The Main Statements of Financial Statements – 1 Updated Reward to

The Main Statements of Financial Statements

This is some explanation of the basic presentation of Financial Statements into a categorised format that is useful for the most of the users for Financial Statements.

There are four main financial statements:

1. Statement of Financial Position,
2. Statement of Profit or Loss and Other Comprehensive Income,
3. Statement of Cash Flows,
4. Statement of changes in Shareholders’ Equity.

Then to complete the contents of Financial Statements there are the ‘Notes to the Financial Statements‘. The Main Statements of Financial Statements

Keep in mind that as part of the Better Business Reporting project (Better communication in financial reporting) by among others IFRS and audit firms, reporting is more and more about better (easier, aligned to business strategy, performance and sustainable entrepreneurship) informing users of Financial Statements of what management thinks of the performance, long(er) term goals, governance and all such things things are not as framed/standardised as they have been.

So like many companies do start with the Statement of Profit or Loss and Other Comprehensive Income rather than the Statement of Financial Position if the Statement of Profit or Loss and Other Comprehensive Income (or only the Statement of Profit or Loss) is the most important, one might even start with the Statement of Cash Flows if it is managed like a ‘cash cow’.  But that might still be a long shot.

The Statement of Financial Position displays the company’s total assets, and how these assets are financed, through either debt or equity. It can also be referred to as a statement of net worth, or a (blast from the past) Balance sheet. The balance sheet is based on the fundamental equation: Assets = Liabilities + Equity at a fixed point in time.

The Statement of Profit or Loss and Other Comprehensive Income is a combination of two items, that may be either combined in one statement or in two statements:

1. A Statement of Profit or Loss, that is a financial report that provides a summary of a company’s revenues, expenses, and profits/losses over a given period of time. The P&L statement shows a company’s ability to generate sales, manage expenses, and create profits. It is prepared based on accounting principles that include revenue recognition, matching, and accruals, which makes it different from the cash flow statement.The Main Statements of Financial Statements
2. A Statement of Other Comprehensive Income, that consists of income, expenses, gains, and losses that, according to the GAAP and IFRS standards, are excluded from net income on the income statement. Revenues, expenses, gains, and losses that are reported as other comprehensive income are amounts that have not been realized yet, and
3. not a statement but a sort of bridging between the Statement of Profit or Loss and Statement of Other Comprehensive Income, recycling (the reclassification from equity to P&L), that is the process where gains or losses are reclassified from equity to the Statement of Profit or Loss as an accounting adjustment. In other words gains or losses are first recognised in the OCI and then in a later accounting period also recognised in the Statement of Profit or Loss. In this way the gain or loss is reported in the total comprehensive income of two accounting periods and in colloquial terms is said to be recycled as it is recognised twice. At present it is down to individual accounting standards to direct when gains and losses are to be reclassified from equity to the Statement of Profit or Loss as a reclassification adjustment.

The Statement of Cash Flows shows the exchange of money between a company and the outside world also over a period of time (and yes you guessed it right, this is on a cash basis, directly from the movements in cash or indirectly calculated from the movements in the Financial Position and Profit or Loss and Other Comprehensive Income). One could say the Statement of Cash Flows is a statement translating the Statement of Financial Position and Statement of Other Comprehensive Income into cash received and cash paid. The cash received and cash paid is classified in three activities:

1. Cash flow from (used in) Operating activities (or Operations) – is cash received or paid in the course of regular business activity—the main way your business makes money, by selling products or services, and paying your operating expenses.
2. Cash flow from (used in) Investing activities  (or Investing) – is cash received or paid in the course of investing in productive assets (such as purchasing equipment), shops or offices and selling or divesting used productive assets shops or offices at the end of their productive/economical life.
3. Cash flow from (used in) Financing activities (or Financing) – is cash received or paid in the course of financing your company with loans, lines of credit, or owner’s equity and repayments of principal on loans and cash paid on dividends to owners.

The Statement of changes in Shareholders’ Equity only shows changes in the interests of the company’s shareholders over time, covering the same period as the Statement of Profit or Loss and Other Comprehensive Income and The Statement of Cash Flows. The statement of changes in stockholders’ equity shows:

1. transactions with shareholders, such as an issue of new shares, buy back of issued shares (that then become treasury shares), and
2. certain technical gains and losses that increase or decrease owners’ equity that are also reported in the Statement of Other Comprehensive Income but that are not reported in the Statement of Profit or Loss.

A common sense rule in IFRS is that disclosures in the Financial Statements need to be either in one of the four main statements or in the notes. For example, if an entity classifies Property, Plant and Equipment (PP&E) into:

1. Land, The Main Statements of Financial Statements
2. Factories, The Main Statements of Financial Statements
3. Offices, The Main Statements of Financial Statements
4. Right-to-use assets, and The Main Statements of Financial Statements
5. Other, The Main Statements of Financial Statements

The entity can include these classes of PP&E directly on the face of the Statement of Financial Position or in the Notes to the Financial Statements to provide useful information. To keep things tidy it is that common sense that tells you to not put every detail in the four main statements. Since PP&E also needs to be reporting all movements in the period covered you will see that one or two lines are included on the face of the Statement of Financial Position, with a breakdown in the Notes to the Financial Statements into the above mentioned 5 classes through a movement schedule.  The Main Statements of Financial Statements

It’s so important to read the Notes to the Financial Statements. The Notes to the Financial Statements are packed with information and are an attempt of IFRS to provide useful information. Here are some of the highlights:

• Significant accounting policies and practices – Entities are required to disclose the accounting policies that are most important to the portrayal of the entity’s financial condition and results. These often require management’s most difficult, subjective or complex judgments. The Main Statements of Financial Statements
• Income taxes – The notes provide detailed information about the company’s current and deferred income taxes. One of the hottest disclosures for the coming years (2019 and forward) is disclosed (US) (or will be disclosed (continental Europe) here, it is the description and tabulation of the main items that affect the entity’s effective tax rate.
• Pension plans and other retirement programs – The notes discuss the entity’s pension plans and other retirement or post-employment benefit programs. The notes contain specific information about the assets and costs of these programs, and indicate whether and by how much the plans are over- or under-funded.
• Stock options – The notes also contain information about stock options granted to officers and employees, including the method of accounting for stock-based compensation and the effect of the method on reported results.

A complete(r) (possible) guide to the Notes to the Financial Statements looks like this:

Also read: Notes to the accounts

The Main Statements of Financial Statements