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Handbook: Financial statement presentation

Handbook | November 2023

Latest edition: In-depth guide on presentation and disclosure requirements, plus considerations under SEC regulations.

Using detailed Q&As and examples, we explain various presentation and general disclosure requirements included in the Codification (i.e. ASC 205 to ASC 280), other broad topics (e.g. related parties under ASC 850 and subsequent events under ASC 855) and SEC regulations. This November 2023 edition incorporates updated guidance and interpretations.

Applicability

• All entities

Relevant dates

• Effective immediately

Key impacts

In the financial statement process, considerable time is devoted to determining what items get recorded and how to account for them, but the critical final mile is determining how they need to appear – i.e. how they are presented and disclosed.

Once the debits and credits have been settled, presentation and disclosure is how that information is conveyed to financial statement users in a transparent, understandable and consistent manner. Disclosure goes ‘behind the numbers’ and is necessary to fully understand the financial statements.

ASC 205 to 280 in the FASB’s Accounting Standards Codification® are dedicated to presentation and disclosure and provide the baseline requirements. Other ASCs address more detailed requirements, specific to certain transactions or industries. For SEC registrants, there is yet more guidance that contains many additional requirements, and which has helped shape practices over the years for all other entities.

In this Handbook, we pull together many of the general requirements and practices to provide you with a fuller picture of how the different financial statements are constructed and how they interact with one another. 

Report Contents

• Financial statements: general principles
• Balance sheet
• Income statement
• Comprehensive income
• Notes to the financial statements
• Risks and uncertainties
• Related parties
• Subsequent events

Download the documents:

Financial statement presentation

Executive Summary

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Handbook: Earnings per share

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Presentation of Financial Statements (IAS 1)

Last updated: 17 May 2024

IAS 1 serves as the main standard that outlines the general requirements for presenting financial statements. It is applicable to ‘general purpose financial statements’, which are designed to meet the informational needs of users who cannot demand customised reports from an entity. Documents like management commentary or sustainability reports, which are often included in annual reports, fall outside the scope of IFRS, as indicated in IAS 1.13-14. Similarly, financial statements submitted to a court registry are not considered general purpose financial statements (see IAS 1.BC11-13).

The standard primarily focuses on annual financial statements, but its guidelines in IAS 1.15-35 also extend to interim financial reports (IAS 1.4). These guidelines address key elements such as fair presentation, compliance with IFRS, the going concern principle, the accrual basis of accounting, offsetting, materiality, and aggregation. For comprehensive guidance on interim reporting, please refer to IAS 34 .

Note that IAS 1 will be superseded by the upcoming IFRS 18 Presentation and Disclosure in Financial Statements .

Now, let’s explore the general requirements for presenting financial statements in greater detail.

Financial statements

Components of a complete set of financial statements.

Paragraph IAS 1.10 outlines the elements that make up a complete set of financial statements. Companies have the flexibility to use different titles for these documents, but each statement must be presented with equal prominence (IAS 1.11). The terminology used in IAS 1 is tailored for profit-oriented entities. However, not-for-profit organisations or entities without equity (as defined in IAS 32), may use alternative terminology for specific items in their financial statements (IAS 1.5-6).

Are you tired of the constant stream of IFRS updates? I know it's tough! That's why I created Reporting Period – a once-a-month summary for professional accountants. It consolidates all essential IFRS developments and Big 4 insights into one readable email. I personally curate every issue to ensure it's packed with the most relevant information, delivered straight to your inbox. It's free, with no spam, and if it turns out not to be right for you, you can unsubscribe with just one click.

Compliance with IFRS

Financial statements must include an explicit and unreserved statement of compliance with IFRS in the accompanying notes. This statement is only valid if the entity adheres to all the requirements of every IFRS standard (IAS 1.16). In many jurisdictions, such as the European Union, laws mandate compliance with a locally adopted version of IFRS.

IAS 1 does consider extremely rare situations where an entity might diverge from a specific IFRS requirement. Such a departure is permissible only if it prevents the presentation of misleading information that would conflict with the objectives of general-purpose financial reporting (IAS 1.20-22). Alternatively, entities can disclose the impact of such a departure in the notes, explaining how the statements would appear if the exception were made (IAS 1.23).

Identification of financial statements

The guidelines for identifying financial statements outlined in IAS 1.49-53 are straightforward and rarely cause issues in practice.

Going concern

The ‘going concern’ principle is a cornerstone of IFRS and other major GAAP. It assumes that an entity will continue to operate for the foreseeable future (at least 12 months). IAS 1 mandates management to assess whether the entity is a ‘going concern’. Should there be any material uncertainties regarding the entity’s future, these must be disclosed (IAS 1.25-26). IFRSs do not provide specific accounting principles for entities that are not going concerns, other than requiring disclosure of the accounting policies used. One of the possible approaches is to measure all assets and liabilities using their liquidation value.

See also this educational material at IFRS.org.

Materiality and aggregation

IAS 1.29-31 emphasise the importance of materiality in preparing user-friendly financial statements. While IFRS mandates numerous disclosures, entities should only include information that is material. This concept should be at the forefront when preparing financial statements, as reminders about materiality are seldom provided in other IFRS standards or publications.

Generally, entities should not offset assets against liabilities or income against expenses unless a specific IFRS standard allows or requires it. IAS 1.32-35 offer guidance on what can and cannot be offset. Offsetting of financial instruments is discussed further in IAS 32 .

Frequency of reporting

Entities are required to present a complete set of financial statements at least annually (IAS 1.36). However, some Public Interest Entities (PIEs) may be obliged to release financial statements more frequently, depending on local regulations. However, these are typically interim financial statements compiled under IAS 34 .

IAS 1 also allows for a 52-week reporting period instead of a calendar year (IAS 1.37). This excerpt from Tesco’s annual report serves to demonstrate this point, showing that the group uses 52-week periods for their financial year, even when some subsidiaries operate on a calendar-year basis:

If an entity changes its reporting period, it must clearly disclose this modification and provide the rationale for the change (IAS 1.36). It is advisable to include an explanatory note with comparative data that aligns with the new reporting period for clarity.

Comparative information

As a general guideline, entities should present comparative data for the prior period alongside all amounts reported for the current period, even when specific guidelines in a given IFRS do not require it. However, there’s no obligation to include narrative or descriptive information about the preceding period if it isn’t pertinent for understanding the current period (IAS 1.38).

If an entity opts to provide comparative data for more than the immediately preceding period, this additional information can be included in selected primary financial statements only. However, these additional comparative periods should also be detailed in the relevant accompanying notes (IAS 1.38C-38D).

IAS 1.40A-46 outlines how to present the statement of financial position when there are changes in accounting policies, retrospective restatements, or reclassifications. This entails producing a ‘third balance sheet’ at the start of the preceding period (which may differ from the earliest comparative period, if more than one is presented). Key points to note are:

• The third balance sheet is required only if there’s a material impact on the opening balance of the preceding period (IAS 1.40A(b)).
• If a third balance sheet is included, there’s no requirement to add a corresponding third column in the notes, although this could be useful where numbers have been altered by the change (IAS 1.40C).
• Interim financial statements do not require a third balance sheet (IAS 1.BC33).

IAS 8 also requires comprehensive disclosures concerning changes in accounting policies and corrections of errors .

Statement of financial position

IAS 1.54 enumerates the line items that must, at a minimum, appear in the statement of financial position. Entities should note that separate lines are not required for immaterial items (IAS 1.31). Additional line items can be added for entity-specific or industry-specific matters. IAS 1 permits the inclusion of subtotals, provided the criteria set out in IAS 1.55A are met.

Additional disclosure requirements are set out in IAS 1.77-80A. Of particular interest are the requirements pertaining to equity (IAS 1.79), which begin with the number of shares and extend to include details such as ‘rights, preferences, and restrictions relating to share capital, including restrictions on the distribution of dividends and the repayment of capital.’ While these kinds of limitations are common across various legal jurisdictions (for example, not all retained earnings can be distributed as dividends), many companies neglect to disclose such limitations in their financial statements.

For guidance on classifying assets and liabilities as either current or non-current, please refer to the separate page dedicated to this topic.

Statement of profit or loss and other comprehensive income

IAS 1 provides two methods for presenting profit or loss (P/L) and other comprehensive income (OCI). Entities can either combine both P/L and OCI into a single statement or present them in separate statements (IAS 1.81A-B). Additionally, the P/L and total comprehensive income for a given period should be allocated between the owners of the parent company and non-controlling interests (IAS 1.81B).

Minimum contents in P/L and OCI

IAS 1.82-82A specifies the minimum items that must appear in the P/L and OCI statements. These items are required only if they materially impact the financial statements (IAS 1.31).

Entities are permitted to add subtotals to the P/L statement if they meet the criteria specified in IAS 1.85A. Operating income is often the most commonly used subtotal in P/L. This practice may be attributed to the 1997 version of IAS 1, which mandated the inclusion of this subtotal—although this is no longer the case. IAS 1.BC56 clarifies that an operating profit subtotal should not exclude items commonly considered operational, such as inventory write-downs, restructuring costs, or depreciation/amortisation expenses.

Profit or loss (P/L)

All items of income and expense must be recognised in P/L (or OCI). This means that no income or expenses should be recognised directly in the statement of changes in equity, unless another IFRS specifically mandates it (IAS 1.88). Direct recognition in equity may also result from intra-group transactions . IAS 1.97-98 require separate disclosure of material items of income and expense, either directly in the income statement or in the notes.

Expenses in P/L can be presented in one of two ways (IAS 1.99-105):

• By their nature (e.g., depreciation, employee benefits); or
• By their function within the entity (e.g., cost of sales, distribution costs, administrative expenses).

When opting for the latter, entities must provide additional details on the nature of the expenses in the accompanying notes (IAS 1.104).

Other comprehensive income (OCI)

OCI encompasses income and expenses that other IFRS specifically exclude from P/L. There is no conceptual basis for deciding which items should appear in OCI rather than in P/L. Most companies present P/L and OCI as separate statements, partly because OCI is generally overlooked by investors and those outside of accounting and financial reporting circles. The concern is that combining the two could reduce net profit to merely a subtotal within total comprehensive income.

All elements that constitute OCI are specifically outlined in IAS 1.7, as part of its definitions.

Reclassification adjustments

A reclassification adjustment refers to the amount reclassified to P/L in the current period that was recognised in OCI in the current or previous periods (IAS 1.7). All items in OCI must be grouped into one of two categories: those that will or will not be subsequently reclassified to P/L (IAS 1.82A). Reclassification adjustments must be disclosed either within the OCI statement or in the accompanying notes (IAS 1.92-96).

To illustrate, foreign exchange differences arising on translation of foreign operations and gains or losses from certain cash flow hedges are examples of items that will be reclassified to P/L. In contrast, remeasurement gains and losses on defined benefit employee plans or revaluation gains on properties will not be reclassified to P/L.

The practice of transferring items from OCI to P/L, commonly known as ‘recycling’, lacks a concrete conceptual basis and the criteria for allowing such transfers in IFRS are often considered arbitrary.

Tax effects

OCI items can be presented either net of tax effects or before tax, with the overall tax impact disclosed separately. In either case, entities must specify the tax amount related to each item in OCI, including any reclassification adjustments (IAS 1.90-91). Interestingly, there is no such requirement to disclose tax effects for individual items in the income statement.

Statement of changes in equity

IAS 1.106 outlines the minimum line items that must be included in the statement of changes in equity. Subsequent paragraphs specify the disclosure requirements, which can be addressed either within the statement itself or in the accompanying notes. It’s crucial to note that changes in equity during a reporting period can arise either from income and expense items or from transactions involving owners acting in their capacity as owners (IAS 1.109). This means that entities cannot adjust equity directly based on changes in assets or liabilities unless these adjustments result from transactions with owners, such as capital contributions or dividend payments, or are otherwise mandated by other IFRSs.

Statement of cash flows

The statement of cash flows is governed by IAS 7 .

• Explanatory notes

Structure of explanatory notes

The structure for explanatory notes is detailed in IAS 1.112-116. In practice, there are several commonly adopted approaches to organising these notes:

Approach #1:

• Primary financial statements (P/L, OCI, etc.)
• Statement of compliance and basis of preparation
• Accounting policies

Approach #1 is logically coherent, as understanding accounting policies is crucial before delving into the financial data. However, in reality, few people read the accounting policies in their entirety. Consequently, users often have to navigate past several pages of accounting policies to reach the explanatory notes.

Approach #2:

• Primary financial statements (P/L, OCI, etc)

In Approach #2, accounting policies are treated as an appendix and positioned at the end of the financial statements. The advantage here is that all numerical data is clustered together, uninterrupted by extensive descriptions of accounting policies.

Approach #3:

• Explanatory notes integrated with relevant accounting policies

Approach #3 pairs accounting policies directly with the associated explanatory notes. For example, accounting policies relating to inventory would appear alongside the explanatory note that breaks down inventory components.

Management of capital

IAS 1.134-136 outline the disclosures related to capital management. These provisions apply to all entities, whether or not they are subject to external capital requirements. An important note here is that entities are not obligated to disclose specific values or ratios concerning capital objectives or requirements.

IAS 1.137 mandates disclosure of dividends proposed or declared before the financial statements were authorised for issue but not recognised as a distribution to owners during the period. Furthermore, entities are required to disclose the amount of any cumulative preference dividends not recognised.

Disclosure of accounting policies

IAS 1 specifies the requirements for disclosing accounting policy information which are discussed here .

Disclosing judgements and sources of estimation uncertainty

IAS 1 mandates disclosing judgements and sources of estimation uncertainty .

Other disclosures

Additional miscellaneous disclosure requirements are detailed in paragraphs IAS 1.138.

IFRS 18 Presentation and Disclosure in Financial Statements

On 9 April 2024, the IASB issued IFRS 18 Presentation and Disclosure in Financial Statements , which replaces IAS 1 and amends IAS 7. This new standard will be effective from 2027 with early application permitted.

Here are the key changes under IFRS 18:

• Two new subtotals have been added to the income statement: ‘Operating Profit’ and ‘Profit Before Financing and Income Taxes’. This change requires companies to categorise income and expenses into operating, investing, and financing activities.
• A new requirement mandates the reconciliation of non-GAAP measures with IFRS-specified subtotals, but this only applies to P/L measures such as adjusted profit. Other metrics like free/organic cash flow or net debt are not included.
• The statement of cash flows will start with operating profit for the indirect method, and the classification of cash flows related to interest and dividends has been standardised. Typically, dividends and interest paid will fall under financing activities, while those received will be recorded under investing activities.

While many IAS 1 provisions remain under IFRS 18, others, including the basis of financial statement preparation and disclosure of accounting policies, have moved to IAS 8, which will be retitled Basis of Preparation of Financial Statements . For further insights, see the IASB Project Summary .

© 2018-2024 Marek Muc

The information provided on this website is for general information and educational purposes only and should not be used as a substitute for professional advice. Use at your own risk. Excerpts from IFRS Standards come from the Official Journal of the European Union (© European Union, https://eur-lex.europa.eu). You can access full versions of IFRS Standards at shop.ifrs.org. IFRScommunity.com is an independent website and it is not affiliated with, endorsed by, or in any other way associated with the IFRS Foundation. For official information concerning IFRS Standards, visit IFRS.org.

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Financial Statement Presentation: Structure and Requirements

Preparing financial statements that meet regulatory requirements can be an overwhelming task for many organizations.

This article provides a comprehensive guide to the key components, structure, and presentation standards for financial statements to ensure proper compliance and disclosure.

We will explore the five main financial statements, breakdown the required elements of each statement, review relevant accounting standards from GAAP and IFRS, and provide practical examples and templates to guide your financial statement preparation. By following the recommendations outlined here, you can create accurate, compliant financial statements tailored to your specific reporting needs.

Introduction to Financial Statement Presentation

Financial statements are formal reports that summarize a company's financial performance over a period of time. They communicate key information to internal and external stakeholders to facilitate decision-making. Proper financial statement presentation is vital for businesses to effectively convey their financial position.

This section will provide an overview of financial statement presentation, including its purpose, key components, and regulatory requirements. It will introduce the 5 main components of financial statements and discuss how proper presentation is vital for businesses.

Understanding the 5 Components of Financial Statements

Financial statements generally contain 5 key components:

• Income Statement - Reports revenue, expenses, and profit/loss over a period of time
• Balance Sheet - Snapshot of assets, liabilities, and equity on a certain date
• Cash Flow Statement - Depicts inflows and outflows of cash
• Statement of Stockholders' Equity - Shows changes in equity accounts
• Notes to Financial Statements - Additional disclosures and details

These 5 reports work together to provide a comprehensive view of a company's finances. Proper categorization and presentation of each component is necessary for stakeholders to accurately interpret performance.

Significance of Financial Statement Presentation

Financial statement presentation standards exist to:

• Communicate Performance - Well-structured reports allow readers to clearly see profitability, liquidity, leverage, etc.
• Meet Regulatory Requirements - Public companies must follow strict presentation rules.
• Facilitate Decision-Making - With organized information, internal and external decisions can be made effectively.

Following presentation guidelines ensures transparency and enables financial analysis .

Regulatory Framework: ASC 205 and IAS 1

In the US, the FASB's ASC 205 establishes presentation principles for financial statements. Similarly, the IASB's IAS 1 outlines international standards. These regulations dictate:

• Statement ordering and content
• Classification and aggregation
• Disclosures

Understanding the regulatory presentation framework is key for proper financial reporting .

Proper financial statement presentation acts as the foundation for communicating performance. By classifying information correctly and meeting presentation standards, businesses can clearly convey their financial position.

What are the requirements for fair presentation of financial statements?

Fair presentation of financial statements requires adherence to accounting standards and a faithful representation of the company's financial position. Some key requirements include:

Compliance with Applicable Accounting Standards

Financial statements must comply with the applicable accounting standards framework, such as:

• US GAAP - Generally Accepted Accounting Principles in the United States
• IFRS - International Financial Reporting Standards

This ensures standardized reporting across companies.

Faithful Representation

Financial statements should faithfully represent the economic reality of transactions and events. Information should be complete, neutral, and free from material error.

Understandability

Financial information should be presented clearly and concisely. Companies should provide adequate disclosures and explanation of accounting policies , estimates, and judgements.

Information in financial statements should be relevant to the decision-making needs of users. Only include information that is capable of making a difference in decisions.

Materiality

Companies must provide all material information - those that can reasonably influence users' decisions. Immaterial information can be excluded.

Comparability

Financial reporting should allow users to identify similarities and differences across reporting periods and between entities. Consistent presentation and reporting facilitates comparison.

Following accounting rules and standards, as well as providing relevant, faithful, and clear information is key to achieving fair presentation of financial statements.

How do you present financial statements in a presentation?

When presenting financial statements, it is important to focus on communicating the key information clearly and effectively to your audience. Here are some tips:

Keep it simple

Avoid using complex financial jargon and acronyms that may confuse your audience. Present key figures, trends, and takeaways in easy-to-understand language. Use examples if needed to illustrate your points.

Use visuals

Visual aids like charts, graphs, and tables can help reinforce numbers and make financial data more digestible. Choose clear, uncluttered designs over flashy graphics. Emphasize key metrics and trends.

Tell a story

Structure your presentation to take the audience on a logical journey. Explain the meaning behind the numbers, and how they relate to broader company strategy and performance. Draw connections between financial statements.

Tailor to your audience

Understand what financial information your audience cares about most, and focus on highlighting the relevant key performance indicators that align to their interests or concerns.

Practice effective delivery

Speak slowly and clearly. Maintain eye contact and gauge audience reaction. Be prepared to answer questions on the details behind your summary figures.

Following these tips can lead to financial presentations that clearly communicate meaning and impact.

How should financial statements be presented?

Financial statements should be presented in a clear, structured format that complies with accounting standards and principles .

General Presentation Guidelines

• Financial statements typically include a balance sheet, income statement, statement of cash flows, and statement of stockholders' equity. Notes and disclosures provide important details.
• Assets are generally presented from most liquid to least liquid, while liabilities are presented from short-term to long-term.
• Positive numbers indicate assets and revenues, while negative numbers signify liabilities, equity, expenses or losses.
• Subtotals and totals should be clearly labeled for each financial statement category or section to improve readability.

Disclosure Requirements

Certain disclosures are required by accounting standards like GAAP or IFRS in the footnotes and statement notes. These include:

Accounting policies used

Details on material asset, liability and equity accounts

Segment and geographical reporting

Commitments and contingencies

Disclosures should provide clarity on any aspects of the financial statements that may be unclear or require further explanation.

Following standard presentation guidelines and properly disclosing important details leads to higher quality, more transparent and understandable financial statements.

What are the requirements for financial statements?

Financial statements need to adhere to certain basic requirements to accurately reflect a company's financial position. These include:

Fair Presentation

Financial statements must fairly present the financial position, performance, and cash flows of an entity. This requires compliance with accounting standards as well as providing adequate disclosures and descriptions to give users an accurate picture of the company's finances.

Going Concern

Financial statements are prepared under the assumption that the entity will continue operating in the foreseeable future. If there are doubts about the company's ability to do so, appropriate disclosures must be made.

Accrual Basis

Financial statements are prepared using the accrual basis of accounting, meaning that economic events are recognized when they occur, not when cash is exchanged. This better matches revenues and expenses to the period in which they were incurred.

Materiality and Aggregation

Information is material if omitting or misstating it could influence decisions made by users of the financial statements. Immaterial items can be aggregated to avoid cluttering statements.

No Offsetting

Assets and liabilities, and income and expenses, cannot be offset against each other unless specifically permitted by the accounting standards. Offsetting obscures useful information.

In summary, financial statements must provide a fair, going concern view of the entity's finances on an accrual basis. They should include all material information without aggregation or offsetting. Most companies must prepare financial statements at least annually and include comparative info from prior periods. Consistency in presentation over time is also key.

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Structuring financial statements: a detailed look.

Financial statements are structured reports that summarize a company's financial position and performance over a period of time. The five main financial statements are:

Income Statement Breakdown

The income statement shows a company's revenues, expenses, and net income over a period of time, usually a quarter or year. Key components include:

• Revenue - Money earned from the company's operations, products, or services
• Cost of Goods Sold (COGS) - Direct expenses related to providing products/services
• Operating Expenses - Indirect expenses like marketing, R&D, administration
• Operating Income - Revenue minus COGS and operating expenses
• Other Income/Expenses - Taxes, interest earned/paid
• Net Income - The "bottom line" profit or loss after subtracting all expenses

The income statement shows whether a company made a profit or loss during the period.

Analyzing the Balance Sheet

The balance sheet is a snapshot of a company's financial position at a point in time. Key components include:

Assets - Resources owned by the company with economic value. Common asset types:

• Current Assets - Cash, accounts receivable, inventory
• Fixed Assets - Property, plants, equipment
• Intangible Assets - Patents, trademarks, goodwill

Liabilities - Debts and obligations owed by the company:

• Current Liabilities - Due within 12 months, e.g. accounts payable
• Long-Term Debt - Due after 12 months, e.g. bonds payable

Shareholders' Equity - Value that would be returned to shareholders if assets were liquidated and debts paid off. Includes:

• Paid-in Capital - Amounts invested by shareholders
• Retained Earnings - Company profits not paid out as dividends

The balance sheet shows the company's financial health and liquidity position.

Cash Flow Statement Categorization

The cash flow statement tracks the actual cash coming into and going out of the business. Cash flows are categorized into:

• Operating Activities - Core business operations, e.g. cash received from customers
• Investing Activities - Investments in capital expenditures, securities, etc.
• Financing Activities - Cash from financing sources like loans and equity issuances

Analyzing the sources and uses of cash flow indicates whether the company is generating enough cash to sustain itself.

Presentation of the Statement of Retained Earnings

The statement of retained earnings summarizes changes in retained earnings over a period. It starts with the prior period's retained earnings, adds net income earned during the current period, and subtracts any dividends paid to shareholders.

The ending retained earnings balance is shown on the balance sheet. Tracking changes helps assess how much of the company's profits are being reinvested vs. paid out to shareholders.

Components of the Statement of Shareholders' Equity

The statement of shareholders' equity summarizes changes in the equity accounts over a period. Key components include:

• Paid-in Capital - Additional investments by shareholders
• Treasury Stock - Company repurchases of outstanding shares
• Retained Earnings - Company profits not paid as dividends
• Accumulated Other Comprehensive Income - Certain income statement items

This statement reconciles the beginning and ending shareholders' equity balances on the balance sheet.

Financial Statement Presentation Standards and Requirements

Financial statement presentation is crucial for effectively communicating a company's financial position and performance to stakeholders. Companies must follow strict presentation standards and requirements outlined by accounting regulations like US GAAP and IFRS.

Adhering to US GAAP Financial Statements Format

The FASB Accounting Standards Codification (ASC) Topic 205 summarizes the core presentation requirements for US GAAP financial statements. Key elements include:

• Classifying the balance sheet into current and noncurrent assets and liabilities
• Presenting expenses by function or nature in the income statement
• Including a statement of cash flows and statement of changes in equity
• Disclosing relevant information in footnotes

Companies should reference ASC 205 and related regulations when preparing financials to ensure proper US GAAP format and disclosure.

Compliance with IFRS and IAS 1 Presentation Standards

International Financial Reporting Standards (IFRS) share similarities with US GAAP but have key differences in presentation under IAS 1 (PDF here). These include:

• Stricter requirements about items presented on the balance sheet and income statement
• Different classifications of expenses and equity
• More flexibility in formatting statements

It is critical for multinational companies to understand both US GAAP and IFRS presentation standards.

Navigating SEC Disclosure Requirements

Public companies in the US must also follow Securities and Exchange Commission (SEC) disclosure rules that impact financial statement presentation. Examples include:

• Segment reporting disclosures about products, services, and geographic areas
• Related party transaction footnotes
• Disclosures of risk factors and uncertainties

See PwC's guide for best practices on SEC disclosures.

Avoiding Common Financial Statement Presentation Pitfalls

Some common financial statement presentation mistakes include:

• Inconsistent classification of expenses across periods
• Netting accounts that should be presented gross
• Failing to properly disclose uncertainties or contingencies

Companies should reference EY's presentation guide and have external audits done to identify areas for improvement.

Exploring Disclosures and Supplementary Information

This section will examine common supplementary financial information and disclosures provided alongside or within financial statements, and their significance in providing a complete financial picture.

Detailing Accounting Policies and Disclosures

Financial statements must include significant accounting policies as a footnote, summarizing principles related to revenue recognition , depreciation methods, valuation of inventories, investments, etc. These disclosures ensure transparency on assumptions and estimates made in preparing the statements.

For example, a retail company may disclose:

• Revenue is recognized at the point of sale when goods are sold to customers.
• Inventory is valued using the FIFO method.
• Fixed assets are depreciated over useful lives of 3-10 years using the straight-line method.

Other vital disclosures provide details on litigation risks, contractual obligations, segment performance, related party transactions , pension plan assets and obligations, etc. These offer context for assessing the company's financial health.

Insights from Management's Discussion and Analysis (MD&A)

The MD&A section discusses the company's financial performance, changes in financial position, and outlook. It analyzes trends in liquidity, capital resources, operations, industry conditions, and other factors impacting the business.

For instance, the MD&A may attribute a revenue decline to specific economic or competitive challenges. Or it may link an increase in capital expenditures to investments in new production facilities. This qualitative perspective supplements the quantitative data in financial statements.

Financial Ratio Analysis and Benchmarks

Many companies include key financial ratios like return on equity , profit margin, asset turnover, debt-to-equity alongside industry benchmarks.

For example, an industrial manufacturer may compare its gross margin percentage, inventory turnover ratio, and days sales outstanding ratio to industry averages. This allows contextual assessment of financial performance.

Benchmarking also assists lenders and investors in comparing companies within an industry when making investment decisions.

Types of Disclosures in Financial Statements

Common disclosures in financial statements include:

• Contingencies: Litigation, environmental liabilities, warranties
• Related parties: Transactions with affiliated entities
• Risks: Interest rate, currency, credit risk exposures
• Subsequent events: Significant events occurring after fiscal yearend
• Uncertainties: Potential asset impairments, variability in estimates
• Segment details: Revenue, assets, profitability by product line or geography

Such disclosures increase transparency on uncertainties inherent in financial reporting and assumptions made by management. They provide vital perspective for financial statement users and must be presented appropriately as per accounting standards.

Practical Examples and Guides for Financial Statement Presentation

This section provides practical financial statement presentation examples and explores resources like the PwC and EY financial statement presentation guides.

Financial Statement Presentation Example

Here is an example of a basic financial statement presentation for a fictional company:

Income Statement

• Revenue: $100,000
• Cost of Goods Sold: $60,000
• Gross Profit: $40,000
• Operating Expenses: $20,000
• Operating Income: $20,000
• Interest Expense: $2,000
• Pretax Income: $18,000
• Income Tax: $5,000
• Net Income: $13,000

Balance Sheet

• Cash: $10,000
• Accounts Receivable: $5,000
• Inventory: $15,000
• Total Assets: $30,000
• Liabilities
• Accounts Payable: $4,000
• Total Liabilities: $4,000
• Shareholders' Equity
• Common Stock: $10,000
• Retained Earnings: $16,000
• Total Liabilities and Equity: $30,000

Cash Flow Statement

• Operating Activities
• Changes in Working Capital: $5,000
• Net Cash from Operations: $18,000
• Investing Activities
• Equipment Purchases: -$3,000
• Financing Activities
• Dividends Paid: -$5,000
• Change in Cash: $10,000

This illustrates the core components and layout of financial statements. Companies provide further disclosures and details in the footnotes.

Leveraging the PwC Financial Statement Presentation Guide PDF

The PwC financial statement presentation guide provides a comprehensive overview of financial statement presentation requirements under IFRS . Key aspects covered include:

• General presentation principles
• Statement of financial position structure
• Income statement layout and disclosures
• Standards for the statement of changes in equity
• Cash flow statement preparation

The guide serves as an authoritative reference for ensuring financial statements adhere to the latest standards and presentation best practices. Companies can leverage the guide when structuring their financial reports to improve quality, transparency, and compliance.

Utilizing the EY Financial Statement Presentation Guide

The EY financial statement presentation guide delivers insights into effectively presenting financial information to stakeholders. Areas covered include:

• Optimizing the balance sheet structure
• Enhancing the clarity of the income statement
• Improving cash flow statement usefulness through classification
• Making critical judgment calls on presentation
• Providing high quality disclosures

By consulting the guide, finance teams can apply EY's presentation best practices to their financial reporting processes. This helps improve the understandability and decision-usefulness of statements for investors and regulators.

Conclusion: Mastering Financial Statement Presentation

Proper financial statement presentation is critical for communicating accurate and transparent information to stakeholders. As discussed, key requirements per GAAP and IFRS standards include:

• Presenting comparative financial statements covering at least two reporting periods
• Clearly labeling each financial statement and its components
• Disclosing relevant information in the notes to assist in interpretation
• Following formatting and component ordering conventions

By mastering guidelines around statement structure, organizations build trust and enable sound decision-making. Key lessons for financial professionals include:

• Understand regulatory presentation standards based on jurisdiction
• Analyze comparative trends and performance over time
• Assess which disclosures are material to the reader
• Format statements consistently across periods
• Focus on transparency through clear communication

Meeting presentation requirements takes diligence, but pays dividends in stakeholder confidence. Financial leaders should continue honing their expertise in this critical discipline.

Related posts

• Delving into IFRS Standards: A Comprehensive Review
• Interim Financial Reporting: GAAP Requirements
• Balance Sheet vs Income Statement
• Understanding Consolidated Financial Statements

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September special: Business Transformation PPT Templates

10 Slide Ideas for Financial Report Presentation

• August 17, 2021
• Financial , PowerPoint templates for download

Working on a company financial report, and want to make it different this time? Financial reviews are typically difficult to digest by non-financial audiences. It can be challenging to communicate the meaning behind the figures. If you want to disclose your quarterly or annual numbers in a simple and understandable way to your key stakeholders, check our blog for examples and inspiration.

A financial report is a management tool used to communicate key financial information to both internal and external stakeholders by covering aspects of financial affairs with the help of KPIs, such as income statements, balance sheets, cash flow, or financial ratios analysis. See how to prepare structured and professional financial slides smoothly using PowerPoint tools.

All graphics examples presented below can be downloaded as an editable source. Explore the Financial Report and Performance Indicators Presentation for PowerPoint.

Get inspired by seven examples of how you can illustrate the components of your financial report presentation and a quick instruction on how you can create a P&L Statement table using simple design tricks.

Visualize your key financial indicators

Such a general slide with a financial report presentation summary will help to analyze the big picture and ensure you’re on the same page with the audience.

You can list the common key indicators such as Global Net Revenue, Like for Like Growth, Cash Conversion Cycle, and Profit Before Tax. A neutral background picture makes the slide more attractive and circles with highlights on the right help to stay focused on important numbers.

Show revenue and profit snapshots on one dashboard slide

This slide shows how you can summarize net sales and profitability evolution using gauges and a simple bar chart. The dashboard illustrates typical profitability measures: Net Sales, Operating Expenses, EBIDTA, and PBT as easy-to-read gauge charts. The profit growth over the years is shown as a clear bar chart.

Illustrate revenue highlights with clear charts

If you’d like to include additional data, for example, revenue highlights over time or regions, you can do it as on the slides above. The first one presents a sales distribution breakdown by months and categories. The second slide example presents sales split by worldwide market geographies on a world map as a light background underlining the location of the markets.

Small elements, like pin icons, doughnut charts, and color-coding will help you add a professional look to your presentation.

Pro tip: To help non-financial people digest the data, keep your slides short, don’t stuff them with jargon words . Use illustrations, and make the most essential data points clearly visible.

Include balance sheet and cash flow tables

The very common problem is the unreadability of massive tables. The balance sheet and cash flow statement will be definitely complex, as you need to squeeze many numbers inside.

Notice how color-coding is used for various table sections, and illustrative symbols, which don’t steal attention from the content, but rather nicely add up. A text box aside can be used for your comments or notes.

Compare key drivers of revenue growth

To illustrate the comparison of several growth drivers, you can apply such stacked bars.

Notice how specific drivers (E-commerce, Emerging Markets, Organic Growth, New Product Lines) are illustrated by corresponding icon symbols, all in one consistent style.

Visualize revenue analysis for each quarter in your financial report

To present an analysis of sales revenue over the year, you can use such a bar chart. It’s slightly enhanced by adding quarter signs over the data chart.

This data chart illustrates revenue analysis split by quarters and channels. If you have some comments or notes you’d like to discuss, we advise putting the most essential point in bold.

Present your financial metrics and indicators as a dashboard grid

Want to go deeper and include the analysis of some ratios? A good idea is to firstly remind your audience what are those indicators and what exactly they show.

If you have more items to show on one slide, it’s good to organize them into some regular grid. Make sure all elements are aligned to make it look professional.

If you have more items to show on one slide, it’s good to organize them to some regular grid.

You can include general definitions and development of key financial analysis ratios e.g. growth, profitability, liquidity, efficiency, solvency, and capital market ratios. On the slide example, you can see the capital market ratios KPI line chart which shows the Dividend Yield and P/E Ratio change over the years.

Guide on how to redesign P&L Statement to a stylish table

Here’s a step-by-step guide on how you can create a P&L Statement table using simple shapes, icons, and a few tricks that will save you time.

1. Use simple PowerPoint shapes to create a stylish table design.

2. Adjust your source P&L table to be readable.

The trick is to have enough margin inside the table cell.

3. Enhance the table header

Add ribbon shapes as an additional header row to make the table look nicer.

4. Redesign the first column

You can add stylish arrows in a place of 1st table column.

5. Enrich your table with icons and a background picture.

See the whole instruction and other visual examples here: How to Create an Effective Company Financial Report Using PowerPoint.

Need to prepare a broader annual report and focus on business highlights? See how to create a comprehensive overview of activities using graphs, icons, infographic elements, and data-driven charts in this blog .

Resources: Financial Report and Performance Indicators Presentation

The graphics in this blog are a part of our financial report layouts collection. Our financial review deck incorporates 30 infographic slide templates for a financial summary overview, balance sheets with assets and liabilities, financial analysis presentation, income statements, profit and loss reports, revenue and profit snapshots, cash flow statements, explain types of financial ratios, key growth drivers, or breakdown of your operational expenses.

You can reuse graphs and charts, and tailor them to your needs in order to make your slides clear and easy to understand. See the full deck here:

Using concise, modern images will make your PowerPoint structured and consistent. To make your presentations even more appealing, consider also using this collection of professionally designed diagram layouts .

More Resources to Get Inspired

If you’re looking for more design inspiration, check our movie guide on how to present financial reports, financial analyses, and financial highlights professionally (you’ll find many more practical tips on our YouTube channel):

Subscribe to the newsletter  and follow our  YouTube channel  to get more design tips and slide inspiration.

infoDiagram Co-founder, Visual Communication Expert

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Financial Report

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Reviewed by Denis Malkov

Design your financial presentation using our free customizable template with financial data slides.

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Financial Report Presentation

Prepared for:

​ [Client.Company] ​

Prepared by:

​ [Sender.FirstName] [Sender.LastName] [Sender.Title] [Sender.Company] ​

Executive summary

Revenue over time

Balance sheet

Revenue over Customer

Revenue by key products

P&L (Profit

Financial analysis

Revenue by region

Table of Contents

Executive summary

Add your executive summary here with financial goals, market analysis, and a preview

of the data that this presentation is going

Financial metrics

Including financial metrics in your presentation will give the report credibility

and help everyone visualize the underlying data.

Metrics to include:

Earnings per share.

Earnings before interest, taxes, depreciation, and amortization.

Operating income

Revenue minus operating expenses.

Profit margins

Net income divided by revenue.

Operating income minus non-operating expenses.

Financial results

Present financial outcomes (both positive and negative) on a weekly, monthly, quarterly, or annual basis.

Financial analysis

Financial analysis helps you spot trends, set policies, and create long-term plans for your business.

Revenue and profit

Add your revenue and profit data to give shareholders a clear picture of gross margins for the business.

Your revenue

Your profit

Revenue over time

Add your revenue over time (on a monthly, quarterly, and/or annual basis) to show how fast your company is growing.

Revenue over customer segments

Present revenue for each customer segment to identify the highest-value groups.

Revenue by key products

Segment revenue by your key products to identify the highest-grossing offerings of your business.

Revenue by region

Split revenue up by region to see which regions are performing best and which regions may need additional expansion efforts and support.

Revenue analysis

Add revenue analysis to see if sales growth is in line with forecasts and goals.

Add your company's balance sheet with its total assets and liabilities.

Add your company's cash flow — the total amount of money moving in and out of your business.

P&L (Profit and Loss)

Summarize the revenue, costs, and expenses for the period covered in your financial report.

Add your company's financial expenses.

Example expenses:

Fixed expenses such as utility bills, insurance, and office space rent

Variable expenses like production and labor

Intermittent expenses like tax repayments or repair costs

Discretionary expenses such as event hosting and software subscriptions

Highlight the key elements of your report such as the percentage of revenue growth, the degree to which profit margins have improved, or the rise in operating income as a result of reducing costs.

Care to rate this template?

Your rating will help others.

Thanks for your rate!

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Home Blog Business How to Make a Financial Presentation [Templates + Examples]

How to Make a Financial Presentation [Templates + Examples]

In the corporate world, many professionals excel at generating reports and financial plans, but we talk about a whole different thing regarding financial presentations. Much like report presentations , they are an entirely different discipline where overloading slides with information tends to be a common bad practice. Hence, acquiring good slide design habits from day one is important.

A financial presentation’s primary goal is to communicate a company’s financial health and performance clearly and compellingly. It goes beyond displaying numbers and charts; it requires a deep understanding of the data and the ability to weave it into a narrative that tells the story of the company’s financial journey and which is its next expected destination. In this article, you will learn how to effectively present financial results so financial professionals and stakeholders without financial education can make informed decisions based on your slides. Additionally, we will list a series of financial presentation templates to make this task easier, taking the design decisions off our hands to concentrate on content generation.

Table of Contents

What is a Financial Presentation?

What are the elements of a financial presentation, how to extract and present data from financial plans and reports, presenting financial data in visual formats, how financial presentation templates save time, recommended financial presentation ppt templates, final words.

A financial presentation is a strategic tool used within a corporate setting to convey important financial data to stakeholders. The primary purpose of these presentations is to inform decision-making processes, showcase company performance, and strategize future operations based on financial insights.

At its core, a financial presentation serves to bridge the gap between what’s understood as complex financial data and strategic business decisions . From a knowledge standpoint, it provides a framework to display financial achievements, highlight areas that need attention, and generate traction on future business decisions. 

Introduction and Executive Summary

Every financial presentation should start with a clear introduction slide that outlines the objectives and what the audience can expect. This is followed by an executive summary , which offers a concise overview of the company’s financial status.

Check out our article on how to start a presentation for more ideas to break the ice at the initial stages of your financial presentation.

Financial Statements Overview

The financial statements to list are the balance sheet, income statement, and cash flow. Those three are critical; depending on the presentation’s objectives, we can add more if required. This overview is not about showing the tables but includes a brief explanation of each component, highlighting significant changes and trends that are required for the audience’s understanding.

Key Performance Indicators and Ratios

From previously defined KPIs, the presentation must list the observed changes, if the metrics meet the success criteria, and where the situation drifts from expected. Examples of KPIs are profitability, liquidity, efficiency, and leverage ratios.

If you prefer to work with the OKR approach, we invite you to check our guide on presenting objectives and key results .

Analysis of Financial Performance

After introducing all the previous data, the presenter must now examine that data, explaining trends, identifying performance drivers, and examining the variances between projected and actual numbers. The core objective is to answer why the results occurred, what they mean for the business, and which corrective measures must be implemented—if required.

Forecasting

Financial projections are presented and discussed based on current market conditions, the current financial situation, and historical data. If the data set is large enough, revenue forecasts, expenditure forecasts, and cash flow forecasts are typically displayed on individual slides. The periods to project depend on whether we are talking about an annual financial forecast, quarterly, etc.

Strategic recommendations for these future scenarios should also be included, as they give decision-makers actionable insights.

Conclusion and Call to Action

We can end the presentation with a summary of the key points discussed (especially if it was a lengthy presentation), the outlook for the company, and the core KPIs of financial health. The call to action to implement depends on the expected action to take out of the information: if making a decision, approving a strategy, or revisiting a budget, for example.

Appendices and supporting information can be delivered in handout for presentation format or include a hyperlink in the slide to access a cloud drive where all those documents can be seen.

Gathering Raw Information

The first step in preparing a financial presentation is to gather relevant data, which includes planned financials and the actual performance metrics. The planned financials refer to budget forecasts or financial targets, which are the blueprint against which actual data performance will be measured.

Data Analysis and KPIs

The data analysis is done in three stages. The first one is a Variance Analysis, which identifies the differences between planned and actual figures. We calculate the variance for each financial metric by subtracting the planned value from the actual value, and with this procedure, positive values indicate over-performance, whereas negative variances suggest under-performance.

Next comes the Trend Analysis, which helps to understand how certain metrics evolve over time. A positive trend is set if the revenue has increased consistently over the last few quarters.

The final analysis is the Ratio Analysis, in which some key ratios are:

• Profitability Ratios: Such as Gross Profit Margin, Net Profit Margin, and Return on Equity (ROE).
• Liquidity Ratios: Such as Current Ratio and Quick Ratio, which measure the company’s ability to meet short-term obligations.
• Efficiency Ratios: Such as Inventory Turnover and Receivables Turnover, which assess how efficiently the company is using its assets.
• Leverage Ratios: Such as Debt-to-Equity Ratio, which indicates the company’s reliance on debt financing.

To determine which KPIs to present, opt for this approach: define their relevance to the target audience and the objectives of the presentation. Provide context for each KPI and its importance, then select a visual aid (charts, graphs, etc.). Compare the KPIs against industry standards, previous periods, or budget targets.

Consolidate Financial Data

This stage involves a detailed examination of where the company has met the targets and where objectives weren’t achieved. The reasons for the variance must be exposed and clarified if they are internal or external. Then, we select the visual format to visualize such data in a way that helps our presentation’s narrative.

Presenting financial data effectively requires the use of visual aids that clarify trends and comparisons. Column charts are ideal for depicting changes over time, allowing the audience to grasp growth patterns, cyclical trends, or inconsistencies quickly. Line charts can be used to denote trends more smoothly, particularly useful for presenting earnings trends or stock price movements over multiple periods.

Comparative Analysis

Business professionals can use formats like column charts listing the previous period or budget to discuss the variations with the actual data. This approach simplifies the process by juxtaposing different datasets rather than understanding two sets of graphs on separate slides.

If you opt for charts, we can implement color coding in legends to distinguish between historical, budget, and actual data. This solution’s advantage is that the audience can visually appreciate growth rates or anomalies, which you can then explain in a second slide and apply the same color scheme for faster memory association.

A preferred option for their versatile usage, dashboard templates for PowerPoint helps us consolidate various financial metrics into a single slide, with plenty of visual cues to maximize retention rate. The best part is that dashboards can be customized, or we can mix & match PPT templates to curate unique slide decks with all the tools required for our financial presentation.

Consistent Aesthetic and Efficiency

The need to dwell on design decisions is minimized when working with financial presentation templates. Those pre-made slide layouts are the byproduct of professional graphic designers and seasoned presenters, meaning they carry an appropriate white balance, color scheme, font pairing, etc. The areas in which you can include images are clear to access in the slide deck, leaving no room for polluted slides with excess content.

On an aesthetic side, since the templates are crafted by professional designers, the color palette is consistent across different slides, and the same applies to font size, font pairing, icon style, etc. All slides look like they belong to the same slide deck, even if you customize the templates with the native tools in your presentation software. The aesthetic remains cohesive, projecting an air of professionalism across your work.

Customization and Reusability

Working with PowerPoint templates for financial presentations has the advantage that we only need to pick our design once. We can continuously update a presentation template with newer data, save it as a new version of the presentation, and deliver it to our audience. This means updating text placeholder areas, graphs, charts, and images as required, a process that takes no longer than half an hour for extensive presentations.

Presenters can also adapt the presentation templates with their company’s branding color scheme, add logos, add more placeholder areas, and tweak any slide aspect as required. We offer plenty of guides on our blog for PowerPoint tutorials and Google Slides tutorials to come up with amazing results. 

This section lists our selected financial presentation templates for PowerPoint and Google Slides, which can make your work much easier.

1. Expense Report for Financial Presentations PowerPoint Template

Easily track and report expenses with a clean, professional layout. Ideal for clear, concise communication with stakeholders. Save time and ensure accuracy in your reporting. Perfect for sales, finance, and management teams.

Use This Template

2. Performance Review Financial Results PPT Template

A slide deck containing all the tools required for the presentation of financial information. Annual performance review, quarterly performance review, strategic slides, and more. This template simplifies the evaluation process with a structured, easy-to-use format. It clearly presents employee information, performance metrics, and goals achieved.

3. Annual Report Finance Presentation Slide Deck

A compendium of tools from timelines, corporate governance, charts, bar charts, and plenty more options if you are wondering how to present financials. 23 slides to deliver transparency into any financial meeting. Check them out!

4. Finance & Investment PowerPoint Template

If you are browsing for an attractive PowerPoint template to engage potential investors, this is the slide deck to use in your upcoming financial presentation. 25 slides containing a broad range of visual cues, graphics, chart, tables, and anything else you can imagine a financial presentation might require.

5. Financial Savings Infographic PPT Template

This is the slide deck to check whenever a financial presentation requires infographics to break complex concepts into easy-to-recall cues. It contains five infographic slides, a detailed circular wheel chart with bar chart and donut chart companion graphics, and suitable icons to express any kind of situation with a deep level of detail.

A financial presentation should typically have around 15-20 slides, depending on the complexity and depth of the information. Ensure that each slide serves a clear purpose and contributes to the overall narrative.

Use clear and concise language, visual aids, and storytelling techniques to make your presentation engaging. Focus on the narrative behind the numbers, explaining the implications and strategic recommendations.

Avoid cluttering slides with too much information, using overly complex jargon, neglecting to explain variances, and failing to align your presentation with the audience’s interests and knowledge level.

Update financial presentations regularly, ideally every quarter, to reflect the most recent financial data and performance. This ensures stakeholders have access to current and relevant information.

Storytelling helps connect the data with the audience by providing context and narrative. It makes the presentation more engaging and highlights the significance of the financial information.

Reinforce confidentiality by only sharing necessary information and using discretion when discussing sensitive topics. If required, anonymize data or use aggregated figures to protect specific details.

Incorporate interactive dashboards, use scenario analysis to show potential outcomes, and apply predictive analytics to forecast future performance. Advanced visualizations like heat maps or waterfall charts can add depth to your presentation.

Enhancing your financial presentation skills is not just about mastering the use of tools and techniques; it’s about effectively interpreting and communicating financial data to influence business decisions. With this tutorial’s tools and presentation structure, we are confident you can transform your financial presentations into strong strategic business guidance.

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What Are Financial Statements?

How financial statements work.

• Balance Sheet
• Income Statement
• Cash Flow Statement
• Changes in Shareholder Equity
• Comprehensive Income

Nonprofit Financial Statements

• Limitations

The Bottom Line

• Corporate Finance
• Financial statements: Balance, income, cash flow, and equity

Financial Statements: List of Types and How to Read Them

• Business Valuation: 6 Methods for Valuing a Company
• Valuation Analysis
• Financial Statements CURRENT ARTICLE
• 6 Basic Financial Ratios
• 5 Must-Have Metrics for Value Investors
• Earnings Per Share (EPS)
• Price-to-Earnings Ratio (P/E Ratio)
• Price-To-Book Ratio (P/B Ratio)
• Price/Earnings-to-Growth (PEG Ratio)
• Fundamental Analysis
• Absolute Value
• Relative Valuation
• Intrinsic Value of a Stock
• Intrinsic Value vs. Current Market Value
• Equity Valuation: The Comparables Approach
• 4 Basic Elements of Stock Value
• How to Become Your Own Stock Analyst
• Due Diligence in 10 Easy Steps
• Determining the Value of a Preferred Stock
• Qualitative Analysis
• Stock Valuation Methods
• Bottom-Up Investing
• Ratio Analysis
• What Book Value Means to Investors
• Liquidation Value
• Market Capitalization
• Discounted Cash Flow (DCF)
• Enterprise Value (EV)
• How to Use Enterprise Value to Compare Companies
• How to Analyze Corporate Profit Margins
• Return on Equity (ROE)
• Decoding DuPont Analysis
• How to Value Private Companies
• Valuing Startup Ventures

Financial statements are reports compiled by businesses that detail the company's financial activities and health. Financial statements are often audited by government agencies and accountants to ensure accuracy and for tax, financing, or investing purposes.

The primary financial statements of for-profit businesses include the balance sheet, income statement, statement of cash flow, and statement of changes in equity. Nonprofit entities use a similar set of financial statements, though they have different names and communicate slightly different information.

Key Takeaways

• Financial statements provide governments, investors, executives, and lenders with a picture of a company's financial activities and profitability.
• Statements required by Generally Accepted Accounting Principles (GAAP) are the balance sheet, the income statement, and the statement of cash flows.
• The balance sheet provides an overview of assets, liabilities, and shareholders' equity as a snapshot in time.
• The income statement reports a company's revenues and expenses, including a company's profit figure called net income.
• The cash flow statement (CFS) tracks how a company uses its cash to pay its debt obligations and fund its operating expenses and investments.

Investopedia / Julie Bang

A business's financial data is used by internal and external parties to analyze that company's performance and make predictions about the likely direction of its stock price. One of the most important sources of reliable and audited financial data is the annual report , which contains the firm's financial statements.

The financial statements are used by investors, market analysts, and creditors to evaluate a company's financial health and earnings potential. The three major financial statement reports are the balance sheet, income statement, and statement of cash flows.

Not all financial statements are created according to the same accounting rules. The rules used by U.S. companies are called Generally Accepted Accounting Principles, while the rules often used by international companies are International Financial Reporting Standards (IFRS). Additionally, U.S. government agencies use a different set of financial reporting rules.

Understanding the Balance Sheet

A company's balance sheet provides an overview of the company's assets, liabilities, and shareholders' equity at a specific time and date. The date at the top of the balance sheet tells you when this snapshot was taken; this is generally the end of its annual reporting period. Below is a breakdown of the items in a balance sheet.

• Cash and cash equivalents  are liquid assets, which may include Treasury bills and certificates of deposit.
• Accounts receivable   are the money owed to the company by its customers for the sale of its products and services.
• Inventory is the goods a company has on hand, intended to be sold as a course of business. Inventory may include finished goods, work in progress that is not yet finished, or raw materials on hand that have yet to be worked.
• Prepaid expenses are costs paid in advance of when they are due. These expenses are recorded as an asset because their value has not yet been recognized; should the benefit not be recognized, the company would theoretically be due a refund.
• Property, plant, and equipment (PPE) are capital assets owned by a company for its long-term benefit. This includes buildings used for manufacturing or heavy machinery used for processing raw materials.
• Investments are assets held for speculative future growth. These aren't used in operations; they are simply held for capital appreciation.
• Trademarks, patents, goodwill, and other intangible assets can't physically be touched but have future economic (and often long-term benefits) for the company.

Liabilities

• Accounts payable are the bills due as part of a business's operations. This includes utility bills, rent invoices, and obligations to buy raw materials.
• Wages payable are payments due to staff for time worked.
• Notes payable are recorded debt instruments that record official debt agreements, including the payment schedule and amount.
• Dividends  payable are dividends that have been declared to be awarded to shareholders but have not yet been paid.
• Long-term debt can include a variety of obligations, including sinking bond funds, mortgages, or other loans that are due in their entirety in more than one year.

Short-term debt is recorded as a current liability separate from long-term debt.

Shareholders' Equity

• Shareholders' equity is a company's total assets minus its total liabilities.  Shareholders' equity (also known as stockholders' equity ) represents the amount of money that would be returned to shareholders if all of the assets were liquidated and all debts paid off.
• Retained earnings  are part of shareholders' equity; this is the amount of net earnings that were not paid to shareholders as dividends.

Example of a Balance Sheet 

Below is a portion of ExxonMobil Corporation's  (XOM)  balance sheet for fiscal year 2023, reported as of Dec. 31, 2023.

• Total assets were $376.3 billion.
• Total liabilities were $163.8 billion.
• Total equity was $212.5 billion.
• Total liabilities and equity were $376.6 billion, which equals the total assets for the period.

Understanding the Income Statement

Unlike the balance sheet, the income statement covers a range of time, generally either a year or a quarter. The income statement provides an overview of revenues, expenses, net income, and earnings per share during that time.

The main purpose of the income statement is to convey details of profitability and the financial results of business activities; however, it can be very effective in showing whether sales or revenue is increasing when compared over multiple periods, which provides valuable information about the success of operations to executive and management.

Investors can also see how well a company's management is controlling expenses to determine whether a company's efforts in reducing the cost of sales might boost profits over time.

Revenue falls into three categories: operating revenue, non-operating revenue, and other income.

Operating revenue is the revenue earned by selling a company's products or services. The  operating revenue for an auto manufacturer would be realized through the production and sale of autos. Operating revenue is generated from the core business activities of a company.

Non-operating revenue is the income earned from non-core business activities. These revenues fall outside the primary function of the business. Some non-operating revenue examples include income from:

• Interest earned on cash in the bank
• Renting out property
• Strategic partnerships like royalty payment receipts
• Advertisement displays located on the company's property

Other income is the revenue earned from other activities. Other income could include gains from the sale of long-term assets such as land, vehicles, or a subsidiary.

Primary expenses are incurred during the process of earning revenue from the primary activity of the business. Expenses include:

• The cost of goods sold (COGS)
• Selling, general and administrative expenses (SG&A)
• Depreciation or amortization
• Research and development (R&D).

Typical expenses include employee wages, sales commissions, and utilities such as electricity and transportation.

Expenses that are linked to secondary activities include interest paid on loans or debt. Losses from the sale of an asset are also recorded as expenses.

Example of an Income Statement

Below is a portion of ExxonMobil Corporation's income statement for fiscal year 2023, reported as of Dec. 31, 2023.

• Total revenue was $344.6 billion.
• Total costs were $291.8 billion.
• Net income or profit was $36 billion.

Understanding the Cash Flow Statement

The cash flow statement (CFS) shows how cash is earned and spent by a company. The cash flow statement complements the balance sheet and  income statement .

The CFS allows investors to understand how a company's operations are running, where its money is coming from, and how money is being spent. The CFS also provides insight as to whether a company is on a solid financial footing.

The cash flow statement contains three sections that report on the various activities for which a company uses its cash.

Operating Activities 

The operating activities on the CFS include any sources and uses of cash from running the business and selling its products or services. Cash from operations includes any changes made in:

• Cash accounts receivable
• Depreciation
• Accounts payable

These transactions also include wages, income tax payments, interest payments, rent, and cash receipts from the sale of a product or service.

Investing Activities

Investing activities include any sources and uses of cash from a company's investments in its long-term future, including changes in equipment, assets, or investments related to cash from investing. This includes:

• The purchase or sale of an asset
• Loans made to vendors or received from customers
• Payments related to a merger or acquisition
• Purchases of fixed assets such as property, plant, and equipment (PPE)

Financing Activities

Cash from financing activities includes the cash from investors or banks, as well as the cash paid to shareholders. Financing activities include:

• Debt issuance
• Equity issuance
• Stock repurchases
• Dividends paid
• Debt repayments

The cash flow statement reconciles the income statement with the balance sheet in three major business activities.

Example of a Cash Flow Statement

Below is a portion of ExxonMobil Corporation's cash flow statement for fiscal year 2023, reported as of Dec. 31, 2023. We can see the three areas of the cash flow statement and their results.

• Operating activities generated a positive cash flow of $55.4 billion.
• Investing activities generated cash outflows of -$19.3 billion for the period. Additions to property, plant, and equipment made up the majority of cash outflows, which means the company invested in new fixed assets.
• Financing activities generated cash outflows of -$34.3 billion for the period. Dividends paid out to shareholders and acquisitions of common stock comprised most of the cash outflows.

Understanding the Statement of Changes in Shareholder Equity

The statement of changes in equity tracks total equity over time. This information ties back to a balance sheet for the same period; the ending balance on the change of equity statement equals the total equity reported on the balance sheet. Investors use this information to understand the profitability of a company and its stock.

The formula for changes to shareholder equity will vary from company to company; in general, there are a couple of components:

• Beginning equity : This is the equity at the end of the last period that simply rolls to the start of the next period.
• (+) Net income : This is the amount of income the company earned in a given period. The proceeds from operations are automatically recognized as equity in the company, and this income is rolled into retained earnings at year-end.
• (-) Dividends : This is the amount of money that is paid out to shareholders from profits. Instead of keeping all of a company's profits, the company may choose to give some profits away to investors.
• (+/-) Other comprehensive income : This is the period-over-period change in other comprehensive income. Depending on transactions, this figure may be an addition or subtraction from equity.

In ExxonMobil's statement of changes in equity, the company also records activity for acquisitions, dispositions, amortization of stock-based awards, and other financial activities. This information is useful for analyzing how much money is being retained by the company for future growth as opposed to being distributed externally.

Understanding the Statement of Comprehensive Income

An often less utilized financial statement, the statement of comprehensive income summarizes standard net income while also incorporating changes in other comprehensive income (OCI). Other comprehensive income includes all unrealized gains and losses that are not reported on the income statement.

This financial statement shows a company's total change in income, even gains and losses that have yet to be recorded in accordance with accounting rules. Investors and lenders can use this information to get a more detailed and comprehensive picture of a company's financial health.

Examples of transactions that are reported on the statement of comprehensive income include:

• Net income (from the statement of income)
• Unrealized gains or losses from debt securities
• Unrealized gains or losses from derivative instruments
• Unrealized translation adjustments due to foreign currency
• Unrealized gains or losses from retirement programs

In the example below, ExxonMobil has over $1 billion of net unrecognized income. Instead of reporting just $36 billion of net income, ExxonMobil reports $37.3 billion of total income when considering other comprehensive income.

Nonprofit organizations record financial transactions across a similar set of financial statements. However, nonprofit organizations do not have shareholders and do not pay out profits. As a result, they use different financial statements to report their activities, income, and expenses.

These financial reports are used by:

• Donors, to assess a nonprofit's activities before donating
• Internal or auditors, to ensure that funds raised by a nonprofit are being well spent
• Government agencies, to ensure that a nonprofit is compliant with all legal and tax requirements

Statement of Financial Position

This is the equivalent of a for-profit entity's balance sheet. The largest difference is nonprofit entities do not have equity positions. Any residual balances after all assets have been liquidated and liabilities have been satisfied are called "net assets."

Statement of Activities

This is the equivalent of a for-profit entity's statement of income. This report tracks the changes in operation over time, including the reporting of donations, grants, event revenue, and expenses to make everything happen.

Statement of Functional Expenses

This report is specific to nonprofit entities. The statement of functional expenses reports expenses by entity function (often broken into administrative, program, or fundraising expenses). This information is distributed to the public to explain what proportion of company-wide expenditures are related directly to the nonprofit's mission.

Statement of Cash Flow

This is the equivalent of a for-profit entity's statement of cash flow. Though the accounts listed may vary due to the different nature of a nonprofit organization, the statement is still divided into operating, investing, and financing activities.

Limitations of Financial Statements

Although financial statements provide a wealth of information on a company, they do have limitations. The statements are often interpreted differently, so investors often draw divergent conclusions about a company's financial performance.

For example, some investors might want stock repurchases , while others might prefer to see that money invested in long-term assets. A company's debt level might be fine for one investor, while another might have concerns about the level of debt for the company.

When analyzing financial statements , it's important to compare multiple periods to determine any trends and compare the company's results to its peers in the same industry.

Lastly, financial statements are only as reliable as the information fed into the reports. Too often, it's been documented that fraudulent financial activity or poor control oversight have led to inaccurate financial statements intended to mislead users. Even when analyzing audited financial statements, there is a level of trust that users must place in the validity of the report and the figures being shown.

External auditors assess whether a company's financial statements have been prepared according to standardized accounting rules. This ensures that all companies are reporting their finances in the same way, which allows investors, lenders, and others to more easily understand their reports. External auditors also ensure that these financial statements are accurate with no misstatements or omissions, whether accidental or deliberate.

What Are the Main Types of Financial Statements?

The three main types of financial statements are the balance sheet, the income statement, and the cash flow statement. These three statements together show the assets and liabilities of a business, revenues, and costs, as well as its cash flows from operating, investing, and financing activities.

What Are the Benefits of Financial Statements?

Financial statements show how a business operates. They provide insight into how a business generates revenues, what those revenues are, what the cost of doing business is, how efficiently it manages its cash, and what its assets and liabilities are. Financial statements show how well or poorly a company is managed.

How Do You Read Financial Statements?

Financial statements are read in several different ways. First, financial statements can be compared to prior periods to understand changes over time better. Financial statements can also be compared between competitors in the same industry to see the differences in their business operations and profits. By comparing financial statements to other companies, analysts can get a better sense of which companies are performing the best and which are lagging behind the rest of the industry.

What Is GAAP?

Generally Accepted Accounting Principles (GAAP) are the rules by which publicly-owned United States companies must prepare their financial statements. These are the guidelines that explain how to record transactions, when to recognize revenue, and when expenses must be recognized. International companies may use a similar but different set of rules called International Financial Reporting Standards (IFRS).

Financial statements are the ticket to the external evaluation of a company's financial performance. The balance sheet reports a company's financial health through its liquidity and solvency, while the income statement reports its profitability. A statement of cash flow ties these two together by tracking sources and uses of cash. Together, these financial statements provide a picture of a business's financial standing that is used by management, investors, governments, and lenders.

U.S. Securities and Exchange Commission. " Exxon Mobile Corporation Form 10-K for the Fiscal Year Ended Dec. 31, 2023 ."

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Resources teachers, parents and learners can use!

Lesson Plan: Grade 10 Accounting – statement of financial position

Edited lesson plan title: grade 10 accounting: statement of financial position, 1. materials needed:.

• CAPS-approved Grade 10 Accounting textbook
• Whiteboard and markers
• Projector and laptop for digital presentations
• Sample financial statements (printed or digital)
• Calculators
• Templates for a statement of financial position (printed or digital)

2. Learning Objectives:

By the end of this lesson, learners should be able to: 1. Define what a statement of financial position is. 2. Identify and categorize assets, liabilities, and equity. 3. Prepare a basic statement of financial position. 4. Explain the importance of the statement of financial position in financial reporting. 5. Use correct accounting terminology when discussing financial positions.

3. Vocabulary:

• Assets – Resources owned by a business that have economic value.
• Liabilities – Obligations the business needs to settle in the future.
• Equity – The owner’s interest in the business, representing ownership worth.
• Current Assets – Assets expected to be converted to cash within a year.
• Non-Current Liabilities – Liabilities that are not due within the next 12 months.

4. Previous Learning:

Learners have previously covered basic accounting principles , including the dual nature of transactions and the purpose of financial statements. They have also had an introduction to assets, liabilities, and equity.

5. Anticipated Challenges and Solutions:

• Solution: Provide clear examples and create a sorting activity to practice.
• Solution: Use a balance scale analogy to demonstrate balance in accounting.

6. Beginning Activities (10% of time: 6 minutes):

• Introduction : Review prior knowledge on financial statements to activate learning.
• Understanding, identifying, and preparing a statement of financial position.
• Quick Engager : Display a mixed list of items (e.g., cash, equipment, loans) and ask learners to classify them as assets, liabilities, or equity.

7. Middle Activities (80% of time: 48 minutes):

• Explain the structure of the statement of financial position.
• Show examples of current and non-current assets/liabilities.
• Introduce the accounting equation clearly.
• Distribute templates of financial positions.
• Work through a sample company’s financial data with the class, filling out the template step-by-step in a discussion format.
• Provide individual or small group worksheets with a set of financial data.
• Learners prepare their own statements of financial position, applying what they’ve learned.
• Use digital tools (like educational accounting software) for learners to input sample data and see real-time financial positions.

8. End Activities (10% of time: 6 minutes):

• Quick recap quiz using an interactive platform (e.g., Kahoot!) focusing on key concepts.
• Learners write one thing they learned and one question they still have about the statement of financial position.

9. Assessment and Checks for Understanding:

• Classification activity at the beginning to gauge prior understanding.
• Ongoing checks during guided practice via questioning and observation.
• Assessment of independent practice financial statements.
• Evaluation of exit ticket responses.

10. Differentiation Strategies:

• Pair with stronger peers during group activities.
• Provide additional visual aids and simplified, step-by-step examples.
• Involve them in calculating financial ratios using data from their statements.
• Introduce common financial adjustments and their impact on equity as an extension activity.

11. Teaching Notes:

• Ensure inclusivity by acknowledging different learning paces and using multilingual explanations if necessary.
• Highlight how accounting principles apply in real-world contexts to engage learners.
• Emphasize mathematical concepts and their application in accounting for cross-curricular links.

Additional Guidelines:

• Use culturally relevant examples to make content relatable.
• Discuss the importance of accurate financial reporting in personal and professional contexts.
• Encourage questions and provide clear, concise answers to reinforce understanding.

Teaching Tips:

• Use real-life examples from South African businesses to contextualize learning.
• Incorporate group discussions to encourage collaborative learning.
• Employ visual aids such as charts and graphs to help learners visualize the data.

Safety and Practical Considerations:

• Ensure learners handle calculators and digital devices appropriately.
• Manage classroom activities to maintain a conducive learning environment.

Overall, this refined lesson plan aims to deliver a comprehensive understanding of the statement of financial position to Grade 10 learners, equipping them with essential financial literacy skills while making the content engaging and accessible.

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XBRL attributes

Ifrs taxonomy 2020 – illustrative examples, illustrative financial statements for small and medium-sized entities (smes).

Examples from Illustrative financial statements for Small and Medium-sized Entities (SMEs) which have been tagged with XBRL. Example reflects full set of illustrative financial statements with the notes block as well as detail tagged.

XYZ Group:  Accounting policies and explanatory notes to the financial statements for the year ended 31 December 20X2

1.       General information

XYZ (Holdings) Limited (the Company) is a limited company incorporated in A Land . The address of its registered office and principal place of business is _________. XYZ Group consists of the Company and its wholly-owned subsidiary XYZ ( Trading) Limited . Their principal activities are the manufacture and sale of candles .

2.       Basis of preparation and accounting policies

These consolidated financial statements have been prepared in accordance with the International Financial Reporting Standard for Small and Medium-sized Entities issued by the International Accounting Standards Board. They are presented in the currency units (CU) of A Land.

Basis of consolidation

The consolidated financial statements incorporate the financial statements of the Company and its wholly-owned subsidiary. All intragroup transactions, balances, income and expenses are eliminated .

Investments in associates

Investments in associates are accounted for at cost less any accumulated impairment losses.

Dividend income from investments in associates is recognised when the Group’s right to receive payment has been established. It is included in other income.

Revenue recognition

Revenue from sales of goods is recognised when the goods are delivered and title has passed. Royalty revenue from licensing candle-making patents for use by others is recognised in accordance with the relevant licence agreements. Revenue is measured at the fair value of the consideration received or receivable, net of discounts and sales-related taxes collected on behalf of the government of A Land.

Borrowing costs

All borrowing costs are recognised in profit or loss in the period in which they are incurred.

Income tax expense represents the sum of the tax currently payable and deferred tax.

The tax currently payable is based on taxable profit for the year.

Deferred tax is recognised on differences between the carrying amounts of assets and liabilities in the financial statements and their corresponding tax bases (known as temporary differences). Deferred tax liabilities are generally recognised for all temporary differences that will result in taxable amounts in determining taxable profit (tax loss) of future periods when the carrying amount of the asset or liability is recovered or settled (taxable temporary differences). Deferred tax assets are generally recognised for all temporary differences that will result in amounts that are deductible in determining taxable profit (tax loss) of future periods when the carrying amount of the asset or liability is recovered or settled (deductible temporary differences)—but only to the extent that it is probable that taxable profits will be available against which those deductible temporary differences can be utilised.

The carrying amount of deferred tax assets is reviewed at each reporting date and is adjusted to reflect the current assessment of future taxable profits. Any adjustments are recognised in profit or loss.

Deferred tax is calculated at the tax rates that are expected to apply to the taxable profit (tax loss) of the periods in which it expects the deferred tax asset to be realised or the deferred tax liability to be settled, on the basis of tax rates that have been enacted or substantively enacted by the end of the reporting period.

Property, plant and equipment

Items of property, plant and equipment are measured at cost less accumulated depreciation and any accumulated impairment losses.

Depreciation is charged so as to allocate the cost of assets less their residual values over their estimated useful lives , using the straight-line method . The following annual rates are used for the depreciation of property, plant and equipment:

If there is an indication that there has been a significant change in depreciation rate, useful life or residual value of an asset, the depreciation of that asset is revised prospectively to reflect the new expectations.

Intangible assets

Intangible assets are purchased computer software that is stated at cost less accumulated depreciation and any accumulated impairment losses. It is amortised over its estimated life of five years using the straight-line method. If there is an indication that there has been a significant change in amortisation rate, useful life or residual value of an intangible asset, the amortisation is revised prospectively to reflect the new expectations.

Impairment of assets

At each reporting date, property, plant and equipment, intangible assets and investments in associates are reviewed to determine whether there is any indication that those assets have suffered an impairment loss. If there is an indication of possible impairment, the recoverable amount of any affected asset (or group of related assets) is estimated and compared with its carrying amount. If estimated recoverable amount is lower, the carrying amount is reduced to its estimated recoverable amount and an impairment loss is recognised immediately in profit or loss.

Similarly, at each reporting date, inventories are assessed for impairment by comparing the carrying amount of each item of inventory (or group of similar items) with its selling price less costs to complete and sell. If an item of inventory (or group of similar items) is impaired, its carrying amount is reduced to selling price less costs to complete and sell, and an impairment loss is recognised immediately in profit or loss.

If an impairment loss subsequently reverses, the carrying amount of the asset (or group of related assets) is increased to the revised estimate of its recoverable amount (selling price less costs to complete and sell, in the case of inventories), but not in excess of the amount that would have been determined had no impairment loss been recognised for the asset (group of related assets) in prior years. A reversal of an impairment loss is recognised immediately in profit or loss.

Leases are classified as finance leases whenever the terms of the lease transfer substantially all the risks and rewards of ownership of the leased asset to the Group. All other leases are classified as operating leases.

Rights to assets held under finance leases are recognised as assets of the Group at the fair value of the leased property (or, if lower, the present value of minimum lease payments) at the inception of the lease. The corresponding liability to the lessor is included in the statement of financial position as a finance lease obligation. Lease payments are apportioned between finance charges and reduction of the lease obligation so as to achieve a constant rate of interest on the remaining balance of the liability. Finance charges are deducted in measuring profit or loss. Assets held under finance leases are included in property, plant and equipment, and depreciated and assessed for impairment losses in the same way as owned assets.

Rentals payable under operating leases are charged to profit or loss on a straight-line basis over the term of the relevant lease.

Inventories

Inventories are stated at the lower of cost and selling price less costs to complete and sell. Cost is calculated using the first-in, first-out (FIFO) method.

Trade and other receivables

Most sales are made on the basis of normal credit terms and the receivables do not bear interest. Where credit is extended beyond normal credit terms, receivables are measured at amortised cost using the effective interest method. At the end of each reporting period, the carrying amounts of trade and other receivables are reviewed to determine whether there is any objective evidence that the amounts are not recoverable. If so, an impairment loss is recognised immediately in profit or loss.

Trade payables

Trade payables are obligations on the basis of normal credit terms and do not bear interest. Trade payables denominated in a foreign currency are translated into CU using the exchange rate at the reporting date. Foreign exchange gains or losses are included in other income or other expenses.

Bank loans and overdrafts

Interest expense is recognised on the basis of the effective interest method and is included in finance costs.

Employee benefits―long-service payment

The liability for employee benefit obligations relates to government-mandated long-service payments. All full-time staff, excluding directors, are covered by the programme. A payment is made of 5 per cent of salary (as determined for the twelve months before the payment) at the end of each of five years of employment. The payment is made as part of the December payroll in the fifth year. The Group does not fund this obligation in advance.

The Group’s cost and obligation to make long-service payments to employees are recognised during the employees’ periods of service. The cost and obligation are measured using the projected unit credit method, assuming a 4 per cent average annual salary increase, with employee turnover based on the Group’s recent experience, discounted using the current market yield for high quality corporate bonds.

Provision for warranty obligations

All goods sold by the Group are warranted to be free of manufacturing defects for a period of one year. Goods are repaired or replaced at the Group’s option. When revenue is recognised, a provision is made for the estimated cost of the warranty obligation.

3.       Key sources of estimation uncertainty

Long-service payments

In determining the liability for long-service payments (explained in note 19), management must make an estimate of salary increases over the following five years, the discount rate for the next five years to use in the present value calculation, and the number of employees expected to leave before they receive the benefits.

4.       Restriction on payment of dividend

Under the terms of the bank loan and bank overdraft agreements, dividends cannot be paid to the extent that they would reduce the balance of retained earnings below the sum of the outstanding balance of the bank loan and the bank overdraft.

5.       Revenue

6.       Other income

Other income includes dividends received from an associate of CU 25,000 in both 20X1 and 20X2 and gain on disposal of property, plant and equipment of CU 63,850 in 20X2.

7.       Finance costs

8.       Profit before tax

The following items have been recognised as expenses (income) in determining profit before tax:

9.       Income tax expense

Income tax is calculated at 40 per cent (20X1: 40 per cent) of the estimated assessable profit for the year.

Income tax expense for the year CU 270,250 in 20X2 (CU 189,559 in 20X1) differs from the amount that would result from applying the tax rate of 40 per cent (both 20X2 and 20X1) to profit before tax because, under the tax laws of A Land, some employee compensation expenses (CU 20,670 in 20X2 and CU 16,750 in 20X1) that are recognised in measuring profit before tax are not tax-deductible..

10.     Trade and other receivables

11.     Inventories

12.     Investment in associate

The Group owns 35 per cent of an associate whose shares are not publicly traded.

13.     Property, plant and equipment

14.     Intangible assets

15.     Deferred tax

Differences between amounts recognised in the income statement and amounts reported to tax authorities in connection with investments in the subsidiary and associate are insignificant.

The deferred tax assets are the tax effects of expected future income tax benefits relating to:

(a)            the long-service benefit (note 19), which will not be tax-deductible until the benefit is actually paid but has already been recognised as an expense in measuring the Group’s profit for the year.

(b)            the foreign exchange loss on trade payables, which will not be tax-deductible until the payables are settled but has already been recognised as an expense in measuring the Group’s profit for the year.

Management considers it probable that taxable profits will be available against which the future income tax deductions can be utilised.

The following are the deferred tax liabilities (assets) recognised by the Group:

The deferred tax assets for the foreign exchange loss and the long-service benefits and the deferred tax liability for software relate to income tax in the same jurisdiction, and the law allows net settlement. Therefore, they have been offset in the statement of financial position as follows:

16.     Bank overdraft and loan

The bank overdraft and loan are secured by a floating lien over land and buildings owned by the Group with a carrying amount of CU 266,000 at 31 December 20X2 (CU 412,000 at 31 December 20X1).

Interest is payable on the bank overdraft at 200 points above the London Interbank Borrowing Rate (LIBOR). Interest is payable on the seven-year bank loan at a fixed rate of 5 per cent of the principal amount.

17.     Trade payables

Trade payables at 31 December 20X2 include CU 42,600 denominated in foreign currencies (nil at 31 December 20X1).

18.     Provision for warranty obligations

Changes in the provision for warranty obligations during 20X2 were:

The obligation is classified as a current liability because the warranty is limited to twelve months.

19.     Employee benefit obligation―long-service payments

The Group’s employee benefit obligation for long-service payments under a government-mandated plan is based on a comprehensive actuarial valuation as of 31 December 20X2 and is as follows:

The obligation is classified as:

20.     Obligations under finance leases

The Group holds one piece of specialised machinery with an estimated useful life of five years under a five-year finance lease. The future minimum lease payments are as follows:

21.     Commitments under operating leases

The Group rents several sales offices under operating leases. The leases are for an average period of three years, with fixed rentals over the same period.

22.     Share capital

Balances as at 31 December 20X2 and 20X1 of CU 30,000 comprise 30,000 ordinary shares with par value CU 1.00 fully paid, issued and outstanding. An additional 70,000 shares are legally authorised but unissued.

23.     Cash and cash equivalents

24.     Contingent liabilities

During 20X2 a customer initiated proceedings against XYZ (Trading) Limited for a fire caused by a faulty candle. The customer asserts that its total losses are CU 50,000 and has initiated litigation claiming this amount.

The Group’s legal counsel do not consider that the claim has merit, and the Company intends to contest it. No provision has been recognised in these financial statements as the Group’s management does not consider it probable that a loss will arise.

25.     Events after the end of the reporting period

On 25 January 20X3 there was a flood in one of the candle storage rooms. The cost of refurbishment is expected to be CU 36,000 . The reimbursements from insurance are estimated to be CU 16,000 .

On 14 February 20X3 the directors voted to declare a dividend of CU 1.00 per share (CU 30,000 total) payable on 15 April 20X3 to registered shareholders on 31 March 20X3. Because the obligation arose in 20X3, a liability is not shown in the statement of financial position at 31 December 20X2.

26.     Related party transactions

Transactions between the Company and its subsidiary, which is a related party, have been eliminated in consolidation.

The Group sells goods to its associate (see note 12), which is a related party, as follows:

The payments under the finance lease (see note 20) are personally guaranteed by a principal shareholder of the Company. No charge has been requested for this guarantee.

The total remuneration of directors and other members of key management in 20X2 (including salaries and benefits) was CU 249,918 (20X1: CU 208,260 ).

27.     Approval of financial statements

These financial statements were approved by the board of directors and authorised for issue on 10 March 2013

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