Small companies and small groups are exempt from providing audited accounts. But the criteria for small companies and small groups should be monitored to trigger the required reporting. Miguel Mighty,one of 30 authentic Jamaican food vendors at Faith's Pen in St. Ann, prepares fried fish and jerked chicken - PHOTO BY JANET SILVERA
THE COMPANIES Act, 2004 (ACT) became effective on February 1, 2005. Generally, the ACT requires that the accounts of companies, except small companies or small groups (as specifically defined by the Act), be prepared in accordance with generally accepted accounting principles promulgated by the Institute of Chartered Accountants of Jamaica (ICAJ), from time to time, or such other body as the responsible Minister may prescribe. ICAJ has adopted International Accounting Standards [now International Financial Reporting Standards (IFRS)].
Small companies and small groups are exempt from providing audited accounts.
The criteria for small companies and small groups should be monitored to trigger the required reporting when such companies do not qualify as being small under the Act. When such companies meet the criteria which require the provision of audited financial statements under IFRS, the first year will pose a challenge as the requirements for first time adoption of IFRS will need to be complied with. As such, the previous year's financial statements will require restatement, and an opening balance sheet will have to be prepared at the beginning of the period to which the comparatives relate to facilitate the preparation of the comparative statement of cash flows.
The auditors will have to do verifications of the current year and the restated figures of the two previous years to facilitate the issuance of an unqualified audit opinion. In some cases, it may be difficult to verify certain information e.g. inventory on hand for the years for which there was no audited financial statements. Companies may choose to take a qualified audit report for the first two years after the change to IFRS and work towards an unqualified audit report in the third year after the change.
The Act provides that a company may, if its articles authorise it, issue redeemable preference shares. However, Section 62 (1) (d) of the Act states that 'where any such shares are redeemed otherwise than out of a fresh issue, there shall out of profits that would otherwise have been available for dividend be transferred to a reserve fund to be called "the capital redemption reserve fund", a sum equal to the amount of the shares redeemed, and the provisions of this Act relating to the reduction of a company's share capital shall, except as provided in this section, apply as if the capital redemption reserve fund were the company's paid up share capital.'
Section 62 (3) of the Act states that the redemption of preference shares by a company under this section shall not be taken as reducing the amount of the company's stated capital. IFRS, however, require shares with certain debt-like features to be classified as debt. Auditors, therefore, will face a challenge in these conflicting circumstances, as, assuming the shares are material to financial statements, compliance with IFRS may mean non-compliance with the Act, and vice versa.
ICAJ has adopted International Standards on Auditing (ISA) and International Auditing Practice Statement (IAPS) 1014- Reporting by Auditors on Compliance with IFRS, is a supplement to ISA 700-The Auditor's Report on Financial Statements. The purpose of the IAPS is to provide guidance on the application of ISA 700 when financial statements are prepared using IFRS, or include a reference to compliance with IFRS.
It follows that when financial statements are prepared in accordance with IFRS and the Act, they must comply with each individually and simultaneously without the need for notes or supplementary statements that reconcile the differences. Therefore, the provisions in the sections of the Act, quoted above, may lead to the issuance of qualified audit opinions. Simultaneous compliance with both IFRS and the Act is unlikely, unless all barriers for compliance with IFRS are eliminated.
Raphael E. Gordon is the managing partner of KPMG Peat Marwick, chairman of KPMG CARICOM and past president of the Institute of Chartered Accountants of Jamaica.
