The Companies (Amendment) Act 2014 (Amendment Act) was passed by Parliament in October 2014, introducing the largest number of changes to the Companies Act since its enactment in 1967. The changes are intended to reduce the regulatory burden on companies, provide for greater business flexibility and improve the corporate governance landscape in Singapore. The Amendment Act is targeted to take effect in 2015. This article highlights some of the key changes on audit exemption, being made to the Companies Act.
Currently, a company is exempted from having its accounts audited if it is an exempt private company with annual revenue of $5 million or less. The Amendment Act introduces a new small company concept for exemption from statutory audit, which replaces the current criteria.
In order to qualify as a “small company”, a company must be a private company that fulfils at least two of the following three quantitative criteria in each of the immediate past two financial years (FYs) –
(a) Total annual revenue of not more than $10 million;
(b) Total assets of not more than $10 million;
(c) Number of employees of not more than 50.
A company which belongs to a group can be exempted from statutory audit only if it qualifies as a small company and the entire group meets at least two of the three quantitative criteria on a consolidated basis.
A “group” refers to a group as determined up to the ultimate holding company, and would include a group where the ultimate holding company is a foreign corporation.
In a nutshell, the “small group” concept is to apply the assessment criteria at the ultimate parent level, and the members of the group are determined in accordance with Singapore Financial Reporting Standards, regardless of whether that parent is incorporated in Singapore or overseas.
If no consolidated financial statements are prepared by the ultimate parent company, the assessment will be based on aggregated numbers, i.e. total aggregated annual revenue, total aggregated assets and total number of employees.
Application of the new “small company” concept
Application of the new “small company” concept can be illustrated simply –
(a) General application
A company qualifies as a “small company” in a particular FY if the company is a private company and meets the quantitative criteria in the previous two consecutive FYs.
(b) Transitional provisions for the first two FYs after the commencement of the “small company” criteria
The transitional provisions are applicable to companies that are incorporated before the date of the commencement of the new “small company” criteria. Such a company can qualify as a “small company” if it is a private company and meets the quantitative criteria in the first or second FY commencing on or after the date of commencement of the “small company” criteria.
A company which has qualified as a “small company” in the first or second FY commencing on or after the date of commencement of the “small company” criteria continues to be a “small company” until it is disqualified as a “small company”. Disqualification would occur if (i) Ceases to be a private company at any time during the FY, or (ii) Does not meet the quantitative criteria for the immediate past two consecutive FYs.
(c) New companies incorporated after the commencement of the “small company” criteria.
A company would qualify as a “small company” in its first or second FY after incorporation if the company is a private company and meets the quantitative criteria in the FY for which the financial statements are being prepared.
Note – Existing safeguards will be retained, such as requiring all companies to keep proper accounting records, and empowering shareholders with at least 5% voting rights to require a company to prepare audited accounts.