Accounting Cycle
Every company has a requirement to maintain proper book of Accounts and some supporting
documents like:
1. Payroll record
2. Gratuity
3. Sales Invoices
Also bring it in proper presentable way in the form of Financial Statements.
Section 220 – Books of Account to Be Kept by Company (Mandatory for all companies):
Purpose:
To ensure companies maintain proper financial records that give a true and fair view of their
financial position.
Key Provisions:
(1) Mandatory Record-Keeping:
• Every company must prepare and keep books of accounts at its registered office.
• These must include:
o Financial statements for each financial year
o Records for branch offices (if any)
o For manufacturing/mining/etc. companies: additional cost records (e.g. material/labor
usage)
Books can be kept at another place in Pakistan, but the company must inform the registrar within 7
days.
(2) Branch Offices:
• If a company has branches, it must:
o Keep proper records at the branch for minimum 5 years
o Send periodic summarized returns to the main office
(3) Director’s Right to Inspect:
• Directors can inspect books during business hours.
• If financial data is kept outside Pakistan, copies must be available locally for inspection.
(4) Duty to Assist:
• Officers/employees must assist directors during such inspections.
(5) Retention of Records:
• Companies must keep books for at least 10 years (or since incorporation if younger).
Penalties for Non-Compliance (Sub-section 6):
Listed companies:
• Jail: Up to 2 years
• Fine: Between Rs. 500,000 to Rs. 5 million
• Plus: Rs. 10,000 per day of continued default
Other companies:
• Jail: Up to 1 year
• Fine: Up to Rs. 100,000
Directors, CEOs, CFOs are held responsible if they caused the default.
(7) For Liquidators:
• Same rules (except 10-year retention) apply during winding up.
Financial Statements (Section 223):
According to Section 131 you need to present the financial statements in the first AGM which can be
held within 120 days of closing, in which company will present the financial statements of 12 to 16
months, this is just for the first AGM and afterwards financial statements need to be maintained for 12
months. Before presenting in the AGM it needs to be approved in the board meeting which is to be held
21 days before the AGM and the directors should receive the notice 7 days before the meeting. Before
the notice of the board meeting the financial statements should be audited.
(1) Obligation to Prepare Financial Statements
• The Board of Directors must prepare and lay the financial statements before the members
at the Annual General Meeting (AGM).
(2) Deadline
• Financial statements must be made within 120 days of the financial year end.
• An extension of up to 30 days can be granted by:
o SECP for listed companies.
o Registrar for other companies.
(3) First Statements
• First financial statements must be made within 16 months of incorporation.
(4) Financial Period
• Each reporting period should not exceed 1 year, unless the registrar grants special
permission.
(5) Audit Requirement
• Must be audited and the auditor’s report must be attached.
• Exemption: Private companies with paid-up capital ≤ Rs. 1 million (or higher if notified) are
exempt.
(6) Distribution to Members
• Audited financial statements + auditor’s report + directors’ report must be sent to members at
least 21 days before AGM (via post or electronically).
• A copy must be kept at the registered office for inspection.
(7) Listed Companies’ Additional Duties
• Must send 3 hard copies + 1 electronic copy to:
o SECP
o Registrar
o Stock Exchange
• Also, we must publish reports on the company’s website.
(8) Default Penalty
• Anyone responsible for non-compliance is punishable under Section 220(6) (which includes
fines and/or imprisonment).
(9) Exemption for SMC
• Single Member Companies (SMCs) are exempt except for the audit requirement, if
applicable.
Contents of the Financial Statements (Section 225):
• IFRS needs to be followed to make financial statements.
• 3rd Schedule tell us which schedule to follow for the specific companies
• 4th Schedule is for listed companies who need to make (P&L, SOFP and Cashflow etc.)
• 5th Schedule is for non-listed companies which include Public unlisted companies and Private
limited companies.
1. True & Fair View + Compliance:
• Financial statements must:
o Show a true and fair view of the company’s affairs.
o Follow financial reporting standards notified by the SECP.
o Be prepared according to the Third Schedule (varies by company type).
Special case:
• Associated companies’ accounting must follow IFRS or SECP standards.
Exemptions:
• Insurance, banking, or other regulated companies follow their own laws (not this section).
2. SECP Can Modify Requirements:
• SECP may modify financial statement rules for a specific company if needed.
3. SECP Can Grant Exemptions:
• SECP may exempt any company (or type of company) from some or all rules if in the public
interest.
4. IFRS Option:
• Companies may choose to fully adopt IFRS (International Financial Reporting Standards)
voluntarily.
o IFRS = Global accounting rules
o IASB = Body that issues IFRS
5. Penalties for Default:
• If someone violates these rules, they’ll face the same punishments as in Section 220(6):
o Jail + Fine (depending on company type)
o Directors/CFOs/CEOs are held liable
Consolidated Statements (Section 228):
Purpose of Section 228:
This section ensures that holding companies present a clear financial picture of the entire group,
including subsidiaries, through consolidated financial statements (CFS).
(1) Mandatory Consolidation
• A holding company must attach consolidated financial statements (CFS) at the end of its
financial year.
• These CFS must:
o Present the group as a single enterprise.
o Follow disclosure requirements under the relevant Schedule (usually the Third
Schedule) and SECP-notified financial reporting standards.
• Exemption: Not required if the holding and its subsidiary are private companies with paid-up
capital ≤ Rs. 1 million.
(2) Interim Closing Requirement
• If a subsidiary’s financial year ends more than 90 days before the holding company’s financial
year, the subsidiary must:
o Prepare interim financial statements as of the holding company’s year-end for
consolidation.
(3) Auditor’s Role
• The holding company’s auditor must also audit the CFS and report in the specified form,
exercising the same powers as under Sections 248 & 249 (audit-related sections).
(4) Qualified Accounts
• Any note/qualification in the CFS must be disclosed, especially if the matter is:
o Not in the holding company’s own accounts.
o Material to the members.
(5) Signatories
• CFS must be signed by the same persons (usually directors) who sign the standalone financial
statements (per Section 232).
(7) SECP Relaxation
• SECP may relax the requirements on application by the holding company.
(8) Penalty
• Default results in a Level 2 penalty (under SECP’s standard penalty scale).
Auditor (Section 248-249):
Breakdown of Section 248 – Auditors’ Right to Information
(1) Auditor’s Rights
The auditor of a company has the right to:
• (a) Access at all times to:
o Books, accounts, and vouchers—regardless of the format (physical or electronic).
• (b) Access to:
o Copies or extracts from branch books/accounts that have been transmitted to the
company’s principal office.
• (c) Demand necessary information/explanations from:
o (i) Any director, officer, or employee of the company.
o (ii) Anyone holding or accountable for the company's books, accounts, or vouchers.
o (iii) Any subsidiary undertaking of the company.
o (iv) Any officer, employee, or auditor of that subsidiary or any person responsible for its
books, accounts, or vouchers.
(2) Penalty for Obstruction
If any officer of the company:
• Refuses or fails (without lawful reason) to:
o Allow access,
o Provide information, or
o Cooperate with the auditor.
Or if the officer:
• Hinders or delays the auditor,
• Fails to give the auditor notice of a general meeting, or
• Provides false or incorrect information—
Then the officer is liable to penalty under Section 252.
Summary:
Auditors must have unfettered access to information and cooperation from both the company and its
subsidiaries. Non-cooperation is penalized, ensuring transparency and accountability in the auditing
process.
Section 249 – Duties of Auditor (Companies Act, 2017)
This section outlines how an auditor must conduct an audit, what must be included in the audit
report, and the auditor’s rights and obligations.
Key Provisions
(1) Compliance with ISA
• The auditor must audit the company and prepare the report in accordance with International
Standards on Auditing (ISA) as adopted by ICAP.
(2) Examination Goals
Auditor must ensure:
• (a) Adequate accounting records are maintained, and proper returns from unvisited branches
are received.
• (b) Financial statements agree with records and returns.
(3) Auditor’s Report to Members
Report must include opinion on whether:
• (a) All necessary information/explanations were obtained.
• (b) Proper books of accounts were kept.
• (c) Statements conform to accounting/reporting standards and match the books.
• (d) Financials give a true and fair view of:
o (i) Financial position (balance sheet),
o (ii) Profit/loss and other comprehensive income,
o (iii) Cash flows.
• (e) Investments, expenditure, and guarantees were for business purposes, and zakat was
correctly deducted and deposited.
Explanation: If the auditor references another report or note, it must be annexed and deemed part
of the auditor’s report.
(4) Negative or Qualified Answers
• If any opinion is negative or qualified, reasons and the actual situation must be clearly stated.
(5) Additional Reporting
• SECP can require auditors to report on additional matters for certain companies.
(6) Audit Opinion Format
• Must follow ISA in expressing an unmodified or modified opinion.
(7) Review of Compliance Statement
• SECP may direct that the compliance statement under Section 227(4) be reviewed by the
auditor with a specified review report format.
(8) Right to Attend General Meetings
• Auditors have the right to attend, be notified of, and be heard at general meetings.
• For listed companies, the auditor (or their written proxy) must be present at the meeting
where financials and the audit report are considered.
Summary:
This section reinforces the auditor’s role as a watchdog—not just in examining books, but also in
ensuring compliance, fair reporting, and corporate transparency, while upholding ISA standards.
Directors Report (Section 226-227):
Section 226 – Duty to Prepare Directors’ Report and Statement of Compliance
(Companies Act, 2017)
Key Provisions
(1) Obligation to Prepare Directors’ Report
• The board must prepare a director’s report for each financial year.
• Exemption:
Private companies (not subsidiaries of public companies) with paid-up capital ≤ PKR 3 million
are not required to prepare this report.
(2) Statement of Compliance
• SECP may require certain classes of companies (via general or special order) to prepare a
statement of compliance.
(3) Holding Companies
• If a holding company is required to prepare consolidated financial statements under Section
228, the directors’ report must also include:
o Information as per Section 227(2) regarding consolidated financials (e.g., business
performance, risks, future outlook, etc.).
(4) Emphasis on Significant Matters
• The directors’ report should focus more on important matters affecting the group as a whole
(i.e., the entire consolidation).
(5) Penalty
• Non-compliance with this section is punishable with a Level 1 penalty on the standard scale
(up to PKR 100,000).
Section 227 – Contents of Directors’ Report and Statement of Compliance
(Companies Act, 2017)
Key Provisions
(1) Basic Requirement
The directors must prepare and attach to the financial statements:
• A report on the state of the company’s affairs,
• A fair review of its business,
• Recommended dividend, if any, and
• Any transfers to reserves.
(2) Additional Requirements for:
Public Companies
Private Companies that are subsidiaries of Public Companies
Their report must also include:
• Names of directors during the year
• Business activities and performance
• Principal risks and uncertainties
• Changes in nature of business (company/subsidiaries/associates)
• Modifications in auditor’s report
• Shareholding pattern
• Holding company name and country (if foreign)
• Earnings per share
• Reasons for loss and future profit outlook
• Defaults in debt payments (and reasons)
• Comments on internal financial controls
• Material post-balance sheet events
• Director & CEO remuneration details (salary, benefits, bonuses, etc.)
• Any other required information
(3) For Listed Companies – Additional Business Review Requirements
Must include:
• Trends/factors affecting future performance
• Environmental impact of the business
• CSR activities
• Director's responsibility on internal financial controls
• Reasons for not declaring dividend despite profits (if applicable)
(4) Statement of Compliance
• The board must attach a Statement of Compliance with the financial statements (format as
specified by SECP).
(5) Signatories
• CEO and one director must sign the report and statement.
(6) Penalties for Non-compliance
• Listed companies: Level 2 penalty (up to PKR 200,000)
• Other companies: Level 1 penalty (up to PKR 100,000)
Dividends (Section 240-243):
Section 240 – Certain Restrictions on Declaration of Dividend
(Companies Act, 2017)
Key Points
(1) General Meeting Can Declare Dividend
Shareholders may declare dividend in a general meeting,
BUT it cannot exceed the amount recommended by the board.
(2) Restrictions on Source of Dividend
Dividend cannot be declared/paid from:
• Profits from sale of immovable property or capital assets,
unless:
o It’s the company’s regular business to deal in such assets; OR
o Such profits are adjusted against losses from similar asset sales.
Unrealized gains (like fair value increase of investment property)
credited to profit & loss cannot be used to declare dividends.
Purpose
To protect capital and ensure only real, realized profits are distributed as dividends.
Section 241 – Dividend to Be Paid Only Out of Profits
(Companies Act, 2017)
Key Rule
A company can pay dividends only from its profits.
Mode of Payment
• Cash
• In kind, but only in this form:
Shares of a listed company held by the distributing company
Not Allowed
• Dividends from capital
• Dividends in kind using assets other than shares of a listed company
Section 242 – Dividend Not to Be Paid Except to Registered Shareholders
(Companies Act, 2017)
Main Rule
Dividends must be paid only to:
• Registered shareholders, or
• A person authorized by them
Modes of Payment
• For all companies:
Cheque, warrant, or electronic transfer — based on shareholder’s instruction
• For listed companies:
Electronic mode only — directly into the designated bank account of the shareholder
Key Restriction
• No dividend to unregistered persons
• No cash or cheque payments for listed companies
Section 243 – Directors Not to Withhold Declared Dividend
(Companies Act, 2017)
1. Obligation to Pay Declared Dividend
• Once a dividend is declared, directors cannot withhold or delay its payment.
• The Chief Executive (CEO) is personally responsible for ensuring timely payment in
accordance with Section 242.
When is a Dividend Considered Declared?
• Final dividend: Date of general meeting
• Interim dividend:
o If share transfer register is closed → date of register closure
o If not closed → date of board approval
2. Penalty for Non-Payment
If the dividend is not paid within the specified time:
• CEO may face:
o Imprisonment up to 2 years
o Fine up to Rs. 5 million
Exceptions (No Offence in These Cases)
No penalty if non-payment is due to:
• (a) Operation of law
• (b) Shareholder’s instructions can’t be followed
• (c) Dispute about right to receive dividends
• (d) Dividend adjusted against dues
• (e) Other reasons not due to company’s default, and SECP approval obtained within 45 days
3. Withholding for Incomplete Information
• A company may withhold dividend if the shareholder hasn’t provided required information
or documents as specified by SECP.
4. Disqualification of CEO
If convicted under sub-section (2):
• Immediately ceases to be CEO
• Ineligible to be CEO or director of any company for 5 years
AGM (Section 131):
Submission of Financial Statement (Section 233):
Section 233 – Copy of Financial Statements to be Forwarded to the Registrar
(Companies Act, 2017)
1. Filing Requirement
After financial statements are:
• Audited,
• Laid before the AGM, and
• Adopted by the company,
they must be filed with the Registrar along with all annexed reports and documents, signed as per
Sections 226, 232, and 251.
Deadline to File:
• Listed companies: Within 30 days of AGM
• Other companies: Within 15 days of AGM
2. If Statements Are Not Adopted
If the AGM:
• Does not adopt,
• Defers, or
• Is adjourned,
then a statement explaining the reason must be attached to the financial statements submitted to
the Registrar.
3. Exemption
This section does not apply to:
• Private companies with paid-up capital ≤ Rs. 10 million,
or any higher limit as may be notified by SECP.
4. Penalties for Non-Compliance
• Listed company: Penalty Level 2
• Other companies: Penalty Level 1
