limitations of The Statement of Financial Position

The limitations of the statement of financial position include the following :

1- The statement of financial position does not purport to show the value of a business, but it enables investors, creditors, and other users to make their own estimates of the enterprise’s value .

2- The common measurement attribute in the statement of financial position is the use of historical cost for the most part of assets and liabilities, historical costs may bear no resemblance to the current value of those items, other Measurement attributes of assets include but are not limited to fair value. Even those assets reported at their current fair values may not always faithfully represent what a company could sell those items for on an open market. Thus statement of financial position does not reflect the fair value of the firm’s assets at specific moment in time nor the status of the firm’s assets in case of forced or orderly liquidation of the firm because financial statements presentation reflect the going concern assumption.

3- A statement of financial position does not allow investors to assess the net realizable value of enterprise assets because assets are usually recorded at original historical cost in a statement of financial position, although some exceptions exist. For example, some short-term receivables are reported at their net realizable value. Thus, the statement of financial position cannot be relied upon to assess NRV of enterprise assets.

4- Exclusion of some economic resources and obligations, not all assets and liabilities are included in the balance sheet; for example, certain contingencies and certain pension obligations are not included. In some cases, liabilities may arise that were not expected.

5- The use of estimates in the determination of certain items, measurements in financial statements tend to be approximate rather than exact. Estimates are commonly used to determine reported amounts, e.g., depreciation and present value.

6- Balance sheets essentially a picture, or snapshot, of the entity’s Items of value, debt, and net worth at a single point in time; accounts may vary significantly a few days before or after the publication of the balance sheet.