Financial reporting is a systematic process of recording and representing a company’s financial data. The reports reflect a firm’s financial health and performance in a given period. Management, investors, shareholders, financiers, government, and regulatory agencies rely on financial reports for decision-making. The purpose of financial reporting is to provide stakeholders with a clear and accurate picture of the financial health and performance of the organization, so that they can make informed decisions about their investment or other relationship with the company. Financial reporting is governed by Generally Accepted Accounting Principles (GAAP) in the United States, and International Financial Reporting Standards (IFRS) in many other countries.
LIMITATIONS OF FINANCIAL REPORTING
Like any other thing, financial reporting also has certain limitations.
1. FINANCIAL REPORTS ARE NOT FUTURISTIC
Financial statements give the data from last year, and hence it is historical. The analysis only clears the picture of the past, and the results cannot be applied directly to forecast anything in the future. However, the stakeholders and creditors are more interested in the future position of the firm so that they can make business decisions based on that. It is a limitation to the utility of these reports.
2. FINANCIAL STATEMENTS ARE TOOLS AND NOT SOLUTIONS
Financial reports show the profitability of the firm and the financial strength as well. But it does not say anything about how you will improve the numbers and develop the business. So, it proves to be a good measuring tool but no solution to the negative results.
3. IT IGNORES THE CHANGES IN THE PRICE LEVEL
In certain cases, the prices of commodities change frequently. However, the financial reports are made, considering the current rates. Hence, if the price changes are not accounted for, the results could be misleading. In some cases, the efficiency may increase by considering the new prices, but the actual efficiency may remain less due to uncertainty.
4. IT DOES NOT CONSIDER THE QUALITATIVE ASPECTS
The financial reports show the only numbers. It lacks the consideration of human resources in the accounting process. It neglects the efficiency, technical know-how, and profitability of its employees. Hence it does not measure the qualitative aspect involved in the business.
5. IN THE ABSENCE OF RELIABLE DATA
it can give misleading results They are calculated based on the data provided by the firm. If the data is not reliable enough, the results could mislead. Hence, it’s not completely reliable.
6. INTANGIBLE ASSETS ARE NOT CONSIDERED
Financial reports consider the expense made to avail the intangible assets like creating a brand image. On the other hand, it does not consider intangible assets as assets. So, this creates a drastic change in the actual reports as compared to the prepared ones.