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 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 Assets 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 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 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 earnings, 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:
- 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 ventures
- 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 StatementStatement of Cash flow is a statement in financial accounting which reports the details about the cash generated and the cash outflow of the company during a particular accounting period under consideration from the different activities i.e., operating activities, investing activities and financing activities. 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 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 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 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 company 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 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.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 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 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 –