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In this Accounting alert, we discuss the effect of ASIC Class Order 07/505 Variation and revocation of financial reporting instruments on existing financial reporting class orders, and also other considerations for new small proprietary companies. Class Order 07/505 has been issued to vary or revoke various ASIC class orders affected by amendments to the Corporations Act 2001 introduced by the Corporations Legislation Amendment (Simpler Regulatory System) Act 2007. The class order commenced on 17 July 2007.
| Note: Class Order 07/505 revokes existing ASIC Class Orders 05/83 Timing of auditor’s independence declaration and 05/910 Auditors’ independence declaration – exemption. The relief these class orders provided has been incorporated into the Corporations Act 2001 by the Corporations Legislation Amendment (Simpler Regulatory System) Act 2007. |
The revised size tests
The Corporations Legislation Amendment (Simpler Regulatory System) Act 2007 received Royal Assent on 28 June 2007. Consequently, the revised size tests described below establishing whether a proprietary company is a large or a small proprietary company applies for financial years ending on or after 28 June 2007:
| Any two of the following: | Large pty company | Small pty company |
|---|
| Consolidated revenue | $25 million or more | less than $25 million |
| Consolidated gross assets | $12.5 million or more | less than $12.5 million |
| Number of employees | 50 employees or more | less than 50 employees |
A small proprietary company is not required to prepare a financial report and directors’ report other than if one of the following apply:
it is directed to do so by its shareholders or by ASIC [s.292(2)(a)]
it is controlled by a foreign company for all or part of the year and it is not consolidated for that period in financial statements for that year lodged with ASIC by a registered foreign company or a company, registered scheme or disclosing entity [s.292(2)(b)].
A proprietary company that was classified as ‘large’ in previous financial years may now be classified as ‘small’ under the revised size tests.
ASIC class orders 98/96, 98/98 and 02/1432 refer to a size test similar to that previously included in the Corporations Act 2001. ASIC has now issued Class Order 07/505, which varies these class orders. Each of these is discussed below under the following headings:
In addition, this Accounting alert also discusses:
Top Reporting relief for foreign controlled small proprietary companies not part of a ‘large group’
ASIC Class Order 98/98 Small proprietary companies which are controlled by a foreign company but which are not part of a large group provides relief to small proprietary companies which are controlled by a foreign company from the requirement to prepare and lodge an audited financial report provided that they are not part of a large group.
Any foreign controlled proprietary company that is now classified as ‘small’ under the revised size tests would not, absent the revisions made by Class Order 07/505, be able to avail themselves of the relief offered by this class order as:
the class order defined a ‘large group’ using the previous size thresholds, which means that any foreign controlled proprietary company that is now classified as ‘small’ under the revised size tests will be part of a ‘large group’ (as presently defined by the class order)
the class order required that a notice of the directors’ resolution that the company intends to take advantage of the relief available under the class order be lodged with ASIC, in general, within three months before the commencement of the relevant financial year (e.g. before 1 July 2006 for a financial year ending 30 June 2007). A different lodgement period applies for entities that are newly registered or became foreign controlled only during the current reporting period.
Class Order 07/505 amends the definition of a ‘large group’ to be consistent with the revised size tests for a large proprietary company (refer above), and provides transitional relief to allow new small proprietary entities to qualify under this class order provided they lodge the notice of the directors’ resolution with ASIC:
in relation to a financial year ended between 28 June 2007 and 30 June 2007 (inclusive), within 4 months of the end of the financial year
in relation to a financial year ending between 1 July 2007 and 30 June 2008 (inclusive), by 31 October 2007.
For all other financial years, the notice of the directors’ resolution will need to be lodged with ASIC before the commencement of the relevant financial year, but not more than three months before the commencement of the relevant financial year in all other circumstances.
As the class order has been varied to provide transitional relief, it is unlikely that any company that misses the extended deadlines above will be granted further relief.
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Small registered foreign companies – reporting requirements
ASIC Class Order 02/1432 Registered foreign companies – financial reporting requirements provides a small registered foreign company which is subject to similar restrictions to an Australian proprietary company (and which is not required to prepare financial statements in its place of origin) with relief from the requirement to lodge financial statements where it is not part of a ‘large group’ and where it is controlled by a foreign parent that lodges consolidated financial statements with ASIC. Similar to Class Order 98/98 (discussed above), the class order specifies the conditions for a ‘large company’ and a ‘large group’.
The class order has been varied by Class Order 07/505 so that the revised size thresholds for Australian proprietary companies (refer above) now apply to assessing whether a registered foreign company is a small registered foreign company or otherwise.
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Synchronisation of financial year with a foreign parent company
Class Order 98/96 Synchronisation of financial year with a foreign parent company permits a company, registered scheme or disclosing entity to synchronise its financial year with that of its ultimate foreign parent entity provided certain conditions are satisfied. The class order is varied by Class Order 07/505 to update references to s.45A(2) and s.45A(3) (that is, the sections specifying the size tests for large and small proprietary companies) to be consistent with the revised size thresholds.
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‘Grandfathered’ status of former large proprietary companies
Certain large proprietary companies are not required to lodge their audited financial reports with ASIC due to ‘grandfathering’ provisions of the former s.319(4) of the Corporations Law and/or ASIC Class Order 05/638 Anomalies preventing certain large proprietary companies from being grandfathered.
If a ‘grandfathered’ former large proprietary company is now classified as ‘small’ under the revised size tests (and is now not required to prepare a financial report under the Corporations Act 2001), can such a company obtain ‘grandfathered’ status if it becomes ‘large’ in a future financial year?
One of the conditions for a proprietary company to maintain its ‘grandfathered’ status (and the exemption from lodging its financial report with ASIC) is that the company’s financial statements (for each financial year) must be prepared and audited before the deadline for reporting to members.
If the new small proprietary company does not continue to comply with this condition (i.e., it does not prepare and have audited financial statements on the basis that it is now a small proprietary company), then should the company become ‘large’ in a future financial year, the company would not be able to avail itself of the ‘grandfathered’ provisions. Consequently, on reverting to a large proprietary company classification, the company would be required to lodge its audited financial report with ASIC (unless it is able to obtain audit and/or lodgement relief under another ASIC class order).
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Reporting relief for wholly-owned subsidiaries
ASIC Class Order 98/1418 Wholly-owned entities provides relief to wholly-owned Australian companies that are party to a deed of cross guarantee from having to prepare and lodge a financial report, directors’ report and auditors’ report (provided certain conditions are satisfied).
One of the conditions of the class order is that the holding entity is not a small proprietary company. In the event that the holding entity is now classified as ‘small’ under the revised size tests, the wholly-owned Australian companies will no longer be able to avail themselves of the relief offered by this class order.
Additionally, wholly-owned Australian companies that are now classified as small proprietary companies under the revised size tests will not be eligible to obtain (and will no longer require) reporting relief under ASIC Class Order 98/1418 because the Corporations Act 2001 does not require small proprietary companies to prepare audited financial reports (except if required under s.292(2)(a) or (b), as outlined above).
It may therefore be appropriate to reconsider whether such small proprietary companies should continue to be party to the deed of cross guarantee. The release of companies from the deed of cross guarantee is undertaken via the execution of a revocation deed.
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