CHAPTER 1 CORPORATE REPORTING - AN INTRODUCTION. Corporate reporting is defined as a system through which both financial as well

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1 1 CHAPTER 1 CORPORATE REPORTING - AN INTRODUCTION 1.1 Concept of Corporate Reporting: Corporate reporting is defined as a system through which both financial as well as non financial information consisting of all details regarding the various activities of business are reported and disclosed to the various users and such disclosure may be mandatory or voluntary (Keyur, 2012) 1. It is a continuous process and an essential means by which companies communicate with stakeholders as part of their accountability and stewardship obligations. 2 Corporate Reporting is the total communication system between a corporate entity and the outsiders, especially the interested groups who use financial and non financial information provided by companies for making important economic decisions. Corporate reporting helps various user groups to evaluate and assess the potential risks involved and rewards of various alternative economic decisions. It relates to the presentation and disclosure aspects of corporate information. However financial information disclosure is at the core of the corporate reporting model, consisting of GAAP compliant financial statements and accompanying notes. 3 The primary objective of presenting useful information to various user groups, by a company is to help them in decision making. Therefore the information so provided by way of corporate reporting, should aid in the evaluation of the amounts, timing, and uncertainties of cash flows, it should also provide information about the 1 M. N. Keyur, Case Study: A Study on Investor's Perceptions towards Corporate Reporting Practices in India, Advance in Management, vol. 5(7), pp , FEE, The Future of Corporate Reporting creating the dynamics for change, Federation of European Accountants October, 2015.p 7. Reporting.pdf, accessed on 23/08/ Price Waterhouse Coppers What is corporate reporting? Corporate reporting: PwC. accessed on 13/06/2013.

2 2 firm's economic resources, claims against those resources, owners' equity, and changes in resources and claims. Corporate Reports are primarily means by which the management of an entity is able to fulfill its reporting responsibility by demonstrating how resources with which it has been entrusted have been used 4. It should further provide information about financial performance during a period and management's discharge of its stewardship responsibility to owners. The non financial information too should likewise be useful to the various user groups in such decision making process. A strong, informative and transparent system of corporate reporting and disclosure is of paramount importance for the efficient and effective allocation of resources. Further well informed economic decisions based on the information provided by a transparent and informative system of corporate reporting by capital market participants lead to efficient allocation of capital, which directly promotes productivity and economic growth. A strong disclosure regime can help to attract capital and maintain confidence in the capital markets. By contrast, weak disclosure and non-transparent practices can contribute to unethical behaviour and to a loss of market integrity at great cost, not just to the company and its shareholders but also to the economy as a whole. 5 Corporate reporting practices have assumed added importance in the recent past. As a result of the growing and diverse necessity of the various user groups along with the prescribed and mandatory statutory requirements; corporate entities have been forced to disclose the minimum information in their annual reports. The supply of information by the corporate entities, on the affairs of their business and performance, to the external users is variously termed as 'corporate reporting', 'public reporting', 4 ICAEW, UK, 'The Corporate Report' A Discussion Paper Published for Comments by the Accounting Standards Steering Committee, 1975, p Richard Baron The Evolution of Corporate Reporting for Integrated Performance Background paper for the 30th Round Table on Sustainable Development. OECD Headquarters, Paris, 25 June 2014 p.8

3 3 'corporate disclosures, or 'external reporting. Corporate reporting covers both financial reporting and non financial information reporting. 6 Corporate reporting is an important means for management to communicate company s performance and value to outsiders. Enhanced disclosure practices help in reducing information gap between the entity and its stakeholders, improve efficiency of capital allocation and also reduce the cost of capital. Full disclosure practice along with transparency in corporate reporting can build climate of trust and boost confidence of investors community. These are driving forces for success of businesses and their sustainable performance that help in maximization of shareholders wealth. Corporate reporting is intended to provide useful information to the outsiders or user groups to enable them in making better economic and business decisions pertaining to the alternative use of scarce recourses as such information help in identifying the enterprise's financial strengths and weaknesses, liquidity and solvency. 1.2 Objectives of Corporate Reporting: In the recent past professional institutions and accounting bodies, both in the national and international level have made attempts to identify and define the objectives of financial statements and financial reporting, which are considered to be of utmost importance for the development of financial accounting and practice. At the national level most of these attempts were made by accounting bodies in the US, U.K and Canada and in the international front IASC (now IASB) took the lead to identify and define the objectives of financial statements and financial reporting. The professional accounting bodies like, FASB (APB), AICPA, CICA, etc and institutions like IASC has played very important and active role in this regard. A good number of committees, 6 FEE, The Future of Corporate Reporting creating the dynamics for change, Federation of European Accountants October, 2015.p TheFutureofCorporate Reporting.pdf, Accessed on 23/08/2016.

4 4 study groups 7 were formed to define the objectives of financial statements and financial reporting both at the national and international level in these countries and the important finding of these committees were published in the form of reports. It is worthwhile to mention here that the findings presented by various reports and concepts on the issue had drawn considerable attention of the accounting bodies, professionals and authorities across the globe and have brought new areas and issues to the front for debate and discussion. The Trueblood Report s recommendation was not only included in the FASB s concepts statement 1 on objectives issued in 1978 but was also included as an integral part of the statements of objectives issued by the standard setters in Canada (1988), Australia (1990), and the United Kingdom (1999) as well as in the conceptual frameworks issued by the IASC in 1989 and jointly by the FASB and IASB in It precipitated a powerful trend around the world. 8 The subsequent developments in accounting and reporting thereof in the countries like the U.S, Canada, U.K, Australia etc. have greatly influenced and have considerable impact on accounting and reporting practices of other countries in the world. The following are some of the prominent reports and concepts which identified and defined the objectives of financial statements and financial reporting. 1. Statement of the Accounting Principles Board No. 4, Basic Concepts and Accounting Principles Underlying Financial Statements of Business Enterprises. AICPA, (APB), USA, 1970, 7 The Trueblood Committee, AICPA 1972, Study Group on the Objectives of Accounting.,AICPA, 1971 Study Group on the Objectives of Financial Statements. AICPA, Accounting Standards Steering Committee, 1975 Committee on Concepts and Standards for External Financial Reports AAA,1977 Research Study commissioned by CICA s Research Department Committee to Prepare a Statement of Basic Accounting Theory,AAA..etc. 8 Zeff, S.A. The Trueblood Study Group on the Objectives of Financial Statements ( ): A historical study. J. Account. Public Policy (2015),

5 5 2. Report of the Study Group on the Objectives of Financial Statements, popularly known as The True blood report. AICPA, USA, 1973, 3. A Discussion Paper Published for Comments by the Accounting Standards Steering Committee, known as The Corporate Report. ICAEW, UK, 1975, 4. Statement of Financial Accounting Concept No. 1", Objectives of Financial Reporting by Business Enterprises". FASB, USA, 1978, 5. Corporate reporting Its future evolution, also known as The Stamp Report. CICA, 1980, Canada, 6. The Framework for the Preparation and Presentation of Financial Statements. IASC, 1989, 7. Conceptual Framework for Financial Reporting Objective of Financial Reporting and Qualitative Characteristics of Decision Useful Financial Reporting Information. FASB, USA, The Conceptual Framework for Financial Reporting. IFRS, 2010, In India the ICAI has pronounced the objectives of financial statements in its Framework for the Preparation and Presentation of Financial Statements in The observations of these reports, concepts and frameworks about the objectives of financial statements and financial reporting are discussed below: Accounting Principles Board (APB): The Accounting Principles Board (APB) USA has outlined the objective of financial accounting and financial statements as The basic purpose of financial accounting and financial statements is to provide quantitative financial information about a business enterprise that is useful to statement users, particularly owners and creditors, in making economic decisions. This purpose includes providing information

6 6 that can be used in evaluating management's effectiveness in fulfilling its stewardship and other managerial responsibilities. 9 The Report of the Study Group on the Objectives of Financial Statements appointed by the American Institute of Certified Public Accountants (AICPA), popularly known as The Trueblood Report 1973, outlines the basic objective of financial statement as The basic objective of financial statements is to provide information useful for making economic decisions. 10 The Statement of the Accounting Principles Board No. 4, Basic Concepts and Accounting Principles Underlying Financial Statements of Business Enterprises issued by the Accounting Principles Board, (APB), USA, in October, 1970 was the first publication which formulated the objectives of financial statements. This statement has outlined one particular, five general and seven qualitative objectives of financial accounting and financial statements. The general objectives determine the appropriate content of financial accounting information and the qualitative objectives indicate the qualities that make financial accounting information useful The objectives of particular financial statements are to present fairly in conformity with generally accepted accounting principles. (1) financial position, (2) results of operations, and (3) other changes in financial position. 2. The general objectives outlined in the statement are: (i) To provide reliable financial information about economic resources and obligations of a business enterprise, in order to (a) evaluate the enterprise's strengths and weaknesses (b) show the enterprise s investments and financing pattern. 9 AICPA,(APB), Statement of the Accounting Principles Board No. 4, Basic Concepts and Accounting Principles Underlying Financial Statements of Business Enterprises, 1970, p AICPA Report of the Study Group on the Objectives of Financial Statements 1973, p AICPA, (APB) 1970, Statement of the Accounting Principles Board No. 4, Basic Concepts and Accounting Principles Underlying Financial Statements of Business Enterprises, p 32

7 7 (c) evaluate the enterprise s ability to meet its commitments, and (d) indicate the present resource base available to exploit opportunities and make future progress. (ii) To provide reliable information about changes in net resources (resources less obligations) of an enterprise that result from its profit-directed activities, in order to (a) show its ability to operate successfully. (b) show the investors the expected rate of dividend return or increases in the price of ownership shares or both. (c) show its ability to pay creditors and suppliers, provide jobs for employees, pay taxes, and generate funds for expansion. (d) provide information to the management to plan operations and to evaluate performance with previously established goals. (e) to evaluate its capability to survive successfully in its profit-directed activities in the long run. (iii) to provide financial information that assists in making predictions and in estimating the earning potential of the firm. (iv) to provide other needed information about changes in economic resources and obligations. (v) to disclose, to the extent possible, other information related to the financial statements that is relevant to the need of the users. The qualitative characteristics of financial information outlined by the statement are as follows 1. Relevance connotes selecting information that are most likely to aid users in making economic decisions.

8 8 2. Understandability connotes that not only the financial accounting information should be understandable but also that such information be presented in a form that the user can understand it. 3. Verifiability, connotes that results based on the financial accounting information would be substantiated by independent measurers using the same measurement methods. 4. Neutrality implies that financial accounting information is directed towards the common needs of users rather than the particular needs of specific users. 5. Timeliness denotes early communication of financial accounting information so that delays in making economic decisions may be avoided. 6. Comparability connotes that differences in results should be the result of different financial accounting treatments. 7. Completeness connotes that financial accounting information will be termed as complete if it includes all financial accounting data that reasonably fulfill the requirements of the other qualitative objectives The True Blood Report, 1973: The Report of the Study Group on the Objectives of Financial Statements appointed by the American Institute of Certified Public Accountants (AICPA), submitted its report in October 1973, which is popularly known as The Trublood Report The study group was appointed to develop objectives of financial statements and it has outlined eleven objectives of financial statements. These are as below 12 ; 12 AICPA, 1973, Report of the Study Group on the Objectives of Financial Statements p

9 9 1) To serve primarily those users who have limited authority, ability, or resources to obtain information and who rely on financial statements as their principal source of information about an enterprise's economic activities. 2) To provide information useful to investors and creditors for predicting, comparing, and evaluating potential cash flows to them in terms of amount timing, and related uncertainty. 3) To provide users with information for predicting, comparing, and evaluating enterprise earning power. 4) To supply information useful in judging management's ability to utilize enterprise resources effectively in achieving the primary enterprise goal. 5) To provide factual and interpretive information about transactions and other events which is useful for predicting, comparing, and evaluating enterprise earning power. 6) To provide a statement of financial position useful for predicting, comparing, and evaluating enterprise earning power. This statement should provide information concerning enterprise transactions and other events that are part of incomplete earnings cycles. 7) To provide a statement of periodic earnings useful for predicting, comparing, and evaluating enterprise earning power. The net result of completed earnings cycles and enterprise activities resulting in recognizable progress toward completion of incomplete cycles should be reported. 8) To provide a statement of financial activities useful for predicting, comparing, and evaluating enterprise earning power. This statement should report mainly on factual aspects of enterprise transactions having or expected to have significant cash consequences.

10 10 9) To provide information useful for the predictive process. Financial forecasts should be provided when they will enhance the reliability of users' predictions. 10) An objective of financial statements for governmental and not for-profit organizations is to provide information useful for evaluating the effectiveness of the management of resources in achieving the organization's goals. 11) To report on those activities of the enterprise affecting society which can be determined and described or measured and which are important to the role of the enterprise in its social environment. The Trueblood Report also listed seven Qualitative Characteristics of Reporting, which should be possessed by the information contained in financial statements and in other reports of enterprise activity, so as to satisfy users' needs. 13 These are; 1. Relevance and Materiality, 2. Substance rather than Form, 3. Reliability, 4. Freedom from Bias, 5. Comparability, 6. Consistency, and 7. Understandability The Corporate Report, 1975 (UK): The Accounting Standards Steering Committee of the Institute of Chartered Accountants in England and Wales (ICAEW) published 'The Corporate Report' as A Discussion Paper Published for Comments by the Accounting Standards Steering Committee in The purpose of the study was to re examine the scope and aims of 13 AICPA,1973 Report of the Study Group on the Objectives of Financial Statements, p

11 11 published financial reports in the light of modern needs and conditions. The committee identified drawbacks in the existing reporting practices and recommended the inclusion of the following additional statements. 14 a) A Statement of Value Added to show how the benefits of the efforts of the entity are shared between employees, providers of capital, the state and reinvestment. b) An employment report dealing with size and composition of the workforce, the work contribution of employees and benefits earned. c) A statement of money exchanges with the government showing the financial relationship between the enterprise and the state. d) A statement of transactions in foreign currency, showing the direct cash dealings of the reporting between the host country and abroad. e) A statement of future prospects showing likely future profits, employment and investment. f) A statement of corporate objectives showing management policy and medium term strategic targets. The report also emphasised that to be useful and to fulfill their fundamental objectives, corporate reports should possess the following seven characteristics, viz, 1) Relevance, 2) Understandability. 3) Reliability, 4) Completeness, 5) Objectivity, 6) Consistency and 7) Time1iness. 14 ICAEW, A Discussion Paper Published for Comments by the Accounting Standards Steering Committee, p 48.

12 Financial Accounting Standards Board (FASB): Financial Accounting Standards Board (FASB) (USA) has pronounced one of the most comprehensive statement on objectives of financial reporting, with the issuance of Statement of Financial Accounting Concept No. 1", "Objectives of Financial Reporting by Business Enterprises" issued in November The following are the objectives of financial reporting developed in the statement. 15 (a) Financial reporting should provide information that is useful to present and potential investors and creditors and other users in making rational investment, credit, and similar decisions. The information should be comprehensible to those who have a reasonable understanding of business and economic activities and are willing to study the information with reasonable diligence. (b) Financial reporting should provide information to help present and potential investors and creditors and other users in assessing the amounts, timing, and uncertainty of prospective cash receipts from dividends or interest and the proceeds from the sale, redemption, or maturity of securities or loans. (c) Financial reporting should provide information about the economic resources of an enterprise, the claims to those resources (obligations of the enterprise to transfer resources to other entities and owners equity), and the effects of transactions, events, and circumstances that change resources and claims to those resources. (d) Financial reporting should provide information about an enterprise s financial performance during a period. Investors and creditors often use information about the past to help in assessing the prospects of an enterprise. (e) Financial reporting should provide information about how an enterprise obtains and spends cash, about its borrowing and repayment of borrowing, about its capital 15 FASB, USA,1978, Statement of Financial Accounting Concept No. 1", "Objectives of Financial Reporting by Business Enterprises".p.11-15

13 13 transactions, including cash dividends and other distributions of enterprise resources to owners, and about other factors that may affect an enterprise s liquidity or solvency. (f) Financial reporting should provide information about how management of an enterprise has discharged its stewardship responsibility to owners (stockholders) for the use of enterprise resources entrusted to it. (g) Financial reporting should provide information that is useful to managers and directors in making decisions in the interests of owners The Stamp Report, 1980: The Canadian Institute of Chartered Accountants (CICA) published a report in June 1980 on Corporate reporting Its future evolution, written by Edward Stamp, and the report is popularly known as The Stamp Report The Stamp Report has enlisted the following five important objectives 16 of corporate financial reporting: a) To assist the efficient allocation of scare resources by providing information useful to those responsible for making investment decisions. b) To provide an accounting by the management to both equity and debt investors, not only for the management's exercise of its stewardship function but also of its success (or otherwise) in achieving the goal of producing a satisfactory economic performance by the enterprise and maintaining it in a strong and healthy financial position. c) To provide information that are relevant to the needs of the users in such a form that minimises uncertainty about the validity of the information, to make rational decisions, and to enable them to make own assessment of the risks associated with the enterprise. 16 CICA,1980, Canada, Corporate reporting Its future evolution,, p

14 14 d) To provide information those results into benefits to those who receive the information. As it is also beneficial to the reporting companies since providing such credible information enhances the likelihood that the users of the information will continue to wish to deal with the company. e) To recognize the needs of users who are capable of comprehending a complete (and necessarily sophisticated) set of financial statements or alternatively, to the needs of experts who will be called on by the unsophisticated users to advise them. The Stamp report stressed importance on accountability of the management, uncertainty and risk, change and innovation, and complexity. The report is also concerned on and the unsophisticated users, while identifying the objectives corporate financial reporting Framework for the Preparation and Presentation of Financial Statements Institute of Chartered Accountants of India, (ICAI). 2000: The Framework for the Preparation and Presentation of Financial Statements was issued by the Accounting Standards Board (ASB) of the Institute of Chartered Accountants of India. (ICAI) in July The ICAI in its framework for preparation and presentation of financial statements has outlined that; The objective of financial statements is to provide information about the financial position, performance and cash flows of an enterprise that is useful to a wide range of users in making economic decisions. Financial statements also show the results of the stewardship of management, or the accountability of management for the resources entrusted to it. Those users who wish to assess the stewardship or accountability of management do so in order that they may make economic decision

15 15 The framework also identified the Qualitative characteristics that should be possessed by accounting information. Qualitative characteristics are the attributes that make the information provided in financial statements useful to users. The four principal qualitative characteristics identified by the framework are the following. 1) Understandability, 2) Relevance, 3) Reliability 4) Comparability The Framework for the Preparation and Presentation of Financial Statements, IASC, 1989 and The Conceptual Framework for Financial Reporting 2010 (the IFRS Framework): The Framework for the Preparation and Presentation of Financial Statements (the Framework) was approved by the IASC Board in April The Framework was published in July 1989 and adopted by the IASB April 2001.According to this Framework; the objective of financial statement is to provide information about the financial position, performance and changes in making economic decisions In 2010 as part of a bigger project to revise the Framework developed by IASC in 1989, the IASB revised the objective of general purpose financial reporting and the qualitative characteristics of useful information. The remaining part of the document from 1989 remains effective. The revised objective of general purpose financial reporting is to provide financial information about the reporting entity that is useful to existing and potential investors, lenders and other creditors in making decisions about providing resources to the entity. The IFRS framework recognizes that the primary users of general purpose financial reporting are present and potential investors, lenders and other creditors, who use that information to make decisions about buying, selling or

16 16 holding equity or debt instruments and providing or settling loans or other forms of credit. The primary users need information about the resources of the entity not only to assess an entity's prospects for future net cash inflows but also how effectively and efficiently management has discharged their responsibilities to use the entity's existing resources (i.e., stewardship). After analysing the pronouncement of the above professional bodies in regard to objectives of Financial /corporate reporting, the following may be identified as the main objectives of Financial/corporate reporting by corporate entities: 1. Providing information useful in making investment and credit decisions: The objective of financial reporting is to provide information that is useful to present and potential investors and creditors and others in making investment, credit, and similar resource allocation decisions. 2. Information Useful in Assessing Cash Flow Prospects: Financial reporting should provide information to help present and potential investors and creditors and other users in assessing the amounts, timing, and uncertainty of prospective cash inflows and also how such cash inflows will be utilized. Such information are essential in assessing an entity s ability to generate net cash inflows and thus to provide returns to investors and creditors. The perceptions of investors and creditors about the ability of the enterprise to generate sufficient cash and to utilize them optimally affect market prices of the enterprise s securities. 3. Information about Enterprise Resources, changes in those resources and claims against those Resources: Financial reporting should provide information about the economic resources of an enterprise, the claims to those resources (obligations of the enterprise towards other entities and owners equity), and the effects of transactions, events, and circumstances that change resources and claims to those resources. Such information helps investors,

17 17 creditors, and others identify the enterprise s financial strengths and weaknesses and assess its liquidity and solvency. 4. Information that reflects Enterprise Performance and Earnings: The primary focus of financial reporting is to provide information about an enterprise s performance. Financial reporting should provide information about an enterprise s financial performance during a period. Investors and creditors often use information about the past to help in assessing the prospects of an enterprise. 5. Information about Enterprise s Liquidity, Solvency, and Funds Flows: Financial reporting should provide information about how an enterprise obtains and spends cash, about its borrowing and repayment of borrowing, about its capital transactions, including cash dividends and other distributions of enterprise resources to owners, and about other factors that may affect an enterprise s liquidity or solvency and flow of funds. 6. Inclusion of Management Explanations and Interpretations: Financial reporting should include explanations and interpretations to help users understand the financial information provided to them. The usefulness of financial information as an aid to investors, creditors, and others in forming expectations about a business enterprise may be enhanced by management s explanations of the information. Management knows more about the enterprise and its affairs than investors, creditors, or other outsiders and can often increase the usefulness of financial information by identifying certain transactions, other events, and circumstances that affect the enterprise and explaining their financial impact on it. 7. Assessment of management s stewardship: Management of an entity is accountable to owners (shareholders) for the custody and safekeeping of the entity s economic resources and for their efficient and profitable use. Management s stewardship responsibilities include protecting the entity s

18 18 economic resources, to the extent possible, from unfavorable economic situations, technological and social changes and from future risks (whether predictable or unpredictable). Management is also accountable for ensuring that the entity complies with all the provisions of applicable laws, regulations, while performing its duties. As management s performance in discharging its stewardship responsibilities significantly affects an entity s ability to run successfully, management s stewardship is of significant interest to users of financial reports. Financial reporting should therefore provide information which helps the user groups in assessing the efficiency and effectiveness of the management s stewardship and also how well the management has discharged its stewardship responsibilities. 1.3 Nature of Corporate Reporting Before the advent of Joint Stock Company (JSC) form of business, the main objective of traditional system of financial accounting and reporting was confined to providing information about the results of business activities, the resources owned and the obligations towards the outsiders by the owner or the owners. The ownership and management rested on the same hands and as a result the owners had full access to all information relating to the business. However the divorce of ownership and management with the advent of JSC form of business necessitated providing detailed and classified information about the business entity to its shareholders and the outsiders as well. Further it became imperative to the management to show their effectiveness in managing the resources of the business efficiently and to run the business profitably amidst stiff competition and ever changing business regulations and legal environment, thereby showing the efficiency and effectiveness of management stewardship. The basic objectives of corporate reporting is to provide

19 19 information having decision usefulness and also about how the management has performed in discharging their stewardship responsibilities. The changing business and economic environment along with the rapid and ever changing technological advancements across the globe has necessitated diverse and varied information needs of the user groups of corporate information. As a result, over the past decade, the nature of corporate reporting has evolved to meet the changing needs of users. Business and capital markets have become more challenging, with greater complexity in business models, sources of risk and uncertainty, as well as greater sophistication in how risk is managed. This evolution reflects a desire for information that is relevant to users, even if such information may be more subjective and less reliable. Financial reporting disclosure requirements and practices have also had to respond to these changes by shifting from simply providing financial information through the financial statements to providing more detailed disclosures, including disclosures of assumptions, models, alternative measurement bases and sources of estimation uncertainty, amongst others. In some ways, disclosures have become the balancing item in the calculus of how to provide credible, decision useful information. 17. Thereby compelling the process of corporate reporting to become dynamic and more responsive to the needs of users at changing faces of time, accepting the fact that it cannot remain static and non responsive to the changing demand of time. There are discussions underway in a number of forums about the boundaries of financial reporting. Some argue that information that is relevant to investors extends beyond the traditional boundaries of financial statements, and there is, at least for some, a growing 17 Stephen A. Zeff "The Objectives of Financial Reporting: A Historical Analysis" Plenary address at the ICAEW s Information for Better Markets Conference,in London. December 17, 2012 p.11

20 20 interest in the concept of integrated corporate reporting across a broader range of performance information. 18 The International Integrated Reporting Council (IRC) and Integrated Reporting (IR) (often referred to as One Report approach) taking a leading role in the integration of financial and non financial reporting, the IRC issued its Integrated Reporting Framework in Even though IR is a volunteer initiative, it is gaining ground and support around the world. Its efforts to put structure around the diverse practices in corporate reporting are helping constituents to bridge the gap between the different requirements of different reporting frameworks. 19. The logic of integrated reporting is to bring together financial and ESG (Environmental, Social and Governance) aspects of a corporation s performance in a single report, in order to encourage a better integration of ESG components in the company s strategy. Integrated reporting is described as a framework which brings together financial, environmental, social and governance (ESG) information in a clear, concise, consistent and comparable format put briefly, in an integrated format. The intention is to help with the development of more comprehensive and comprehensible information about an organization s total performance, prospective as well as retrospective, to meet the needs of the emerging, more sustainable, global economic model. It is about driving an internal transformation through a new organisation of corporate disclosure. The purpose of an integrated report is for companies to explain to providers of financial capital about their ability to create value in the near, medium and long term. 18 Ibid p IFAC. The Evolving Nature of Financial Reporting: Disclosure and Its Audit Implications system/ files/publications/exposure-drafts/iaasb-disclosures_discussion_paper.pdf accessed on 23/08/2016.p.33

21 21 In India, the top 100 listed companies are now required to include ESG in their annual reports, following the adoption of the country s guidelines for social, environmental and economic responsibilities Influence of Environment on Corporate Reporting The reporting and disclosure practices of corporate entities and the needs of the users of such information across the globe are highly influenced by changing social, economic, legal and business environments. In the report Improving business reporting. A customer focus popularly known as the Jenkins Committee Report published by the AICPA, in 1994, has pointed out that The relevance of the information, businesses report to users is affected by a constantly changing environment. Economic and technological change occurs swiftly, and the changes affect the needs of users of business information.. 21 The complex business environments, recent technological developments and various initiatives to expand business operations and financial transactions around the world have further necessitated adoption of new areas and initiatives in the sphere of corporate reporting, to satisfy the information needs of a wide range of corporate information users. This in turn has made corporate reporting and disclosure a dynamic and ever changing area. FASB has observed that The objectives of financial reporting are not immutable they are affected by the economic, legal, political, and social environment in which financial reporting takes place.. 22 The Jenkins report also has also suggested the responsibilities to be assumed by standard setters in the given situation. Standard setters should have some systematic 20 India s Security Exchange Board (SEBI) mandates top 100 listed companies to adopt the country s National Voluntary Guidelines for Social, Environmental and Economic Responsibilities of Business (KPMG 2013) 21 AICPA, USA, Improving business reporting. A customer focus, p FASB, USA,1978, Statement of Financial Accounting Concept No. 1", "Objectives of Financial Reporting by Business Enterprises".p 1

22 22 approach to awareness of the likely importance of these changes for business reporting so that agenda priorities are well chosen, resources effectively deployed, and standards appropriate to the environment in which they are to be applied. 23. The revision of the objective of general purpose financial reporting and the qualitative characteristics of useful information forwarded by the IASC Framework ( Framework for the Preparation and Presentation of Financial Statements ) issued by the IASC in 1989 by the IASB by adopting The Conceptual Framework for Financial Reporting in 2010 (known the IFRS Framework) is an example of the recognition of the fact that the objectives of financial reporting is not immutable, rather they need to be changed in the light of changing economic, legal, political, and social environment in which financial reporting takes place. This is the reason for which the IASC framework (1989) was revised and reissued by IASB in Among the various recommendations forwarded by the Jenkins committee in its report Improving business reporting. A customer focus, for Facilitating Change in Business Reporting it has specifically suggested that. companies should be encouraged to experiment voluntarily with ways to improve the usefulness of reporting.standard setters and regulators should consider allowing companies that experiment to substitute information specified by the model for information currently required. 25 thereby recognizing the importance of voluntary disclosure than ever before. It can therefore be reasonably concluded that the ever changing legal, business, and social environment, technological developments and the resultant change in the information needs of the users has necessitated redefining the objectives of financial 23 AICPA, USA, Improving business reporting. A customer focus, p The IASB Framework was approved by the IASC Board in April 1989 for publication in July 1989, and adopted by the IASB in April In September 2010, as part of a bigger project to revise the Framework the IASB revised the objective of general purpose financial reporting and the qualitative characteristics of useful information. The remaining of the document from 1989 remains effective. 25 AICPA, USA, Improving business reporting. A customer focus, p 107

23 23 reporting as an integral part of corporate reporting and constant endeavors are on to make necessary changes in the methods procedures and media of corporate reporting. 1.5 Qualitative features of Financial Reporting Information is considered useful if it can be applied in making decisions. To be useful, information must possess certain qualities. The qualitative features which make financial reporting useful, signify the types of information that are likely to be used by the users of these information in making reasoned and well informed economic decisions. The quality of financial information is enhanced provided they possess the qualitative features. These are the yardsticks which measure the reliability of such information. The qualitative characteristics reflect the broad ethical goals of truth, justice, fairness and right to equality that are well accepted as desired goals of a civilized society. The reports of various committees as mentioned in the earlier section of this chapter have suggested certain qualitative characteristics of financial information. These are discussed below: Reliability: The most important qualitative characteristic of accounting information is that the information provided must be useful. Information to be useful must be reliable. To be reliable, the information shall possess the following features: (a) that such information shall carry faithful representation of transactions. (b) that such information shall be accounted for and presented in accordance with their substance and economic reality. (c) that such information shall be neutral. (d) that such information shall be prudent. (e) that such information must be complete. The contents of financial information should conform to the above features. If these features are not followed in the preparation and presentation of accounting

24 24 information, quality financial statements cannot be prepared. Reliability implies that information communicated should represent what it purports to represent. Further the information is considered reliable if it is free from any error or biasness. The information furnished must be based on facts and should be verifiable. Financial reporting should provide reliable information that is useful to the present and the potential investors and creditors and other users in making rational economic decisions Relevance: Relevance implies that all those items of information that may aid the users in making economic decisions should be reported. Information is termed as relevant if it has the capacity to confirm or change a decision maker s expectations. The Accounting Principle Board has described relevance as the primary qualitative objective of financial accounting information. FASB in its concept No.1 has stated that accounting information to be relevant information must be capable of making a difference in a decision by helping users to form predictions about the outcomes of past, present and future events for correct expectations. The True Blood Report, the Corporate Report London and the Financial Accounting Standards Board in its conceptual framework have also mentioned relevance as an important qualitative characteristic of decision-useful financial reporting information. The entire exercise of corporate disclosure will be futile, if the information disclosed is not relevant to the needs of the users Thus the information, which is not relevant, is useless for the users Materiality: The term materiality refers to the relative importance of an item of information. Material items of information, denotes those items of information, the knowledge of which might influence the decisions of the users of the financial statements. This concept implies that not all financial information should be reported, immaterial information may be ignored while doing financial reporting. Information is said to be material if its omission or misstatement would influence the economic

25 25 decisions of users on the basis of the financial statements No generally accepted guidelines have been established for judging materiality. Materiality should be judged considering the significance of information and its probable impact on user economic decisions. Thus information is material if it is relevant to the decisions of the users, as materiality and relevance both are defined by reference to the needs of users in making economic decisions Understandability: An essential quality of the information provided in financial statements is that it must be readily understandable by users. For this purpose, it is assumed that users have a reasonable knowledge of business, economic activities and accounting and will study the information with reasonable diligence. Information about complex matters that should be included in the financial statements because of its relevance for economic decision-making needs of users should not be excluded merely on the ground that it may be too difficult for certain users to understand. The information should be presented in reports in such a way that it can be understood by reasonably well informed as well as by sophisticated readers. Accounting information is more understandable if it is quantifiable, is consistent, is comparable with similar information, and is simple Comparability: Comparability is another important qualitative characteristic of accounting information. The financial statements should be prepared in such a way that profitability and financial position of an entity may be used for making: (a) Intra-firm comparison, i.e. comparison with similar information of the same enterprise over different periods; and (b) Inter-firm comparison, i.e. comparison with the information of another similar enterprise over different periods.

26 26 (c) Such comparison reveals the strength and weaknesses of the entity. Comparability is possible if the same accounting policy is followed by an entity over different periods in case of an intra firm comparison. In case of Inter-firm comparison, different firms within the same industry must adopt the same accounting policy over different periods to make the comparisons a meaningful one Timeliness: Timeliness which is an ancillary aspect of relevance means making information available to decision makers before it loses its capacity to influence decisions. The Accounting Principle Board (APB) in its Statement No.4 (1970) Basic Concepts and Accounting Principles Underlying Financial Statements of Business Enterprises has mentioned timeliness as one of the qualitative objectives of financial reporting. According to this statement, timely financial accounting information is communicated early enough to be used for economic decisions which it might influence and to avoid delays in the making of these decisions Similarly the Corporate Report London observed that if the reports are to be useful and to fulfill their fundamental objectives, they must possess timeliness as one of the characteristics. Timeliness does not qualify information to be relevant but a lack of timeliness can diminish the relevance of information. If information would be disclosed timely, decisions could be taken by the users promptly and exactly. Thus accounting information must be communicated before its usefulness is lost or when its decision is due, it should be available to its users. Information is useful for a decision maker if it is relevant and reliable. Information becomes useful, relevant and reliable if it is made available in time. The principle of timeliness states that information should be disclosed timely Completeness: The Accounting Principle Board of America in its Statement No. 4 mentioned completeness as the qualitative objective of financial accounting, According

27 27 to the statement completeness implies that all the information that is reasonably needed to fulfill the requirement of the other qualitative objectives should be reported. The accounting information must be complete from the point of view of statutory requirements and materiality. The users of accounting must be provided with full information so that they may take right decisions at right time However; completeness is relative because financial statements cannot show everything. To try to include in financial reporting everything that any potential user might want would not be cost beneficial and might conflict with other desirable characteristics, such as understandability. Thus information disclosed through financial reporting must be complete within the bounds of materiality and cost Neutrality: According to Accounting Principle Board (APB), Neutrality means that the accounting information is directed towards the common needs of the users rather than the particular needs of specific users. The accounting information must be fair; it must be measurable and reported with as much objectivity and neutrality as possible. The information must be based on firm verifiable evidence and it must not tend to benefit a particular user at the cost of other users. Financial statements are not neutral if, by the selection or presentation of information, they influence the making of a decision or judgment in order to achieve a predetermined result or outcome Substance rather than Form: If information is to represent faithfully the transactions and other events that it purports to represent, it is necessary that they are accounted for and presented in accordance with their substance and economic reality and not merely their legal form. The substance of transactions or other events is not always consistent with that which is apparent from their legal form. The transactions and events recorded in the books of accounts and presented in the financial statements should be governed by the substance of such transactions and not by the legality of