How to properly draw up financial statements?

This article answers the following questions:

• When can an auditor question the amount of deferred tax assets?
• How should revenues from the sale of goods or finished products be reported?
• In what situations should provisions for liabilities be recognised in the financial statements?

As we mentioned in our article on how to prepare a company for the financial year-end closing, every single year, auditors keep identifying lack of appropriate disclosures and errors in financial statements that require their amendments. According to available information, over half of the companies audited in Poland regularly receive recommendations to rectify their financial statements. This means that most of these documents show significant deficiencies, and companies fail to present their financial data accurately and clearly in their reports – at least prior to the audit. Many of these shortcomings result from insufficient knowledge and involvement of company management boards and supervisory bodies in financial reporting matters, which justifies the need for mandatory external audits of financial statements conducted by independent experts, such as statutory auditors.

What are the most frequent errors encountered by auditors when they audit financial statements? How do these errors distort the picture of economic events, contributing to the unreliability of data presented to entity owners and relevant institutions? What should be in the spotlight in order to steer clear of errors, properly close the financial year, and avoid the stress associated with auditors' visits? It's worth discussing key issues using specific, real-life examples.

Errors in the recognition of fixed assets and intangible assets in the financial statements

In the area of fixed assets and intangible assets, the most common error encountered by audit firms is the entity's failure to verify the depreciation/amortisation rate and determining it based on the economic useful life of the assets.

Skipping this step indicates improper process organisation and a lack of information flow related to the entity's current assets, the pace of changes occurring within it, planned downtime, increased production periods, or the anticipated replacement of used equipment with new one. This means that the entity fails to present its assumptions and plans for the use of acquired assets to the financial and accounting staff.

Keeping the finance and accounting department in the loop is therefore crucial, as it significantly reduces the risk of errors in the presentation of both fixed and intangible assets in the financial statements. This translates not only into more efficient audit procedures but also into more accurate determination of the financial performance and increased investor and customer confidence in a company that is committed to ensure appropriate transparency.

Revaluation of fixed assets in the balance sheet

Continuing the issue of assumptions and budgets (or other information held by management boards), it is impossible not to mention the consequences of not analysing on an ongoing basis the revenues (benefits) generated by the entity in relation to the assets it utilises.

In the course of an audit, auditors may question, among other things, the value of fixed assets (which do not generate economic benefits) and the amount of deferred tax assets (when budget projections – if any are prepared by the entity – do not indicate the possibility of paying tax in the future while these deferred assets are already in use).

In order to keep away from auditor amendments (and the related significant revaluation), or to avoid a qualified opinion on the financial statements (or even a complete waiver of its expression by the auditor), it is advisable that the accounting department carries out an early analysis of the premises for recognising the impairment of fixed assets.

Inventory count and timing of revenue recognition

The issue of inventory and sales revenues is a very broad one, thus in this case we will focus only on a common problem that is significant for the presentation and reliability of reporting: the issue of incorrect (too early) recognition of revenues from the sale of goods or finished products.

The Polish Accounting Act does not define the moment of revenue generation, but it can be concluded that revenue should be recognised in the very period to which it relates (accrual principle) – provided that the economic benefits arising from it and the related costs can be measured reliably (matching principle).

In practice, these guidelines may prove insufficient, which means that in order to properly determine the moment of revenue generation, it is advisable that businesses refer to the International Financial Reporting Standards (IFRS)¹. As provided under the Polish Accounting Act, in matters not regulated therein or in the National Accounting Standards, entities may apply the rules set forth in IFRS.

Companies can (and should) follow international guidelines even if they do not prepare reports under IFRS, as this allows for the consistent and accurate classification of amounts for goods or products for which control has been transferred to the buyer as revenue. For more on this topic, go to our blog and read a series of articles dedicated to IFRS 15.

Example of applying IFRS to the balance sheet and profit and loss account

If a buyer does not collect the purchased goods before 31 December 2025 – i.e. the buyer of e.g. a car collects the goods from the showroom on 5 January 2026 – it is necessary for the seller to record such goods and show them in the inventory at the end of the year (because the conditions of sale have not been met, i.e. control, including benefits and risks, has not been transferred to the buyer².

By applying the provisions of IFRS, the entity can in this case avoid a significant distortion of the balance sheet (inventories and receivables), the profit and loss account (in the area related to turnover on the revenue side and costs of goods or products sold) and the net profit, as despite issuing a sales invoice with a December date, the postings will be made in the books in the following year.

The opposite situation is also possible: the release of goods or products before the end of the year may not constitute a sale if control over the purchased goods has not been transferred to the buyer as – according to the contractual assumptions – the goods or products were to be delivered to the buyer’s own plant, which was not completed by the seller by the end of the financial year.

Inventory valuation

Proper inventory valuation is another issue often overlooked by accounting departments, yet it is crucial for the proper depiction of the financial situation of an entity. Valuation errors in financial statements are more common in determining inventory value relative to the achievable price than in calculating components, recognising individual production costs, or distributing raw materials and goods.

The reason is simple: companies fail to draw conclusions from economic analysis and do not utilise market information. Despite having access to price data (and demand for their goods) before closing their accounts for the past year, they fail to verify the realisable price of their inventories after the balance sheet date. Consequently, the value of their inventories is often higher than the actual realisable price.

In such a case, following appropriate audit procedures, auditors propose an inventory valuation adjustment. Pursuant to Article 28 (1)(6) of the Polish Accounting Act, tangible current assets are valued at acquisition or production cost, no higher than their net selling price as of the balance sheet date. Therefore, an impairment loss should be recognised as at the balance sheet date (if the selling price is known to be lower than the original value, in accordance with the applicable valuation method).

Example of a difference in inventory valuation in the financial statements

A product manufactured in December 2025 with a value of 100 units was sold in February of the following year (before the financial statements were drawn up) for 95 units. If the difference is material to the financial statements taken as a whole, the company should recognise an impairment loss of 5 units as of 31 December 2025.

Financial instruments

Another common error encountered by financial statements audit experts is the failure to disclose financial instruments acquired to hedge a given currency transaction or for speculation. As in the examples above, such errors can occur for two reasons:

• lack of information flow (e.g. when management does not inform the accounting team about a contract signed with a bank),
• insufficient knowledge, which means that training for financial and accounting staff is necessary.

Example of submitting financial statements covering financial instruments

The management board of an entity purchasing materials in EUR, concerned about a depreciation of the PLN against the EUR, executed a transaction on 1 December 2024, which consisted of purchasing EUR 100 for PLN 420 three months later (expecting that EUR 1 would fetch more than PLN 4.20 in the future). The company is obligated to value the acquired instrument at the end of the 2024 financial year at the value determined as of the balance sheet date (even though it relates to exercise at the end of February 2025). If the forward exchange rate on 31 December 2024 relating to the exercise of the instrument exercised on 28 February 2025 is above PLN 4.20/EUR, then revenue should be acknowledged; otherwise, the entire amount should be recognised as finance costs.

In addition to the calculation and valuation of financial instruments, appropriate disclosures in additional notes should also be considered. This is required by both the Polish Accounting Act and the Regulation of the Minister of Finance on financial Instruments.

Valuation and presentation of liabilities and provisions for liabilities

In the case of provisions (as in the case of financial instruments), the gravest mistake is failure to include them in the entity's financial statements, even though they are required to be created based on past events that oblige the company to do so.

Companies notoriously fail to create provisions for unused leave or provisions for guarantees or jubilee awards (although their necessity is a derivative of the principle of matching revenues and costs); provisions for unused leave are, in fact, a category that is most often skipped by companies due to – as the entity usually justifies – “employees using their outstanding leave by the end of September of the following year”.

Example of recognising unused leave in the financial statements

At the end of 2024, a company had 100 days of unused leave; assuming an average salary of PLN 5,000, the company should have created a provision for unused leave in the amount of approximately PLN 28,000. It is irrelevant that as of 30 September 2025 100% of these outstanding leave days had been used, as operating costs were disproportionate to revenue from core operations (by not taking leave, employees contributed to increasing the potential for higher revenue).

Another common and significant error made by accounting departments is the failure to accrue interest on financial liabilities or to disclose trade payables in the financial statements when a service was performed (or the entity acquired control of or derived benefits from a purchased good) during the reporting period, but the actual date of receipt of the liability fell after the balance sheet date. This is related to the timing of the acknowledgment and recognition of the cost or acquisition of goods, and the principle is similar to that described for revenue recognition.

An example of a proper presentation of a liability

At the end of January 2026, a transportation company received a summary of overhauls and repairs for vehicles operating in various European countries during the financial year ended 31 December 2025. Based on this summary, the company will receive an invoice just before wrapping up its financial statements; therefore, the financial and accounting departments should recognise this amount as service costs and, on the balance sheet, as trade liabilities.

A different situation concerns the creation of provisions for audit services ("balance sheet audit"), for which the invoice will be delivered after the financial statements are closed. The service is performed in the year following the audited year, but it relates to the reporting year. Therefore, the cost should be recognised in the reporting year, and the audit provision should be included in "Accruals" (unlike the above example regarding vehicle service repairs, in which case the service is confirmed by an invoice after the financial statements are prepared). The service relates to the reporting year, and only the formal document – the invoice – is delivered later, i.e., after the financial statements are prepared.

When drafting annual financial statements, you should consider consulting an expert

As you can see, an experienced auditor can spot many errors when reviewing financial statements; the ones we have mentioned here are just the tip of the iceberg. This problem is not limited to the financial statements themselves – auditors also identify numerous quantitative and qualitative errors in additional explanatory notes, in the introductions to financial statements, in management reports, and in cash flow statements.

Add to this the entire collection of errors, such as the lack of appropriate disclosures, and it becomes clear that the fiscal and financial year-end closing period is a time of intense work not only for the accounting department and company management, but also for the auditing firms. You can, of course, find instructions on how to choose a good auditor in our publications.

If you have any questions or concerns, please contact us directly, e.g. via LinkedIn.

¹ This means International Financial Reporting Standards, International Accounting Standards (IAS) and interpretations developed by the IFRS Interpretations Committee or the former Standing Interpretations Committee.

² A different situation is the case where the goods were separated and ready for delivery to the buyer within the specified time frame and the buyer would have expressly confirmed the instructions regarding late delivery.