External reporting definition
/What is External Reporting?
External reporting is the issuance of financial statements to parties outside of the reporting entity. The recipients are usually investors, creditors, and lenders, who need the information to evaluate the financial condition of the reporting entity. At its most formal level, external reporting involves the issuance of a complete set of audited financial statements, which include an income statement, balance sheet, and statement of cash flows. The recipients may allow the issuance of unaudited financial statements for interim periods.
The Reason for External Reporting
There are several reasons why an organization engages in external reporting. First, it provides crucial financial information to an entity’s stakeholders, which they need to decide whether they should continue supporting it with credit or investments. Non-investing parties, such as the local government, also need external reporting to determine whether the reporting entity is conducting its operations in a manner that meets local regulations. Another reason for external reporting is community relations, since other stakeholders who are impacted by the business want to know what it is doing, from the perspectives of environmental impact, layoffs, and local expansion plans.
Public Company External Reporting
The most elaborate external reporting is conducted by publicly-held companies, which must issue the annual Form 10-K and quarterly Form 10-Q to the Securities and Exchange Commission. Both forms include a complete set of financial statements and extensive disclosures. They must also issue a Form 8-K when certain types of events occur. The reporting requirements for these forms are extremely detailed.
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Internal vs. External Financial Reporting
Internal reporting and external reporting serve different purposes for a business, primarily in terms of audience, content, format, and regulatory requirements. Here is a detailed comparison:
Audience. Internal reporting is prepared for internal stakeholders such as management, executives, department heads, and employees. It is used to inform decision-making within the organization. Conversely, external reporting is prepared for external stakeholders, such as investors, creditors, and regulators.
Purpose. Internal reporting is aimed at helping management with decision-making, performance evaluation, and strategy development. It focuses on operational efficiency, resource allocation, and business growth. Conversely, external reporting provides financial transparency to stakeholders, ensures accountability, and helps external parties assess the financial health and performance of the business.
Content. Internal reporting includes financial and non-financial information, and may budgets, forecasts, performance reports, KPIs (Key Performance Indicators), project progress, and operational metrics. Conversely, external reporting primarily contains financial statements, and is an summarized format.
Regulatory impact. Internal reporting is not influenced by any regulatory mandates, and so tend to be tailored to internal needs. Conversely, external reporting must comply with legal and regulatory requirements (e.g., SEC regulations in the U.S.), and may need to be audited prior to its release.
Frequency. Internal reporting can be generated as frequently as needed — daily, weekly, monthly, or ad hoc. Conversely, external reporting is usually issued on a quarterly or annual basis, and has fixed deadlines for doing so.
Confidentiality. Internal reporting is often confidential and limited to the organization’s employees. Conversely, external reporting is publicly available for investors, regulators, and other stakeholders.