What are Annual Financial Statements?

AFS is a written report of a company’s financial performance, financial strength, and liquidity status based on a 12-month consecutive period. The primary purpose of annual financial statements is to
measure and report on 2 key aspects of a company’s activities, namely its financial position and financial performance.

There are 4 essential reports forming part of the AFS that include the statement of financial position, statement of comprehensive income, statement of changes in equity, and statement of cashflows.

  • The statement of financial position includes information about a company’s assets, liabilities, and shareholder equity at a specific point in time.
  • The statement of comprehensive income reports the income and expenses of the company, normally for a 12-month period.
  • Statement of equity summarises the transactions that influenced the shareholders equity during the period, for example profits, dividends declared and shareholding changes.
  • Statement of cashflows reports the movement of cash to and from the company during theperiod. Cashflows are split into 3 main sections, namely operating-, investing- and financing activities.

Why is this important?

  • Legal compliance – Section 30 of the Companies Act states that a company must prepare annual financial statements within six months after the end of the financial year.
  • Decision making – AFS enables stakeholders such as owners or shareholders to make decisions about the business, based on financial analysis performed. Investors use AFS to understand and keep updated with the company’s financial performance.
  • Tax compliance – SARS requires that the annual income tax return (IT14) be accompanied by signed annual financial statements of the company, except for companies that are dormant, body corporates or microbusinesses (turnover below R1million).
  • Funding – Banks and other financial institutions require formal AFS, and sometimes year-todate management accounts, to assess whether the company can afford debt.

Classification of Annual Financial Statements

Different types of entities require different types of Annual Financial Statements. The three types are as follows:

1. Compilation AFS (Internal / external)
2. Independently Reviewed AFS
3. Audited AFS

The type of AFS required for your business is determined by calculating the Public Interest Score (PI Score). This score indicates the degree of public interest in a company. Factors considered when
calculating the PI Score includes, but is not limited to turnover, number of employees, third party liabilities etc. It determines whether a company requires an Audit or Independent Review of the
financial statements, and which reporting standards to be applied.

How do I get AFS?

Financial statements are compiled using the information obtained from detailed transaction records of the entity. Without accounting record-keeping on a daily, weekly, and monthly basis, financial
statements cannot be produced.

BusinessServices.com can assist in all your accounting needs, from accounting to AFS and Tax returns.