Accounting alert 2008/04 - Financial reporting relief for wholly-owned entities
On 19 March 2008, the ASIC issued Class Order 08/11 Variation of Class Order [CO 98/1418] (CO 08/11). The class order is effective from 31 March 2008.
Class Order 98/1418 Wholly-owned entities (CO 98/1418) relieves wholly-owned subsidiaries from the requirement to prepare a financial report and to have that financial report audited, provided certain conditions are met. One of the conditions is the existence of a deed of cross guarantee between the holding entity and the wholly-owned subsidiaries seeking the relief under the class order. A copy of the amended class order is available on the ASIC website (PDF 151kb).
Class Order 08/11 amends CO 98/1418 to enable more companies to take advantage of the relief available under the class order, and to remove some of the administrative burden for group companies.
In this Accounting alert we focus on the following amendments to the class order:
- Removal of the requirement for a three year compliance history with the financial reporting requirements of the Corporations Act 2001
- Replacement of the requirement to lodge an annual notice concerning use of the class order
- Other amendments.
We also highlight the ASIC's no action policy in relation to past late lodgements or non-lodgement of ASIC Form 389.
Paragraph (p) of the first order of CO 98/1418 required the wholly-owned entity seeking relief and the holding entity to have substantially complied with the requirements of Chapter 2M (financial reports and audit) and Chapter 2N (updating ASIC information about companies and registered schemes) of the Corporations Act 2001 (or where the holding entity is a registered foreign company, Part 5B.2 of the Corporations Act 2001) during the three years prior to the first financial year relief was sought under the class order, and since that time.
The operation of this condition prevented, amongst others:
- Newly incorporated wholly-owned entities
- In general, wholly-owned proprietary companies changing classification from 'small proprietary' to a 'large proprietary',
From being eligible for relief under the class order on the basis that they were unable to demonstrate a past history of compliance with Chapter 2M and Chapter 2N of the Corporations Act 2001, e.g. as financial reports were not prepared.
Also, a wholly-owned entity whose holding entity was previously late in lodging its financial statements or had a qualified audit opinion was consequently not eligible for relief under CO 98/1418.
Paragraph (p) of the first order of the class order has been deleted, and will consequently allow more entities to qualify for relief under the class order. Wholly-owned entities previously rejected for relief for being unable to demonstrate a three-year compliance history may wish to reassess whether they are now able to take advantage of the relief available under the class order.
The requirement to lodge an annual notice concerning use of the class order has been replaced with a requirement to lodge a notice when relief under the class order is first applied and when the holding entity changes (an 'opt-in' notice), and another notice when the company ceases to apply the relief (an 'opt-out' notice).
This amendment is consistent with a similar change introduced to Class Order 98/98 Small proprietary companies which are controlled by a foreign company but which are not part of a large group via Class Order 07/822 Variation of Class Order [CO 98/98] in late December 2007 (refer our What's new analysis for further information).
The 'opt-in' notice
Before these amendments, a wholly-owned entity seeking relief under the class order had to lodge an annual notice, using ASIC Form 389, with the ASIC. Effective 31 March 2008, entities need only lodge ASIC Form 389 (updated) when first seeking relief and thereafter only where the holding entity under the deed of cross guarantee changes.
An entity that has previously lodged the annual notice for a financial year ended on or before 31 March 2008 (within the deadlines for lodgement) need not lodge a further Form 389 post these amendments as a condition for obtaining relief. An entity that has not yet lodged the annual notice for a financial year ended on or before 31 March 2008 or has been late in lodging a past notice may benefit from the ASIC's ' no action position' - click here for more information about the no action position.
The 'opt-out' notice
Where a wholly-owned entity ceases to apply the relief available under the class order (the 'first non-reliance year'), it must lodge a notice to this effect with the ASIC, using ASIC Form 399 (new) unless it lodges a Chapter 2M annual financial report for that year.
Statement of reassessment of relief
Part of the annual notice to the ASIC included notice that at or about the time of the wholly-owned entity's balance date the directors had reassessed the advantages and disadvantages associated with the wholly-owned entity remaining a party to the deed of cross guarantee and taking advantage of the relief afforded by CO 98/1418, and that the directors had resolved either that the entity should continue to remain a party to the deed or seek to be released from the deed of cross guarantee, as the case may be.
While the annual notice is no longer required, CO 98/1418 continues to require that directors make this annual reassessment and resolution as a condition for relief.
Significant other amendments to CO 98/1418 include:
|ASIC discretion to disallow relief||The amendments give the ASIC the discretion to disallow an entity from relying on the relief available under CO 98/1418 by inserting as a condition for relief that the ASIC has not notified the wholly-owned entity in writing that it may not rely on the order. ASIC Information Release 08-08 accompanying the class order notes that the ASIC may exercise this discretion where it has particular concerns about financial reports of the holding entity|
|Reduction of the matters which must be addressed in the certificates||The certificates required by CO 98/1418 no longer include statements (by a registered company auditor or lawyer with a practising certificate) to the effect that the wholly-owned entity has satisfied all of its obligations under s.319(1) and s.319(3) of the Corporations Act 2001 in relation to the three financial years before the first financial year for which it is seeking to take advantage of relief under the class order, and that none of the auditor's reports for those financial years are qualified|
|Removal of the requirement to lodge solvency statements and simplification of the signing requirements||Previously, the solvency statements required by paragraph (o)(i) and (o)(v) of the first order of CO 98/1418 had to be signed by at least two directors (unless the entity only had one director) and lodged with the ASIC as part of the wholly-owned entity's initial procedures in applying for relief - the amendments allow the solvency statement to be made under a single director's signature, and no longer require the statements to be provided to the ASIC|
|Removal of the requirement for a statutory declaration||Paragraph (o)(iii) of the first order of CO 98/1418, which required that the wholly-owned entity provide the ASIC with evidence that the entity is entitled to the benefit of the class order in the form of a statutory declaration, has been removed.|
In ASIC Information Release 08-08, the ASIC note that they will be adopting a no action position, in certain circumstances, in relation to past late lodgement or non-lodgement of ASIC Form 389 as the requirement of an annual notice to be provided to the ASIC has been removed. Such previous breach of the conditions of the class order would otherwise mean that such wholly-owned entities would not be permitted to rely on the relief available under the class order for the relevant financial year, and for the two subsequent financial years.
In respect of a financial year ending on or prior to 31 March 2008, where a wholly-owned entity has sought relief under CO 98/1418 but has not lodged a Form 389 within four months of the end of the financial year, the ASIC has indicated that it does not intend to require the entity to lodge its financial report (i.e. exclude the company from being eligible for relief) or otherwise take action in relation to the entity's failure to lodge where:
- The holding entity has lodged consolidated financial statements covering the company for that financial year within the time period required by the Corporations Act 2001
- An effective deed of cross guarantee was in place between the company and the holding entity
- The conditions of CO 98/1418 are otherwise complied with
- The company has lodged or lodges Form 389 in respect of at least one financial year. To take advantage of the no action position, a company that has not previously lodged a Form 389 must do so by 30 June 2008.
The ASIC also note in the information release that their no action position will not preclude third parties from taking legal action for breaches of the Corporations Act 2001 arising from the company's failure to comply with the conditions of the class order.