Harmonising user needs with reporting requirements of close corporations

English: The Close Corporations Act requires that the annual financial statements of close corporations must, in conformity with generally accepted accounting practice appropriate to the business of the corporation, fairly present the state of affairs of the corporation at the end of the financial year concerned, and the results of its operations for that year. According to generally accepted accounting practice, the objective of financial statements is to provide useful information about the enterprise to the primary user groups of the financial statements, independent of the size of the entity. The primary user groups of the financial statements of close corporations are the members, SARS and bankers. The recognition, measurement and disclosure requirements contained in the Statements of GAAP do not give rise to cost-effective and useful information being provided to the users of financial statements of close corporations and other small entities, because these users do not require the extensive information provided in general purpose financial statements. Consequently, an accounting standard is required to differentiate between general and limited purpose financial statements. In South Africa, the Limited Purpose Financial Reporting Standards (LPFRS) were developed. The modifications stipulated in this LPFRS mainly relate to the disclosure requirements that were reduced, with only a few alternatives allowed to the recognition and measurement criteria relating to deferred tax and financial instruments. These developments may not be sufficient enough for the purposes of close corporations. Accordingly, the study recommends that a formal, separate set of simplified differential reporting standards be developed for the purpose of close corporations. To be acceptable, the reporting method should meet most of the information needs of the users of the financial statements of close corporations and other small entities, and simultaneously provide cost-effective information that is a fair presentation of the results, taking into consideration the additional costs that may result from adopting differential reporting standards.