Financial Reporting Overview

What is financial reporting? 

Financial reporting is a process that is used to standardize how companies report their financial information. 

Why do we need financial reporting? 

It allows for efficient capital markets because investors have better (quantity and quality) information through increased transparency of company performance. Increased transparency often means better decision making, and more investor confidence. 

Information is only useful because we can use it to make decisions. Decisions affect the future performance. And, future performance is what is relevant to stakeholders (parties that have an interest in the company). 

Stakeholders include owners, managers, creditors, employees, regulators, auditors, the community, etc.

In order for this reporting to be useful in comparing firms, generally accepted standards must be implemented that companies follow. 

Who set the financial reporting regulation?

The Securities and Exchange Commission (SEC) appointed the Financial Accounting and Standards Board (FASB) to develop a set of reporting standards for public companies. 

The SEC requires companies to adhere to the Generally Accepted Accounting Principles (GAAP) as developed by the FASB, a private body.