When do you need Annual Financial Statements?
Yes, there are circumstances which require that your company prepares Annual Financial Statements, so let’s take a look at the what, when and why.
- The banks require them if they’re going to lend money to the company.
- Any other lender will require them.
- They may be required for a large tender.
So, if they are required, what form should they take and who will prepare them?
Financial statements should always be prepared to International Financial Reporting Standards, otherwise you may as well not bother.
Who should prepare your yearly financial statements?
Any competent accountant who has the appropriate software and knowledge (that includes Harbour and Associates – see quotation here).
Will the lender require that they be audited, reviewed, or independently compiled? No to the first two, even if they say “audited”, they rarely mean it, and yes to the last one.
And that’s basically it. You don’t need to read further.
However, those of you who think the law says you must prepare them can read on, because in terms of SARS and the Companies Act, you almost certainly don’t need formal Annual Financial Statements.
SARS only requires that with the company annual tax return, you must submit “signed off annual financial statements”, but gives no definition of these and they accept an Income Statements and Balance Sheet signed by a director. I don’t believe that anybody ever looks at them anyway, unless the return gets red flagged.
The Companies Act of 2008 says in s30(2A) “If, with respect to a particular company, every person who is a holder of, or has a beneficial interest in, any securities issued by that company is also a director of the company is exempt from the requirements in this section to have its annual financial statements audited or independently reviewed.” This is actually the definition of an “owner managed company”, which I refer to below.
Then we go to the Company Regulations, which form part of the Act. 27(4) dictates the financial reporting standards of all companies not excluded by s30(2A) of the Act. This effectively means that if the company is excluded, then it can determine its own reporting standards.
So, in terms of the Companies Act, if your company is owner managed, it can decide how it wants to present its financial reports and that means that its Income Statement and Balance Sheet which are in the bookkeeping app database are sufficient. Note that a company with a Public Interest Score of 350 or more is not exempt, but that means your turnover would have to be in the R300 millions per year, in which case you would not be reading this article.
There’s a lot of misunderstanding about the finer interpretation of “owner managed”. Here are two very important examples –
1) The Independent Regulatory Board for Auditors (IRBA) stated that a company that is owned by a trust is not owner managed. SAICA, the South African Institute for Chartered Accountants, took a different view from day one. However, in 2018, SAICA (and I, in 2020) have come around to the IRBA’s view
2) What about the wholly owned subsidiary of another company? Again, apply the definition. If the shareholders of the holding company are also its directors, then it is owner managed. However, the shareholder of the subsidiary is the holding company and it cannot be the director, so the subsidiary is not owner managed.
Need Annual Financial Statements for your company?