Accurate financial reporting is an essential aspect of running a successful business. Companies are obliged to maintain appropriate financial records that accurately record and explain their transactions and financial performance. These records should allow for the preparation of “true and fair” financial statements that can be audited.
What financial records should be kept?
Under section 286 of the Corporations Act 2001 (Cth) (Act), all companies are required to maintain adequate and proper written financial records.
ASIC suggests several basic financial records that companies should maintain including financial statements (such as profit and loss, balance sheet, and cash flow statements), general ledger, general journal, assets register, computer backups, cash records, bank account statements, sales/debtor records, work in progress records, and various other documents related to company operations.
What about financial reports?
Keeping accurate financial records makes it much easier to prepare financial reports. The key documents involved in financial reporting include:
- Financial Report: This report consists of statements on profit and loss, balance sheet (financial position), cash flow and equity, and accompanying notes. It provides an overview of the company’s financial performance.
- Directors’ Declaration: The directors are required to provide a declaration stating that they have reasonable grounds to believe the company is solvent, and the financial statements and notes comply with accounting standards, providing a “true and fair” view.
- Directors’ Report: This report, as outlined in sections 299 and 300, includes information such as a review of operations, significant changes in the state of affairs, principal activities, future developments, dividends, director details, and more.
- Auditor’s Report: An independent auditor examines the company’s financial report and provides a report on its accuracy and compliance with accounting standards.
- Half-Year Report: Disclosing entities are required to prepare a half-year financial report, which includes financial statements, directors’ report, and an auditor’s report or review.
Who needs to provide financial reports?
While all companies must keep proper financial records, not all of them are required to produce formal financial reports. Financial reports and directors’ reports must be prepared for each financial year by the following entities:
- Disclosing entities incorporated or formed in Australia.
- All public companies, except small companies limited by guarantee, unless directed otherwise under sections 294A or 294B.
- Large proprietary companies, which are defined as companies meeting at least two out of three criteria: consolidated gross operating revenue over $50 million, consolidated gross assets over $25 million, or more than 100 employees.
- All registered schemes.
Financial reports must comply with accounting standards and regulations outlined in section 296. However, small proprietary companies and small companies limited by guarantee have some exceptions if subject to specific member or shareholder directions.
Why do financial reports need to be approved by Directors?
While your financial reports will be prepared by your accountant, as a Director you are still responsible for financial reports. Directors play a crucial role in approving financial statements. They are obliged to apply their knowledge of the company’s situation to validate the veracity of information contained in financial reports.
They must make a declaration regarding the company’s ability to pay its debts, compliance with accounting standards, and providing a “true and fair” view. This declaration should be made in accordance with a resolution, specify the date, and be signed by a director.
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The material and contents provided in this publication are informative in nature only. It is not intended to be advice and you should not act specifically on the basis of this information alone. If expert assistance is required, professional advice should be obtained.