Financial statements provide a snapshot of a corporation's financial

health, giving insight into its performance, operations, and cash

flow. Financial statements are essential since they provide
information about a company's revenue, expenses, profitability, and
debt.

What is the importance of the four financial statements?

They are important as they provide an understanding of the business's overall
revenue and expenses. This can help a business to make decisions based on
previous data and trends, and can inform the decisions of lenders, consumers, and
government agencies.

What are the 3 most important financial statements?

The income statement, balance sheet, and statement of cash flows are required
financial statements.

What is the purpose of a statement of financial?

A statement of financial position is commonly used to assess the position of a
business in terms of financial stability and potential risk. A typical statement is likely
to include a snapshot of a business's: assets. liabilities (such as loans, VAT, and
Corporation Tax)

What is the general purpose of the financial statements?

General purpose financial statements not only help businesses to fulfil their
obligations to stakeholders, such as shareholders, lenders, regulators, and investors.
 They also provide stakeholders with a comprehensive and transparent view of a
company's financial position, performance, and cash flows.

Uses of Financial Statements

Following are some of the uses of financial statements:

1. Determine the financial position of the business: The most important use of the financial
statements is to provide information about the financial position of the business on a given date.
This piece of information is used by various stakeholders in order to take important decisions
regarding the business.
2. To obtain credit: Financial statements present the picture of the business to the potential lenders
and this information can be used by them to provide additional credit for business expansion or
restrict the credit so as to start recovery.
3. Helps investors in decision making: Financial statements contain all the essential information
required by the potential investors for determining how much they want to invest in the business.
It is also helpful in decision making regarding the price per share that the investors want to invest.
A sound financial statement is the key to obtaining investments.
4. Helps in policy making: The financial statements help the government in deciding the taxation
and regulations policies based on the way the company is running its operations. The government
bodies can tax a business based on the level of their income and assets.
5. Useful for stock traders: Financials statements help stock traders with the knowledge of the
situation the company is in and therefore adjusting their quotes accordingly.

Also Read: Financial Statements of a Company

Importance of Financial Statement

The significance of financial statements prevails in their service to persuade the diverse
interests of distinct classes of parties such as creditors, public, management, etc.,

 Importance to Management: Increase in size and intricacies of aspects influencing the business
functions requires scientific and strategic access in the management of contemporary trading
concerns. The management team needs up to date, precise and methodical financial data for the
intentions. Financial statements assist the management in comprehending the progress, prospects,
and position of the business counterpart in the industry.
 Importance to the Shareholders: Management is detached from control in the case of
companies. Shareholders cannot take part in the day-to-day business pursuits. However, the
outcome of these pursuits should be disclosed to shareholders during the annual general body
meeting in the form of financial statements.

Summary of IAS 16
Objective of IAS 16
The objective of IAS 16 is to prescribe the accounting treatment for property, plant, and equipment.
The principal issues are the recognition of assets, the determination of their carrying amounts, and the
depreciation charges and impairment losses to be recognised in relation to them.

Scope
IAS 16 applies to the accounting for property, plant and equipment, except where another standard
requires or permits differing accounting treatments, for example:

assets classified as held for sale in accordance with IFRS 5 Non-current Assets Held for Sale and
Discontinued Operations biological assets related to agricultural activity accounted for under IAS 41
Agriculture
exploration and evaluation assets recognised in accordance with IFRS 6 Exploration for and
Evaluation of Mineral Resources mineral rights and mineral reserves such as oil, natural gas and
similar non-regenerative resources.
The standard does apply to property, plant, and equipment used to develop or maintain the last three
categories of assets. [IAS 16.3]

The cost model in IAS 16 also applies to investment property accounted for using the cost model
under IAS 40 Investment Property. [IAS 16.5]

The standard does apply to bearer plants but it does not apply to the produce on bearer plants. [IAS
16.3]

Recognition
Items of property, plant, and equipment should be recognised as assets when it is probable that: [IAS
16.7]

it is probable that the future economic benefits associated with the asset will flow to the entity, and the
cost of the asset can be measured reliably.
This recognition principle is applied to all property, plant, and equipment costs at the time they are
incurred. These costs include costs incurred initially to acquire or construct an item of property, plant
and equipment and costs incurred subsequently to add to, replace part of, or service it.

IAS 16 does not prescribe the unit of measure for recognition – what constitutes an item of property,
plant, and equipment. [IAS 16.9] Note, however, that if the cost model is used (see below) each part
of an item of property, plant, and equipment with a cost that is significant in relation to the total cost
of the item must be depreciated separately. [IAS 16.43]
IAS 16 recognises that parts of some items of property, plant, and equipment may require replacement
at regular intervals. The carrying amount of an item of property, plant, and equipment will include the
cost of replacing the part of such an item when that cost is incurred if the recognition criteria (future
benefits and measurement reliability) are met. The carrying amount of those parts that are replaced is
derecognised in accordance with the derecognition provisions of IAS 16.67-72. [IAS 16.13]

Also, continued operation of an item of property, plant, and equipment (for example, an aircraft) may
require regular major inspections for faults regardless of whether parts of the item are replaced. When
each major inspection is performed, its cost is recognised in the carrying amount of the item of
property, plant, and equipment as a replacement if the recognition criteria are satisfied. If necessary,
the estimated cost of a future similar inspection may be used as an indication of what the cost of the
existing inspection component was when the item was acquired or constructed. [IAS 16.14]

Initial measurement
An item of property, plant and equipment should initially be recorded at cost. [IAS 16.15] Cost
includes all costs necessary to bring the asset to working condition for its intended use. This would
include not only its original purchase price but also costs of site preparation, delivery and handling,
installation, related professional fees for architects and engineers, and the estimated cost of
dismantling and removing the asset and restoring the site (see IAS 37 Provisions, Contingent
Liabilities and Contingent Assets). [IAS 16.16-17]

Proceeds from selling items produced while bringing an item of property, plant and equipment to the
location and condition necessary for it to be capable of operating in the manner intended by
management are not deducted from the cost of the item of property, plant and equipment but
recognised in profit or loss. [IAS 16.20A]

If payment for an item of property, plant, and equipment is deferred, interest at a market rate must be
recognised or imputed. [IAS 16.23]

If an asset is acquired in exchange for another asset (whether similar or dissimilar in nature), the cost
will be measured at the fair value unless (a) the exchange transaction lacks commercial substance or
(b) the fair value of neither the asset received nor the asset given up is reliably measurable. If the
acquired item is not measured at fair value, its cost is measured at the carrying amount of the asset
given up. [IAS 16.24]

Measurement subsequent to initial recognition

IAS 16 permits two accounting models:

Cost model. The asset is carried at cost less accumulated depreciation and impairment. [IAS 16.30]
Revaluation model. The asset is carried at a revalued amount, being its fair value at the date of
revaluation less subsequent depreciation and impairment, provided that fair value can be measured
reliably. [IAS 16.31]
The revaluation model
Under the revaluation model, revaluations should be carried out regularly, so that the carrying amount
of an asset does not differ materially from its fair value at the balance sheet date. [IAS 16.31]

If an item is revalued, the entire class of assets to which that asset belongs should be revalued. [IAS
16.36]

Revalued assets are depreciated in the same way as under the cost model (see below).

If a revaluation results in an increase in value, it should be credited to other comprehensive income

and accumulated in equity under the heading "revaluation surplus" unless it represents the reversal of
a revaluation decrease of the same asset previously recognised as an expense, in which case it should
be recognised in profit or loss. [IAS 16.39]

A decrease arising as a result of a revaluation should be recognised as an expense to the extent that it
exceeds any amount previously credited to the revaluation surplus relating to the same asset. [IAS
16.40]

When a revalued asset is disposed of, any revaluation surplus may be transferred directly to retained
earnings, or it may be left in equity under the heading revaluation surplus. The transfer to retained
earnings should not be made through profit or loss. [IAS 16.41]

Depreciation (cost and revaluation models)

For all depreciable assets:

The depreciable amount (cost less residual value) should be allocated on a systematic basis over the
asset's useful life [IAS 16.50].

The residual value and the useful life of an asset should be reviewed at least at each financial year-end
and, if expectations differ from previous estimates, any change is accounted for prospectively as a
change in estimate under IAS 8. [IAS 16.51]

The depreciation method used should reflect the pattern in which the asset's economic benefits are
consumed by the entity [IAS 16.60]; a depreciation method that is based on revenue that is generated
by an activity that includes the use of an asset is not appropriate. [IAS 16.62A]
The depreciation method should be reviewed at least annually and, if the pattern of consumption of
benefits has changed, the depreciation method should be changed prospectively as a change in
estimate under IAS 8. [IAS 16.61] Expected future reductions in selling prices could be indicative of a
higher rate of consumption of the future economic benefits embodied in an asset. [IAS 16.56]

Depreciation should be charged to profit or loss, unless it is included in the carrying amount of
another asset [IAS 16.48].

Depreciation begins when the asset is available for use and continues until the asset is derecognised,
even if it is idle. [IAS 16.55]

Recoverability of the carrying amount

IAS 16 Property, Plant and Equipment requires impairment testing and, if necessary, recognition for
property, plant, and equipment. An item of property, plant, or equipment shall not be carried at more
than recoverable amount. Recoverable amount is the higher of an asset's fair value less costs to sell
and its value in use.

Any claim for compensation from third parties for impairment is included in profit or loss when the
claim becomes receivable. [IAS 16.65]

Derecognition (retirements and disposals)

An asset should be removed from the statement of financial position on disposal or when it is
withdrawn from use and no future economic benefits are expected from its disposal. The gain or loss
on disposal is the difference between the proceeds and the carrying amount and should be recognised
in profit and loss. [IAS 16.67-71]

If an entity rents some assets and then ceases to rent them, the assets should be transferred to
inventories at their carrying amounts as they become held for sale in the ordinary course of business.
[IAS 16.68A]

Disclosure
Information about each class of property, plant and equipment

For each class of property, plant, and equipment, disclose: [IAS 16.73]

basis for measuring carrying amount depreciation method(s) used useful lives or depreciation rates
gross carrying amount and accumulated depreciation and impairment losses reconciliation of the
carrying amount at the beginning and the end of the period, showing:
additions disposals acquisitions through business combinations revaluation increases or decreases
impairment losses reversals of impairment losses depreciation net foreign exchange differences on
translation other movements
Additional disclosures

The following disclosures are also required: [IAS 16.74]

restrictions on title and items pledged as security for liabilities expenditures to construct property,
plant, and equipment during the period contractual commitments to acquire property, plant, and
equipment compensation from third parties for items of property, plant, and equipment that were
impaired, lost or given up that is included in profit or loss.
IAS 16 also encourages, but does not require, a number of additional disclosures. [IAS 16.79]

Revalued property, plant and equipment

If property, plant, and equipment is stated at revalued amounts, certain additional disclosures are
required: [IAS 16.77]

the effective date of the revaluation whether an independent valuer was involved for each revalued
class of property, the carrying amount that would have been recognised had the assets been carried
under the cost model the revaluation surplus, including changes during the period and any restrictions
on the distribution of the balance to shareholders.