Books of Accounts & Financial Statements

BOOKS OF ACCOUNT TO BE KEPT BY COMPANY(SECTION-230)

• Every company shall keep proper books of account in respect of:– All sums of money received and expended by the company– All sales and purchases of goods by the company– All assets and liabilities of the company– In case of a company engaged in production, processing,

manufacturing or mining activities, a production record as may be required by the commission through a general or special order

• Books of account should be preserved for ten years• Books of account are to be kept at the registered office of the

company. If kept at any other place, the registrar should be informed within 7 days as decided by directors.

• Books of account should give a true and fair view of the state of affairs of the company and should contain explanation of transactions.

• Directors can inspect the books of account during the business hours.

• Where a company has branch office, whether in or outside Pakistan, the company shall keep records of all transactions relating to such branch office at branch premises and a summary of such transactions for a maximum interval of three months shall be kept at registered office or any other place as decided by directors.

Contd…

• If company fails to comply with the above provision, every director, including chief executive and chief accountant:– of listed company is liable to imprisonment for one year and a

fine of not less than Rs.20,000 not more than Rs.50,000 and a further fine of Rs.5000 per day during which the default continues or

– of other companies is liable to imprisonment for six months and with a fine, which may extend to Rs.10,000

Contd…

INSPECTION OF BOOKS OF ACCOUNT BY REGISTRAR,ETC

• The books of account and other papers of every company shall be open to inspection by the registrar or any officer authorized by the commission, if it is considered necessary.(Sec.231)

• It shall be the duty of every director, officer or other employee of the company to produce all the books etc. to the person inspecting them.(Sec.231)

Default in compliance with provisions of section 231.-

• (1) If default is made in complying with the provisions of section 231, every person who is in default shall be punishable with imprisonment for a term which may extend to one year and with fine which shall not be less than ten thousand rupees.

• (2) Where a director or any other officer of a company has been convicted of an offence under this section, he shall, on and from the date on which he is so convicted, be deemed to have vacated his office as such and, on such vacation of office, shall be disqualified for holding such office in any company, for a period of five years.

ANNUAL ACCOUNTS AND BALANCE SHEET (SECTION-233)

• First annual accounts of a company must be presented before the AGM within eighteen months from the date of incorporation.

• Subsequent annual accounts should be presented once at least in every calendar year before an AGM.

• The accounts should be made up in the case of first accounts, from the date of incorporation and in the case of subsequent accounts from the date of the preceding accounts to a date not earlier than the date of the meeting by more than four months.

• The accounts shall be prepared for a period not exceeding 12 months except in case where permission is granted by the registrar for preparation of accounts for a longer period.

ANNUAL ACCOUNTS AND BALANCE SHEET (SECTION-233)

• Profit and loss account and balance sheet shall be audited by the auditor and auditor’s report should be attached .

• Copy of accounts, auditor’s report should be sent to every member at least 21 days before the AGM

• Listed companies are required to send five copies of their audited accounts to the registrar , the commission and the stock exchange.

CONTENTS OF BALANCE SHEET(SECTION-234)

GENERAL:a) Every balance sheet and profit & loss account should

give a true and fair view of the state of the company’s affair and of the profit or loss of the company at the end of its financial year.

b) Every item of expenditure fairly chargeable to income shall be brought into account.

c) Any expenditure which in fairness can be distributed over several years but is incurred in one year should be so distributed and reasons for doing so should be given.

For listed company, private and non-listed public company which is a subsidiary of a listed company:

a) A statement of changes in equity and a cash flow statement shall form part of balance sheet and profit and loss account.

b) Accounting policies should be stated and, where there is any change in accounting policies the auditor shall report whether he agrees with the change.

c) International financial reporting standards as adopted by SECP should be followed in preparation of accounts.( A cash flow statement is the financial statement that measures the cash generated or used by a company in a given period)

For other companies:

a) A statement of changes in equity and a cashflow statement.

b) Accounting policies should be stated and where there is any change in accounting policies the auditor shall report whether he agrees with the change.

c) International financial reporting standards as adopted by SECP should be followed in preparation of accounts.

Special Audit• (1) The Commission may on its own motion, or upon an

application made by members holding not less that 20% voting rights in a company, order a special audit of the company and appoint an auditor to carry out detailed scrutiny of the affairs of the company. (2) The Commission may, during the course of the special audit, pass such interim orders and directions as may be deemed appropriate by the Commission.

(3) On receipt of the special audit report, the Commission may issue such directions for immediate compliance to the company and its management as the Commission deems fit.

(4) In case where the special audit has been ordered by the Commission on an application made by members of the company, one half of the expenses of the special audit shall be borne and paid in advance by such members, and the other half shall be borne by the company.

Special Audit

• (5) In case where the special audit has been ordered by the Commission on its own motion, the expenses of the special audit shall be payable by the company.

• (6) The amount of expenses liable to be paid by the company, the members or any other persons, as the case may be, shall be recoverable as arrears of land revenue.

• (8) The provisions of section 255 shall apply mutatis mutandis to the auditor appointed to carry out the special audit of the company under sub-section (1).

• ( Mutatis mutandis is a Latin phrase meaning "changing only those things which need to be changed" or more simply only the necessary changes)

Revaluation - Depreciation

• A change of a price of goods or products, specially used as revaluation of a currency, where it means a rise of currency to the relation with a foreign currency in a fixed exchange rate.

• - Depreciation The monetary value of an asset decreases over time due to use, wear and tear or obsolescence. This decrease is measured as depreciation. Description: Depreciation, i.e. a decrease in an asset's value, may be caused by a number of other factors as well such as unfavorable market conditions, etc.

Treatment of surplus arising on revaluation of fixed assets(section-235)

• Any surplus on Revaluation of fixed assets should be transferred to an account named “surplus on revolution of fixed assets account”.

• This account should be shown in the balance sheet after capital and reserves;

• Surplus on revolution shall not be set off or reduced except:– for setting of any decrease in revaluation of asset; or– when revalued asset is disposed of, surplus relating to it can be

adjusted or setoff.• Depreciation on assets which are revalued shall be determined with

reference to the value assigned to such assets on revaluation and depreciation charge for the period shall be taken to the profit and loss account;

• An amount equal to incremental depreciation for the period shall be transferred from ”surplus on revaluation of fixed assets account”.

An amount equal to incremental depreciation charged in previous years may be transferred from “surplus on revaluation of fixed assets account” to un-appropriate profit/accumulated loss through statement of changes equity.

Contd…

Director’s report (section-236)• Director’s report shall be attached to the balance sheet.• It shall state business affairs, proposed dividend, if any,

amounts set aside to reserve, if any.• In the case of a public company or a private company which is

a subsidiary of a public company director’s report shall also include in addition to matters as given previously– Disclosure of any material changes and commitments affecting the

financial Position of the company which have occurred between the year end and the date of report;

– Disclosure of any material changes in the nature of business etc, which have occurred during the year, if the disclosure is necessary for understanding the state of the company’s affairs.

– ….

Contd…– Explanation to any qualification in auditor’s report.– Pattern of holding of shares.– Name and country of incorporation of holding company is

established outside Pakistan. – The earning per share.– Reasons for incurring loss and reasonable indication of future

prospects of profit.– Information about defaults in payment of debt.

• The directors of a holding company required to prepare consolidated financial statements under section 237 shall make out and attach to consolidated financial statements, a report with respect to the state of group’s affairs and all provision of subsection(2),(3) and (4) shall apply to such report.

• Director’s report shall be signed by the chairman of the directors or chief executive of the company, if so authorized by the directors; otherwise by the chief executive and a director.

Definition of 'Consolidated Financial Statements'

The combined financial statements of a parent company and its subsidiaries.

The consolidated financial statements present an aggregated look at the financial position of a parent and its subsidiaries, they enable you to gauge the overall health of an entire group of companies as opposed to one company's stand alone position.

Balance sheet of holding companies(section 237)

Consolidation financial statements.

1) There shall be attached to the financial statements of a holding company having a subsidiary or subsidiaries, at the end of the financial year at which the holding company’s financial statements are made out consolidated financial statements of the group presented as those of a single enterprise.

2) Where the financial year of a subsidiary precedes the day on which the holding company’s financial year end by more than three months such subsidiary shall make an interim closing on the day on which the holding company’s financial year ends and prepare financial statements for consolidation purposes.

3) Every auditor of a holding company appointed under section 252 shall also report on consolidated financial statements and exercise all such and duties are vested in him under section 255.

4) All interim financial statements of a subsidiary as required under sub-section (2) shall be reviewed by the auditors , who shall report on such financial statements in the prescribed form.

5) There shall be disclosed in the consolidated financial statements:a) any qualifications contained in the auditor’s reports on the

accounts of subsidiary subsidiaries for the financial year ending with or during the financial year of the holding company

b) any material notes or explanation on a qualification, regarding to but not covered in the financial statements of a holding company.

6) Every consolidated financial statement shall be signed by the same persons by whom the individual balance sheet and the profit and loss account or income and expenditure accounts of the holding company are required to be signed under section 241.

Contd…

7) All provisions of sections 233,242,243,244 and 245 shall apply to a holding company required to prepare consolidated financial statements under this section as if for the word “company” appearing in these sections, the words “holding company” substituted.

8) The commission may, on an application or with the consent of the directors of a holding company direct that in relation to any subsidiary, the provisions of this section shall not apply to such extent only as may be specified in the direction.

9) If a holing company fails to comply with any requirement of this section every officer of the holding company shall be punishable with fine which may extend to 55000 RS in respect of each offense unless he shows that he took all reasonable steps for securing compliance by the holding company of such requirements and that the non-compliance of default on his part was not willful and intentional.

Contd…

• The directors of a company shall ensure that, except where in their opinion there are good reasons against it, the financial year of each of its subsidiaries coincides with the company’s own financial year.

• (2) Where it appears to the Commission desirable for a holding company or a holding company’s subsidiary to extend its financial year so that the subsidiary’s financial year may end with that of the holding company, and for that purpose to postpone the submission of the relevant accounts to a general meeting from one calendar year to the next, the Commission may on the application or with the consent of the directors of the company whose financial year is to be extended direct that, in the case of that company, the submission of accounts to a general meeting, the holding of an annual general meeting or the making of an annual return shall not be required in the earlier of the said calendar years.

Financial year of holding company and subsidiary. 238

239 Rights of holding company’s

representatives and members

• (1) A holding company may, by resolution, authorize representatives named in the resolution to inspect the books of account kept by any of its subsidiaries; and the books of account of any such subsidiary shall be open to inspection by those representatives at any time during business hours.

• (2) The rights conferred by section 265 upon members of a company may be exercised, in respect of any subsidiary, by members of the holding company as if they also were members of the subsidiary.

Balance sheet of modaraba company(section 240)

Modaraba companies are required to attach balance sheet, annual accounts and other reports circulated to modaraba certificate holders with their financial statements.

AUTHENTICATION OF BALANCE SHEET (SECTION-241)• Accounts should be approved by the board of directors.• Balance sheet and profit and loss account shall be signed

by the chief executive and at least one director. If chief executive is out of Pakistan for the time being then these shall be signed by at least two directors and a statement shall be given by the directors explaining reasons .

COPY OF BALANCE SHEET TO BE FORWARDED TO THE REGISTRAR (SECTION-242)• Three copies of listed company audited accounts and the auditor’s

report duly signed by the management and auditors should be filed with the registrar within thirty days from the AGM.

• In other cases two copies are required.• Private companies, having paid up capital of less than 7.5 million

rupees, are not required to file their accounts with the registrar.

RIGHT OF MEMBERS/DEBENTURE-HOLDERS OF COMPANY TO COPY OF THE ACCOUNTS AND THE AUDITOR’S REPORT(SECTION-243&247)• Members have the right to get copies of annual accounts etc. of

company on payment of the prescribed fee. The same rights are available to debenture-holders or trustees for debenture-holders of the company.

QUARTERLY ACCOUNTS OF LISTED COMPANIES (SECTION 245)• All listed companies shall within one month of the close of every

quarter of its year of account, prepare and transmit to the members and the stock exchange, a profit and loss account and balance sheet as at the end of that quarter whether audited or otherwise. They shall file with the registrar and commission three copies .

• Quarterly accounts shall be circulated for the 1st , 2nd and 3rd quarter within one month of the close of that quarter.

• Approval of the board of directors will be mandatory for circulation of the quarterly accounts.

• If a company fails to comply with any of the requirements of this section, every director including chief executive and chief accountant of the company who has knowingly by his act or omission been the cause of such default shall be liable to a fine of not exceeding one hundred thousand rupees and to a further fine of not exceeding one thousand rupees per day during which default continues.

ADDITIONAL STATEMENTS OF ACCOUNTS AND REPORTS (SECTION-246)• The SECP may by general or special order, require

companies, or a class of companies or any particular company, to prepare and send to the members, the registrar, the SECP, a stock exchange and any other person such periodical statements of accounts, information or other reports “audited by an auditor” in such form and manner and within such time, as may be specified in the order.

ADDITIONAL STATEMENTS OF ACCOUNTS AND REPORTS (SECTION-246)• The SECP vide circular number 23/2005,has directed

to all listed companies and their subsidiaries to provide:-– Other information contained in their annual report, as

such term is defined in international standard on auditing 720(other information in the documents containing audited financial statements)to their external auditor

– Sufficient time to their external auditor to review and comment upon any “material inconsistencies” found in such other information where the other information may contradict the information contained in the audited financial statements.

Penalty for improper issue, circulation for publication of balance sheet or profit and loss

account(section 244)If any copy of balance sheet is issued, circulated or published without attaching:i. Profit and loss account or income and expenditure

account;ii. Any accounts, reports, notes or statements referred

with balance sheet;iii. The auditors report andiv. The directors reportThe company and every officer of the company who is knowingly and willfully in default shall be punishable with fine which may extend to five thousand rupees.