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What extant accounting standards require

Purpose of financial statements

IFRS GAAP and the new UK GAAP, which is based on IFRS IAS 1 -Presentation of financial statements, consider the purpose of financial statements to be:


Financial statements are a structured representation of the financial position and financial performance of an entity. The objective of financial statements is to provide information about the financial position, financial performance and cash flows of an entity that is useful to a wide range of users in making economic decisions. Financial statements also show the

results of the management's stewardship of the resources entrusted to it. To meet this objective, financial statements provide information about an entity's:

(a) assets

(b) liabilities

(c) equity

(d) income and expenses, including gains and losses

(e) contributions by and distributions to owners in their capacity as owners

(f) cash flows.

This information, along with other information in the notes, assists users of financial statements in predicting the entity's future cash flows and, in particular, their timing and certainty. (IAS 1,2013)

Items (a), (b) and (c) are to be found in the balance sheet; (d) in the income statement and statement of comprehensive income; (e) in the statement of changes in equity; and (f) in the statement of cash flows.

I always think that the last sentence following (f) is an interesting one in that it is the one rare instance where the standard setters are bold enough to declare that financial statements and notes can help predict the future. Maybe we should pick up this idea and look at our own or others' statements - do they assist with prediction of cash flows and any supporting strategies?

A complete set of financial statements is therefore considered to contain:

1 a statement of financial position or balance sheet as at the end of the period;

2 a statement of profit or loss and other comprehensive income for the period;

3 a statement of changes in equity for the period;

4 a statement of cash flows for the period;

5 notes, comprising a summary of significant accounting policies and any other explanatory information.

There will be comparative figures, restated if there have been any changes in accounting policies or errors.

There will be company law requirements as to what goes into accounts. Typically, company law leaves the detail of what has to be disclosed to the relevant accounting standard setters. In the United Kingdom the company law requirement to produce a directors' report is aimed at ensuring that significant facts that would not be addressed by any accounting standard are disclosed, for example the names of directors and their shareholdings. While basic company law is important (it has to be obeyed!), it is in the areas of business reviews and the now aptly named strategic reports that the push for more, relevant disclosure is to be found, and this is outlined in the 'Future developments' section below.

Stock exchanges and specialist regulators, for example for the banking and insurance sectors, may require further statements or detail.

In the United States the SEC requires form 10-K to give a comprehensive summary of a company's performance, its year-end position (the balance sheet) and a statement of cash flows. This information often forms the basis of the annual report to shareholders where additional material such as pictures, charts etc may be added. Annual reports are an excellent opportunity to promote the company.

Much of what is now contained in annual reports has evolved, maybe as a result of country-specific issues, for example the content of US 10-K has much of what you'd expect but also some possibly specialist or apparently not material items. For example, there will be some history behind 'Item 4 Mine safety disclosures' being a specific disclosure requirement.

10-K Content

Part i

Item 1. Description of business

Item 1a. Risk factor

Item 1b. Unresolved staff comments

Item 2. Description of properties

Item3. Legal proceedings

Item 4. Mine safety disclosures

Part ii

Item 5. Market for registrant's common equity, related stockholder matters and issuer purchases of equity securities

Item 6. Selected financial data

Item 7. Management's discussion and analysis of financial condition and results of operations

Item 7a. Quantitative and qualitative disclosures about market risk

Item 8. Financial statements and supplementary data

Item 9. Changes in and disagreements with accountants on accounting and financial disclosure

Item 9a. Controls and procedures

Item 9b. Other information

Part iii

Item 10. Directors, executive officers and corporate governance Item 11. Executive compensation

Item 12. Security ownership of certain beneficial owners and management and related stockholder matters

Item 13. Certain relationships and related transactions, and director independence

Item 14. Principal accounting fees and services

Part iv

Item 15. Exhibits, financial statement, schedules, signatures

This does illustrate that statements, notes and disclosures in the United States and the United Kingdom (and elsewhere) will have much commonality but differences will remain.

Worldwide, there are moves to make financial statements even more useful and not just to investors for making economic decisions but also useful to all stakeholders.

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