Understanding Annual Financial Statements Under IFRS for SME’s
Annual financial statements are essential for any business, helping owners, investors, and lenders understand how the business is doing. For small and medium-sized businesses, the International Financial Reporting Standard for Small and Medium-sized Entities (IFRS for SMEs) provides a simpler way to prepare these reports.
Instead of overwhelming businesses with complex rules, IFRS for SMEs focuses on what’s most important. Let’s go through the different parts of the annual financial statements so you can understand their purpose and how they work.
1. Statement of Financial Position (Balance Sheet)
Think of this as a snapshot of your business’s financial health on a specific date, usually at the end of the financial year. It answers three key questions:
What does the business own? (Assets)
Current assets: These are things that can be turned into cash quickly, like cash in the bank, inventory (goods for sale), and money owed by customers (accounts receivable).
Non-current assets: These are things the business owns that will be used for a long time, such as property, machinery, and vehicles.
What does the business owe? (Liabilities)
Current liabilities: These are short-term debts that must be paid within a year, like unpaid supplier invoices, taxes due, or short-term loans.
Non-current liabilities: These are long-term debts, like bank loans that will take years to repay.
What’s left for the owner? (Equity)
This represents the owner’s stake in the business, including the original investment, retained earnings (profits kept in the business), and any shares issued.
For example, imagine a bakery:
It owns R100,000 worth of equipment, R50,000 in cash, and R20,000 in stock.
It owes R40,000 to suppliers and R30,000 on a bank loan.
The remaining R100,000 (assets minus liabilities) is the owner’s equity.
The Balance Sheet shows whether the business is financially stable and able to meet its obligations.
2. Statement of Comprehensive Income (Profit or Loss Statement)
While the Balance Sheet is a snapshot, this statement tells the story of what happened during the year. It answers:
How much money did the business make? (Revenue)
How much did it spend? (Expenses)
Did it end up with a profit or a loss?
Key parts of the Profit or Loss Statement:
Revenue – Money earned from selling goods or services.
Cost of Sales (if applicable) – If the business sells products, this includes the direct cost of making or buying them.
Gross Profit – The difference between revenue and cost of sales.
Operating Expenses – Costs of running the business, like rent, salaries, marketing, and electricity.
Finance Costs – Interest on loans or overdrafts.
Profit or Loss Before Tax – What’s left after all expenses.
Income Tax – The tax payable on profits.
Final Profit or Loss – The amount the business keeps after paying tax.
For example, if our bakery sells R200,000 worth of bread:
It spends R80,000 on ingredients and R50,000 on rent, wages, and other expenses.
It also pays R10,000 in loan interest and R15,000 in tax.
That leaves a final profit of R45,000.
This statement is crucial because it shows whether the business is making money or struggling.
3. Statement of Changes in Equity
This statement explains how the owner’s stake in the business has changed during the year.
It includes:
The opening balance of equity (last year’s closing balance).
The year’s profit or loss (added if profit, subtracted if loss).
Any dividends paid to shareholders (money taken out of profits).
Any new investment (new shares issued or capital added by owners).
For example, if the bakery started the year with R80,000 in equity,
It made R45,000 in profit
The owner withdrew R10,000 as dividends
The closing equity will be R115,000
This section helps owners see whether their business is growing in value.
4. Statement of Cash Flows
Even if a business looks profitable on paper, it might run out of cash if money isn’t managed well. The Cash Flow Statement shows how much cash moved in and out during the year.
It’s divided into three parts:
Operating Activities – Cash from daily business activities.
Money received from customers.
Payments to suppliers and employees.
Investing Activities – Cash spent on buying or selling assets.
Buying new equipment, vehicles, or property.
Selling old equipment or investments.
Financing Activities – Cash from loans, investments, or repaying debts.
New loans or repayments.
Money received from investors.
For example, if our bakery:
Earned R200,000 from sales but only received R180,000 in cash (some customers paid later).
Paid R160,000 in cash for rent, wages, and supplies.
Bought a new oven for R20,000.
Borrowed R50,000 from the bank.
Repaid R10,000 of its old loan.
At the end of the year, it may have R40,000 in cash left.
This statement is critical because businesses can fail even if they are profitable, simply because they run out of cash to pay suppliers, salaries, or bills.
5. Notes to the Financial Statements
Financial statements show the numbers, but the notes explain the details. They include:
Accounting policies – How assets, revenue, and expenses are recorded.
Breakdowns of key items – Like how much of the revenue came from different sources.
Important risks and liabilities – Any ongoing lawsuits, debts, or contracts.
For example, if the bakery has R50,000 in loans, the notes may explain that R30,000 is due next year, and R20,000 is payable over five years.
Why Are These Statements Important?
Financial statements help businesses:
✔ Understand if they are making a profit or losing money.
✔ Manage cash flow and avoid running out of money.
✔ Get loans or investments from banks and investors.
✔ Comply with tax and legal requirements.
Even small businesses benefit from keeping accurate financial records.
Final Thoughts
Financial statements might seem complicated, but they tell the story of your business’s financial health. By understanding the Balance Sheet, Profit or Loss Statement, Cash Flow Statement, and other sections, business owners can make better decisions, attract investors, and plan for growth.
Join us for a CPD on IFRS for SME Annual Financial Statements. Register here
Are you ready to take your financial statement preparation to the next level? Join Leana van der Merwe in this 1.5-hour live webinar on 10 February 2025 to gain practical, hands-on insights into preparing IFRS for SME-compliant annual financial statements.
📊 What You’ll Gain:
✅ A clear understanding of the IFRS for SMEs framework
✅ Knowledge of Companies Act compliance for financial reporting
✅ Practical skills to prepare a full set of financial statements
✅ Guidance on measurement & disclosure rules for assets, liabilities, and equity
✅ Solutions to common financial reporting challenges
🔍 Who should attend?
This session is essential for accountants, bookkeepers, financial managers, and anyone involved in SME financial reporting who wants to ensure full compliance with IFRS for SMEs and the South African Companies Act.
📅 Date: 10 February 2025
⏰ Time: 14:00 (1.5 hours)
🎓 CPD Units: 2
📍 Format: Live Event
🔥 Secure your spot now. Don’t miss this opportunity to sharpen your financial reporting skills and stay ahead of compliance changes.
👉 Register here
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