The deadline for submission of audited financial statements expires on October 1, according to the Law of Georgia on Accounting Recording, Reporting and Auditing. According to Part 2 of Article 9 of the Law:
Entity (other than a non-profit (non-commercial) legal entity) is entitled to submit to the Service the statutory financial statements (including the consolidated statements), management reporting, statement on payments made to the State and in cases prescribed by this law, together with the audit report, immediately, but not later than October 1 of the next year after the reporting period, via established procedure.
Key terms used in the article:
The subject – the public law and private legal entities, except for the budget organizations, defined by the Budget Code and the National Bank of Georgia, branch of other country’s enterprise, individual entrepreneur, if they meet the statutory criteria of business income, assets used in economic activities and employment number; (Article 2. 1. „e“).
Service – “The Service for Accounting, Reporting and Auditing Supervision – State Subordinate Institution within the Ministry of Finance of Georgia (2.1. I)”.
The law divides the subjects into four categories (2.1. “T”):
Fourth category enterprise – an entity whose figures meet at least two of the following three criteria at the end of the reporting period:
A) The total value of assets does not exceed 1 million Lari;
B) Income not exceeding 2 million Lari;
C) the average number of employees in the reporting period does not exceed 10;
Third category enterprise – an entity that is not a fourth category enterprise and whose figures at the end of the reporting period meet at least two of the following three criteria:
A) The total value of assets does not exceed 10 million Lari;
B) Income not exceeding 20 million Lari;
C) the average number of employees in the reporting period does not exceed 50;
Second category enterprise – an entity that is not a third or fourth category enterprise and whose figures at the end of the reporting period meet at least two of the following three criteria:
A) The total value of assets does not exceed 50 million Lari;
B) Income not exceeding 100 million Lari;
C) the average number of employees in the reporting period does not exceed 250;
First category enterprise – an entity whose figures meet at least two of the following three criteria at the end of the reporting period:
A) The total value of assets exceeds 50 million Lari;
B) Income exceeds 100 million Lari;
C) the average number of employees in the reporting period exceeds 250;
The financial records to be submitted to the Service prescribed by the law before October 1 (financial, management, auditor’s report) shall be governed by law and other normative acts of Georgia. Accounting and financial reporting must comply with international standards for accounting and financial reporting.
Accounting and financial reporting standards consist of:
A) International Financial Reporting Standards (IFRS);
B) International Financial Reporting Standards for Small and Medium-sized Entities (IFRS for SMEs);
C) the financial reporting standards established for fourth category enterprises;
D) financial reporting standards established for non-profit (non-commercial) legal entities.
E) An individual entrepreneur who does not belong to Category 1-3 entities is authorized to use the financial reporting standards established for fourth category enterprises in accordance with this paragraph for the purpose of accounting and financial reporting. The use of financial reporting standards for fourth category enterprises is established by the Service. The use of standards is mandatory.
Typically, first, second, third category entities and non-profit (non-commercial) legal entities have sufficient resources to conduct financial, management, accounting and tax reporting and timely and fully submit the financial reporting required by law. The fourth category of entities-enterprises are facing certain difficulties, primarily those entities in this category, whose income and assets are not exactly millions. If we consult the law, the fourth category includes both an enterprise with assets of 190,000 Laris and income of 1 950,000 Laris and an enterprise with 3 employees, income of 200,000 Laris and assets of 20,000 Laris.
At first glance everything is simple; financial reporting standards for the fourth category of enterprise describe in detail the principles and procedures of preparation of financial statements, which is not a great relief for entrepreneurs who have a highly vague understanding of accounting (financial as well as management) and whose knowledge and experience is limited to submitting declarations and issuing bills and who is firmly convinced that the financial statements are tax declarations and such statements are prepared only for tax authorities.
In such circumstances, the surprised and confused entrepreneur has only one opportunity – to invite a more or less qualified specialist (considering the financial capacity of the enterprise). The problem is not solved by this either. The invited specialist will by all means demand accounting (not only) data of the reporting period. The way to generate such data is not so simple. Judge for yourself.
The law prescribes the rules of accounting to be followed by the entity unless otherwise prescribed by the relevant regulatory body. Namely, an entity:
A. Conducts accounting records based on natural measurement units, in general, in monetary terms, with their chronological, continuous and documentary representation.
B. The entity carries out accounting records through the employed accountant or by rendering services of another qualified natural person / legal entity.
C. The entity shall ensure that every economic event carried out by it is fully represented in accounting records and shall ensure its internal control.
The entity shall, for the purpose of fulfilling the requirements of this Law, taking into account the complexity of its activities and organizational structure:
A) determine accounting policies;
B) Develop a plan of accounts within the rules established by the legislation of Georgia;
C) Develop mechanisms and procedures for the generation and control of documents representing economic events;
D) determine the terms and technology of accounting information processing;
E) Develop financial reporting forms based on the relevant financial reporting standards and define the procedures for preparing and submitting financial statements;
F) Develop a set of business processes and business rules (internal control system) that ensure the effectiveness of its operations, the reliability of financial statements and their compliance with Georgian legislation.
G) Develop a Corporate Governance Code, etc.
The entity conducts accounting records on the basis of accounting documents. Accounting documents are:
A) primary accounting documents, including internal primary accounting document – a document certifying the entity’s internal operation, as well as an external primary accounting document – a document obtained from another party or an original document submitted by the entity to another party;
B) bookkeeping documents (accounting records, logs and other documents).
The entity shall be responsible for the internal control system and the preparation and submission of true financial statements in accordance with the procedure established by the legislation of Georgia.
The authenticity of the data contained in the documents as well as the timely and qualitative compilation of accounting documents shall be the responsibility of the persons compiling and signing them. And so on. . . . .
Two questions arise:
First. The jobs listed require high qualification and appropriate remuneration. Does every enterprise have this capability?
Second – which partially answers the previous question,
Who needs the financial reporting of a fourth category enterprise. The purpose of financial statements is to provide its external customers with reliable information about the financial position of the enterprise in order to make a reasoned economic decision with respect to the enterprise.
Again, a question arises, what kind of economic decisions can banks, micro-finance and insurance companies, suppliers and customers make from the financial statements prepared as of December 31, in October, November or, if you will – in June or August of the following year.
As difficult as it may be for the fourth category entities to comply with the requirements of the law, it must be well remembered that compliance with the law is necessary, while non-compliance…
The only thing we can recommend to an entrepreneur is very simple – figure out accounting principles. Let’s not forget that accounting is the language of business. A businessman who considers sum paid for every purchase an “expense”, any incoming sum an “income” and does not believe his eyes when, in rather net profit conditions, has empty cash bank and mortgages his only residence, in order to secure a dollar credit, can only expect short-term success, but still only in “ivory tower” conditions.
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