There is in my opinion a
common misconception that if a company that has a PIS of less than 100 points
and their financial statements are internally compiled the company has
carte blanche to determine their own accounting policies. Any financial
statements prepared by any company registered in terms of the Companies Act and
CC Act must satisfy the following legal criteria before issuing these financial
statements:
Source – Section 29 of Companies
Act:
- satisfy the financial reporting standards as to form and content, if any such standards are prescribed;
- present fairly the state of affairs and business of the company, and explain the transactions and financial position of the business of the company;
- show the company’s assets, liabilities and equity, as well as its income and expenses, and any other prescribed information
Quite clearly in respect of a)
this sort of company cannot comply with; however in respect of b) no matter
what the directors decide to do they have to ensure that their AFS present
fairly and explain the transactions and financial position of the company –
this in itself may well indicate that directors cannot use the cash basis of
accounting to prepare financial statements or even not allow them to simply
make things up without due consideration to the users of the financial
statements. In the extreme case where the shareholder is the director who
happens to be the only user; fair presentation to this person still means
knowing what his or her liabilities are; knowing who owes you money; knowing
what future taxes the company is going to pay; and most important of all having
sufficient information to determine whether the company is a going concern –
this would require disclosure of contingent liabilities.
The writers of the legislation
left nothing to chance in c). No matter what every company must show their
assets – this means in my opinion those assets that are income producing at the
very minimum. These assets must be valued at the very least at cost less write offs.
The company must show debtors and for that matter any other assets that are
owned or controlled by the company. All liabilities of the company must be
disclosed otherwise how can one begin to calculate the PIS. This same applies
to revenue.
I can
go on and on providing evidence that the directors of such a company DO NOT
HAVE CARTE BLACHE TO USE THEIR OWN ACCOUNTING POLICIES. The Companies Act
provides safeguards against that.
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