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Chapter 2 - Operation of the large/small test
Rationale for new classification
2.1
Prior to the 1995 amendments the Corporations
Law required all proprietary companies, regardless of size, to prepare
financial statements. However, exempt proprietary companies, unless their
accounts were audited, were required to lodge key financial data with the ASIC
including current assets, non-current intangible assets and non-current
liabilities. This information, as the PJSC noted in its report of 2 March 1995,
served little or no public purpose.[1]
It was often unreliable and was provided up to seven months after it was
current. On the other hand, non-exempt proprietary companies were required to
lodge full accounts. The basis for the requirement was that these companies,
which are ultimately wholly or partly owned by public companies, should be
accountable in a public manner.
2.2
While the classification of companies as exempt
and non-exempt reflected the status of the company, there was no consistent
rationale for identifying companies in which there was a public interest. For
example, very large companies, in which there may be a substantial public
interest because they employed a large number of people, could be classified as
exempt while minor enterprises could be non-exempt. The policy approach adopted
was to establish an objective three-part test that reflected the size and
economic influence of the company. At the same time, removing the requirement
to lodge key financial data would reduce the burden of regulation for the majority
of proprietary companies. The policy underlying the new system was stated in
the Explanatory Memorandum to the First Corporate Law Simplification Bill 1995:
Financial reporting requirements under the Law have been reduced
for most proprietary companies, but strengthened for companies which have a
significant economic impact. The Bill streamlines the regulation of all
proprietary companies. Under the new rules, small proprietary companies face a
regulatory burden that is no greater, and in significant respects less, than
the burden currently faced by exempt proprietary companies.[2]
Summary of proprietary company accounting
requirements
2.3
Under the First Corporate Law Simplification
Act 1995, all large proprietary companies are required to lodge audited accounts
with the ASIC within four months of the end of the financial year. A
proprietary company will be ‘large’ if it satisfies at least two of the
following criteria:
- The consolidated gross operating revenue of the company and the
entities it controls (if any) is $10 million or more.
- The value of the consolidated gross assets at the end of the
financial year of the company and the entities it controls (if any) is $5
million or more.
- The company and the entities it controls (if any) have more than
50 employees at the end of the financial year.
2.4
The amount of a company’s consolidated gross
operating revenue for a financial year and the value of its consolidated gross
assets are to be calculated in accordance with the Accounting Standards.[3] In counting employees for the
purpose of the test, part-time employees are to be counted at an appropriate
fraction of the full-time equivalent.[4]
Unless exempted by the ASIC, large proprietary companies that were not
previously required to lodge audited accounts were required to lodge financial
statements for the 1995/96 financial year. However, for these companies the
requirement that the lodged financial statements be audited applied in respect
of financial statements for the 1996/97 financial year. The ASIC further deferred
the audit requirement for these companies to years ending on or after 9
December 1997.
2.5
In deciding whether to exercise its discretion
to exempt a large proprietary company from the audit requirement, the ASIC is
required to take into account factors such as the expected costs and benefits
of the company complying with the audit requirement, and any practical
di![]() fficulties the company faces in complying with the requirement. ASIC Policy
Statement 115, Audit Relief for Proprietary Companies, and Policy Statement
43, Accounts and Audit Relief, outline the circumstances in which the
ASIC will consider audit relief.
2.6
Some large proprietary companies are exempt from
lodging accounts under section 319(4) of the Law. This provision allows a large
proprietary company not to lodge financial statements with the ASIC if it was
an exempt proprietary company on 30 June 1994, which has its accounts audited
and satisfies certain other conditions. However, the ASIC may require such a
company to lodge financial statements and auditor’s reports.
2.7
A small proprietary company that is controlled
by a foreign company is required to prepare and lodge its own accounts unless
the foreign company has lodged consolidated accounts with the ASIC.[5]
2.8
Shareholders with at least 5 per cent of the
voting shares in a small proprietary company may require the company to prepare
accounts and have them audited.[6]
Any financial statements prepared by the company at the request of shareholders
must be sent to all shareholders. The ASIC may also require a small company to
prepare accounts, have them audited and lodged. It must specify the date by
which the documents have to be prepared or lodged.
2.9
All companies nevertheless are required to keep
accounting records. These records must correctly explain their transactions and
financial position to enable true and fair accounts to be prepared and properly
audited in accordance with the Law.[7]
1998 ASIC Report to the Senate
2.10
In accordance with a motion passed by the Senate
on 28 September 1995, the ASIC was required to prepare a report on the
operation of the large/small test two years and six months after the
commencement of the Act. The ASIC’s response to the Senate order was dated 5
June 1998 and tabled on 22 June 1998. The 1998 ASIC report was not debated by the
Senate. The following is a summary of the findings of the 1998 report:
- 99.3% of all proprietary companies (1,027,146 proprietary
companies) which would have been required to prepare financial statements prior
to the Act have no financial reporting requirements.
- The reporting requirements for the following companies were
unchanged as a result of the Act:
- 2,101 grandfathered large proprietary companies;
- 1,215 non-grandfathered large proprietary companies which were
previously non-exempt; and
- 973 small proprietary companies which are controlled by foreign
companies and which were previously non-exempt.
- The following proprietary companies are required to lodge
financial statements and many will be required to have them audited:
- 1,592 non-grandfathered large proprietary companies which were
previously exempt; and
- 718 small proprietary companies that are controlled by foreign companies
and were previously exempt.[8]
2.11
Since the tabling of the 1998 report the number
of companies which have no financial reporting requirements has increased from
1,027,146 to 1,152,403.[9]
Operation of the large/small test
2.12
According to the 1998 report, the majority of
companies supplying information about the large/small test exceeded all the
criteria, not just the two criteria necessary to be classified as large
proprietary companies. The majority of these companies were well above the
criteria comprising the large/small test. Half the companies reported
consolidated gross operating revenue which was at least three times the $10
million threshold. Half the companies also reported consolidated gross assets
which were at least three times the $5 million criterion. Less than half of the
companies had at least two times the 50 employees criterion.[10] In its submission to the PJSC,
the ASIC provided updated information on revenue, assets and employees, as well
as the number of members, for the year to 8 December 1999:
|
|
Consolidated Gross Operating Revenue
|
Consolidated Gross Assets
|
Employees
|
Members
|
|
Number reporting
information
|
1,934
|
1,934
|
1,934
|
1,934
|
|
Average
|
$95.5m
|
$150.2m
|
198
|
2
|
|
% not meeting
criterion
|
5.9%
|
2.8%
|
36.9%
|
n/a
|
|
First Quartile (25%
lower than)
|
$16.9m
|
$11.2m
|
20
|
1
|
|
Second Quartile
(50% lower than)
|
$31.7m
|
$23.9m
|
71
|
2
|
|
Third Quartile (75%
lower than)
|
$74.0m
|
$79.1m
|
165
|
3
|
|
Highest
|
$6,312.6m
|
$31,490.0m
|
7,835
|
240
|
Source: Australian
Securities and Investments Commission, Submission 6, Attachment 2, p 4.
2.2
The ASIC concluded that the information provided
in the 1998 report and the updated information “demonstrates that the test
satisfies the objectives outlined in the Explanatory Memorandum to the First
Corporate Law Simplification Bill.”[11]
Applications for audit relief
2.3
As noted earlier, the introduction of the
large/small test in 1995 reduced the reporting requirements for 94 per cent of
all proprietary companies. However, some previously exempt companies were
required to lodge their accounts for the first time, while some were required
to have them audited for the first time. Following the release of its policy
for audit relief for proprietary companies in November 1996, the ASIC has given
some relief to particular classes of companies while a small number of
companies have applied for individual relief.
2.4
The table below indicates the number of
companies lodging financial statements that are receiving audit relief:
|
|
Financial year ending 9/12/97 to 8/12/98
|
Financial year ending 9/12/98 to 8/12/99
|
|
|
Large proprietary companies
|
Small proprietary companies controlled by foreign
companies
|
Large proprietary companies
|
Small proprietary companies controlled by foreign
companies
|
|
Number of companies
lodging notice of audit relief and lodging financial statements
|
515
|
13
|
412
|
6
|
|
Total number of
companies lodging financial statements
|
3,245
|
1,798
|
2,501
|
1,312
|
|
Percentage of
companies likely to have obtained audit relief
|
15.9%
|
0.7%
|
16.5%
|
0.5%
|
Source: Australian
Securities and Investments Commission, Submission 6, p 11.
2.5
Under the ASIC Class Order relief, large
proprietary companies and small proprietary companies that are controlled by a
foreign company may be exempted from the requirement to prepare and lodge
financial statements. The ASIC policy also includes class relief for all
proprietary companies that meet certain requirements concerning the company
being well managed and in a sound financial position. Between 9 December 1995
and 14 July 2000, the ASIC dealt with 102 applications from proprietary
companies for audit relief outside its Class Order relief. These applications
covered small proprietary companies that are controlled by foreign companies as
well as large proprietary companies, but do not include applications which were
later withdrawn prior to decision by the ASIC. Of the 102 applications, 81 or
80 per cent of the total were granted. These figures include 41 applications by
proprietary companies controlled by foreign companies, 28 of which were
granted.[12]
Applications for individual relief
2.6
Since the introduction of the large/small test,
the ASIC has only granted relief to two companies that made application for
individual relief from a total of 61 applications. The ASIC considered that
both companies were effectively small while the remaining applications did not
meet the pre-conditions for relief.
2.7
Two of these decisions not to grant relief were
appealed to the Administrative Appeals Tribunal. In both cases, the companies
argued that the requirement to lodge accounts was inappropriate to their
circumstances and imposed unreasonable burdens. (These cases are discussed in
Chapter 3 of this report).
2.8
The ASIC advised that its policy for audit
relief for proprietary companies was appropriate in the context of the
requirements of the Law.
Public access to accounts lodged with the ASIC
2.9
A measure of the importance of the financial
statements of large proprietary companies to users of those accounts is how
often those documents are accessed on the public record. The ASIC’s public
database records each access of a company’s accounts.
2.10
As the table below shows, the financial
statements of the 3,245 non-grandfathered large proprietary companies were
accessed 10,549 times on the ASIC database each year, an average of 3.25
accesses per year. This figure is consistent with the information provided in
the 1998 report.[13]The
following table analyses these accesses by class of proprietary company:
Class of company
|
Number of accesses from 8/12/97 to 20/2/00
|
Annualised number of accesses
|
Number of companies which lodged financial
statements in respect of years ending in the 12 months to 8/12/98
|
Average number of annualised accesses per company
lodging financial statements
|
Number of companies which lodged for years ending in
12 months to 8/12/98 whose financial statements were accessed at least once
from 8/12/97 to 20/2/00
|
|
Non-grandfathered large proprietary companies
|
23,266
|
10,549
|
3,245
|
3.25
|
2,259
|
|
Small proprietary companies
controlled by foreign companies
|
4,882
|
2,214
|
1,978
|
1.23
|
562
|
|
Total
|
28,148
|
12,763
|
5,043
|
2.53
|
2,821
|
Source: Australian Securities
and Investments Commission, Submission 6, Attachment 2, p 4.
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