Effective use of current legislation and accounting standards for financial reporting can save businesses money
The new Companies Act, the International Financial Reporting Standard (IFRS) for SMEs and auditing standards can help companies reduce audit costs and simplify their financial statements, says Geoff Fortuin, Deloitte Western Cape partner.
However noted Fortuin, many businesses are still unclear of the benefits and options that current legislation and accounting and auditing standards can provide when preparing their financial statements. This is despite the fact that the new regulations have made financial reporting simpler and more cost effective through less stringent financial reporting requirements.
He said the the current environment provides a healthy balance between greater accountability and flexibility allowing less time and money to be spent on financial reporting. Businesses can, therefore, focus on sustainability and growth in these tough economic times. We believe there has been insufficient uptake in adapting to and effectively taking advantage of the benefits that exist. Companies need to realise there is no longer ‘a one size fits all’ approach to financial reporting.
IFRS for SMEs became the first set of international accounting requirements developed specifically for SMEs in July 2009. It was developed in response to demands by users of international accounting standards for a less onerous financial reporting framework for SMEs.
The global accounting transition to IFRS, issued by the International Accounting Standards Board, all JSE listed companies were required to report under IFRS to ensure that firms globally made the same levels of disclosures and used the same conceptual approach when reflecting their financial results. These requirements are however not mandatory for unlisted subsidiary companies of listed entities, who may elect to use IFRS for SMEs .This would potentially cause some difficulties with the group consolidation process, but suitably designed year end group reporting packs can be used to overcome this challenge, added Fortuin
As stated by the South African Institute of Chartered Accountants (SAICA), the IFRS for SMEs is suitable for all entities that prepare general purpose financial statements (not tailored to the needs of any one group) except those whose securities are publicly traded and who hold assets in a fiduciary capacity for a broad group of outsiders as one of itsprimary businesses.
The new Companies Act, which came into effect in May this year, has also introduced more flexibility in the audit requirements for companies. Whereas all public companies and parastatals will be required to conduct audits as was the case under the previous Companies Act, there are more accommodating requirements for a large proportion of private companies depending primarily on their level of turnover, debt and number of employees. These factors determine the entity’s public interest score which in turn determines whether the company’s financial statements must be reviewed or audited. In certain very limited circumstances, the new Companies Act requires neither an audit nor a review to be performed, said Fortuin.
“Companies still need to be responsible and adhere to the requirements of their external funders such as banks and shareholders and ensure they are fully compliant and responsible corporate citizens. However, every business is unique and needs to evaluate its options when preparing its financial statements and determining whether the audit or review requirement applies in its particular circumstances. This can potentially free up monies which can be used to acquire other services from the company’s professional service providers or to invest in other areas of the business that can enable further growth,” says Deloitte Western Cape partner and Professional Practice Director, Lester Cotten. “To a degree an audit is no longer a grudge purchase”.
“The financial reporting landscape has changed for many companies including subsidiaries of listed companies. It should be noted that IFRS for SMEs doesn’t just apply to small businesses as international SMEs can be sizeable companies,” said Cotten.
In addition, the introduction of the new Companies Act and the updating of the relevant reporting Auditing Standards have also been designed to increase choice and in many cases reduce the cost of doing business”.
Lester said an example of how the Auditing Standards makes life easier is where no financial reporting framework is prescribed for a company or other entity like a trust. The standards allow for an audit to be done against a stated basis of accounting as determined by the directors or trustees and ultimately vetted by the auditor with regard to the attainment of fair presentation in the financial statements.