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Financial Reporting Compliance

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To ensure that a business is operating lawfully, adhering to good practices, and not violating the principles of a fair market, governments worldwide have various controls and reporting requirements in place. Financial reporting is a crucial piece of that puzzle, and it allows governments to keep track of the financial activities of businesses operating within their countries. Thanks to globalization and individual businesses operating in multiple countries, financial reporting compliance has become more sophisticated and complex.

What is Financial Reporting Compliance?

Financial reporting compliance is one of a business’s primary obligations towards the country (and some local bodies) it’s operating in. This reporting typically follows the standard set by the country’s taxation authority or another regulatory body and informs the government about all the financial activities a business performs in a given year. This information helps identify whether a business is engaged in illicit financial activities like tax fraud and ensures that the government has a clear idea of how much taxes the business owes.

This compliance becomes more sophisticated for businesses that operate internationally because they don’t just have to meet the compliance standards of each of the countries, they operate in but also adhere to the International Financial Reporting Standards (IFRS) to remain globally compliant with financial reporting.

International Financial Reporting Standards (IFRS)

International Financial Reporting Standards (IFRS) are accounting rules/standards the financial reports of all businesses/corporate entities must follow to ensure that they are understandable and comparable in almost all countries. The IFRS aims to make financial reporting and, by extension, financial reporting compliance consistent globally, leading to transparency and more accessible business interactions.

The IFRS replaced an older version of globally understandable accounting standards called International Accounting Standards (IAS). The standards were developed and controlled, maintained, and promoted by the International Accounting Standards Board (IASB), headquartered in London.

Roughly 167 countries adhere to IFRS, though it doesn’t include the US, which has its alternative to the global financial reporting compliance standards – GAAP or Generally Accepted Accounting Principles (GAAP).

So if you have a business that spans multiple countries (all following IFRS), you can streamline your financial reporting compliance by adhering to the IFRS, even in the US. The Securities Exchange Commission (SEC), which is the top governing body in the US that controls (and ensures) a fair market, allows foreign companies to follow IFRS.

However, if you are registered in the US as a publicly traded company or a regulated business entity, you may have to use GAAP for your financial reporting purposes.

The IFRS standard valid for 2023 is IFRS 17.

Financial Reporting Compliance For Different Businesses

It’s important to understand that the business size and categorization influence the financial reporting compliance requirements. Publicly traded companies may be required to adhere to the IFRS guidelines even if they are strictly local and trade only in a specific country. In contrast, small-to-medium-sized businesses (SMEs) may have different financial reporting requirements based on the countries the businesses operate in.

Core Elements of International Financial Reporting Compliance

In most countries, adhering to the IFRS reporting and accounting standards may help you remain compliant regarding financial reporting. The standards cover several different areas of financial reporting, and some of the most important ones are:

  • Balance sheets typically have three core elements – assets, liabilities, and net worth/equity. However, the IFRS or local financial reporting standards may define what is classified under assets, what counts as liabilities, and how a business’s equity should be calculated at any given time.
  • The comprehensive income of a company requires separating its expenses from its earnings to determine the actual income (or profit and loss). The IFRS has several guidelines/rules defining how comprehensive income should be reported. It goes into granular details, including the impact of interest on income/expenses.
  • A business’s equity or the earnings that stay in business must be reported accordingly. It’s different for publicly traded companies and local SMEs.
  • Cash flow statements keep track of all the cash flowing into and out of a business. It’s far more comprehensive than profit and loss.

Understanding what IFRS standards are and how they apply to the financial reporting of your business is an important first step toward financial reporting compliance.

Financial Reporting Compliance – Good Practices and Challenges

Before diving into good financial reporting compliance practices, it’s important to understand what happens when a business doesn’t comply with financial reporting standards. The most significant consequence is being at odds with the regulatory bodies of the countries you operate in. At best, it may be classified as an accounting error, and the business may have to pay a fine.

At worst, non-compliant financial reporting may be considered a deliberate omission of necessary facts in reporting and may lead to legal charges against the company. Financial reporting also has an impact on management practices and investments. Without the right financial data, the management may make wrong and, in some cases, risky decisions. It may also be considered a non-transparent practice that can drive off investors.

The good practices associated with financial reporting compliance are:

  • Understanding compliance requirements you are subject to. This may include both IFRS and a country’s financial reporting requirements that may be more comprehensive.
  • Keep a clean financial trail. It’s easy for large businesses where there are protocols and SOPs for almost all financial transactions. But many small businesses, even when they are operating in another country/selling to another country, may delay financial reporting and recording till the last possible minute. This leads to reconciliation instead of accurate reporting.
  • Leveraging the best-in-class tools and technologies for financial record keeping and reporting.
  • Keep an audit trail of all the changes made to the financial records.
  • Adhere to the timelines of financial reporting.

Adhering to the financial reporting compliance standards can help keep your business safe from the ire of relevant regulatory bodies and make you attractive to partners and investors. Schedule a consultation today to see how Aadmi can equip your business. Don’t hesitate to contact our team and update your workplace practices to align with the evolving employment landscape.

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