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Introduction
According to Article 3.17 of the document "Exposure Draft IFRS for SMEs® Accounting Standard - Third edition of the IFRS for SMEs Accounting Standard - September 2022", it must include all of the following documents in order to have a complete set of financial statements:
- Financial statement.
- Income Statement.
- Statement of changes in equity.
- Cash flow.
- Notes.
References
Statement of financial position
It is a document that represents the balance sheet and financial situation of a company. The balance sheet is separated into current and non-current assets, and consists of assets, equity, liabilities.
Current assets comprise resources that are expected to be liquidated or used as part of usual business operations within one year from the date of the balance sheet. The distinction is particularly useful for investors who distinguish between net working capital and capital used for long-term operations in an operating cycle.
There is also another presentation, it is based on the degree of liquidity, but is suitable for banks and financial institutions that do not provide goods or services within an identifiable operating period.
Non-current assets are corporate resources that are expected to remain in use for an extended period beyond twelve months after the balance sheet date.
Short-term (current) liabilities are those due within the usual operating cycle or within twelve months after the balance sheet date. Trade payables must always be classified as short-term liabilities even if their settlement occurs beyond the normal operating cycle or more than twelve months after the balance sheet date.
Long-term (non-current) liabilities are those due beyond the normal operating cycle or more than twelve months after the balance sheet date.
Income statement
The income statement is the representation of the profit and loss account and is classified according to the by nature of expense method.
The classification by nature is one of the options available from the IFRS for SMEs, and since it is the simplest and most flexible for different business realities, it was decided to implement this approach.
The concept is that costs are aggregated according to their nature, such as depreciation, purchases of materials, transportation costs, etc.
There is also the classification by cost destination, where costs are distinguished between cost of goods sold and other costs, which provides more meaningful information but requires a considerable degree of discretion on the part of the financial statement preparer.
Statement of changes in equity
The statement of changes in the equity of a company between two financial years reflects the variations in the net equity due to the increase or decrease of its net assets for the period or the wealth generated, based on the specific valuation criteria implemented and indicated in the financial statements.
Cash flow
The IFRS for SMEs stipulates that entities must categorize their transactions into three distinct activities:
- Operating.
- Investing.
- Financing.
It further permits entities to present their operating cash flows using either the direct or indirect method. Ultimately, the framework’s goal is to furnish decision-useful information to users, aiding them in making informed economic choices.
Notes
The notes to the financial statements represent a fundamental part of financial reporting under IFRS for SMEs. They provide additional and detailed information that integrates and explains the data presented in the main financial statements.
Furthermore, they play a crucial role in ensuring the transparency and completeness of financial reporting, allowing users of the financial statements to fully understand the company's financial position, performance, and cash flows.
In conclusion, the notes to the financial statements are therefore an essential tool for improving the transparency and comparability of financial reporting at an international level.