Gafieva G.
Kazan (Volga region) Federal University
The importance of financial reporting development
Today, Russian
generally accepted accounting principles are reforming in accordance with the
international financial reporting standards. At the same, time the
international standards of financial reporting are also changing. These
standards were formed and developed in an era of industrial production and
there have been significant changes in the business environment, models and
value creation process since they had been formed. The increasing complexity of
production processes and economic transactions has led to additional disclosure
requirements. New laws, standards and requirements forced changes. The volume
of financial reporting has been increased, new sustainability reporting and
management commentary has appeared. Despite the increase in the information
supplied, it is still inadequate, fragmented and disconnected. Scandals
involving transparency of financial reporting, in the wake of the financial crisis,
make it necessary to rethink the principles of financial reporting formation.
In our opinion,
multidirectional interests of financial reports users are a difficulty in the
way of unified principles. For example, creditors would like to know realizable
value of a company’s assets, whilst the owners of a company usually are
interested in return on capital employed and in valuation of assets at cost. Therefore,
the starting point of our research is the analysis of the history of financial
reporting in Russia and abroad. Based on it, we conclude that the principles of
accountability were developed based on information needs of users who provide
limited resources.
For a long time,
the financial capital was the most critical recourse. However, current business
conditions indicate the increasing role of human, social and natural capitals.
This raises the need to reflect their contribution to the financial performance
of the company. The absence of this information leads to bias and it does not
allow making economic decisions based on comprehensive analysis. The
International Financial Reporting Standards contain the tools to reflect, for
example, environmental policy with the help of provisions. The contribution of
each type of capital in the company's value and the financial results of its
operations, both in the short and long term, also must be reflected in the
report. Therefore, a mechanism should be found to assess human, social and
natural capitals. As well as the format of financial reporting should be created,
that allows disclosing this information.
The new
integrated reporting format is intended to develop guidelines that address
these challenges. An Integrated Report
aims to display a company’s stewardship not only of financial capital, but also
of the other capitals, their interdependence and how they contribute to the
value of the company. It also focuses on an ability to create and sustain value
in the future, not on past financial performance and financial risk. Today’s
reporting is often said to be too compliance orientated, reducing the scope for
organizations to exercise an appropriate amount of judgment. While a certain
level of compliance orientation is necessary to ensure consistency and enable
comparison, Integrated Reporting offers a principles-based approach that drives
greater focus on factors that are material to particular sectors and
organizations. It permits an organization to disclose its unique situation in
clear and understandable language. However, the large number of estimates and
forecasts leads to the subjectivity of accounting data and the complexity of
their inspection. In our opinion, the reported data should be cleaned as much
as possible from subjective estimation and allow its users to interpret it
according to their interests.
It should be
noted that in Russia, the scarcest resource continues to be the financial
capital and the main purpose of the transition to international standards is
access to international financial markets. The contribution of other types of
capital in the creation and stability of the value of the company on a regular
basis is not tracked. The new format of financial reporting will help Russian
companies to realize importance of all types of capital employed and assess
their contribution to the company’s value. Considering sufficient amount of
natural and human recourses in Russia, an integrated reporting model may increase
investment appeal of the country.
Financial
reporting is crucial element of business transactions. Making an investment
decision always involves transaction cost. Globalization, complexity of
business and financial structures constantly increase them. However,
transparent financial reporting could sufficiently reduce them. At the same
time disclosing all relevant information will allow companies to get fair
market value of their shares. That will bring stability to financial markets,
the importance of which was clearly showed in the last financial crises.
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