Financial Reporting and Analysis Unit 4

Definition of a Company

• A company is an association of people working together to make a profit.
• It is a legal person, incorporated according to the Companies Act No. 71 of 2008.
• A company's existence is independent of its shareholders, and the liability of shareholders is limited to the amount invested.

Types of Companies

• For-profit companies:
  • Public companies
  • Private companies
  • State-owned companies
  • Personal liability companies
• Non-profit companies:
  • Formed to benefit the public or for cultural/social activities

Establishing a Company

• A company must be established according to the Companies Act No. 71 of 2008.
• The people who start a company are called incorporators or promoters.
• One or more persons can start a for-profit company.
• The promoters complete and sign a Memorandum of Incorporation (MOI) and file a Notice of Incorporation with the Companies and Intellectual Properties Commission (CIPC).

Transactions Related to Companies

Share Capital

• The MOI stipulates the maximum number of shares a company is authorised to issue (authorised share capital).
• Companies usually register an authorised share capital that is larger than what is needed at the time.
• The shares that are actually sold are called the issued share capital.

Types of Shares

• Preference shares:
  • Provide holders with a fixed percentage dividend.
  • Have preferential rights to dividends over other shareholders in the event of liquidation.
• Ordinary shares:
  • May only qualify for dividends once preference shareholders have been paid.
  • Share in the profit varies depending on availability and dividend approved.

Debentures

• Public companies are entitled to raise capital by issuing debentures.
• A debenture is a long-term loan (non-current liability) and is redeemed at the end of its term.
• Debenture holders receive a fixed percentage interest usually paid annually.

Dividends and Retained Earnings

• Dividends may only be declared from profit after tax.
• The board of directors recommends a proposed dividend to shareholders at the annual general meeting.
• The proposed dividend is stated as the number of cents per share.
• A current liability, shareholders for dividends, is created.
• When the dividend is paid, the liability is settled.
• Companies usually do not distribute all profits after tax as dividends, and a portion is retained to finance expansion.

Company Tax

• Companies pay tax each year at a specific rate (e.g. 28%) on their taxable income.
• Dividends Tax replaced Secondary Tax on Companies from 01 April 2012.
• Dividends Tax is levied at a rate of 15% of the amount of dividends paid by a company.
• Companies are required to make two provisional tax payments to the South African Revenue Services (SARS).

Financial Reporting for Companies

• Financial statements are intended to provide information about a company's financial position, financial performance, and changes in financial position.
• Companies produce different sets of financial statements aimed at different users.
• Financial statements for internal use are similar to those of sole proprietorships and partnerships.
• Financial statements for external users contain minimum required information as prescribed by the Companies Act.

Financial Statements

• Statement of Comprehensive Income:
  • Reflects all income and expenses of a company.
• Statement of Changes in Equity:
  • Reflects changes in a company's equity.
• Statement of Financial Position:
  • Reflects a company's financial position at a specific point in time.

Cash Flow Statement

• Reflects all cash flows of a company in a standardised format.
• Provides information about cash receipts and cash payments for a specific period.
• Cash flows are classified into operating, investing, and financing activities.

Operating Activities

• Cash flows from operating activities are derived from a company's main revenue-generating activities.
• Include cash flows from transactions reflected in the Statement of Comprehensive Income.

Investing Activities

• Provide details about specific expenditures made to generate future income and outflows.
• Relate mainly to the purchase and sale of non-current assets.

Financing Activities

• Provide information relating to cash flows to and from providers of capital.
• Include cash flows from issuing shares, loans, bonds, and debentures.