Other limitations: There are certain other limitations associated with the financial statements. Firstly, the analysis and decision making may not be effective if only one year financial statement is considered. Thus, extensive analysis has to be conducted based on several years of performance (Henderson et al., 2015). Secondly, the information contained in the financial statements is difficult to verify. If the companies misrepresent the information, the decision making will be severely impacted. Apart from this, the effect of inflation is not considered in the financial statements (Brigham & Houston, 2012). The amount related to assets and liabilities may appear to be low.
All these factors that have been discussed above have considerable effect on the financial statement which can impact the quality of financial statement analysis.
The IAS regulations were adopted by the European Union countries in 2002 for preparation of the financial statements in accordance with IFRS. IFRS have been part of financial reporting in United Kingdom in 2005. As a result of this, three new financial reporting standards i.e. FRS 100, 101 and 102 came into force.
The FRS 100 reporting standard (Application of financial reporting requirements) is associated with the framework for the entities to prepare the financial statements. The IFRS framework addresses the objective of the financial reporting and other aspects in relation to financial reporting. As stated in the IAS regulation (Regulation No. 1606/2002), the consolidated financial statements of companies listed on the regulated European Union market are required to be prepared in accordance with the IFRS framework (Horton & Serafeim, 2010). The companies that are not listed may follow IFRS or UK GAAP for preparation of financial statements.
The overall requirements for the financial statements, including structure, contents and overriding concepts are laid down in the IAS1 Presentation of financial statements. The standard requires a complete set of financial statements to comprise a statement of financial position, a statement of profit or loss and other comprehensive income, a statement of changes in equity and a statement of cash flows (Iatridis, 2010).The other companies are free to follow UK GAAP which is governed by the Companies Act (Sangster, Stoner and McCarthy, 2011).
Apart from this, there are different sections which highlight the treatment and recognitions of different components of the financial statements.