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Audit Relief for Company Groups
Chapter 2M of the Corporations Act 2001 (Cth) (Act) provides the financial reporting and audit requirements for companies, which include an obligation on all companies to keep financial records and an obligation on public companies and large proprietary companies to prepare financial reports and directors’ reports.
Under section 301(1), a company must have its financial report audited and obtain an auditor’s report. Further audit requirements include:
- distribution of financial report, directors’ report and audit report (Reports) to members (sections 314(1), 315(1), 315(4) and 316);
- the requirement for a public company to lay the Reports before an annual general meeting (section 317);
- lodgment of Reports with ASIC (section 319); and
- the requirement of a public company to appoint an auditor (sections 327A, 327B and 327C).
Companies may be able to obtain relief from these financial reporting and audit requirements either by fulfilling the criteria laid out in Class Order 98/1418 or by applying to ASIC for relief under section 340 of the Act.
Audit Relief under Class Order 98/1418
Under section 341 of the Act, ASIC has issued Class Order 98/1418 which provides a process by which the wholly-owned subsidiaries (Wholly-owned Entities) of a parent company (Holding Entity) may be granted relief from their reporting and audit requirements. Class Order 98/1418 contains numerous conditions (both positive and negative) that the company group must satisfy, including:
- the financial year of the Holding Entity must end on the same date as the end of the financial year for which relief is being sought (Relevant Financial Year);
- each entity seeking the relief must be a Wholly-owned Entity at the end of the Relevant Financial Year;
- to be a Wholly-owned Entity, the entity must be controlled by the Holding Entity and have no members other than the Holding Entity, another Wholly-owned Entity of the Holding Entity, or a nominee of either the Holding Entity or another of the Wholly-owned Entities;
- the Holding Entity must not be a small proprietary company; and
- the Holding Entity must have prepared consolidated financial statements for the Relevant Financial Year.
Deed of Cross Guarantee
If the conditions under Class Order 98/1418 are met, a group of companies is allowed to publish one set of financial statements for the entire group, subject to all companies in the group entering into a deed under which they provide cross guarantees for each other’s debts (Deed of Cross Guarantee). The intended effect of the Deed of Cross Guarantee is that if the Holding Entity or any of its Wholly-owned Entities goes into insolvent liquidation, the surviving parent or subsidiaries pay to the liquidator of the insolvent company the amount by which admitted claims against the insolvent company exceeds the available funds.
A company must be appointed trustee under the Deed of Cross Guarantee to hold the benefit of the promises made by all the other entities in the group. If the appointed trustee is one of the companies within the group (that is, either the Holding Entity or one of the Wholly-owned Entities), an alternative trustee must also be appointed to act as trustee in respect of the covenants made by the first trustee.
ASIC requires that all Deeds of Cross Guarantee are identical in all material aspects to the Pro Forma 24 Deed of Cross Guarantee (issued by ASIC). The Deed must be accompanied by certification from a legal practitioner holding a current practicing certificate that the wording of the Deed is exactly the same as that in Pro Forma 24 (except with respect to specific names and immaterial wording) and that the Deed has been executed correctly.
Lodgment of Documents
Once the Deed of Cross Guarantee is correctly executed, it must be lodged at ASIC together with the legal practitioner’s certification prior to the end of the Relevant Financial Year. The Wholly-owned Entities then have until 4 months following the end of the Relevant Financial Year to lodge with ASIC a Form 389 in order to opt-in to the relief for the Relevant Financial Year.
Application under section 340
A company may also apply to ASIC under section 340 of the Act for relief from any of the Audit Requirements contained in Parts 2M.2, 2M.3 and 2M.4 of the Act. In order to grant the relief, ASIC must be satisfied that the requirement to comply with the relevant requirements would:
- make the financial report or other reports misleading;
- be inappropriate in the circumstances; or
- impose unreasonable burdens.
To show that the requirement to comply would make the financial report or other reports misleading, a company must show that strict compliance would make the financial or other reports misleading and that the problem cannot reasonably be remedied by explanations in the notes to the financial statements.
The only circumstance in which compliance with the relevant provisions may be considered inappropriate is where the requirement is in conflict with another financial reporting requirement and there is clear legislative intent that the conflicting requirement is to take precedence. ASIC has stated that the following circumstances are not regarded as sufficiently inappropriate:
- where there is no purpose to the disclosure or the disclosure is of no benefit to the users of the information to be disclosed; or
- the fact that the only reason the company must prepare the reports is due to its classification as a large proprietary company.
A burden may arise either in the process of complying with a particular audit requirement or after having complied with the requirement. What constitutes an unreasonable burden is a question of fact, having regard to the following factors:
- the expected costs of complying with the audit requirements;
- the expected benefits of having the company or companies comply with the audit requirements;
- any practical difficulties that the company or companies face in complying effectively with the audit requirements;
- any unusual aspects of the operation of the company or companies during the financial year concerned; and
- any other matters that ASIC considers relevant.
Other factors that are relevant in determining whether the requirements of Parts 2M.2, 2M.3 and 2M.4 of the Act would impose an unreasonable burden include:
- the information needs of users and potential users of the financial report;
- the objectives of the financial reporting and audit provisions; and
- the intentions of the Australian Accounting Standards Board and the Auditing and Assurance Standards Board.
For further advice or for assistance in preparing a Deed of Cross Guarantee and associated forms, please contact our experienced team.Clayton Hellen