Diksia.com - Reporting is a crucial process for any organization that wants to communicate its performance, achievements, challenges, and opportunities to its stakeholders.
Reporting can be done in various ways, depending on the purpose, audience, and standards of the report.
However, not all reports are created equal. Some reports may contain more accurate, relevant, and reliable information than others.
In this article, we will explore some of the common statements that are made about reporting and examine which ones are true and which ones are false.
What is Financial Reporting?
Financial reporting is the process of preparing and presenting financial statements that show the financial position, performance, and cash flows of an organization.
Financial statements are usually prepared according to a set of rules and principles known as Generally Accepted Accounting Principles (GAAP) or International Financial Reporting Standards (IFRS).
These standards ensure that financial statements are comparable, consistent, and transparent across different organizations and jurisdictions.
Financial reporting is mainly intended for external users, such as investors, creditors, regulators, and tax authorities.
These users rely on financial statements to make decisions about providing or withdrawing funds, assessing risks and returns, enforcing laws and regulations, and collecting taxes.
Therefore, financial reporting must be accurate, complete, timely, and auditable.
What is Non-Financial Reporting?
Non-financial reporting is the process of disclosing information that is not directly related to the financial performance or position of an organization.
Non-financial information may include environmental, social, governance (ESG), ethical, human rights, diversity, innovation, quality, customer satisfaction, employee engagement, and other aspects that affect the organization’s sustainability and reputation.
Non-financial reporting is mainly intended for internal users, such as managers, employees, board members, and owners.
These users use non-financial information to monitor and improve the organization’s strategy, operations, culture, values, and stakeholder relationships.
Therefore, non-financial reporting must be relevant, reliable, understandable, and actionable.
However, non-financial reporting may also be of interest to external users who want to evaluate the organization’s impact on society and the environment.
For example, customers may prefer to buy from organizations that are socially responsible and environmentally friendly.
Investors may seek to invest in organizations that have good governance practices and long-term growth potential.
Regulators may require organizations to comply with certain standards or disclose certain information related to their non-financial performance.
To meet the needs of external users who are interested in non-financial information, some organizations may choose to follow voluntary frameworks or guidelines for non-financial reporting.
Some examples of these frameworks or guidelines are:
- The Global Reporting Initiative (GRI) Standards1, which provide a comprehensive set of sustainability reporting standards that cover topics ranging from biodiversity to tax.
- The International Integrated Reporting Council (IIRC) Framework, which promotes integrated reporting that combines financial and non-financial information in a concise and coherent way.
- The Sustainability Accounting Standards Board (SASB) Standards, which focus on industry-specific ESG issues that are material for investors.
- The Task Force on Climate-related Financial Disclosures (TCFD) Recommendations, which aim to improve the disclosure of climate-related risks and opportunities by organizations.
True or False Statements About Reporting
Now that we have a basic understanding of what financial and non-financial reporting are, let us look at some of the common statements that are made about them and see which ones are true and which ones are false.
Statement 1: Financial reporting is more important than non-financial reporting.
False. Financial reporting and non-financial reporting are both important for different reasons and serve different purposes.
Financial reporting provides a snapshot of the organization’s past performance and current position based on quantitative data.
Non-financial reporting provides a broader perspective of the organization’s present situation and future potential based on qualitative data.
Both types of reporting complement each other and provide a more holistic view of the organization’s value creation and impact.
Statement 2: Financial reporting is more regulated than non-financial reporting.
True. Financial reporting is subject to more rules and regulations than non-financial reporting. This is because financial statements have a direct impact on the decisions of external users who have a stake in the organization’s financial performance.
Therefore, financial statements must comply with the applicable accounting standards and laws that govern their preparation and presentation.
Non-financial reporting is less regulated because it is mostly driven by internal needs or voluntary initiatives. However, this does not mean that non-financial reporting is not subject to any standards or expectations.
Non-financial reporting must still adhere to the principles of relevance, reliability, understandability, and comparability that apply to any form of reporting.
Statement 3: Financial reporting is more objective than non-financial reporting.
False. Financial reporting and non-financial reporting are both subject to some degree of subjectivity and judgment. Financial reporting may seem more objective because it is based on numbers and calculations.
However, financial reporting still involves making assumptions, estimates, and choices that may affect the results and interpretation of the financial statements.
For example, the choice of accounting policies, the estimation of depreciation and impairment, and the recognition of revenue and expenses are all areas where financial reporting may involve subjectivity and judgment.
Non-financial reporting may seem more subjective because it is based on words and narratives.
However, non-financial reporting still requires using evidence, data, and indicators to support the information and claims that are made.
For example, the selection of material topics, the measurement of performance indicators, and the verification of data sources are all areas where non-financial reporting may involve objectivity and rigor.
Statement 4: Financial reporting is more standardized than non-financial reporting.
True. Financial reporting is more standardized than non-financial reporting because there are more established and widely accepted frameworks and principles for financial reporting than for non-financial reporting.
For example, GAAP and IFRS are the two dominant accounting standards that are used by most organizations around the world for financial reporting.
These standards provide clear and consistent rules and guidance for preparing and presenting financial statements.
Non-financial reporting is less standardized because there are more diverse and evolving frameworks and guidelines for non-financial reporting than for financial reporting.
For example, GRI, IIRC, SASB, and TCFD are some of the leading frameworks and guidelines for non-financial reporting, but they are not mandatory or universally adopted by all organizations.
These frameworks and guidelines provide flexible and adaptable recommendations for disclosing non-financial information.
Statement 5: Financial reporting is more frequent than non-financial reporting.
True. Financial reporting is more frequent than non-financial reporting because there are more legal and contractual obligations for financial reporting than for non-financial reporting.
For example, most organizations are required to prepare and publish annual financial statements as part of their statutory or regulatory filings.
Some organizations may also need to prepare and publish quarterly or monthly financial statements as part of their contractual or market requirements.
Non-financial reporting is less frequent because there are fewer legal or contractual obligations for non-financial reporting than for financial reporting.
For example, some organizations may choose to prepare and publish annual or biennial sustainability reports as part of their voluntary or stakeholder commitments.
Reporting is a vital process for any organization that wants to communicate its performance, achievements, challenges, and opportunities to its stakeholders.
Reporting can be done in various ways, depending on the purpose, audience, and standards of the report.
However, not all reports are created equal. Some reports may contain more accurate, relevant, and reliable information than others.
In this article, we have explored some of the common statements that are made about reporting and examined which ones are true and which ones are false.
We hope that this article has helped you to understand the differences between financial and non-financial reporting, and how to identify true and false statements about reporting practices.
