Annual Financial Statements are records and reports that examine a 12-month period (either the calendar year or the financial year) of your business. These statements reflect financial performance and business health and are necessary for renewing banking facilities and applying for or increasing credit.
It is also a requirement of the Companies Act that the annual financial statements are prepared within 6months of the financial year-end of the Company.
Included in financial statements are:
Balance Sheet (Statement of Financial Position) – is a snapshot at a point in time of what you own (assets), who you owe (liabilities) and what your business net worth is (equity).
Income Statement (Statement of Comprehensive Income) – is a summary of the trading journey from your opening balance sheet to the closing balance sheet. It summarises how much money you made selling goods/services to clients, the cost of doing so and whether you made a profit or loss.
Statement of Cash Flow – is the story of how you made or lost cash through trading (operating activity), how you financed the business (financing activities) and what assets you invested or disinvested in (investing activities).
Statement of Changes In Equity – is a report of any changes in equity over the year-long period.
Do I need to be audited?
A revision of the Companies Act in 2008, removed the requirement of audits for certain companies based on their Public Interest Score (PIS). If your company scores 350 or more, you will require an audit.
This revision comes with a degree of flexibility towards SMEs (businesses with scores below 350), as they develop they can opt for an independent review. Catering for two types of reviews, the act now includes, an independent financial review and an audit.
Public Interest Scores are calculated according to a point system, outlined below:
Every employee = 1 point
Every R1 million owed = 1 point
Every R1 million turnover = 1 point
Every shareholder or beneficiary = 1 point
Audit vs. Independent Review
An audit is the process whereby an independent/external auditing team examines your company’s financials. This is an extensive process that offers the utmost assurance (reasonable assurance), making it the more authoritative process of the two.
Independent review offers much more limited assurance. This examination involves less in-depth processes, and this exercise is largely just an assurance that the financial statements weren’t miscalculated.
Compilation
The Companies Act provides that if 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, and that companies Public Interest Score is less than 100, that company is exempt from the requirements in Section 30 of the Act to have its annual financial statements independently reviewed.