What are Annual Financial Statements?
Annual Financial Statements refers to the annual presentation of the financial performance of the entity and comprises a Balance Sheet, Statement of Profit and Loss, Statement of changes in equity, Cash flow statement and Notes to the financial statements. Annual Financial statements are prepared on a going concern basis unless management intends to wind up the operations of the entity under the accrual basis of accounting.
The key purpose of financial statements is to provide information to the stakeholders that are useful for making economic and financial decisions about the business.
Constituents of Annual Financial Statements
The annual financial statements consist of the following five statements:
#1 – Balance Sheet
The balance sheet presents the financial position of an entity at a specific point in time. IAS 1 “Presentation of Financial Statements”, require presentation of the following items on the face of the balance sheet as a minimum requirement:
- Assets: Including Non-Current Assets such as property, plant and equipment, intangible assets, financial assets, assets held for sale, deferred tax asset and current assets such as inventory, receivables, cash, and cash equivalents.
- Liabilities: Including financial liabilities, deferred tax liability, and current liabilities such as trade payables and provisions.
- Equity: Including share capital, retained earnings and minority interest.
#2 – Statement of Profit and Loss
The income statement is prepared for reporting the financial performance of the entity during the year. The accounting could be the calendar year or fiscal year depending upon the accounting policy followed by the entity.
The minimum items to be presented on the face of the income statement as per IAS 1 “Presentation of Financial Statements”, as are:
- Operating Expenses
- Earnings before Interest and Taxes (EBIT)
- Finance Cost
- Share of profit or loss from the associates and/or joint ventures
- Tax Expenses
- Profit and loss from discontinued operations
- Net Income After Tax for the period
- Income attributable to the minority interest
- Income attributable to the equity shareholder of the entity
#3 – Cash Flow Statement
All entities that prepare their annual financial statements in line with IFRS or IAS are required to present the cash flow statement as part of annual financial statements. The cash flow statement reports the changes in cash and cash equivalents during the year due to operational, financing and investing activities.
#4 – Statement of Changes in Equity
This includes the following:
- The amount of Profit and loss attributable to the shareholders.
- Transactions made with equity shareholders such as the issue of new shares, the amount of dividend paid, and balance of the reserves and surplus.
- The correction made in respect of prior period errors.
- In the case of any changes made in accounting policies, the disclosure about the effect of the change on financial statements.
#5 – Notes to Financial Statement
Notes to the financial statements are an integral part of financial statements and include:
- Specific policies used as per GAAP/IFRS.
- Accounting estimates.
- Details of all the amounts disclosed on the face of the balance sheet and income statement.
Sample Annual Financial Statements
For illustration purposes, let’s take a look at the sample annual financial statement of Apple Inc.
#1 – Balance Sheet
#2 – Income Statement
#3 – Statement of Changes in Equity
#4 – Cash Flow Statement
- The following information shall be presented for the proper understanding of information presented in the financial statements:
- Name of the entity.
- Standalone Financial Statement or Consolidated Financial Statement. If an entity has a subsidiary or multiple subsidiaries, it is required to prepare a standalone financial statement as well as consolidated financial statements. Consolidated financial statements present the combined financial performance of the holding company as well as its subsidiaries company.
- The reporting period for which the financial statements are presented.
- Presentation Currency.
- Level of rounding used to present the amount in the financial statements e.g, in thousand or in millions.
- It is important to report the previous year balances in the annual financial statements for the sake of comparison.
- Annual Financial Statements are prepared for the accounting year may be equal to the calendar year, fiscal year or any other period as per the accounting policy of the entity.
- As per IFRS, all the assets and liabilities are reported at the fair value.
- Financial statements should be prepared on a going concern basis. In case the management is aware of any uncertainties that may cause significant doubt upon the continuity of the entity, such uncertainties should be disclosed.
- Except for the cash flow statement, annual financial statements are prepared using the accrual basis of accounting.
- According to IAS 1, “Presentation of Financial Statements” If income and expense items are of material nature, that amount should be disclosed separately. Items of material nature include:
- Discontinuing operations.
- Disposal of investments and non-current assets.
- Restructuring Expenses.
- Litigation settlements.
- Notes to the Financial Statements should present:
- Specific accounting policies.
- Disclosure of information required by IFRS.
- Additional information is relevant to understanding the financial statements.
- It is mandatory for the listed entities to publish their financial statements with the time stipulated by law of the land. Also, as a part of legal compliance entities are required to file a copy of their financial statements with the listed stock exchange.
Annual Financial statements report the financial position and performance of the entity for a specified period of 12 months. Such information is used by management, investors, lenders, and creditors to analysis the financial position of the entity in order to take important economic and financial decisions for the future growth of the entity.
This has been a guide to Annual Financial Statements. Here we discuss the 5 constituents of annual financial statements – Statement of Profit and Loss, Cash Flow Statement, Statement of Changes in Equity and Notes to Financial Statement along with examples. You may learn more about basic accounting from the following articles –