Failure to maintain these records adequately and with precaution against and detection of falsification of such records carry liability for the members. This record maintenance requirement could be delegated to the Accounting Officer or equivalent.
The members of the close corporation have a duty to cause annual financial statements, which should be drawn up within nine months of the end of the financial year. The financial statements must be in agreement with the accounting records and be approved and signed on behalf of all the members of the corporation.
at the year end and the movement during that financial year
The Close Corporations Act makes no provision for comparative figures, nor requires a cash flow statement. However, in the interest of fair presentation and considering the needs of the users of the annual financial statements, comparative figures should be presented. The need to include a cash flow statement is dependent on the type of trade and the needs of the users.
The annual financial statements of a close corporation must be in conformity with generally accepted accounting practice appropriate to the business of the corporation; which will fairly present the state of affairs as at the financial year end and the results of its operations for that financial year.
Besides the specific disclosure that is required, as listed above, the members must ensure that sufficient details are proved in the financial statements to reflect fair presentation. This means that ‘little GAAP’ should be applied. This is where it gets confusing – what is ‘little GAAP’?
Historically, financial statements were based on generally accepted accounting practices. However, the conclusiveness and consistency of accounting practices was difficult to establish. Standards of accepted accounting practices where codified and recorded as statements of generally accepted accounting practices (these were the ‘AC’ statements). Accounting practices that have been documented in Standards are referred to as ‘big GAAP’ (also referred to as ‘promulgated GAAP’ or “Statements of GAAP”), while accounting practices that have not been documented are referred to as ‘little GAAP’ (also referred to as ‘un-promulgated GAAP’). Both types of GAAP share many similarities and have the same authority. Typically, companies have to apply ‘big GAAP’, while close corporations apply ‘little GAAP’.
The requirement that close corporations’ annual financial statements must be compiled in accordance with ‘little GAAP’ implies that the basic accounting concepts (being the going concern, matching, consistency, and prudence principles) should form the basis of the financial statements. When annual financial statements are compiled, basis of presentation that apply the concepts correctly, considering relevance and the particular circumstances of the entity, should be adopted (when considering the basis to apply, the substance over form and materiality concepts must be considered).
The accounting bases that are applied are referred to as the accounting policies and should be disclosed in the financial statements. The materially concept requires that accounting policies should be disclosed for all those items which may be regarded as material or critical in fairly presenting the results of operations and the financial position of the corporation at the end of the financial year. As the financial statements have to provide information, such as to external parties, the users of the financial statements must be considered when determining materiality and disclosed.
Annual financial statements must be approved and signed by, or on behalf of, the members holding a member’s interest of at least 51%.
According to section 62 of the Close Corporations Act the accounting officer should “review the appropriateness of the accounting policies represented to the accounting officer as having been applied in the preparation of the annual financial statements” and report in respect of the above to the corporation.
Close Corporations may apply IFRS for small to medium-sized entities. The standard has provision for first-time adoption.