The Importance of Preparing Financial Statements

As a businessman and entrepreneur, one needs to understand the importance of preparing annual financial statements.

 

Below are some of the many reasons:

• When submitting annual tax returns, SARS may request financial statements to accurately review and complete this process, unless the company has not traded, in which case a Nil return can be submitted
• Financial institutions like banks or credit providers may require financial statements to grant or provide credit.
• As an entrepreneur, financial statements are required to guide you in making informed business decisions relating to the going concern of your business operations.
• When selling your business, rest assured that the potential buyers will scrutinize every aspect of your business and not being able to promptly produce financial statements, current and prior years, may lead to the sale not being realized.

These are just some of the reasons why it is important to prepare financials statements on an annual basis using a qualified accountant belonging to an accredited professional body (SAICA, SAIPA, SAIGA etc.).

Occasionally confusion exists about whether companies should produce audited, independently reviewed, or compiled financials.

 

To eliminate the confusion, financial statements can be classified in the following way:

 

1) Compiled financial statements

All companies are required to have financial statements compiled in terms of the Companies act. These compiled financial statements may then be required by the Companies Act to be sent for independent review or audit based on specific factors that will be set out below. The company will only be required to present compiled financial statements if it meets the following criteria:

a) Companies with a public interest score under 350 and
• Are owner managed (all shareholders are directors)
• The financial statements are externally compiled
• No act, law or MOI obligating the company to have its financial statement audited or independently reviewed.

 

2) Independently reviewed financial statements

An independent review is done after the financial statements have been compiled and can be done by an accountant who is registered with an accredited body (does not need to be an auditor). An independent reviewer will then review the file to ensure the file is correct and provide a higher level of assurance on the financial statements. The Regulations propose that an independent review is required if the company that falls in any of the following categories in any particular financial year:

a) Companies with a public interest score of over 100, but under 350, and
• The company is non-owner managed (not all shareholders are directors)
• The financial statements must be externally compiled
• No act, law or MOI obligating the company to have its financial statement audited

b) Companies with a public interest score of under 100
• The company is non-owner managed (not all shareholders are directors)
• The Financial statements can be internally or externally compiled
• No act, law or MOI obligating the company to have its financial statement audited.

c) Any company that falls below the requirements may also elect to have their financial statements independently reviewed.

 

3) Audit of financial statements

The Act requires public companies and state-owned companies to have audited financials. In addition, the Regulations propose that an independent review is required if the company falls in any of the following categories in any particular financial year:

a) Any profit or non-profit company if, in the ordinary course of its primary activities, holds assets in a fiduciary capacity for persons who are not related to the company, and the aggregate value of such assets held at any time during the financial year exceeds R5 million.

b) Any non-profit company, if it was incorporated
(i) directly or indirectly by the state, an organ of state, a state-owned company, an international entity, a foreign state entity or a company; or
(ii) primarily to perform a statutory or regulatory function in terms of any legislation, or to carry out a public function at the direct or indirect initiation or direction of an organ of the state, a state-owned company, an international entity, or a foreign state entity, or for a purpose ancillary to any such function; or

c) Any other company whose public interest score in that financial year is
(i) 350 or more; or
(ii) at least 100, but less than 350, if its annual financial statements for that year were internally compiled.

 

4) How is the public interest score (PIS) calculated?

a) Points equal to the average number of employees of the company during the financial year.

b) one point for every R1 million (or portion thereof) in third party liability of the company, at the financial year end.

c) one point for every R1 million (or portion thereof) in turnover during the financial year; and

d) one point for every individual who, at the end of the financial year, is known by the company,

e) in the case of a profit company, to have a beneficial interest directly or indirectly in any of the company’s issued securities; or

f) in the case of a non-profit company, to be a member of the company, or a member of an association that is a member of the company.

 

TLOK’s Accountants are registered with SAIPA (South African Institute of Professional Accountants), with more than 20 years’ experience.

 

We can assist with compiled and independently reviewed financial statements. TLOK are not auditors therefore we cannot provide auditing services, but we have partnered with accredited auditors to allow us to provide the full bouquet of services to our clients.