Standardization of Financial Statements refers to the procedures followed by a number of entities or subsidiaries under a parent company in order to assess their financial performance accurately.

Unlike the financial statements of a single entity, Standardization of Financial Statements involves additional procedures to consolidate and accurately reflect the financial data of all subsidiaries.

In today’s article, we will explore the concept of financial statement standardization, highlight the main conditions required, and align our discussion with prevailing accounting regulations in Saudi Arabia.

What Is Standardization of Financial Statements?

Financial statements are a set of reports aimed at assessing the financial performance of a company over a specific period of time. These reports include information about the company’s assets, liabilities, revenues, profits, expenses, and other relevant financial data.

For subsidiaries, consolidated financial statements are prepared and submitted to the parent company, which then compiles unified statements for regulatory authorities.

The process begins with each company preparing its own financials. Then, the parent company coordinates with its subsidiaries to prepare consolidated reports, which are reviewed and approved by the authorized party.

The steps to prepare standardized financial statements include:

• Identifying the subsidiaries of the parent company.

• Verifying financial periods based on investment and financing activities during the past term.

• Organizing financial data and determining accounts payable and receivable.

• Merging financial information to prepare unified financial statements, including the balance sheet, income statement, and cash flow statement.

• Reviewing the standardized financial statements and comparing them with official documents.

Conditions for Standardizing Financial Statements

Several conditions must be met when implementing Standardization of Financial Statements:

• Using consistent accounting policies and principles for similar transactions.

• Ensuring the statements comply with international accounting standards.

• Obtaining approval from stakeholders regarding the standardization process.

• The parent company must exert control over its subsidiaries.

• Minority interests must be clearly identified and properly integrated.

• The parent company should own more than 50% of the equity in subsidiaries. If it owns less than 50%, it must hold significant influence or a strong professional reputation in the field.

• The financial reports must adhere to Generally Accepted Accounting Principles (GAAP).

• Only the company’s own transactions should be included in the unified reports—intercompany transactions must be eliminated.

• Financial data must be aligned to the same reporting date across all entities.

For more information on applicable standards, you can refer to the Saudi Organization for Chartered and Professional Accountants (SOCPA).

Presentation Standards for Financial Statements

The presentation of financial statements refers to how data and items are arranged, classified, and disclosed, including accompanying notes. These notes summarize the accounting principles used and offer comparisons with prior periods.

General considerations for presentation include:

• Integrity and clarity of reporting.

• Compliance with accounting standards.

• Accrual basis accounting.

• Consistency.

• Offsetting rules.

• Materiality.

• Comparative information for previous periods.

Examples of Financial Statements

The most common types of financial statements include:

• Income Statement

• Balance Sheet

• Cash Flow Statement

• Statement of Shareholders’ Equity

• Comprehensive Income Statement

When preparing a company’s financial statements, it’s essential to follow proper accounting principles. Typically, this process is handled by a certified accountant.

At Business Pillars Company, our certified accountants and legal auditors provide professional financial statement preparation services. Our expert team delivers accurate, high-quality accounting services tailored to your company’s needs.

Conclusion

In summary, Standardization of Financial Statements plays a critical role in uncovering financial data that may not be visible in separate financial reports. It is essential for presenting a clear financial position and enhancing corporate performance through unified reporting.

Read also:

Point-of-Sale System Accounting and the Importance of POS Systems for Business Owners

Saudi National Foundation Day and the Difference Between It and Saudi National Day

Internal Control System in Companies and Its Components

Lease Contracts Standard IFRS 16 and the Impact of Its Application

Point-of-Sale System Accounting and the Importance of POS Systems for Business Owners