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The low-down on Financial Statements for companies

With the launch of the Corporate Income Tax Return service for SME’s recently, there are questions around the requirement for companies to produce financial statements once they have filed their return. In particular, small business owners have been asking whether they need to engage an expensive professional to prepare them, or if can they be drafted and signed internally by their accountant/bookkeeper. There also seems to exist some confusion around the requirement for an audit versus an internal review. Below, we try and clear up some of the confusion around this topic.

Who can prepare Financial Statements?

The business owner or company accountant or any other employee (hopefully with some accounting knowledge!) can draw up the financial statements internally.

Alternatively, they can be compiled independently by an accounting professional on the basis of accounting records provided by the company. An independent accounting professional is someone who has no personal financial interest in the company, nor is an employee of the company. They would have no involvement in the day-to-day running of the company and would typically belong to a regulatory body (e.g. South Africa Institute of Chartered Accountants or the South African Institute of Professional Accountants).

Are there prescribed financial reporting standards?

Prescribed financial reporting standards are a particular format in which the financial statements must be drafted based on regulated accounting standards and policies. The Companies Act does prescribe certain financial standards for reporting – these include IFRS, IFRS for SMEs and SA GAAP. In the case of some small companies, who compile their financial statements internally, the company can choose to use its own financial reporting standards rather than one of the three mentioned above.

The financial reporting standard, which must be used, will depend on the category of company (i.e public – listed, public – unlisted or private) and its public interest score. It would be useful to work out the public interest score of your company so you can see if you need to prepare your financial statements based on prescribed standards or if the company can use its own financial standards.

In addition, the public interest score will also determine whether or not an audit or internal review will be required (more on this later).

How do I calculate public interest score for my company?

There are four parts to the calculation. You need to allocate points per section and then add up the total. See example below for further clarification:

Description  Example Points 
1 point per average number of employees per year 10 employees 10
1 point for every R1m (or portion thereof) in  third party liability at year end R5,000,000 5
1 point for every R1m (or portion thereof) in turnover at year end R10,500,000 11
One point for every individual who at year end:

1) in the case of a profit company: has a direct or indirect beneficial interest in the company's issued shares or,

2) in the case of a non-profit company, is a member of the company or is a member of an association that is a member of the company
N/A 0
Total Points    36

Does my company require an audit or an internal review or are neither applicable?

An audit is a detailed examination of the company’s financial records by independent external auditors who provide an audit report at the end of the audit in which they express an opinion on the accuracy of the financial statements.

An independent accounting practitioner performs an independent review. Like an audit, this involves a review of the company’s financial records in order to arrive at an opinion on the financial statements of the company, however the review procedures are more high level and less onerous than an audit (and consequently the engagement is quicker and cheaper).

If a company requires an audit, it won’t require an independent review as well (and vice versa).

There's one category of companies, which will not require an audit or an independent review – these are small, owner-managed companies with a public interest score of less than 100. These are generally companies with a couple of directors, who own all the shares and run the business themselves.

What financial reporting standard do I need to use?
Do I need an audit or independent review (or neither of these)?

Category of Company Prescribed financial reporting standard

Audit Independent Review
Public companies -  listed on an exchange X     Yes No 
Public companies - not listed on an exchange X X   Yes No
Other Companies with public interest score 350 and upwards X X   Yes  No 
Other Companies with public interest score at least equal to 100 but less than 350 X X X Yes, only if financial statements were internally compiled Yes, only if financial statements were independently compiled
Other Companies with public interest score less than 100 (i.e 1-99) and financial statements are independently compiled. X X X No Yes, unless every shareholder is also a director (i.e owner managed companies)
Other Companies with public interest score less than 100 (i.e 1-99) and financial statements are internally compiled. Reporting standards determined by the company

No Yes, unless every shareholder is also a director (i.e owner managed companies)

Do financial statements need to be submitted to SARS?

It is compulsory for small, medium and large businesses to submit signed financial statements to SARS on the submission of their ITR14 (company tax return). These are submitted via SARS eFiling when the ITR14 is submitted.

The financial statements must be signed off by the Public Officer.

The minimum requirement of the financial statements is that they contain a Balance Sheet, Income Statement and Notes. 

The submission of financial statements is optional for companies classified as:


-body corporates or

-microbusinesses (turnover less than R1m)

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