Understanding financial reporting requirements in Australia for different types of businesses
Amanda White
We now have an understanding of the four financial statements and we know how to construct three of them. Do all businesses have to produce these reports? What are their legal obgliations?
Depending on the size and structure of your business, there are varying reporting requirements in Australia. The table below provides a summary:
| Business type | Liability | Keep accounting records | Submit financial statements to regulator | Have financial statements audited |
| Sole trader
Business owned and operated by a single person |
Unlimited liability – any debts of the business are debts of the owner | Yes – for 5 years | No | No |
| Partnership
Business owed by two or more people |
Unlimited liability – debt incurred by any one partner is owed by all partners | Yes – for 5 years | No | No |
| Proprietary company (Pty Ltd)
Incorporated entity owned by shareholders |
Limited liability – debts of the business belong to the business alone | Yes – for 7 years | No | At the request of shareholders |
| Public Company (Ltd)
Incorporated entity owned by shareholders and shares are traded on a public exchange |
Limited liability – debts of the business belong to the business alone | Yes – for 7 years | Yes | Yes |
Sole traders and partnerships are not governed by Australia’s main market regulator – the Australian Securities and Investment Commission (ASIC). They are fast and easy to set up, and dissolve, but there are significant risks related to liability in both business structures.
Just because the sole trader, partnerships and proprietary companies are not required to prepare financial statements to the regulator, doesn’t mean that they don’t use them. Our financial statements are critical pieces of information that help businesses of all sizes make decisions – that could be related to customers, suppliers, employees, investment or any other multitude of business-related decisions.
A study at the University of South Australia published in 2018 found that 14% of small to medium enterprises failed because they did not understand finance and accounting. A basic understanding of the fundamentals of accounting is critical no matter what your business-related career path may be.
Companies are incorporated entities under the governance and oversight of ASIC. The increased legal protection afforded to companies means that it does take more time, paperwork and cost to set up these business structures. The biggest legal protection provided to companies is that they have limited liability – the business exists as a separate entity and any debts that are incurred by the business belong to the business – shareholders are not liable if the business goes under and there are debts left unpaid. In a sole trader or partnership, the business owners are liable – meaning that a lender may take possession of an owner’s family home or other assets to pay outstanding debts.
Shareholders of public companies
Shareholders of public entities are required to be provided with financial statements every six months in the format of a half-year set of statements and a full year set of statements. They must comply with the AASB rules related to how to account for various transactions as well as the layout or format of the information (which is what we’ve learned in this chapter). The Corporations Act of 2001 sets out these requirements including that these companies must have their annual financial statements audited – that is, whether the economic reality depicted by the business in their four financial statements is a true and fair view.
The use of standardised financial statements (not just in Australia but around the world, everywhere except North Korea and the USA) allows shareholders to then compare companies and make decisions about how they are going to allocate their scarce resources (investment funds) across various businesses.
In the next chapter, we will be learning how to conduct this analysis to analyse the performance of a single firm within a year and over time, and also how to compare firms within a specific year and also over time.
