Regulation of Company Financial Statements
Company financial statements (ie those of limited (ltd) and public (plc) companies) are slightly more complex than those of sole traders and partnerships. They also need to conform to the relevant legislation and accounting standards and have up to date knowledge of:
- Companies Act 2006
- Financial Reporting Standards (FRSs) – UK domestic standards issued by the Financial Reporting Council, used by smaller limited companies.
- International Financial Reporting Standards (IFRSs) and International Accounting Standards (IASs) – international standards issued by the International Accounting Standards Board, often used by bigger companies.
A limited company’s financial statements must be prepared in accordance with these standards and also published via Companies House.
You should already be aware of some IASs, in particular IAS 2 and IAS 16:
IAS 2 Inventories: sets out the accounting techniques for valuing inventories, generally at the lower of cost and net realisable value.
IAS 16, Property, Plant and Equipment: accounting treatments for non-current assets, and how to show the carrying amounts in the statement of financial statement after deducting accumulated depreciation.
There are more regulations around the preparation of the financial statements but the basic structures are the same, although there will be added considerations.
Unlike sole traders and partnerships limited companies are separate legal entities.
Presentation of Company Financial Statements
Financial statements are presented in accordance with IAS 1 – Presentation of Financial Statements, this allows for comparability between previous periods as well as other companies in the same industry (ie M&S comparing itself to Debenhams).
IAS 1 also requires a statement of cash flows, which links the statement of profit or loss to the changes in assets and liabilities and the effect on the cash of the company.
Companies Act Requirements
It is the responsibility of the directors to keep adequate records to show and explain the company’s financial transactions and disclose the financial position. The directors should prepare financial statements at least annually, these will then be approved by the board of directors and signed on behalf of the board by a director.
There are mandatory disclosures as part of the financial statements:
Employee numbers and costs
Directors’ benefits and remuneration (pay)
The directors will also compile a report which will give a review of the company’s activities over the previous financial period and also future plans. This will all be reported back to the shareholders at the annual general meeting (AGM), who will vote to accept the statements and reports.
The annual financial statements and directors’ report are filed with the Registrar of Companies where they are available for public inspection.
Accounting Principles
IAS 1 requires that companies comply with the following accounting principles:
- Going concern – the company will continue to operate for the foreseeable future (ie next 12 months)
- Accruals – income and expenditure is matched to the reporting period it refers to.
- Materiality – each material class of similar items is to be shown separately in the financial statements.
Accounting Policies
IAS 1 requires that financial statements need to be prepared:
- With consistent and appropriate accounting policies (ie depreciation & inventory valuation).
- Information should be relevant, reliable, comparable and understandable.
- If necessary additional information should be provided in order that users can understand particular transactions.