FINANCIAL STATEMENTS: There are three basic financial statements, namely balance sheet, income statement, and cash flow statement. These are supplemented by detailed notes to these statements.
Balance sheet shows what assets an organisation holds, what liabilities it has to pay, and what fund it maintains. It says whom it transacts with, how much it owes from them and how much to pay them. The notes to the financial statements supplement these figures by disclosing the quality aspect of the above transactions. For example, buildings, plant and machineries are properly used, their depreciation is properly determined and disclosed, debtors and advances are good. Similarly bank loan is not defaulted and payments to the creditors are made in time. Cash and inventories are neither short nor in excess.
Income statement shows the quality of operations. For example, what are its various sources of revenue, what are its various classes of expenses, why are these increasing or decreasing? How much do workers get and how much do directors and executives get? Are there proper insurance of assets and regular audits of transactions? Are there contingencies like warranties and penalties? Are the local and foreign training and money involved properly disclosed? An annual report, including financial statements, is the lab for the business students and researchers. It is so important that the two accounting bodies ICAB (Institute of Chartered Accountants of Bangladesh) and ICMAB (Institute of Cost and Management Accountants of Bangladesh) give awards for the best financial statements every year.
PUBLIC LIMITED COMPANIES (PLCS): Publication of annual reports and financial statements of publicly financed companies is mandatory around the world. The purpose of this is to give information to the shareholders for making their investment decisions. Generally shareholders in publicly listed companies do not take part in management. Professional managers run the business on behalf of the shareholders. As a result there is conflict of interest - managers may pursue some interests for their own benefit and not necessarily for the shareholders.
PRIVATE COMPANIES: But the above divorce between owners and managers in the PLCs is not the case in the case of private companies which are owned by maximum 50 shareholders. These shareholders own, manage and control their own business and therefore conflicts of interest is relatively low. Therefore these companies do not have obligation to publish annual report and financial statements for the public.
PUBLIC SECTOR ORGANISATIONS: Nowadays, publication of annual reports and financial statements of government organisations for public benefit is mandatory in most of the countries around the world. This is required because the government organisations are initially funded by the taxpayers' money, transfer from other levels of government, social contributions, and local and foreign debt. And if there is annual operating surplus that is owned by the government. The purposes of these finances are varied, such as public benefit, infrastructure development, economic growth, institution building, poverty reduction, and good governance. Therefore efficient utilisation of public money and the disclosure of this evidence is an obligation of these organisations.
IPSAS: International Public Sector Accounting Standards (IPSAS) are issued by the International Federation of Accountants (IFAC) to be complied with by public sector organisations around the world. These IPSAS are essentially the same accounting as in their equivalent international accounting standards (International Accounting Standards or IAS and International Financial Reporting Standards or IFRS) in the corporate sector. Differences are in terminologies used, for example, IPSAS use the term 'entities' rather than 'companies'. There are also some specific standards for the public sector like standards for heritage assets, revenue from non-exchange transactions such as taxes and transfers, and presentation of budget information in financial statements.
IPSAS help benefit the public and redistribution of income and wealth. Although profit is not the primary objective these public sector organisations must operate efficiently so that these are sustainable and not dependent much on government funds. The IFAC board believes that the adoption of IPSAS harmonises national public sector accounting and reporting. It improves the quality and comparability of financial reporting by the public sector around the world. Pricewaterhouse Coopers (PWC) survey finds that 71 per cent of central governments have adopted IPSAS.
BSEC: Bangladesh Securities and Exchange Commission (BSEC) is the apex body under the Ministry of Finance to regulate, monitor and promote the stock market in the country. It has a corporate governance code which includes a detailed section on financial reporting and disclosure. The section requires all stock exchange-listed companies to prepare annual and quarterly financial statements, namely Income Statement, Cash Flow Statement and Balance Sheet and make these available in their websites for public benefit.
Although BSEC is a nationally important public sector organisation and it rightly recognises the importance of financial statements and preaches for the inclusion of these in other equally important corporate sector organisations, it surprisingly does not include its financial statements in its annual report. It has a government fund and now operates with its own revenue and surplus which belongs to the government. It reports its various sources of revenue but does not disclose its expenses. It does not report any financial statements in its annual report. Stakeholders do not know how the commission is spending its money. If the commission reports income statement and balance sheet, the stakeholders could assess the efficiency of its activities by various ratios on operating expenses, inventory management, depreciation, travelling expenses, perquisites, salaries and benefits.
It is unthinkable that a public organisation of so much importance does not report financial statements. As the corporate sector organisations must publish their financial statements because they use public shareholders' money, so a public sector organisation must do the same because it uses public tax money.
A balance sheet shows the liquidity, profitability and solvency of an organisation. It documents the day-to-day operational efficiency, funds position, and the future of an organisation. A balance sheet is a picture of an organisation's accountability.
PRACTICE AROUND THE WORLD. The Securities and Exchange Board of India includes all standard financial statements in its annual report. Its 2017-18 total assets are INR39350m, liabilities INR1970m, and funds INR37370m.
Financial Conduct Authority of UK includes corporate like standard financial statements, namely statement of comprehensive income, statement of financial position, statement of changes in equity, statement of cash flows and notes to the financial statements.
Financial Services Authority of Indonesia (OJK) calls its income statement as Statement of Activities. It shows how efficiently it operates its activities. Other financial statements are the same as in the corporate and public sector organisations. Its 2017-18 total assets are 7647bn Rupiah and total liabilities are 3446bn Rupiah.
Even Bangladesh Institute of Capital Market, another capital market development-related public sector organisation of much smaller size than the BSEC, publishs financial statements in their annual reports.
Dr Dhiman Chowdhury is Professor of Accounting at the University of Dhaka.
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