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 equityStatement Of Changes In EquityStatement of changes in equity is the adjustment of opening and closing balances of equity during a particular reporting period. It explains the connection between a company’s income statement and balance sheet. It also includes all those transactions not captured in these two financial statements., 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 fundamental 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 AssetsNon-Current AssetsNon-current assets are long-term assets bought to use in the business, and their benefits are likely to accrue for many years. These Assets reveal information about the company's investing activities and can be tangible or intangible. Examples include property, plant, equipment, land & building, bonds and stocks, patents, trademark. such as property, plant and equipmentProperty, Plant And EquipmentProperty plant and equipment (PP&E) refers to the fixed tangible assets used in business operations by the company for an extended period or many years. Such non-current assets are not purchased frequently, neither these are readily convertible into cash. , intangible assetsIntangible AssetsIntangible Assets are the identifiable assets which do not have a physical existence, i.e., you can't touch them, like goodwill, patents, copyrights, & franchise etc. They are considered as long-term or long-living assets as the Company utilizes them for over a year. , financial assetsFinancial AssetsFinancial assets are investment assets whose value derives from a contractual claim on what they represent. These are liquid assets because the economic resources or ownership can be converted into a valuable asset such as cash., assets held for saleAssets Held For SaleAvailable for sale Securities are the company's debt or equity securities investments that are expected to be sold in the short run and will are not be held to maturity. These are reported on the balance sheet at fair value, and any unrealized gains or losses on these securities are reported in other comprehensive income as a part of shareholders' equity rather than in the income statement., deferred tax assetDeferred Tax AssetA deferred tax asset is an asset to the Company that usually arises when either the Company has overpaid taxes or paid advance tax. Such taxes are recorded as an asset on the balance sheet and are eventually paid back to the Company or deducted from future taxes., and current assets such as inventory, receivables, cash, and cash equivalentsCash, And Cash EquivalentsCash and Cash Equivalents are assets that are short-term and highly liquid investments that can be readily converted into cash and have a low risk of price fluctuation. Cash and paper money, US Treasury bills, undeposited receipts, and Money Market funds are its examples. They are normally found as a line item on the top of the balance sheet asset. .
- Liabilities: Including financial liabilitiesFinancial LiabilitiesFinancial Liabilities for business are like credit cards for an individual. In simple terms, a financial liability is a contractual obligation that needs to be settled in cash or any other financial asset and are very useful in the sense that the company can employ “others’ money” in order to finance its own business-related activities for some time period which lasts only when the liability becomes due. The liabilities could be of two types, short term and long term., deferred tax liabilityDeferred Tax LiabilityDeferred tax liabilities arise to the company due to the timing difference between the accrual of the tax and the date when the company pays the taxes to the tax authorities. This is because taxes get due in one accounting period but are not paid in that period., and current liabilitiesCurrent LiabilitiesCurrent Liabilities are the payables which are likely to settled within twelve months of reporting. They're usually salaries payable, expense payable, short term loans etc. such as trade payables and provisions.
- Equity: Including share capitalShare CapitalShare capital refers to the funds raised by an organization by issuing the company's initial public offerings, common shares or preference stocks to the public. It appears as the owner's or shareholders' equity on the corporate balance sheet's liability side., retained earningsRetained EarningsRetained Earnings are defined as the cumulative earnings earned by the company till the date after adjusting for the distribution of the dividend or the other distributions to the investors of the company. It is shown as the part of owner’s equity in the liability side of the balance sheet of the company., and minority interestMinority InterestMinority interest is the investors' stakeholding that is less than 50% of the existing shares or the voting rights in the company. The minority shareholders do not have control over the company through their voting rights, thereby having a meagre role in the corporate decision-making..
#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 policyAccounting PolicyAccounting policies refer to the framework or procedure followed by the management for bookkeeping and preparation of the financial statements. It involves accounting methods and practices determined at the corporate level. 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:
- OPEXOPEXOperating expense (OPEX) is the cost incurred in the normal course of business and does not include expenses directly related to product manufacturing or service delivery. Therefore, they are readily available in the income statement and help to determine the net profit.
- Earnings before Interest and TaxesEarnings Before Interest And TaxesEarnings before interest and tax (EBIT) refers to the company's operating profit that is acquired after deducting all the expenses except the interest and tax expenses from the revenue. It denotes the organization's profit from business operations while excluding all taxes and costs of capital. (EBIT)
- Finance CostFinance CostFinancing costs refer to interest payments and other expenses incurred by the company for the operations and working management. An enterprise often borrows money from different financing sources to run their operations in return for interest payments and capital gains.
- Share of profit or loss from the associates and/or joint venturesJoint VenturesA joint venture is a commercial arrangement between two or more parties in which the parties pool their assets with the goal of performing a specific task, and each party has joint ownership of the entity and is accountable for the costs, losses, or profits that arise out of the venture.
- Tax Expenses
- Profit and loss from discontinued operations
- Net Income After Tax for the period
- Income attributable to the minority interestMinority InterestMinority interest is the investors' stakeholding that is less than 50% of the existing shares or the voting rights in the company. The minority shareholders do not have control over the company through their voting rights, thereby having a meagre role in the corporate decision-making.
- 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 statementCash Flow StatementA Statement of Cash Flow is an accounting document that tracks the incoming and outgoing cash and cash equivalents from a business. 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 surplusReserves And SurplusReserves and Surplus is the amount kept aside from the profits that are to be used either for the business or for the shareholders to pay out dividends. Reserves and surplus is reflected under shareholders funds in the balance sheet..
- The corrections made concerning errors made in the past.
- 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 estimatesAccounting EstimatesAccounting estimates refer to the technique of calculating unquantifiable items in business with no accuracy of date, record or expense. It is based on experience, judgement and knowledge and helps in the overall view of the total balance and cost incurred..
- Details of all the amounts disclosed on the face of the balance sheetBalance SheetA balance sheet is one of the financial statements of a company that presents the shareholders' equity, liabilities, and assets of the company at a specific point in time. It is based on the accounting equation that states that the sum of the total liabilities and the owner's capital equals the total assets of the company. 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 StatementConsolidated Financial StatementConsolidated Financial Statements are the financial statements of the overall group, which include all three key financial statements – income statement, cash flow statement, and balance sheet – and represent the sum total of its parents and all of its subsidiaries.. If an entity has a subsidiary companySubsidiary CompanyA subsidiary company is controlled by another company, better known as a parent or holding company. The control is exerted through ownership of more than 50% of the voting stock of the subsidiary. Subsidiaries are either set up or acquired by the controlling company. 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 companyHolding CompanyA holding company is a company that owns the majority voting shares of another company (subsidiary company). This company also generally controls the management of that company, as well as directs the subsidiary's directions and policies. as well as its subsidiaries company.
- The reporting periodReporting PeriodA reporting period is a month, quarter, or year during which an organization's financial statements are prepared for external use uniformly across a period of time in order for the general public and users to interpret and evaluate the financial statements. 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 yearFiscal YearFiscal Year (FY) is referred to as a period lasting for twelve months and is used for budgeting, account keeping and all the other financial reporting for industries. Some of the most commonly used Fiscal Years by businesses all over the world are: 1st January to 31st December, 1st April to 31st March, 1st July to 30th June and 1st October to 30th September, 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.Accrual Basis Of Accounting.Accrual Accounting is an accounting method that instantly records revenues & expenditures after a transaction occurs, irrespective of when the payment is received or made.
- According to IAS 1, “Presentation of Financial Statements,” If income and expense items are material, that amount should be disclosed separately. Items of material nature include:
- Discontinuing operations.
- Disposal of investments and non-current assets.
- Restructuring ExpensesRestructuring ExpensesRestructuring Cost is the one-time expense incurred by the company in the process of reorganizing its business operations. It is done to improve the long term profitability and working efficiency. This expenditure is treated as the non-operating expenses in the financial statements..
- 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 the 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 analyze the financial position of the entity 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 five constituents of annual financial statements – Statement of Profit and Loss, Cash Flow Statement, Statement of Changes in Equity, and Notes to Financial Statements along with examples. You may learn more about basic accounting from the following articles –