Financial Capability is the measure of a construction company’s financial abilities to carry out future construction projects.
This measure is based on the company’s best revenue as well as its net assets as at the latest financial year period.
This information is normally presented within the Annual Financial Statements.
For this reason, the CIDB will always request the Annual Financial Statements of the applicant company to determine the financial capability score on a sliding scale as depicted by table C(ii) on the CIDB’s application form.
You can view the CIDB table by clicking here.
With this in mind, it is very important that clients pay good attention to the information contained within their annual financial statements to establish that they will indeed qualify for the CIDB grading that they are aspiring for when submitting these annual financial statements.
There are a number of factors to look out for when submitting these annual financial statements to the CIDB.
Factor number 1. Revenue.
The CIDB will take a look at the revenue figure to determine if you have met the revenue threshold for the CIDB grade that you are applying for.
A number of accountant’s have the tendency of just putting this revenue figure for the sake of showing that the financial capability revenue figure has been met, however, please be warned that the CIDB has a full bench of accountant’s who can spot when your are trying to manipulate the CIDB revenue figure requirements.
They will compare the accuracy and the reason-ability of your revenue figure to the other supporting documents such as the total value of the combined construction contracts completed within a financial year as well as to the total cash flow received through your bank statements.
If there are variances in excess of 10%, then your financial statements could be disregarded for the CIDB grading that you are trying to apply for.
Factor number 2, Net assets value or net worth.
The CIBD will also look at your financial statements to determine, your company’s net worth by taking into consideration, your total financial assets less total financial assets and determine the grading you qualify for based on their sliding scale table as reflected under table C(ii) on their application form.
Once again, the CIDB accountants will be on a look out for companies that try to over inflate their net asset’s value by looking at the supporting documents for items such as cash & cash equivalents as reflected on the bank statements at specific balance sheet dates.
They will also be on the look out for fictitious financial statement asset line items such as revaluation reserves & surpluses that exist without independent valuation certificates.
Signing off of the annual financial statements.
The CIDB will also investigate the designation as well as the standing of the accounting officer, who signs off the annual financial statements. Any accountant who signs off your annual financial statements must be in good standing with a properly recognized accounting body within South Africa.
Secondly, they must also have the authority to sign off your annual financial statements based on your company’s public interest score. Different accountants have different authorities to sign off financial statements based on the construction company’s public interest score.
Factor number 3, compliance to IFRS 15 when reporting revenue from construction contracts.