External reporting requirements ensure transparency between publicly traded companies and their owners. Let’s walk through the required reporting, supplemental reporting, and finance’s role in the process.
What is External Reporting?
External reporting involves preparing financial information to distribute outside your organization. This type of reporting is regulated in the US by the SEC. In addition, it must be compliant with US GAAP. The SEC requires external reporting for publicly traded companies. They have delegated GAAP responsibilities to the Financial Accounting Standards Board (FASB). The SEC enforces the standards FASB creates.
Every company must publish the three financial statements.
Balance Sheet: The Balance Sheet is a snapshot of a company’s assets, liabilities, and equity at a point in time. Assets are the resources of a company including items such as cash, real estate, and inventory. Liabilities are amounts you owe to other parties such as loans and vendor payments. Stockholder’s equity is the value of the company excluding liabilities. This is essentially the “book value.”
Income Statement: The Income Statement shows how profitable a company is over a certain period of time. This statement compares the revenues of an organization against the expenses to determine income. Finance often refers to this as a Profit and Loss Statement (P&L).
Statement of Cash Flows: The Statement of Cash Flows shows cash inflows and outflows during a specific period of time. The statement has three parts: operating activities, financing activities, and investing activities.
Companies must publish these statements quarterly (part of filing 10-Q) and annually (part of filing 10-K).
Many companies choose to include additional information beyond what is required. Firstly, some companies will report on their operating segments. Secondly, they might provide metrics and KPIs. In addition, other companies may provide non-GAAP schedules with adjusted income. They could even normalize for one-time transactions.
Many companies will include earnings guidance with their external reporting. The guidance can be very detailed, “we believe we will generate $1M in revenue.” The guidance can also be very vague, “we look to grow revenue 2-4% year over year.”
GAAP does not dictate this reporting. Although, GAAP does require companies to report consistently and accurately across reporting periods.
Finance is first and foremost an end-user of accounting results. While accounting is responsible for GAAP reporting and external reporting schedules, Finance generates most management accounting. Finance often produces management reporting at the same time as the accounting close.
Investor Relations often sits within finance to interact with Wall Street. In addition, Finance also drives the earnings guidance process. They generate earnings guidance based on the consolidated forecast for the company.
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