Reporting and Lodgement Obligations of Australian Private Companies

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1 Reporting and Lodgement Obligations of Australian Private Companies Darryn Rundell, CA, Accounting Technical and Financial Reporting Specialist, Pitcher Partners Dean Ardern, Technical Director, Pitcher Partners March 2018 Over the past 18 months Australian proprietary limited companies have been subject to an increased level of scrutiny by the Australian corporate regulator, the Australian Securities and Investments Commission (ASIC), regarding lodgement of their financial statements. When applicable, failure to lodge a financial report under section 319 of the Corporations Act 2001 (Corporations Act) is an offence of strict liability. Accordingly, for the sake of their personal circumstances as well as their companies, directors of Australian private companies need to ensure they comply with Australian lodgement requirements. Notwithstanding that the requirements in Chapter 2M.3 of the Corporations Act, particularly the requirements for certain proprietary limited companies to prepare and lodge audited financial statements with ASIC, have been subject to relatively few amendments over time, awareness of these requirements, as well as their concomitant penalties, varies dramatically across the director community. To address this issue, this article discusses some of the key matters to consider when determining whether an Australian private is required to lodge annual audited financial statements and an acing directors report with ASIC. Are all Australian private companies required to lodge financial statements with ASIC? Not all Australian private companies are required to lodge financial statements with ASIC. Unless specifically exempted, the Corporations Act requires large proprietary companies and foreign-controlled proprietary companies that meet certain size-related criteria to lodge audited financial statements with ASIC.

2 What is a large proprietary? A proprietary is a that is registered as, or converts to, a proprietary under the Corporations Act. In order to qualify as a proprietary, the must: be limited by shares or be an unlimited with share capital have no more than 50 non-employee shareholders and except in limited circumstances, not do anything that would require disclosure to investors under Chapter 6D of the Corporations Act (such as offering the sale of securities in the to more than 20 investors). A large proprietary is a proprietary that satisfies at least 2 of the following 3 criteria: a) the consolidated revenue for the financial year of the proprietary and the entities it controls (if any) is $25 million or more b) the value of the consolidated gross assets at the end of the financial year of the proprietary and the entities it controls (if any) is $12.5 million or more and c) the proprietary and the entities it controls (if any) have 50 or more employees at the end of the financial year. For the purpose of assessing whether a proprietary is large (or small as discussed below), section 45A(6) of the Corporations Act clarifies that consolidated revenue and consolidated gross assets are to be calculated as if the applied the relevant Australian Accounting Standards (irrespective of whether in the past it had prepared financial statements and if so, had applied all relevant Australian Accounting Standards), which would include AASB 118: Revenue and AASB 10: Consolidated Financial Statements. The Corporations Act requires all large proprietary companies that are not otherwise exempt to lodge audited annual financial statements with the acing audit report and a directors report prepared in accordance with the applicable requirements in the Corporations Act with ASIC. What is a foreign-controlled small proprietary? A foreign-controlled proprietary is a proprietary that is controlled (directly or indirectly) for all or part of the financial year by a foreign. Control is defined in Section 50AA of the Corporations Act as...the capacity to determine the outcome of decisions about the... entity s financial and operating policies. It is worth noting that this definition of control is not consistent with the definition of control used in AASB 10 to circumscribe a group (parent and its subsidiaries), which is also used to assess whether a proprietary is large. In addition to being controlled by a foreign for all or part of the financial year, a foreign-controlled small proprietary must also meet the criteria for small in section 45A(2) of the Corporations Act. These criteria are, in effect, the inverse of the large criteria.

3 Accordingly, a foreign-controlled proprietary would be assessed as small if it satisfied at least 2 of the following 3 criteria: a) the consolidated revenue for the financial year of the proprietary and the entities it controls (if any) is less than $25 million b) the value of the consolidated gross assets at the end of the financial year of the proprietary and the entities it controls (if any) is less than $12.5 million and c) the proprietary and the entities it controls (if any) have less than 50 employees at the end of the financial year. The Corporations Act requires foreign-controlled small proprietary companies to prepare and lodge audited annual financial statements with ASIC unless the is consolidated (for all or part of the financial year during which the is controlled by a foreign ) in financial statements that are lodged with ASIC for the financial year by a registered foreign, Australian, registered scheme or disclosing entity (that has an obligation to lodge financial statements with ASIC). Is there any relief available to Australian private companies? In limited circumstances, Australian private companies may be granted relief from the requirement to prepare, audit and lodge annual financial statements with ASIC. The following table identifies the various forms of relief available to large proprietary companies and foreign-controlled small proprietary companies under the Corporations Act. Type of private Potential preparation, audit and lodgement relief Lodgement relief is available to grandfathered large proprietary companies (under the former section 319(4) of the Corporations Act) Large proprietary under ASIC Corporations (Wholly-owned Companies) Instrument 2016/785 Audit relief is potentially available under ASIC Corporations (Audit Relief) Instrument 2016/784 Foreign-controlled small proprietary under ASIC Corporations (Foreign-Controlled Company Reports) Instrument 2017/204 under ASIC Corporations (Wholly-owned Companies) Instrument 2016/785 Audit relief is potentially available under ASIC Corporations (Audit Relief) Instrument 2016/784

4 Consistent with the foregoing table, directors should first consider whether their Australian private is a grandfathered large proprietary. Such companies have been granted exemption from the requirement to lodge annual financial statements with ASIC, subject to the continued satisfaction of specified conditions (as outlined in the former section 319(4) of the Corporations Law), including, among other things, that the annual financial statements are subject to audit. Secondly, having established that their Australian private is not a grandfathered large proprietary, directors should consider whether the Australian private is eligible for relief under any relevant ASIC Instruments. As noted in the foregoing table, a number of Legislative Instruments currently operate that provide relief to eligible large proprietary companies and eligible foreign-controlled small proprietary companies from the requirement to lodge annually audited financial statements and a directors report with ASIC, subject to specified conditions being satisfied. The most relevant of these ASIC Instruments are discussed below. ASIC Corporations (Foreign-Controlled Company Reports) Instrument 2017/204 ASIC Corporations Instrument 2017/204 provides relief to eligible foreign-controlled small proprietary companies that are not part of a large group from the requirement to prepare, audit and lodge annual financial statements with ASIC, subject to the conditions specified in the Instrument being satisfied. For the purposes of this Instrument, a large group is a group (comprising the foreign-controlled small proprietary and any of its controlled entities, and any entities within the group to which the foreign-controlled small proprietary belongs that are incorporated or formed in Australia or carry on business in Australia and any of their controlled entities) that satisfies at least 2 of the following 3 criteria: a) the combined revenue of the Australian-based group for the financial year is $25 million or more b) the combined value of gross assets of the Australian-based group at the end of the financial year is $12.5 million or more and c) the Australian-based group has 50 or more employees at the end of the financial year. ASIC Corporations (Wholly-owned Companies) Instrument 2016/785 ASIC Corporations Instrument 2016/785 provides relief to eligible wholly-owned proprietary companies that are subsidiaries of a registered foreign, Australian or disclosing entity from the requirement to lodge audited financial statements on an annual basis with ASIC, subject to the conditions specified in the Instrument being satisfied. These conditions include, among other things, the requirement for the wholly-owned proprietary and the holding entity to execute a deed of cross guarantee (in the prescribed form) and for the holding entity to lodge consolidated financial statements with ASIC that include the wholly-owned proprietary. ASIC Corporations (Audit Relief) Instrument 2016/784 ASIC Corporations Instrument 2016/784 provides relief to eligible large proprietary companies and eligible foreign-controlled small proprietary companies from the audit requirements of the Corporations Act, subject to the conditions specified in the Instrument

5 being satisfied. These conditions include, among other things, the following requirements: the s annual financial report was not audited for a financial year ending during 1993 or any later financial year (except for a financial year of a foreigncontrolled small proprietary which ended after 9 December 1995 and before 24 April 1997) the directors have determined that there are reasonable grounds to believe that the will be able to pay its debts as and when they become due and payable the total liabilities of the do not exceed 70% of total tangible assets and the made a profit from ordinary activities after related income tax expense for the current financial year or the immediately preceding financial year.