The first statements of a newly formed company
What is different about a newly incorporated company's first annual financial statements: the period, no comparatives, the cash flow and first policies.
By Achekam · · 5 min read · For Accountants & audit firms in South Africa, Nigeria, Kenya
A new company's first set of financial statements looks like any other set, but almost every part of it is a first: the first period, the first opening position (there is none), the first accounting policies, and often the first time the owners have had to think of the company as separate from themselves. Treat it as a routine compilation and the gaps tend to show up a year later, when the second set's comparatives do not make sense.
Here is what changes for a first set, and how to set the client up properly before its first year end arrives.
A first period that may not be twelve months
A company's first financial period runs from incorporation to its chosen year end, and it is often shorter or longer than a year. A company registered mid-year with a February year end may have a first period of a few months; one that chose a year end just before its incorporation anniversary may have a period well over a year, within the limits company law sets.
Whatever the length, the statements must make it clear. When the reporting period is longer or shorter than a year, the frameworks require disclosure of that fact, the reason for it and the fact that the amounts presented are not entirely comparable. Headings matter too: "for the period from incorporation to" the year end, rather than "for the year ended".
Check the year end against the company's registration documents rather than taking it on trust. A year end chosen by an incorporation agent and never discussed with the owner is common.
No comparatives, and what the cash flow starts from
A first set has no prior period, so there are no comparatives. That simplifies the layout, but it has a quieter effect on the cash flow statement. In Achekam, the cash flow statement's current-year column is worked out from the change in balances. In a first period the opening balances are nil, so the change in each balance is simply its closing amount.
That is right for most lines and wrong for some. Typical cases:
- Shares issued for something other than cash. If the founder contributed a vehicle or equipment in exchange for shares, the closing balances suggest cash came in from share capital and went out on equipment. Neither happened. Both are non-cash transactions, to be left out of the cash flow and disclosed instead.
- A business taken over on loan account. Assets bought from the founder against a loan look like borrowing and investing; often no cash moved.
- Set-up costs the founder paid personally. These sit as a loan from the director, not as a financing inflow of cash.
Staff can type their own figure for any cash flow line, and a typed figure takes priority over the calculated one. Use that for the non-cash transactions, and note the reason on the file.
Next year, comparatives can come from the issued first-year statements, from figures a person enters or from a prior-year set a person reviews. Getting the first year right saves explaining a restatement in the second.
Opening the client properly before the first year end
New companies are easy to onboard badly, because so little exists at the start. Achekam's Onboarding page shows a readiness checklist for each new client, built from what the server holds, and offers "Mark active" only when every item is met. The items are the registration and income tax numbers, an active service, a contact, an engagement and an account manager.
For a newly formed company the income tax number is often the missing item. Treat that as a prompt: registering the company for tax is a first-year task, and a client that cannot be marked active is a client with something outstanding.
When creating the engagement, staff choose its type, such as annual financial statements compilation, independent review or statutory audit. Decide the level early. In South Africa a company with a public interest score of 350 or more must be audited, and so must one scoring 100 or more whose statements were compiled internally, and a new company's score can be low in its first year and higher in its second. Onboarding generally is covered in getting a new client ready to work on.
Share capital, set-up costs and owner funding
Three items appear in almost every first set:
- Share capital. Agree the shares issued and the amount paid to the share register and the company's records. Share capital not yet paid is not a cash receipt.
- Set-up costs. Under IFRS for SMEs, start-up costs are generally expensed rather than carried as an asset, and the costs of issuing shares are deducted from equity. Incorporation fees, legal fees and launch marketing usually go through profit or loss.
- Owner funding. Most new companies are funded by loans from the founder. Get the terms in writing: whether interest is charged, whether there is a repayment date and whether the loan is subordinated. Its classification as current or non-current depends on those terms, and the related-party note will need them.
Choosing accounting policies for the first time
A first set is the only time policies are chosen without precedent. Choose deliberately, because a later change needs a reason and restated comparatives. The usual questions: the cost model for property, plant and equipment, the cost formula for inventories, how revenue from each kind of sale is recognised, and how borrowing costs are treated.
Achekam's Studio includes standard accounting policy wording based on IFRS for SMEs, labelled for review before issue, and staff can write their own policies. The standard wording is a starting point; a policy should describe what the client actually does. Where no standard deals directly with a transaction, preparers build a policy from the concepts underneath the standards, and the IFRS Foundation's page on the Conceptual Framework explains its purpose and how it helps preparers develop accounting policies when no IFRS Standard applies.
From there the draft is built in the usual way from a mapped trial balance, as described in building draft statements from a mapped trial balance. A first set done carefully is the foundation every later set stands on.
General guidance only, not advice on your own circumstances. Tax and payroll rules change: check the current position with the authority or your adviser.
