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Why Companies Outsource the Financial Statements Compilation to Experts in South Africa

On 1 January 2015 the law changed for companies and from that day onwards, it is no longer a requirement for certain entities that the financial statements compilation must be done by an auditor. At first, small and medium size business owners were elated with the possible cost savings.

However, preparing your own financial statements can be a daunting task, especially because you have to do so in compliance with the requirements of the law. As the result of the frustration, many companies now outsource the preparation and submission of their financial statements to organisations such as The Tax Shop, where experts prepare the annual financial statements for business entities required by law to submit such, as well as prepare the provisional statements and management accounts, while also providing consultation services.

If your company by law is required to prepare a financial statements compilation read on since we share a few basics to get you on the right track.

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What is the Financial Statement Compilation?

It is basically a record of activities related to your entity’s finances and the status of the entity. This is a formal record that must be compiled in a structured way and should include the management discussion. The compilation includes a balance sheet, which is the report of your entity’s liabilities, assets and the ownership equity at a specific date. Apart from the balance sheet, you must create an income statement, which is the report detailing earnings and expenses, as well as the profits generated for a certain timeframe. Add to such the equity statement, which is a report of your entity’s cash-flow over a particular period as related to the cash flow in terms of operation, financing and investments during the period.

If you manage a small operation these reports may not be so complicated, but the more multifaceted your activities and larger your entity the more complex the reports will be. With such statements, you will need to include analysis to explain in addition to various footnotes to describe items on the statements in detail.

Objective of the Statements

The idea behind the creation of such statements is to provide an in-depth view of the entity’s performance. As such, the statements must be easy to read and understand. SARS, of course, must be able to see exactly what the entity’s expenses and income are and how cash-flow has been managed. The footnotes explaining items in the statements are extremely valuable in this regard. The statements are also used by banks, investors, buyers and trading partners to assess the performance and investment potential of the particular business entity.

Purposes of the Financial Statements are:

  • Basis for important investment and financial strategy decisions, as well as decisions regarding the direction that business operations should take.
  • Information for shareholders and other stakeholders to determine the financial health of the business entity.
  • Information for employees to use for negotiation of remuneration, promotions and benefits through collective bargaining agreements.
  • Lending institutions require the statements to determine whether to grant overdraft facilities or loans for working capital.
  • The statements are often included in entity annual reports to provide a complete overview of the entity’s performance and to entice further investment.
  • SARS and statutory bodies require the information to determine compliance with specific regulations.

More about the Notes

The notes submitted alongside or as part of the financial statements include details and an explanation regarding the going concerns, various accounts, liabilities and assets. These notes put the financial data in perspective for the reader.

Management Discussion

The management discussion is not the same as the notes. This part includes an analysis of the data and interpretation by the entity’s management. Such can include information about past performance, growth or decline, challenges and achievements in the past as well as for the current reported period. It can also include a discussion of the projections and trends and how various factors affect the entity.

When is the Submission Due?

The FAIS Act stipulates that the financial statements must be submitted to the Registrar within a period of four months after ending of the entity’s financial year-end.

What Next?

If you struggle to compile your business entity’s financial statements in accordance with the legal requirements call in expert help rather than submitting incorrect statements which can seriously affect your firm’s standing with SARS, lending institutions, and investors.