Here is a quick-reference Q&A to assist you in understanding the importance of an independently compiled annual financial statement.
I run a small business with two employees. My turnover is less than R1 million per annum. Do I really need to compile an annual financial statement?
If you run a business, even if you deem it small, it’s necessary to compile or have annual financial statements compiled. Here’s why:
- To establish how your business is doing.
An annual financial statement is a structured summary of information about your business. It shows the state of your finances, including profits, which is important should you wish to loan money, for example.
- Preparing an AFS is required by law.
If the business is a closed corporation or has been incorporated as a company, you are legally required to compile an annual financial statement not later than three months after the end of your company’s financial year. The format must subscribe to the International Financial Reporting Standards. If you have staff, the AFS meets certain reporting obligations required by your labour law obligations too.
- An AFS is necessary for accurate tax
SARS requires the submission of annual financial statements, prepared in accordance with our tax laws. Accurate annual financial statements will help establish the amount of tax you have to pay. This is important as paying too little with result in penalties, and paying too much could harm your cash flow. If you are registered for VAT, your AFS will assist in establishing how much VAT you should be paying.
What does an annual financial statement consists of?
The most common set of financials includes a balance sheet, an income statement and a statement of cash flow. When used for investment purposes, these reports may be accompanied by an analysis compiled by company management or an independent auditor. This is what each statement looks like in more detail:
- A balance sheet consist of assets, liabilities and equity (the difference between what your business is worth and what you owe).
- An income statement reflects the income and expenses of a company over a specified period of time.
- The statement of cash flow shows how a business generated cash flow and then how it was used. Cash flow is usually split into operations, investing and financing.
These reports plus any supporting material by way of management reports are typically required to be completed within three months of the accounting year. A business operating on a calendar year would have until the end of March as their deadline.
How often must an annual financial statement be compiled?
An AFS usually covers a fiscal year or company year. Sometimes, however, an AFS is required at interim times during the year in addition to the complete year – this is relevant to public companies.
How long should I keep my annual financial statements?
South African law requires that you retain all annual financial statements as these may be requested by SARS at any time.
Why is it advisable to have my annual financial statements compiled independently?
Regulations and standards surrounding the compilation of annual financial statements are updated and amended fairly frequently, so it makes sense to consult with accountants and tax practitioners to perform this task for you. They will know of any updates to the law and are also up to date with any new IRFS regulations. In South Africa certain businesses are subject to having their AFSs audited or independently reviewed depending on whether the business is owner-managed or not, and what their public interest score points are. These kinds of details, which you may not be aware of, could open your business to scrutiny if the annual financial statements are not prepared and presented properly. A tax practitioner or accountant will know the requirements. For example, in 2018 businesses were instructed by the CIPC(Companies and Intellectual Property Commission) to present their financial reporting in iXBRL, a format used to standardise all AFS data, allowing the CIPC to interpret the data more effectively.
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