Financial statements can be difficult to understand for those who don’t have a strong finance or accounting background. But it is important to be able to understand them because they have a treasure-trove of useful information about how an organisation is performing that is otherwise difficult to come by. Read on below for an overview of the main components of a general purpose financial statement.
What are general purpose financial statements?
State entities and local governments are required to prepare general purpose financial statements that comply with the requirements of the Australian Accounting Standards Board.
The financial statements are prepared for general users—users who can’t command information from the entity. Entities prepare statements to be materiality correct and focus on what is important to their general users.
Preparing statements in accordance with a framework allows comparability between entities in comparing measurement and recognition of financial transactions and balances.
What do they contain?
General purpose financial statements are prepared on an accruals basis, meaning that most transactions are recognised when the event, or performance obligation, occurs, not when cash is paid or received. They also have the current and the preceding year to help users better understand trends.
The statements contain 4 primary financial statements supported by a series of more detailed notes, including comparing the budgeted position to the actual position (for state entities). The 4 primary statements are:
- Statement of comprehensive income
- Statement of financial position
- Statement of changes in equity
- Statement of cashflows.
Statement of comprehensive income
This statement outlines the revenues and expenses over the year. It also includes non-cash transactions such as depreciation, and increases or decreases in the value of assets. Most not-for-profit entities aim for a break-even position or small surplus to allow them to re-invest in their business in future years.
Statement of financial position
The statement of financial position presents all the assets of the entity at year end, and how they are funded, for example through liabilities and equity. Assets and liabilities are split into current and non-current which generally means if they are expected to be settled within 12 months.
The notes to this statement will explain how assets and liabilities are valued. For example, whether assets are recognised at historical cost, a current market value or a current replacement cost. The notes will also explain how a market value or a current replacement cost is determined.
Statement of changes in equity
The statement of changes in equity explains what the government’s (or owner’s) interest is comprise of. It also highlights the movement between the various classes of equity. The most common classes for state entities are contributions by government, retained surpluses (or deficits) and the combined increases in the value of the assets they administer.
Statement of cashflows
The statement of cashflows categorises all cash payments made and received through-out the year into three groups; operating activities, investing activities and financing activities. Operating Activities are day to day business cashflows of the entity. Investing Activities cover cash payments resulting from movements in assets and liabilities relating to cash generating activities or investments in long-term service delivery assets, such as building roads. Financing activities are cashflows relating to how the entity is financed, it covers equity injections, returning equity to Government and taking out or repaying long-term borrowings.
What do we do with the statements?
The Queensland Audit Office (QAO) audits the financial statements prepared by management of the entity to express an opinion on whether they give a true and fair view of the financial performance and position at the end of the financial year.
The results of these audits are then included in our annual financial audit reports to parliament. For more information please read these sector-based reports. They explain our key findings and business insights from auditing the financial statements.