Statutory requirements
Partnerships and sole traders are under no statutory obligation to prepare annual accounts or have them audited, although some form of accounts is usually required for income tax purposes. The companies incorporated under the Corporations Law are, however, subject to extensive statutory requirements which are summarized below.

Accounts and Directors’ Reports
The directors must prepare accounts and lay them before shareholders in an annual general meeting within 5 months of the financial year end (6 months in the case of an exempt proprietary company). The directors then have a further 1 month to lodge an annual return together with a copy of the financial accounts with the Australian Securities Commission.

As proprietary companies do not have to hold annual AGMs, their annual returns for each year must be lodged with the Australian Securities Commission before 31 January in the next calendar year. Small proprietary companies are not required to lodge financial accounts, unless the small proprietary company is owned by a foreign company, and consolidated accounts have not been lodged with the Australian Securities Commission.

A company’s financial year is generally the period from 1 July in one year to 30 June in the following calendar year. An Australian subsidiary of a foreign corporation is permitted to change their financial year to correspond with the financial year of its parent.

Financial accounts comprise:
• A profit and loss account (income statement) covering the financial year
• A balance sheet as at the end of the financial year
• Notes giving certain supplementary information and disclosures
• A statement by directors
• A directors’ report
• An audit report
• A cash flow statement.

The accounts must give a true and fair view of the company’s affairs and are to be prepared in accordance with approved accounting standards (which have been given legislative backing through the Corporations Law).

Public companies and large proprietary companies must send a set of financial accounts to its shareholders. In relation to public companies, a notice of meeting and a set of financial accounts are to be forwarded to shareholders giving at least 14 days notice of an annual general meeting.

In addition to accounts showing the company’s position as a separate entity, a company with subsidiaries must normally submit group accounts dealing with the company and its subsidiaries. For this purpose, the subsidiaries must, as far as possible, draw up accounts for the same period as those of the holding company. The group accounts are presented in the form of a consolidated set of financial statements.

Books and records
Incorporated bodies are required under the Corporations Law to keep proper accounting records. These must contain the information necessary to disclose with reasonable accuracy, at any time, the company’s financial position at that time, and to enable the directors to prepare accounts in compliance with the requirements of the Law. The accounting records must be preserved for a period of 7 years for accounting records and 5 years for all other records. The accounting records must record:
• All sums of money received and expended, and the matters in respect of which the receipts and expenditure take place
• The assets and liabilities

If the company’s business involves dealing in goods, also:
• Statements of stock held at the date to which the accounts have been drawn up, and all stock-taking records from which statements have been prepared
• Statements of all goods sold and purchased, showing the goods and identifying the buyers and sellers (except in the case of goods sold in the retail trade).

The accounting records must be kept at the company’s registered office or at such other place as the directors think fit. If the accounting records are not kept in Australia, the company must maintain Australian accounts and returns which disclose the financial position of the business and which must be sufficiently detailed to allow a proper balance sheet and profit and loss account (income statement) to be drawn up. These records must be updated at least every six months, and must be kept in a place which gives access to the directors at all reasonable times.

If accounting records are not kept in a legible form, they must be capable of being reproduced in a legible form. Accounting records must be kept in English. Computer records are acceptable, provided that the company has the ability to print them out in hard copy form.

Annual return
At least once every calendar year, a company must file an annual return with the Australian Securities Commission. It must contain a list of shareholders, particulars of the directors and secretary, the amount of the company’s total indebtedness in respect of mortgages and charges, and certain other statutory information.

Auditor and audit requirements
While there is no general statutory requirement that the accounts of an unincorporated business should be audited, companies incorporated under the Corporations Law must appoint an independent auditor. In certain other cases there may be relevant legislation imposing audit requirements. Generally, small proprietary companies do not need to appoint an auditor. However, the accounts of a small proprietary company must be audited if 5% or more of shareholders require the company to do so, or if the Australian Securities Commission requests it.

An auditor is to be appointed within one month of incorporation. Most companies appoint practicing accountants or firms of accountants as auditors and, in addition, frequently look to them for other services, including advice on taxation and other financial matters.

The auditor is required to make a report to the shareholders on: • The accounts, and group accounts where applicable, required to be laid before the company at the annual general meeting
• The entity’s accounting records
• Other records relating to those accounts.

The auditor’s report must state whether, in his opinion, the accounts are properly drawn up in accordance with the Corporations Law, Australian Accounting Standards and applicable Approved Accounting Standards so as to give a true and fair view of the affairs of the company.

Accounting profession
The two major professional bodies of accountants whose members are engaged in public practice in Australia are:
• The Institute of Chartered Accountants in Australia
• The Australian Society of Certified Practicing Accountants.

Auditing standards
The professional bodies have jointly codified auditing techniques and have issued auditing standards, which prescribe basic principles and practices which members are expected to follow in the conduct of an audit.

Auditing guidelines have also been issued by these professional bodies, giving guidance on such topics as planning, controlling and recording an audit and accounting systems.

Accounting principles
The professional bodies have jointly issued Australian Accounting Standards (AASs) which supplement the requirements of the Corporations Law as to the form and content of accounts. The provisions of the AASs are mandatory on members of the professional bodies and any significant departure with which the auditor does not agree should be referred to in the auditor’s report.

The Corporations Law also requires the use of Approved Accounting Standards which are, in the main, similar to those standards issued by the joint accounting bodies.

Form and content of financial statements
In general, the disclosure requirements for financial statements are set out in the Corporations Law. Certain additional disclosures are required by AASs and, in the case of listed companies, by the rules of the Stock Exchange.

Both the balance sheet and the profit and loss account (income statement) are required to be prepared using a specific format which is explained in detail in Schedule 5 of the Corporations Law.

The balance sheet has to show assets, liabilities and provisions under headings and in the order required by the Corporations Law. The reporting company is at liberty to expand the required analysis but must give the prescribed minimum of information, except that any classification which is immaterial in amount may be combined with another classification.

The profit and loss statement also has a fixed format which includes the disclosure of operating profit or loss, profit or loss on extraordinary items and minority interests in such profits or losses.

The profit and loss statement must contain additional information by way of footnote. This includes, in particular:
• Interest payable and receivable, bad and doubtful debts, depreciation charges, auditor’s remuneration and directors’ emoluments
• The investing company’s share of profits less losses of associated companies (normally companies in which the equitable investment is for the long term and is in excess of 20%, but not exceeding 50%, of the share capital)
• The taxation charge for the year together with details of the basis on which the charge was calculated
• The aggregate amount of dividends paid and proposed
• Extraordinary items
• All movement in reserves and transfers to and from provisions other than depreciation.

Companies are required to disclose accounting policies followed in dealing with items which are judged to be material or critical in determining their profit or loss for the year and in stating their financial position. These items often include depreciation of fixed assets, stocks and work-in progress, treatment of goodwill and other intangible assets, long-term contracts, deferred taxation and the translation of foreign currencies.

Comparative figures for the preceding financial year must be shown for all items in the balance sheet, the profit and loss account and the notes thereto.

Valuation of assets
The bases of valuation of fixed assets, investments and inventories must be disclosed.

Current assets are included at the lower of cost and net realisable value, while for fixed assets the most usual basis is original cost less depreciation.

However, as permitted by the Corporations Law, many companies periodically revalue land and buildings, and the resulting surplus is taken to a revaluation reserve. For tangible assets, such as trading stock (inventories) and current asset investments, cost is usually calculated on a FIFO (first in first out) basis. The LIFO (last in first out) method of stock valuation is prohibited for accounts purposes and is not an allowable valuation method for tax purposes. Cost for stock valuation purposes includes an appropriate allocation of dissect overheads.

All fixed assets with a limited useful economic life are required by law to be depreciated to their estimated residual value over the period of their useful economic life.

Footnotes
The Corporations Law lays down certain minimum requirements for information to be given in the notes to the financial statements, if not given in the financial statements themselves. This information covers a large number and variety of matters, such as accounting policies, departure from generally accepted accounting principles, fixed-asset purchase commitments, contingent liabilities, transactions with directors and persons connected with them, and particulars of subsidiaries and related companies.

Companies with shares or loan capital quoted on an Australian Stock Exchange have for some time been required to provide shareholders with preliminary announcements of their six-monthly, as well as annual, profits. For these purposes, only certain significant figures need to be given, and they need not be audited.

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This page last modified: 15 Mar 2008