February 5, 2019

When your Australian startup needs to prepare financial reports

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When your Australian company needs to prepare financial reports

Updated: 7 December 2019

Per the Corporation Act’s small business guide, your startup’s accounting requirements depend on whether your company is classified as small or large. 

Also, your company's classification can change from one financial year. 

What is a small company?

So, a company is classified as small for a financial year if it satisfies at least 2 of the following tests:

  • gross operating revenue of less than $10 million for the year
  • gross assets of less than $5 million at the end of the year
  • fewer than 50 employees at the end of the year

And a company that does not satisfy at least 2 of these tests is classified as large.

As most startup companies will be classified as small under these tests, we'll look at accounting requirements for small companies below.

Financial records to keep

Under the Corporations Act, a company must keep sufficient financial records to record and explain their transactions and financial position.

And your records allow true and fair financial statements to be prepared and audited.

Now, financial record here means some kind of systematic record of the company's financial transactions and not simply a collection of receipts, invoices, bank statements and cheque butts.

Preparing annual financial reports and directors' reports

The Corporations Act requires a small company to prepare an annual financial report if shareholders with at least 5% of the votes in the company direct it to do so, ASIC directs it to do so or it has one or more crowdsourced funding shareholders at any time during the financial year.

Below are the items included in the financial reports:

  • profit and loss statement; and
  • balance sheet; and
  • statement of cash flows; and 
  • directors' report (about the company's operations, dividends paid or recommended, options issued etc.)

Unless the shareholders' direction specifies otherwise, the company must prepare the annual financial report in accordance with the applicable accounting standards.

Other reasons to prepare financial reports

Although the Corporations Act itself may not require your company to prepare a financial report, except in the circumstances mentioned, your company may need to prepare the annual financial reports for the purposes of other laws (for example, income tax laws). 

Also, preparing financial reports is good business practice, so your company can monitor and better manage its financial position.

Large proprietary companies

Large proprietary companies must prepare annual financial reports and a directors' report, have the financial report audited and send both reports to shareholders. Also, they must also lodge the annual financial reports with ASIC unless exempted.

Key points

If you are a small company that meets 2 of the tests below then you don't need to prepare financial reports (but its good practice to prepare them): 

Test (a): gross operating revenue less than $10 million; or 

Test (b): gross assets of less than $5 million at the end of the year; or 

Test (c) fewer than 50 employees at the end of the year.

And, if you are a large company, you need to prepare audited financial reports and a directors report and have both sent to shareholders.

About the author 

Vivian Michael

As founder and lawyer at Michael Law Group, Vivian advises Australia's top entrepreneurs on business and employment matters. Clients benefit from Vivian's commercially focussed and pragmatic legal advice, business experience, and commitment to deliver the best quality business legal services to her clients.

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