The preparation of annual financial statements constitutes one of the more consequential procedures within corporate operations, given that its primary purpose is to present, in a transparent manner, the financial position and financial performance of the entity. The procedure itself may assume a lesser or greater degree of complexity, depending upon the volume of intricate business transactions occurring during the year, the availability of data, the familiarity with accounting regulations, and the resources that may be allocated to this activity within the prescribed deadline.
Regulatory deadlines for the preparation and submission of financial statements occupy a prominent place in the professional calendar of an accountant; however, it remains necessary to duly consider all aspects that may give rise to difficulties during the preparation of the statements, so that they may provide accurate and reliable information. A proactive approach is essential for ensuring the quality of the financial reports.
Below are the most common challenges encountered by entities throughout this process:
Interpretation and Application of Accounting Standards
This aspect becomes particularly pronounced in periods involving amendments or initial adoption of specific IFRS requirements and local regulations, as well as changes to the financial reporting framework (for example, when an entity’s size classification changes or when ownership changes occur, which may necessitate adjustments to certain accounting policies).
An additional aspect concerns complex or unusual business events that may arise during the financial year and carry significant accounting implications. Proper recognition and presentation of such events in the financial statements requires expertise and a thorough command of IFRS, and very often an understanding of the best market practice, especially in situations where professional judgment must be exercised.
Preparation of Accurate and Complete Financial Statements
The preparation of financial statements and the provision of all disclosures required under IFRS call for solid familiarity with accounting regulations, as well as sufficient time to carry out this activity with due diligence. The deadlines for filing financial statements are prescribed by regulation, and any delay entails penalties. Entities obliged to prepare an Annual Business Report must invest additional effort and time in drafting this report, which is expected to include all elements mandated by the regulatory framework. The recently issued Guidelines on Non-Financial Reporting constitute an important tool intended to assist reporting entities in enhancing the quality of their reports.
Preparation / Amendment of Accounting Policies
It is not uncommon for new accounting standards to be adopted, or for a new or amended accounting policy to be introduced, without a corresponding update of the underlying document, which is required under the regulatory framework and is meant to serve as the foundation for financial reporting.
Application of IFRS 9 – Financial Instruments
The calculation of expected credit loss in accordance with IFRS 9 requirements may entail complex computations and the exercise of certain judgments to ensure that the recognized impairment allowances are aligned with the requirements of the standard. This is particularly the case when an entity has a significant volume of trade receivables and/or financial placements.
Another dimension of IFRS 9 concerns the recognition of financial derivatives in the financial statements (e.g., interest rate swaps) and the documentation of hedge accounting. Familiarity with valuation techniques is essential to ensure that the determined fair values are reliable and compliant with the regulatory framework.
Application of IFRS 15 – Revenue from Contracts with Customers
Although in use for several years, certain aspects of this standard may still present challenges, especially where specific circumstances exist in the sale of goods (granting various types of discounts, selling bundles of goods/services, multiple performance obligations, variable prices, deferred payment terms, considerations related to principal/agent assessments, rights of return, etc.).
IFRS 16 – Leases
The application of this standard has introduced an extensive body of work related to the recognition of lease agreements from the lessee’s perspective, including the need to determine the discount rate used for establishing the present value of the lease liability and the right-of-use asset. Certain contractual elements, such as indexation of lease payments, require annual adjustments to the calculation, while contract modifications necessitate new computations in accordance with the standard’s requirements.
IAS 19 – Employee Benefits
Calculation in accordance with IAS 19 requirements calls for interpretation of the collective bargaining agreement and the Labour Law, familiarity with actuarial assumptions and methods for determining the present value of obligations for severance payments, jubilee awards, and unused annual leave, as well as adherence to the rules governing the accounting treatment of the resulting effects.
IFRS 3 – Business Combinations and IFRS 10 – Consolidated Financial Statements
If, during the reporting period, your company has acquired a controlling interest in another legal entity, the requirements of IFRS 3 must be applied, including the allocation of the purchase consideration to the identifiable assets acquired and liabilities assumed, with recognition of any additional identifiable intangible assets, as well as goodwill or a gain from a bargain purchase. The requirements of the standard are detailed and demand a high level of technical knowledge for proper application. Thereafter, it is necessary to consider the alignment of accounting policies across entities within the same group and any adjustments that may need to be undertaken in the preparation of consolidated financial statements.
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Preparation of Annual Financial Statements – What Are the Challenges?
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The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.
