Corporate strategy and financial reporting are two closely related aspects of a business. Corporate strategy is what a company's goals and objectives are, and financial reporting is the snapshot of whether those goals and objectives are being met.
How the accountants prepare the financial statements and do the accounting practices very much relies on the strategies set by the management. For businesses, this relationship is important to understand to be accurate, transparent and compliant with regulation.
How Corporate Strategy Shapes Financial Reporting
Corporate strategy is the long-term vision, market positioning and competitive advantages of a business. How a company deals with these elements has far reaching effects on the financial reports and accounting procedures of a company.
- Financial Statement Preparation
Therefore, most of the strategic decisions, like mergers and acquisitions, expansion in new markets, or divestitures, demand changes in the financial reporting. Take, for instance, a company that has determined to come into a new market, and therefore may need to adjust its investment into cost of goods sold, depreciation, or capital expenditures which in turn will impact its financial statements. - Accounting Practices
The choice of accounting methods used is also affected by corporate strategies. For instance, a rapid expansion company will adopt an aggressive revenue recognition policy which entails reporting more revenues; a conservative strategy could lead to cautious reporting. Along these lines, a business emphasis on sustainability or long term growth can impact how investments in research and development are recorded, or what the goodwill measure of an asset is. - Risk Management and Financial Transparency
The way a company reports its assets and liabilities often depends on its approach to risk management. Complex financial statements may result from contingent liabilities or off-balance sheet arrangements that businesses with a high tolerance for risk may have. However, conservative companies may opt for less complex statements to keep their transparency and be out of regulatory sight.
When does a company expand and what is its strategic approach to expansion?
Corporate strategy must be aligned with financial reporting to continue to maintain trust by the investors themselves and to satisfy auditors and regulators.
The Role of Corporate Strategy in Enhancing Compliance
- Tax Strategies
Tax planning is usually a key part of corporate strategy. An example of this can include a business going for global expansion, and using tax efficient strategies, shifting profits to low tax jurisdictions. However, these strategies must be reflected properly in financial reports to meet international tax laws and penalty free. - Governance and Ethical Practices
Bringing ethical decisions connected with corporate strategy (for instance, sustainability efforts or public transparency initiatives) to the table can affect how companies will disclose environmental liabilities or ethical risks. A firm that takes a stakeholder view of assessing a company’s impact on its constituents may mandate that executives disclose their compensation or information on the activities of its board as a symbol of its commitment to transparency and shareholder value.
What is the effect of a company’s approach to expansion on its financial reporting?
To avoid investor’s distrust and regulatory compliance issues, corporate strategy must be aligned to the financial reporting.
Impact on Financial Performance Metrics
- Valuation of Assets and Liabilities
The way a company values and accounts for its assets and liabilities is determined by its corporate strategy. For example, an intellectual property emphasis may increase the valuations of intangible assets (e.g., brand value), which will impact on the balance sheet, and impact on key financial ratios such as return on assets (ROA). - Capital Structure Decisions
Financial reporting is also conditioned on strategic decisions concerning the combination of debt and equity financing. A company will have more debt to fund its aggressive growth whereas a company focused on maintaining a financially stable condition will reveal lower debt ratios on its balance sheet showing lower debt.
Conclusion
Financial reporting and accounting practices are very much dependent on corporate strategy. To comply, to be transparent and to ensure a clear view of the company’s performance, strategic decisions on growth, risk, investments and governance must be correctly reflected in financial statements.
As businesses attempt to manage these complicated interactions, it is imperative for business success over the long term that companies understand the link between corporate strategy and financial reporting. Aligning strategic goals to sound financial practices ensures companies remain in good standing with investors, satisfactorily meet with regulatory standards, and will continue to reap the benefits of growth for the long term. At Applied Accountancy, we help you with the accounting and strategic planning complexities. For expert advice on how to improve your financial reporting practices, contact us.
Applied Expertise: corporate strategy, financial reporting, business goals, financial statements, accounting practices, mergers and acquisitions, market expansion, cost of goods sold, depreciation, capital expenditures, revenue recognition, risk management, financial transparency, tax strategies, global expansion, ethical practices, asset valuation, capital structure, debt and equity financing, return on assets (ROA), stakeholder engagement, governance, transparency initiatives, strategic alignment, financial performance metrics, investor trust, regulatory standards
