What is Financial Reporting? Types, Definition, & Examples

Financial reporting is the process of documenting and presenting your company’s financial information, typically through financial statements.

Wear your investor hat for a moment. If you were an investor in your own company, you’d need plenty of financial information about the company—revenue, cost structure, cash flows, capital expenditure, capital structure, what have you—to decide if it’s the right company to invest in, what price to pay per share, and when to exit.

Financial reports give investors this information. It also helps you and your CFO make critical decisions such as whether it makes sense to raise capital through debt or whether your financial performance is at par with expectations.

Financial reports are records that provide an overview of the company’s financial performance over a specific period and financial position on a given date.

They’re the most important gauge of a company’s financial health and are prepared according to accounting standards applicable in your region.

Publicly traded UK companies prepare their financial reports (or financial statements) using International Financial Reporting Standards (IFRS), while most private companies and non-public entities use UK Generally Accepted Accounting Principles (UK GAAP). US companies use US GAAP.

Types of financial reports

Here are the five main types of financial reports as per Financial Reporting Standard (FRS) 102 and FRS 105 (under the UK GAAP) and International Accounting Standards (IAS) 1 and IAS 7 (under IFRS):

• Income statement (profit and loss statement): Think of it like a movie that runs for the duration of the reporting period (a month, quarter, or year). It shows you the amount of revenue you generated, the total expenses of the company, the taxes you paid, and the amount you’re left with (the net profit).

• Balance sheet: The balance sheet shows your company’s financial position. Think of it as a photo of your company’s financial condition on a specific date. It shows your company’s capital, assets, and liabilities.

• Cash flow statement: A cash flow statement is a summary of cash inflows and outflows. Any transaction that doesn’t impact cash flow doesn’t appear here. If you sold a pen to your friend on credit and they haven’t paid, this transaction will have no impact on the cash flow statement.

• Statement of shareholders’ equity: Statement of shareholders’ equity summarises the impact of the company’s financial transactions on the book value* of the company’s equity. Retained earnings (amount of net profit invested back into the business), dividends, buybacks, and new equity capital raised during the reporting period appear here.

*Book value is an accounting term for the value of a company's equity as it appears on the company’s balance sheet.

• Notes to the financial statements: Notes to the financial statements offer additional context to figures in the financial reports. This includes accounting policies, contingent liabilities, and more. For example, if a company is currently under investigation for an environmental incident, you may have to report a contingent liability.

Some companies may also need to prepare a statement of comprehensive income, which includes items not recognised in the income statement, but do affect equity. Revaluation of assets, actual gains or losses on defined benefit pension plans, and currency differences on foreign operations are examples of line items that appear in this statement.

The reporting requirements for this statement vary under UK GAAP, but it’s mandatory for companies following IFRS. Reporting requirements are prescribed under Section 5, FRS 102 (UK GAAP) and Paragraphs 81 to 105 of the IAS 1 (IFRS).

Financial report example

The size of financial reports varies by company. Let’s take Unilever as an example. The company’s 2023 annual report has over 200 pages. It goes into plenty of detail about the company’s future, strategy, and financial vision.

Financial statements are a small part of the annual report. While each financial statement follows the same format, they’re quite complex. Here’s Unilever’s income statement:

For most companies, financial statements are much less complex for various reasons. The reason? Few small companies have non-controlling interests or operations in hyperinflationary economies.

Financial reports are highly regulated because they offer plenty of value to external stakeholders. Here’s a quick overview of the objectives of financial reporting:

• Compliance: This is the primary reason companies prepare external financial reports such as the income statement and balance sheet. Read more in our article on Financial Compliance Challenges.
• An overview of your financial position: Investors and creditors may look at your balance sheet to make key decisions about investing in your business or lending money to it.
• Show profitability and performance: The income statement shows external stakeholders your company’s profitability and performance over a specific period.
• Monitor cash flows: Cash flows are just as important as profitability. If lenders see that you’re profitable but need a ton of cash to sustain growth for the foreseeable future, they might feel uncomfortable about the potential decrease in your interest coverage ratio.
• Facilitate comparability: External stakeholders, especially investors and analysts, use financial statements to compare your company with peers for a more context-rich analysis of your company’s performance and financial position.

Our focus for this guide is financial statements, which are prepared for external financial reporting. They’re a regulatory requirement for most businesses, but there are other types of financial reports companies may prepare. All financial reports go into either of the following categories:

• External financial reports: They’re prepared for external stakeholders (regulatory bodies, investors, creditors, etc.) and include statutory financial statements, director’s report, strategic report, corporate tax returns, and Environmental, Social, and Governance (ESG) reports, depending on your company size, industry, and various other factors.

• Internal financial reports: They’re prepared for management to monitor performance and decision-making, and include budgets, variance reports, cash flow forecasts, cost sheets, and more. These aren’t required by the law, so these reports are prepared based on conventions rather than strict rules. You can use your own format, schedule, and policies to prepare internal financial reports.

Financial reporting standards are guidelines that dictate how financial reports are prepared and presented.
The standards offer a framework to ensure transparency, consistency, and comparability in financial statements of different organisations and jurisdictions.

There are various accounting standards issued by organisations and regulatory bodies such as the International Accounting Standards Board (IASB), UK Financial Reporting Council (FRC), and the Financial Accounting Standards Board (FASB).

UK companies must follow either the IFRS (issued by IASB) or UK GAAP (issued by FRC) depending on various factors. Let’s dive a little deeper into each.

International Financial Reporting Standards (IFRS)

The Companies Act 2006 and the Financial Conduct Authority (FCA) require all publicly listed companies in the UK to prepare financial statements in accordance with IFRS. There are multiple reasons why the FCA mandates using the IFRS and not UK GAAP:

✅ EU mandate: When the UK was part of the EU, listed companies in EU member states were required to prepare consolidated financial statements using IFRS (according to European Union Regulation No 1606/2002) to promote a level playing field across the European capital markets. Even after Brexit, the UK continues to use IFRS to maintain a robust and transparent reporting framework and attract international investment.

✅ Global consistency and comparability: IFRS is designed to create a consistent framework across different countries. This makes financial reports comparable across companies in various jurisdictions and allows investors to analyse statements from companies around the world.

✅ Attracts foreign investment: IFRS makes it easier for foreign investors familiar with the standards to assess investment options in the UK. This helps develop more efficient capital markets and enables companies to raise capital more easily and from a wider pool of investors.

UK Generally Accepted Accounting Principles (GAAP)

Private companies in the UK can choose between IFRS and UK GAAP. If you’re a small business, consider opting for the UK GAAP. It has simpler reporting requirements.

Here’s how reporting under the UK GAAP is simpler:

✅ Fewer disclosure requirements: UK GAAP has fewer disclosure requirements, which reduces the volume of information you need to gather and present on financial reports.

✅ Simpler measurement and recognition criteria: For example, FRS 102 often allows entities to use historical cost instead of the fair value of certain assets. This simplifies valuation. FRS 102 also outlines simple revenue recognition criteria compared to guidelines in IFRS 15 (Revenue from Contracts with Customers), which are complex and require significant judgement.

✅ Easier accounting for financial instruments: IFRS 9 (Financial Instruments) prescribes complex treatments for classification, measurement, and impairment of financial instruments. FRS 102 offers a more straightforward treatment that requires less extensive analysis and documentation.

✅ No statement of cash flows: FRS 102 doesn’t require small companies to prepare a cash flow statement, which is a hard requirement under IFRS.

✅ Easier presentation format for micro-entities: FRS 105 allows micro-entities to prepare simplified financial statements (only an income statement and balance sheet) with minimal disclosures. This lowers administrative burden and cost of financial reporting for micro-entities.

To be classified as a micro-entity, you need to fulfil any two of the following requirements:

• A turnover of £632,000 or less
• Assets of £316,000 or less on its balance sheet
• 10 employees or less

Following best practices helps comply with regulatory requirements, make reporting processes more efficient, and build a reputation rooted in transparency. Let’s talk about some best practices you can follow. Some of these are also regulatory requirements themselves.

1. Automate financial reporting with robust finance software

Manual accounting processes were the norm in the 90s, but modern companies rely on automated finance software to:

• Generate real-time financial reports: Automated software updates financial reports in real-time as they happen. You can enter transactions manually or configure the finance software to pull data from your ERP system.
• Minimise errors: Manual data entry and report preparation is a recipe for errors, which lead to expensive revisions, restatements, or penalties in worse cases.
• Simplify consolidations: If you have multiple subsidiaries or divisions, preparing consolidated financial statements can take hours of effort. Imagine having to manually eliminate intercompany transactions and combining financial statements with potentially different currencies and standards. Reporting software can automatically prepare consolidated statements accurately and timely without investing a ton of resources.
• Reduce costs: Automated finance software can handle large volumes of financial transactions without additional resources or administrative burden. The result? Lower money spent on human and other resources for financial reporting.
• Better security: Financial software that offers encryption, access control, and audit trails protects sensitive financial data and simplifies the auditor’s job when verifying the accuracy of financial reports.

Make sure you don’t waste money on outdated and inefficient software. They can do more harm than good.

Access Financials is a cloud-based accounting software that allows your finance team to access accounting data from any device with an internet connection. If you’re looking for finance software that can automate financial reporting, book a demo for Access Financials.

2. Ensure strong internal controls

Strong internal controls aren’t optional. Here’s why:

• The UK Corporate Governance Code mandates them. Provision 29 states that “The board should monitor the company’s risk management and internal control framework and, at least annually, carry out a review of its effectiveness.”
• If you’re a UK subsidiary of a US-based parent company, Section 404 of the Sarbanes-Oxley Act of 2002 (SOX) requires your management to annually assess the effectiveness of the company’s internal control over financial reporting (ICFR).

ICFR makes regulatory and governing bodies more comfortable about the reliability and accuracy of your financial statements. Even though UK GAAP and IFRS don’t explicitly mandate internal controls, there’s intersection between guidelines under both frameworks and internal controls.

For example, IFRS 15 (Revenue from Contracts with Customers) requires judgements that might be prone to error or manipulation. Without robust internal controls, there’s no way to reliably assure stakeholders about the accuracy of compliance with IFRS 15.

Lack of internal controls is also a problem during audits. International Standards on Auditing (UK) requires auditors to consider the company’s internal controls as part of their risk assessment when auditing financial statements (ISA 315).

While auditors aren’t required to provide an opinion on internal controls unless required by a specific law like SOX, they will assess whether there are weaknesses in internal controls that could lead to material misstatements in your financial statements.

3. Provide clear and comprehensive disclosures

The Companies Act 2006, IFRS, and UK GAAP all require you to make disclosures that offer stakeholders more context about the figures in the financial statements and various aspects of business.

Most companies go beyond the prescribed disclosure requirements to prove their commitment to transparency. When you do this, remember that IFRS and UK GAAP emphasise materiality when it comes to disclosures, so focus on information that matters.

Materiality refers to the significance of information in influencing the economic decisions of a user of financial statements (such as investors and analysts). IASB refined its definition of material in October 2018 to make it easier to understand and apply:

“Information is material if omitting, misstating or obscuring it could reasonably be expected to influence the decisions that the primary users of general purpose financial statements make on the basis of those financial statements, which provide financial information about a specific reporting entity.”

The new definition complements the IFRS Practice Statement 2 Guidance from IASB, which outlined a four-step process you can use to make materiality judgements when preparing financial statements.

According to the Companies Act 2006, you’re required to disclose various pieces of information in the following reports (if your company is required to prepare them):

• Director’s report: This report includes critical information about your business, strategy, risks, uncertainties, and any significant events affecting the company during a given financial year.
• Strategic report: Medium and large-sized companies must provide a strategic report including details about the company’s performance, business model, principal risks, and future outlook.
• Corporate governance disclosures: Publicly traded companies need to disclose governance practices. This includes details about board structure, executive pay, and risk management.

IFRS and UK GAAP have additional requirements. Here are some examples:

Disclosure requirements under IFRS:

• IAS 1 (Presentation of Financial Statements) requires you to disclose details on significant accounting policies, estimates, and judgements, as well as the reasoning behind key financial decisions.

• IFRS 7 (Financial Instruments: Disclosures) requires disclosures related to financial instruments, such as risks the company is exposed to (credit risk, liquidity risk, etc.) and how you manage these risks. You’re also required to disclose the fair value of financial instruments and explain how you came up with those values.

Disclosure requirements under UK GAAP:

• Section 8, FRS 102 requires you to prepare notes to financial statements that disclose accounting policies, estimates, judgements, and key information about financial instruments, revenue recognition, leases, and provisions.

4. Be prepared for external audits

If you’re a public company or a private company meeting certain size criteria (such as turnover greater than £10.2 million, assets exceeding £5.1 million, or 50 or more employees), you’re legally required to undergo an external audit.

The preparation for audit starts at the beginning of a financial year, when you assess the effectiveness of ICFR, ensure you have a finance software that can accurately record transactions and generate timely financial statements, and make other financial compliance arrangements.

However, there are things to prepare for a few months before the audit:

• Prepare supporting documentation: Financial transactions must be supported by proper documentation. When auditors request proof of major transactions (loans, large asset purchases, etc.), you should be able to deliver it promptly.
• Ensure team readiness: Designate a point of content in the finance team to liaise with auditors, coordinate document requests, and provide clarifications. Explain key transactions and judgements made during the year to your finance team to make sure they’re prepared to respond efficiently to audit queries.
• Review key areas of focus: Make sure you and the finance team know key focus areas for auditors. For example, if your revenue streams are complex, auditors may focus on ensuring that your revenue recognition policies comply with IFRS 15 or FRS 102 as applicable. If you’re undergoing litigation, auditors may require you to justify the calculations and assumptions for the contingent liability reported in your financial statements.

Most of the information needed during an audit should be easily accessible if you use a reliable finance software solution. Finance software also simplifies the auditor’s job because it’s easier for them to search for documents, transactions, and other details using software.

• Companies prepare external financial reports to share financial information with external stakeholders.
• Regulators use laws like the Companies Act 2006 and accounting standards like the IFRS and UK GAAP to ensure your financial reports are accurate and complete.
• Reporting requirements vary based on the company’s size, industry, and other factors.
• Finance software is not a “nice-to-have,” but a necessity for most companies to simplify accounting processes and comply with regulatory requirements.