Alice Šrámková | 8.10.2024
IFRS 18 Presentation and Disclosures in Financial StatementsTaxes, accounting, law and more. All the key news for your business.
The financial statement in general is defined in Act no. 563/1991 Coll., on Accounting, as amended (hereinafter the accounting act). It states that the financial statement consists of the balance sheet, the profit and loss statement, the cash flow statement, statement of changes in equity, notes to the financial statement and the annual report. Micro and small accounting units are not obliged to compile the cash flow statement and the statement of changes in equity. Under the assumption that the accounting entity is not obliged to have its financial statement verified by an auditor, it is not obliged to compile an annual report. The individual documents are compiled for the individual accounting periods, so this is annual work, not only of the accounting department. The individual departments of a company should participate in the general compilation of documents for the financial statement, in order for the individual documents, and thus also the overall financial statement to be compiled in compliance with a true and fair presentation of the accounting, which is one of the accounting principles.
The object of today’s article, as the title suggests, will be one document that is part of the financial statement, namely the Notes to the financial statement 2020. The notes are one of three documents, which all companies are obliged to compile, regardless of the type of the given accounting entity. Although this is an annually compiled document, mistakes are frequently made in its compilation. When compiling the notes to the financial statement, it is necessary to focus on what its aim is and accordingly to fill this document with relevant information.
What do the notes to the financial statement serve for
The aim of the notes to the financial statement is to explain and complement the information contained in the balance sheet and the profit and loss statement, or to inform the user about facts not included in the other parts of the financial statement (especially in the profit and loss statement), the essence of which is, however, significant for its user. There is no precise template for the notes to the financial statement, saying what the notes should look like (only guidelines or examples of notes), but the content of the notes is, nonetheless, defined by decree no. 500/2002 Coll., implementing some stipulations of the Accounting act, and applies to accounting entities, which are entrepreneurs using doubly entry accounting, in the sense of its article 39 and the following.
On general level we can say that for clarity of information in the notes to the financial statement, general information about the accounting entity and the used accounting methods appears in the first part, and in the second part, information explaining significant/unusual values/events, which occurred in the given accounting period, are stated. The requirements as to the scope of information stated in the notes differ depending on the category of the accounting entity. A generally known rule applies here that a large accounting entity is obliged to publish more (detailed) information than a micro-size accounting entity.
First it is necessary to determine the category of the accounting entity
The basic prerequisite for correct compilation of the financial statement is the determination of the category of the accounting entity – micro, small, medium or large. The accounting entity is categorized based on three set criteria – the average annual number of employees, the total value of net assets and the annual total of net turnover. More detailed information about categorizing accounting entities is stated in the accounting act (articles 1b and 1c).
The categorizing of accounting entities will not be described in greater detail, because it is not the object of today’s article, nevertheless we discussed it in one of our earlier issues (see link to our website - https://www.gtnews.cz/publikace/kategorizace-ucetnich-jednotek-aneb-vite-jake-jsou-vase-povinnosti/).
The most frequent shortcomings in the financial statement
Some companies do not consider the notes to the financial statement important and they only state basic data about the company in it, which are available in a public register. If a company compiles a financial statement, which does not include all obligatory parts, a fine may be impending for the company under the accounting act, up to the amount of 3 % of the balance (total assets). It is, moreover, important to remark that if a company is subject to obligatory audit, the auditor comments on the entire financial statement in his opinion, not only on the state reports. It is therefore necessary to keep in mind when compiling the financial statement that the notes to the financial statement, too, may influence the audit opinion.
We encounter various notes in the audit practice – both in terms of the aspect of graphics and the content, and it always depends on the type of company (field of business, size of the company). The aim of today’s article is not to copy the decree (i.e. to state the obligatory parts of the given document), but to point out shortcomings/findings we come across the most frequently when verifying notes to financial statements. They mainly include the following:
The first mistake, which frequently happens, is that the accounting entity does not realise it has changed its category. The change of category occurs when exceeding or not meeting 2 criteria (turnover, net assets, number of employees) in two consecutive accounting periods preceding the current financial statement. New accounting entities determine their category according to a real assumption of the state of the given criteria as of the balance sheet date of the first accounting period. The category may change, though, over time – the turnover, number of employees, net assets increase/decrease, and it is necessary to react to such changes in the financial statement. It happens that the company does not notice that instead of a micro accounting entity it is now a medium accounting entity and new obligations arise from this, including among others the obligation of compiling more extensive notes to the financial statement.
If the company is updating (adjusting) the notes according to the new classification, it is necessary to publish more detailed information in the notes for the previous period, too, for comparability of the information for both presented accounting periods. A situation may occur, for example, that a company is obliged to publish information about the bonuses granted to members of managing, controlling and administrative bodies for the period of the year 2020. It is not sufficient to publish these data for the year 2020 alone, but it is also necessary to state related data for the year 2019.
In practice, we sometimes encounter notes to financial statements, which are too extensive and, in some cases, do not present helpful information.
The most frequent type of “excess” information in the notes to financial statement are:
A frequent mistake when compiling notes to the financial statement is that a company forgets one of the obligatory essentials of the notes. This situation may relate to the already mentioned erroneous categorizing of the accounting entity.
Most frequently, it is the failure to state information about:
Companies are obliged to publish all of this information according to the decree (depending on their size or their category), but sometimes the accounting entity forgets about it in the amount of stated data or it is intentionally not stated.
With regard to the great time demands when compiling the notes to the financial statement, in most cases the notes are taken over from the previous period and only an update is made. Especially in case of larger documents, this update is not being performed in the entire document and therefore errors occur. It is suitable to pay greater attention not only to changes of values, but also to the lines of total amounts or to text content. There are cases, when a company fills in the individual numbers for the current year correctly (for example information about non-current tangible assets), but the related lines with total amounts contain values from the previous period; or a change of deferred tax receivable into a deferred tax liability is not recorded.
All documents of the financial statement need to be dated with the same compilation date. The financial statement is a set of prescribed documents, which form one whole and for this reason they should have the same date of compilation. The requirement of a unified date of compilation does not mean, of course, that the accounting department or the accountant compiles all documents on one day. In practice, all documents are being prepared in the course of several days or a week/weeks, nevertheless the final documents to the financial statement need to be unified due to the fact that the date of compilation of the financial statement is not only a key one for the company itself, but also for external entities (users of the financial statement), because this date is important, among other things, for the assessment of events, which happened after balance sheet date and which, as such, should be reflected in the financial statement of the given accounting period either directly by means of an adjustment performed in the state reports, or only by stating the information in the notes to the financial statement. Every event needs to be assessed separately and it is necessary to have sufficient supporting information/documentation for the given assessment.
How to fill in the notes to the financial statement
The answer to the question of “how to compile the notes to the financial statement correctly and efficiently” is not a simple one. In today’s article, the most frequent shortcomings we encounter in audit practice were presented.
If we were to try and answer after all, we should divide the question into two parts, namely:
As has already been stated above, the notes to the financial statement represent an individual document of every accounting entity, and it is thus not possible to “copy” information from another accounting entity only because we like the structure of their notes. It may happen, for example, that the accounting entity will not have content for a half of the information mentioned here, or the notes do not contain everything that should be stated. In this article, we outline the most frequent errors when compiling the notes to the financial statement, which, as we hope, will help you avoid repeating them.