Legal requirements

Companies Bill 2010 Provisions on Preparation and Presentation of Financial Statements & Annual Return

Legal requirements PART XIX (clauses 345-408) of the Companies Bill 2010 provides for: • the preparation of the financial statements of a company. • establishes two regimes of accounting for small companies and large companies respectively, • introduces IAS as the format for accounting, the IFRS as the format for financial reporting, and recognizes the use of websites for formal presentation of financial statements and other information of a company. PART XX (clauses 409-412) deals with annual returns of a company and specifies the contents of an annual return.

Companies subject legal requirements The requirements as to financial statements apply to different kinds of companies, the main distinctions being: • Companies subject to the small companies accounting regime and (large) companies that are not subject to that regime • Quoted companies and companies that are not quoted.

Small accounting regime company 347. A company is small if any two or more of the following conditions were satisfied in in relation to its last financial year ending on or before the end of the financial year to which the accounts relate: • Turnover of not more than thirty million shillings; • Total of its statement of financial position, not more than fifteen million shillings • Employees, not more than fifty For a period than a company’s financial year, the maximum figures for turnover shall be proportionately adjusted Number of employees means the average number of persons employed by the company in the year

Companies qualifying as small: parent companies 348. A parent company qualifies as a small company in relation to a financial year only if the group of companies headed by it qualifies as a small group and it satisfies two or more of the following requirements: • an aggregate turnover of not more than 750 million shillings net or 900 million shillings gross • an aggregate statement of the financial position totaling not more than 375 million shillings net or 450 million shillings gross • an aggregate number of not more that 50 employees The aggregate figures are ascertained by aggregating the net or gross figures for each subsidiary undertaking included in parent company’s financial statements.

Companies excluded from the small companies regime. The small companies regime does not include a company that is, or was at any time within the financial year to which the financial statements relate— • a public company; • a company whose financial statements are exempt from audit requirements • a body corporate, other than a company, whose shares are admitted to trading on a stock exchange or other regulated market in Kenya; • a person who carries on insurance market activity.

Quoted and unquoted companies. 350. A company is a quoted company in relation to a financial year if its shares are admitted to trading on a stock exchange or other regulated market in Kenya immediately before the end of the accounting reference period by reference to which that financial year was determined.

Duty to keep accounting records. 351. Every company shall keep accounting records which:- • Sufficiently show, and explain the transactions of the company during the year • Disclose with reasonable accuracy, the financial position of the company at the reporting time; • Form the basis for the directors to ensure compliance with all applicable legal and other requirements.

Form of accounting records Accounting records for each financial year shall contain— • Entries from day to day of all sums of money received and expended by the company and the matters in respect of which the receipt and expenditure takes place; • A record of the assets and liabilities of the company • Statements of stock held by the company at the end of each financial year, of goods sold and purchased, of the identity of the buyers and sellers of goods • Failure to keep proper accounting records is an offence and, on conviction, every officer of the company becomes liable to a fine not exceeding 500,000 shillings or to imprisonment for a term not exceeding one year or to both.

Preservation of accounting records. 353. Accounting records of a company shall be kept at its registered office or such other place in Kenya as the directors think fit, and at all times be open to inspection by the officers of the company. The accounting records that a company is required by law to keep shall be preserved by it for 7 years from the date on which they are made, but in the case of a company that is party to a lawsuit, until the lawsuit is concluded. Every officer of a company which fails to preserve its accounting records for the minimum prescribed period commits an offence which attracts a fine not exceeding 500,000 shillings or imprisonment for a term not exceeding two years or to both.

A company’s financial year. 355. The first financial year begins with the first day of its first accounting reference period and ends with the last day of that period or such other date, not more than 7 days before or after the end of that period, as the directors may determine Subsequent financial years begin with the day immediately following the end of the previous financial year of the company; and end with the last day of its next accounting reference period or such other date, not more than 7 days before or after the end of that period, as the directors may determine The directors of a parent company shall ensure that, except where there are good reasons against it, the financial year of each of its subsidiary undertakings coincides with the financial year of the parent company

Accounting reference periods and accounting reference date. 356. The accounting reference periods of a company are determined according to its accounting reference date in each calendar year. The accounting reference date of a company is the last day of the month of the anniversary of its incorporation The first accounting reference period of a company is the period beginning with the date of its incorporation and ending with its accounting reference date. Subsequent accounting reference periods of a company are successive periods of twelve months beginning immediately after the end of the previous accounting reference period and ending with its accounting reference date.

Change of accounting reference date. 357. A company may change its accounting reference date by shortening or extending the current or previous accounting reference periods provided that • An accounting reference period shall not be extended so as to exceed 18 months • A notice extending a company’s current or previous accounting reference period is not effective if given less than five years after the end of an earlier accounting reference period of the company that was extended under this section.

Financial statements to give true and fair view. 358. The directors of a company shall ensure that the company prepares • financial statements that materially represents a true and fair view of the assets, liabilities, financial position and profit or loss of the individual financial statements, of the company, • In the case of a group, consolidated financial statements that materially represents a true and fair view of the aggregate assets, liabilities, financial position and profit or loss of the of the undertakings included in the consolidation

Duty to prepare financial statements 362. The directors of every company shall prepare individual financial statements for the company for each of its financial years in accordance with the IFRS • Where a small company is a parent company the directors may, in addition to preparing individual financial statements for the year, prepare group financial statements for the year • Where the company is a parent company the directors shall ,in addition to preparing individual financial statements for the year, prepare group financial statements for the year unless the company is exempt from that requirement.

Additional Information Disclosures The Bill identifies critical information about the company which, if not reported in the financial statements, should be disclosed in the notes to the financial statements or be submitted together with the annual financial statements of a company. • Information about related undertakings • Information about employee numbers and costs. • Information about directors’ benefits: remuneration. • Information about directors’ benefits: advances, credit and guarantees • Directors’ report.

Information about related undertakings • 364. the directors may only give information in respect of the undertakings whose results or financial position, in the opinion of the directors, principally affected the figures shown in the company’s annual accounts; and undertakings excluded from consolidation • If a company fails to disclose full information about its related undertakings in the notes to the financial statements or in the annexure to the next annual return of the company, the company and every officer of the company who is in default commits an offence and shall be liable on conviction to a default fine not exceeding 1,000 shilling or to imprisonment for a term not exceeding six months or to both.

Information about employee numbers and costs. In the case of a company not subject to the small companies, the following information on employees, if not reported in the financial statements, shall be disclosed in notes to the financial statements: • the average number of persons employed and the average number of persons so employed within each category of employees determined with regard to the organization of the activities of the company. • wages and salaries paid or payable in respect of that year • Contributions by the company to any social security or pension schemes on behalf of its employees In group financial statements, the numbers for subsidiary undertakings are consolidated

Information about directors’ benefits: remuneration 365. Information to be given in notes to the financial statements:- Gains made and consideration or benefits received or receivable by directors on the exercise of share options, under an incentive scheme, in respect of past services, or for making available the services, of a person as director or in any other capacity while director Amounts paid to or receivable by a person connected with a director; or a body corporate controlled by a director, are treated as paid to or receivable by the director

Information on directors’ benefits: advances, credit and guarantees 367. In the case of an individual company, details of the amount, interest rate, amount repaid, balance outstanding and main conditions of advances and credits granted to directors, and guarantees entered into by the company on behalf of its directors shall be shown in the notes to its individual financial statements • In the case of a parent company, details of advances and credits granted to the directors of the parent company, by that company or by any of its subsidiary undertakings; and guarantees entered into on behalf of the directors of the parent company, by that company or by any of its subsidiary undertakings, shall be shown in the notes to the group financial statements.

Directors’ report: Preparation The directors of an individual company shall prepare a directors report for each financial year of the company. The directors of a parent company shall prepare a group directors’ report relating to the undertakings included in the consolidation. A group directors’ report may, where appropriate, give greater emphasis to the matters that are significant to the undertakings included in the consolidation, taken as a whole. • .

Contents of directors’ report: general • The report of the directors of a company for a financial year shall state— • the names of the persons who, at any time during the financial year, were directors of the company; and • the principal activities of the company in the course of the year. In relation to a group directors’ report, outline undertakings included in the consolidation. • Except in the case of a small company, the report shall state the amount, if any, that the directors recommend should be paid as dividend. • The Minister may by regulations specify other matters that shall be disclosed in a directors’ report.

Contents of directors’ report: business review. For companies not subject to the small companies regime, the directors’ report shall contain a business review to inform members of the company and assist them to assess how the directors have performed their duty. The business review shall contain analyses and information on the company’s :- • Business risks and uncertainties • Business development, trends, performance and position and factors likely to affect its future development, performance and position • information on the impact of the business of the company on the environment • Information on the social and community issues and policies of the company

Contents of directors’ report: Disclosure of relevant audit information. The Bill requires the directors of any company, unless it is exempt from the requirements with regarding audit of its financial statements, to include in the directors’ report a signed statement that they have furnished relevant audit information that may be needed by the company’s auditor in connection with preparing his report.

Statement as to disclosure of relevant audit information 372. The directors’ report shall contain a statement that each of the directors at the time the report was prepared approved:- • was aware that there is no relevant audit information of which the company’s auditor is unaware; • has taken all the steps that he ought to have taken as a director in order to make himself aware of any relevant audit information and to establish that the company’s auditor is aware of that information. • took all the steps, including enquiries with fellow directors and the auditors and such other steps as are required by his duty as a director to exercise reasonable care, skill and diligence, in making relevant audit information available for the auditor of the company

Approval and signing of directors’ report. 373. The directors’ report shall be approved by the board of directors and signed on behalf of the board by a director or the secretary of the company. • If the directors’ report is prepared in accordance with the small companies regime, it shall contain a statement to that effect. • If a directors’ report is approved that does not comply with the requirements of this Act, every director of the company who knew that it did not comply, or was reckless as to whether it complied and failed to take reasonable steps to secure compliance with those requirements or, as the case may be, to prevent the report from being approved, commits an offence.

Components of financial statements • Profit and loss account (Income and Expenditure Account) • Statement of financial position -consolidated for the group or detailed for individual companies; • Statement of changes in equity • Statement of cash flows • Notes to the financial statements comprising a summary of significant accounting policies and other explanatory notes and disclosures.

Disclosure of general information on reporting entity • Each component of the financial statements should be clearly identified. In addition, information disclosing the identity of the company should be prominently displayed and repeated when it is necessary for a proper understanding of the information presented.

General information disclosure (cont.) • Name of the reporting entity or other means of identification; • Whether the financial statements are consolidated for the whole reporting entity or relate to a service, responsibility area, department or other segment of the reporting entity. • The reporting date or the period covered by the financial statements. • Reporting currency, • Level of precision (e.g. thousands or millions of units of the reporting currency).

Presentation of financial statements • Where Financial Statements are presented together with or as part of another document, e.g. the annual report, the Financial Statements shall be clearly identified and distinguished from other information in the same document.

Disclosure of compliance with IFRS & relevant laws Disclose that the financial statements: • comply with the IFRS, • present fairly the financial position, financial performance and cash flows of the company, and: • comply with relevant legislative, regulatory or other externally-imposed regulations.

Disclosure of comparatives • Unless when an IFRS permits or requires otherwise, comparative information shall be disclosed in respect of the previous period for all amounts reported in the financial statements. • When the classification of items in the financial statements is amended, the comparative amounts shall be reclassified and the nature, amount and reason of such reclassification of comparative amounts disclosed. • When it is impracticable to reclassify comparative amounts, disclose the reason for not reclassifying and the nature of the changes that would have been made if amounts were reclassified.

Approval and signing of financial statements. The annual financial statements of a company shall be approved by the board of directors and signed on behalf of the board by a director of the company. The signature of the director shall be on the statement of financial position of the company. The statement of financial position of the financial statements of a small company shall contain a statement to that effect. If the approved financial statements do not comply, officers of the company who knew of the default or failed to take reasonable steps to secure compliance or prevent their approval commit an offence and are liable to a fine not exceeding 1,000,000 shillings or imprisonment for two years or to both.

Annual financial statements 408. “annual financial statements”, are a company’s individual financial statements for that year; and any group financial statements prepared by the company for that year. For an unquoted company, annual financial statements and reports its annual financial statements, the directors’ report, and the auditor’s report on all those documents For a quoted company, annual financial statements and reports are its annual financial statements, the directors’ remuneration report, the directors’ report, and the auditor’s report on all those documents

A COMPANY’S ANNUAL RETURN • 409. Every company shall submit to the Registrar successive annual returns each of which is made up to a date not later than the date that is from time to time the company’s return date, i.e. the anniversary of the company’s incorporation; or the anniversary of the date the company filed its last annual return.

Annual Return: contents Every annual return states the date to which it is made up and contains the following information— • the situation of the registered office of the company and the registered postal address thereof; • the type of company and its principal business activities; • the prescribed particulars of the directors of the company; the secretary or joint secretaries of the company; and any person appointed as an authorized signatory of the company; • if the register of members and register of debenture holders, or a duplicate of any such register is not kept available for inspection at the registered office, of the company, the address of the place where it is kept;

411. The annual return of a company having a share capital shall also contain a statement of capital; and the particulars of every person who is a member of the company on the date to which the return is made up; or has ceased to be a member of the company since the date to which the last return was made up, or in the case of the first return, since the incorporation of the company.

A statement of the number of shares of each class held by each member of the company at the date to which the return is made up and the number of shares of each class transferred since the date to which the last return was made up; or in the case of the first return, since the incorporation of the company, by each member or person who has ceased to be a member; and the dates of registration of the transfers to persons ceasing to be or becoming members since the date of the last return; • Where the company has converted any of its shares into stock, the return shall give the corresponding information in relation to that stock, stating the amount of stock instead of the number or nominal value of shares.

Failure to deliver annual return • 412.If a company fails to deliver an annual return before the end of the period of twenty-eight days after a return date, an offence is committed by every director of the company; and • in the case of a public company, every secretary of the company; and every other officer of the company who is in default commits an offence and is liable on conviction to a fine not exceeding 100,000 shillings or to imprisonment for a term not exceeding one year or to both. • the contravention continues until such time as an annual return made up to that return date is delivered by the company to the Registrar.

Legal requirements