually by Corporations at the

end of an accounting period. It generally contains summaryofaccounting data for that period, with background notes,forms, and otherinformation.

` Financial Reporting is the process of presenting financialdata of a company's position, operating performance, andfunds flow for an accounting period.

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ICC-International Chamber of Commerce

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` ICC based in France, is the world businessorganization, a representative body that speaks withauthority on behalf of enterprises from all sectors inevery part of the world. ICC promotes an openinternational trade and investment system and themarket economy. Business leaders and experts drawnfrom the ICC membership establish the businessstance on broad trade and investment policy as wellas on vital technical and sectoral subjects. ICC wasfounded in 1919 and today it groups thousands of

member companies and associations from over 130countries

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` Information is the lifeblood of global capital markets. High-quality,consistent, comparable and understandable reporting by businessenterprises enhances investor confidence and market efficiency, andthereby contributes to the depth and liquidity of capital markets.

` ICC noted that there is a substantial gap between the quality offinancial information available in many countries and the Reasonable

expectations of the users of this information.` The potential benefits of a worldwide framework for financial reporting

are significant:

` Greater comparability and comprehension of financial information forinvestors, especially those engaging in cross-border transactions,

` Increased availability of capital and lower costs,`

More efficient allocation of resources, Higher economic growth.

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` International Financial Reporting Standards (IFRS) is a set of accountingstandards developed by an independent, not-for-profit organization called theInternational Accounting Standards Board (IASB).

` The goal of IFRS is to provide a global framework for how public companiesprepare and disclose their financial statements. IFRS provides general guidancefor the preparation of financial statements, rather than setting rules for industry-specific reporting.

` Having an international standard is especially important for large companiesthat have subsidiaries in different countries. Adopting a single set of world-widestandards will simplify accounting procedures by allowing a company to use onereporting language throughout. A single standard will also provide investors andauditors with a cohesive view of finances.

` Currently, over 100 countries permit or require IFRS for public companies, withmore countries expected to transition to IFRS by 2015.

` IFRS is sometimes confused with IAS (International Accounting Standards),which are older standards that IFRS has replaced.

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` GAAP is a collection of commonly followed accounting rules andstandards for financial reporting.

` GAAP specifications include definitions of concepts andprinciples, as well as industry-specific rules. The purpose ofGAAP is to ensure that financial reporting is transparent and

consistent from one organization to another.` There is no universal GAAP standard and the specifics vary fromone geographic location or industry to another. In the UnitedStates, the Securities and Exchange Commission (SEC)mandates that financial reports adhere to GAAP requirements.

` Many countries around the world have adopted the InternationalFinancial Reporting Standards (IFRS). The SEC has released aproposed roadmap for conversion from GAAP to IFRS by 2015.

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` EBR-Enhanced BusinessReporting:

` ICC thru Enhanced Business Reporting (EBR) Consortium ,contemplates areporting model that goes beyond financial performance to encompassinformation on a companys markets, operating environment, strategy,capabilities and resources, execution and non-financial performance. The goalis to develop a reporting framework that adds value to the information supplychain; that is comparable across companies, geographies and time-frames; and

the content of which can be measured with an acceptable degree of accuracy.` XBRL-eXtensible BusinessReporting Language:

` Looking to the future, companies, investors and other stakeholders will need totake into account new technologies that can contribute to the timeliness andefficiency of financial and business reporting and analysis. XBRL is an open,global information standard that allows users to exchange data betweendifferent software applications in the real time using the internet. This facilitatesaccess to information from multiple sources and allows downloading directly intospreadsheets and models for analysis. The use of XBRL permits accurate andquick research of financial and business information.

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` Financial reporting helps organizations safeguard theirassets, report accurate accounting data and ensurethat personnel comply with regulations.

` Financial reporting should provide information that isuseful to present and potential investors and creditorsand other users in making rational investment, credit,and similar decisions.

` Financial reporting should provide information aboutthe economic resources of an enterprise; the claims tothose resources (obligations); and the effects of

transactions, events, and circumstances that causechanges in resources and claims to those resources.

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` The balance sheet shows a companys financial

position at a specific date. In annual reports, that

date is the last day of the companys fiscal year.

` One side of the balance sheet (often the left side)

shows what the company owns and what is owing to

it. These items are called assets.

` The otherside of the balance sheet shows (1) what

the company owes (called liabilities) and (2) the

shareholders equity or net worth of the companywhich represents the shareholders interest in the

company.

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` Shareholders equity represents the excess of the

companys assets over its liabilities. Accordingly,

the companys total assets are equal to the sum of

the companys liabilities plus the shareholdersequity.

` Assets = Liabilities + Shareholders Equity

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` Current assets are cash and assets which can beturned into cash right away or which, in the normalcourse of business, will be turned into cash in the nearfuture, i.e., normally within one year. Current assetsare the most important group of assets because theylargely determine a firms ability to pay its day-to-dayoperating expenses. On the balance sheet, currentassets are usually listed in order of liquidity, i.e., thosewhich can be converted into cash most quickly arelisted first, followed by the others.

` There are five broad groups of current assets:` Cash, Temporary investments, Accounts receivables,

Prepaid expenses, Inventories.

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` PROPERTY, PLANT AND EQUIPMENT

` Property, plant and equipment (also called capital

assets) consist of land, buildings, machinery,

tools and equipment of all kinds, trucks, furnishings

and so on used in the day-to-day operations of a

business. Unlike current assets, which are converted

by successive steps into cash, the value of capital

assets to a company lies in their use in producing

goods and services for sale, rather than in their salevalue. They are not intended to be sold.

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` CAPITALIZATION :Capitalizing refers to therecording of an expenditure as an asset ratherthan as an expense. This is done to allow for thespreading of an expense over more than one

accounting period.` DEFERRED CHARGES :Deferred charges are

another type of asset frequently shown on thebalance sheet. These chargesrepresent

payments made by the company for which thebenefit will extend to the company over a period ofyears.

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` Intangible assets are assets that cannot be

touched, weighed or measured. They are not

available for the payment of debts of a going

business and they usually decline greatly in value in

the event of liquidation. Some common examples are

goodwill, patents, copyrights, franchises and

trademarks. Intangible assets, which may be grouped

on the balance sheet under the headings

miscellaneous assets or other assets, comprisevaluable legal rights essential to the operations of the

company.

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` CURRENT LIABILITIES:

` Bank advances, Accounts payable,Dividends

payable, Income taxes payable

` Other

Liabilities:

Deferred revenue results when acompany receives payment for goods orservices

that it has not yet provided.

` LONG-TERM DEBT :As distinct from current debts,

which have to be paid within a year, the long-term debt

of a company is usually due in monthly or annual

installments over a period of years or in a lump sum in

a future year.

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` This statement also called the Income Statement or

Profit and Loss Statement shows how much revenue a

company received during the year from the sale of its

products or services and the expenses the company

incurred for wages, materials, operating costs, taxes

and other expense items. The difference between the

two is the companys profit or loss for the year. The

amount left over, after payment of income taxes, is net

earnings, out of which dividends may be paid to theshareholders.

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` SHARE CAPITAL :This item is the amount received bythe company for its shares at the time they wereissued.

` CONTRIBUTED SURPLUS :Contributed surplus

originates from sources other than earnings. Itmay originate when a company sells its stock formore than the stocks par value.

` RETAINED EARNINGS :Retained earnings is theportion of annual earnings retained by the

company after payment ofall expenses and thedistribution of dividends. The earnings retained eachyear are reinvested in the business.

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` The profit or loss in a companys most recent year isdetermined in the earnings statement and then transferredto the Retained Earnings Statement. Retained earningsare profits earned overthe years that have not been paidout to shareholders as dividends. These retained profits

accrue to the shareholders, but the directors have decidedfor the present time to reinvest them in the business.` The retained earnings statement provides a record of the

profits kept in the business year after year. Profit for thecurrent year is added to, or the loss is subtracted from, thebalance of retained earnings shown in the statement from

the previous year. Dividends declared during the year aresubtracted in this statement.

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` While the balance sheet shows a companys financial

position at a specific point in time and the earnings

statement summarizes the companys operating

activities for the year, neither statement shows how

the companys financial position changed from one

period to the next.

` The cash flow statement fills this gap between the

balance sheet and the earningsstatement by

providing information about how the companygenerated and spent its cash during the year.

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` A cash flow statement shows the companys cash flows forthe period under the following three headings:

` Operating Activities :Cash generated and spent for maindirect activities of the Company.

` Financing Activities : If the company has issued new

shares or debt , cash flows into the company.` Investing Activities : Investing activities highlight what the

company did with any money not used in the directoperation of the company. It includes any investments thatthe company made in itself, such as the purchase of newcapital assets or disposal of such assets . As well, in thissection you will find any dividends actually received froman investment in another company.

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` The raw data that an accounting system collects is

too detailed to be practical for most potential

users. Financial reporting summarizes the detailed

data produced by the accounting system and thenpresents the data in a format that facilitates use by

decision makers.

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` Internal Financial Reporting :

` To effectively and efficiently handle operations, managers need reliable financial data. These managers usefinancial reports prepared for their specific use referred to as internal financial reports.

` Internal financial reports are designed to accomplish two goals:

Enable the management to monitor compliance with legal and contractual provisions of the district / company(for example, budget analysis and grant activity).

Provide district/company management with information on current performance needed to make futurefinancial plans (for example preparing next years budget).

` Because internal financial reporting is designed expressly to meet the needs of the districts /companysmanagement, the format and content depends entirely on what management finds most suitable. Timeliness is acritical consideration in internal financial reporting. As a result, internal financial reports are issued periodically(daily, weekly, bi-weekly, monthly, or quarterly) rather than annually, as is often the case for external reporting

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` Special-Purpose External Financial Reporting:

` There are a variety of parties outside the

district/company that need financial data to meet

their specific needs. Such reports are referred toas special-purpose external financial reports.

` The contents, format, and timing of these reports

depend on the outside party that imposes the

requirement.

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` General-Purpose External Reporting There are three groups of users ofCompanys general-purpose external financial reports:

1. Those to whom the Company is primarily accountable (Stakeholders,Investors,Promoters).

2. Those who directly represent the Investors (BOD).

3. Those who lend to the Company or participate in the lending process. (Banks and FinancialInstitutions)

` Obviously the managers probably use general-purpose external financialreporting as they have access to the underlying data.

` The Company Managers have to report the available data in a certain format,acceptable to the stakeholders/bankers, based on their (stakeholders)information needs.

` The criteria used to determine those common information needs are known asgenerally accepted accounting principles (GAAP).

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` General-Purpose External Financial Reports` 1.Government-Wide Financial Statements` 2. Fund Financial Statements` 3.Notes to the Financial Statements

` 4.Required Supplementary Information (RSI) /Management discussion & analysis (MD&A) intendedto provide a narrative introduction and overview thatusers need to interpret the basic financial statements.This information is presented before the basic financialstatements.

` 5.Comprehensive Annual Financial Report (CAFR) . ACAFR has three major sections: Introductory,Financial , Statistical .

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` It helps Investors/Govt. to understand following:1. Ownership details: Nature and structure of Capital and shareholding

pattern.2. Creditors-Names of banks and otherLenders.

3. Preparation of Balance sheet ,P& L,Cashflow & Retained Earnings.4. Details of Debtors-Companies or Individuals5. Details of Purchasing policies and payment or credit facilities6. Pending Orders on hand and status of order execution.7. Existing employees and their salary details.8. Insurance amount for the Company and other Risk management

details.9. Delayed payments, if any and their details.10. Overall account of the Financial situation or status of the Company.

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1. C h a i r m a n s Message l Corporate Information lBoard of Directors & Officers

2. Customer Profile l Employee Profile l Financialhighlights l Directors Report

3. Management Discussion & Analysis (MD&A)4. Auditors Report5. Balance Sheet, Profit and loss account ,Income

Statement6. Cash flow statement l Schedules / Notes to accounts

7. Statement of shareholders equity8. Risk Management Report9. Corporate Governance Report.

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` It helps in Company analysis.` It provides vital information about the assets and liabilities

of the company.` It helps to know the share capital and shareholding pattern.` It helps in understanding the standard accounting practices

and policies (GAAP/IFRS) of the company.` It helps the Investors and / or Creditors (Banks and FI) to

decide, if they should invest in OR lend money to thecompany.

` It helps the top management, for monitoring, control and

enhancing the overall company performance.` It helps in improving the financial analytical and

interpretation skills.

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` It helps in providing accurate and correct information of thefinancial health/status of the company to all the stakeholders.

` It contains letters,charts,facts and fugures,statistical analysis,forward looking statements and MDA.

` It provides all the answers to any questions, raised by the

Investors or any other stakeholders.` It gives details of the company objectives, financial data,

statistical analysis and conclusions on the current status andalso makes recommendation for future actions.

` It draws certain plan of action, for approval of the stakeholders,thru AGM Resolutions.

`

It helps create goodwill amongst the community thru providingdetails of CSR activities.