As part of good corporate governance, it is essential that companies regularly prepare, adopt and file their financial statements at the Companies Registry.

Financial statements aid existing and prospective investors in making informed decisions as to the financial and operating functions of the company. In this alert we look at the roles of both directors and shareholders of a company in ensuring the correct preparation and adoption of financial statements.

Deadline for lodging financial statements with Registrar

Pursuant to section 684 of the Companies Act, 2015 the deadline for lodging the financial statements with the Registrar is:

• for a private company – nine months after the end of the company’s relevant accounting reference period; and
• for a public company – six months after the end of the company’s relevant accounting reference period.
• If the relevant accounting reference period is the company’s first and is a period of more than 12 months, the deadline is:
• nine months or six months, from the first anniversary of the incorporation of the company; or
• three months after the end of the company’s accounting reference period, whichever ends later.

In accordance with section 633(3), the first accounting reference period of a company is a period of at least six months after the date of its incorporation and not more than 18 months after that date. The subsequent accounting reference periods of a company are successive periods of 12 months beginning immediately after the end of the previous accounting reference period and ending with its accounting reference date.

A company may, by notice lodged with the Registrar for registration, change its accounting reference date having effect in relation to:

• the current accounting reference period of the company and subsequent periods; or
• the previous accounting reference period of the company and subsequent periods.

Offence and penalties relating to failure to comply

Pursuant to section 692 of the Companies Act, 2015, failure by a company to lodge its financial statements and reports for a financial year before the deadline, means that each person who was a director of the company immediately before the end of that period commits an offence and upon conviction is liable to a fine not exceeding KES 200,000.

Lodgement requirements for companies subject to small companies’ regime

Pursuant to section 624 of the Companies Act, 2015, a company qualifies as small if it satisfies two or more of the following requirements:

• it has a turnover of not more than KES 50 million;
• the value of its net assets as shown in its balance sheet at the end of the year is not more than KES 20 million; and
• it does not have more than 25 employees (average number of persons employed under contracts of service by the company in the year).

Despite meeting the above criteria, a company will not qualify for the small companies’ regime if at any time in the financial year to which the financial statements relates:

• it was a public company; or
• it was a member of an ineligible group.

A group of companies is ineligible if any of its members is:

• a public company;
• a body corporate other than a public company whose shares are traded on a securities exchange or other regulated market in Kenya and the East Africa Community; or
• a company and its subsidiaries that carries on co-operative society activities, micro-finance activities, trade in insurance market or banking activities.

Small regime companies are exempt from audit. However, a company is not entitled to the exemption if it was a public company or carried on a banking or insurance business at any time within the relevant financial year.

Small regime companies should lodge a copy of a balance sheet for each financial year, drawn up as at the last day of that year.

They may also lodge a copy of the company’s profit and loss account for that year and a copy of the directors’ report for that year with the Registrar.

Filing of financial statements for foreign branches

Foreign companies are required to file financial statements for each year with the Companies Registry. The financial statements should be filed together with a statement supported by a statutory declaration verifying that the copies are true copies of the financial statements of the parent company.

Role of the board in preparing financial statements

The board has a responsibility to ensure proper transparency and accountability within an organisation. This includes the timely preparation of financial statements, which ought to be a true reflection of the organisation’s performance.

The board is required to ensure that the organisation is reported as a going concern (as the case may be) in both the annual and half-year financial statements. These statements must be accompanied by the necessary assumptions and qualifications.

The board must also ensure that the financial statements are presented to shareholders on time. This is usually during the annual general meeting (AGM) of the organisation. During the AGM, the members of the company will be required to approve the audited financial statements.

The adoption of the audited financial statements and the auditor’s report is part of the ordinary business to be conducted at an AGM, and this is included in the notice for the meeting. The notice of the AGM to members should be circulated at least 21 days prior to the AGM.

The importance of tabling the financial statements at an AGM is to enable members to:

• query or raise any issues concerning the financial statements to the board and auditors of the company prior to adopting the financial statements; and
• to have an understanding as to the utilisation of the company’s resources and the actions of the board towards the efficient running of the company.

In conclusion, the board should put in place adequate structures to enable the generation of true and fair financial statements. The board shall take full responsibility for the accuracy of the financial statements.