Clear, concise and regular reporting of financial information to the stakeholders of a business is a vital component of long-term success. Among the recipients of reporting are the management team and board of directors. Some of the aspects that should be reported on a regular basis are accounting changes, accounting errors, asset retirement, and voluntary disclosures.
Companies must often alert business stakeholders regarding changes to accounting policies. These disclosures alert stakeholders to why financial information may suddenly look different on the company’s financial statements. Disclosures may be simple statements regarding the change or provide a lengthy explanation for the reason to change the company’s accounting policies and procedures.
Accounting errors usually require companies to inform stakeholders via a financial statement disclosure. Errors can result from a variety of reasons. Transposing numbers, mathematical computation, incorrect application of GAAP or failing to revalue assets using fair market value are a few accounting errors. Companies may need to correct previous financial statements to accurately reflect the company’s financial position for previous accounting periods. Significant accounting errors can result in financial audits and possible bankruptcy by the company. To prevent errors, organizations can use FP&A tools that automate the consolidation process.
Asset retirements usually require financial disclosures. Companies retire assets once the asset provides no future benefits to the company. Retiring an asset requires companies to obtain a fair market value along with the asset’s salvage value. The difference between the sale price and the asset’s salvage value usually results in a net loss that is included on the company’s income statement. Companies must explain this loss to business stakeholders and how the asset was valued upon retirement.
Voluntary disclosures represent additional managerial statements or comments on a company’s financial statements. Companies are not required to provide business stakeholders with this information. Business owners may decide to issue additional commentary on the financial statements to notify lenders or investors about the company’s financial operations. Voluntary disclosures can include forward-looking statements relating to the company sustainability, the business owner’s analysis of financial data and other comments regarding the company’s overall financial health.
Organizations Should Be Transparent in Their Reporting
When it comes to disclosure and communication, it’s important to be transparent. In the current COVID-19 environment, the need for transparent communication is all the more magnified. Organizations should make sure that their reporting is clear, concise, and comprehensive.