[PS 58] Reporting requirements registered foreign companies and Australian companies with foreign company shareholders

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1 [PS 58] Reporting requirements registered foreign companies and Australian companies with foreign company shareholders Chapter 2M and Part 5B.2 Reissued 4/9/1998 Amended 5/4/2000, 3/2/2005 Previous versions: Issued 28/6/1993 and amended 24/1/1994, 18/7/1994, 6/12/1994, 23/1/1995, 30/1/1995, 10/7/1995: see [SPS 58A]. Reissued 7/5/1997 and amended 4/2/1998: see [SPS 58B]. Editor's note: This policy statement replaced Policy Statement 36 issued 12 October 1992 (see 1993 ASC Digest at PS 4/21). Headnotes Discretionary power under s601ck(7); declaration [CO 02/1432] that s601ck does not apply to specified registered foreign companies; large proprietary companies with foreign company shareholders; application of s292(2) dealing with small proprietary companies which are controlled by foreign companies; s341(1) class orders [CO 98/96], [CO 98/98], [CO 98/99] and [CO 98/1417]; audit relief for small proprietary companies which are controlled by foreign companies; synchronisation of financial year with foreign parent. Australian Securities & Investments Commission December 2004 Page 1

2 Purpose [PS 58.1] In this policy statement, ASIC outlines the circumstances in which: (c) (d) it exercises its discretionary power under s601ck(7) of the Corporations Act 2001 (the Act) to declare that s601ck (lodgment of annual financial statements) does not apply to specified registered foreign companies; it will allow large proprietary companies in which a foreign company has a direct or indirect interest relief from the requirement to lodge its financial report, directors report and auditors report with ASIC; it will provide relief to small proprietary companies which are controlled by foreign companies; and it will provide relief from the requirements of s323d of the Act in order to permit synchronisation of the financial year of a company, registered scheme or disclosing entity with the financial year of a foreign parent company. [PS 58.2] In this policy statement references to sections are references to sections of the Act unless otherwise specified. Contents Headnotes Purpose [PS 58.1] Registered foreign companies relief [PS 58.3] Large proprietary companies which have foreign company shareholders [PS 58.8] Small proprietary companies which are controlled by foreign companies [PS 58.16] Concept of a large group [PS 58.18] Lodgment of foreign company financial statements for the purposes of s292(2) [PS 58.24] Subsection 292(2) and control test [PS 58.28] Synchronisation of financial year with foreign parent [PS 58.29] Registered foreign companies relief [PS 58.3] Section 601CK includes requirements for registered foreign companies to lodge a balance sheet, profit and loss statement and cash flow statement with ASIC. Under s601ck(7) ASIC may provide relief to registered foreign companies from this requirement. [PS 58.4] ASIC has decided that it will not give relief under s601ck(7) to a registered foreign company carrying on business in Australia if the relief means that the registered foreign company Page 2

3 would lodge less information with ASIC than an equivalent Australian company. [PS 58.5] In particular, ASIC will not execute a s601ck(7) declaration in respect of registered foreign companies which would result in them lodging less information than equivalent nongrandfathered Australian proprietary companies which are controlled by foreign companies. Subsection 601CK(7) declaration [CO 02/1432] only applies to registered foreign companies which: (c) (d) (e) are subject to provisions corresponding with, and no less strict than those which s113 imposes on Australian proprietary companies; are not required to prepare any one or more of the following under the law applicable to the company in their place of origin: (i) a balance sheet at the end of their last financial year; (ii) a profit and loss statement for their last financial year; or (iii) a cash flow statement for their last financial year; have not been a disclosing entity, borrowing corporation or guarantor of a borrowing corporation at any time during the calendar year; are not large under a test similar to that applied to proprietary companies under s45a of the Act; and either: (i) (ii) are not a part of a group which is a large group (the concept of a large group is discussed later in this policy statement); or have been consolidated for their entire financial year in consolidated financial statements lodged with ASIC by one or more parents of the company which are registered foreign companies, companies, recognised companies or disclosing entities. [Historical note: PS 58.5 amended 3/2/2005 by replacing the reference to [CO 98/97] with [CO 02/1432] and by deleting from the end of the paragraph the sentence: Declaration [CO 98/97] applies from 10 July 1998 and replaces declaration [CO 97/2346] which applied from 1 January ] [PS 58.6] Section 601CK(7) gives ASIC power to make declarations relating to specified foreign companies and it is ASIC s view that this enables a declaration to be made that specifies a class of foreign companies. Foreign companies within a class that are incorporated, or meet the requirements for the first time, after the date of a declaration can take advantage of the declaration, provided they meet the terms and conditions of the declaration. [Historical note: PS 58.5 replaced 3/2/2005. The paragraph formerly read: Section 601CK(7) does not give ASIC power to make orders dealing with classes of foreign companies. However, it is the view of ASIC that it can make a declaration Page 3

4 under s601ck(7) for one or more foreign companies that exist at the date of the declaration and which may be identified by general words, rather than by name. Therefore, relief under a s601ck(7) declaration will not be available to a foreign company that is incorporated, or meets the requirements for the first time, after the date of the order. Accordingly, ASIC will re-execute the declaration every six months so that foreign companies incorporated or qualifying for relief after the date of one declaration can benefit from the relief contained in a succeeding declaration..] [PS 58.7] Subsection 601CK(9) requires foreign companies to which a s601ck(7) declaration applies to lodge an annual return in the prescribed form (Form 406) with ASIC at least once in each calendar year. Large proprietary companies which have foreign company shareholders [PS 58.8] Up to 31 December 1995, the ASC provided s601ck(7) (then s349(7)) declarations in relation to those foreign companies which were similar to exempt proprietary companies. Prior to the First Corporate Law Simplification Act 1995, the definition of exempt proprietary company in s69 included proprietary companies in which no shares were owned by a non-exempt person. Unless a foreign company was one in respect of which a former s349(7) declaration had been made (an exempt foreign company under s9), it was a non-exempt person. However, the lapse of the previous s349(7) declarations on 31 December 1995 meant that those large proprietary companies with foreign company shareholders ceased to be exempt proprietary companies. [PS 58.9] Large proprietary companies may qualify for grandfathering under old s319(4) (which continues to apply by virtue of s1408) which relieves them from the requirement to lodge a financial report, directors report and auditors report with ASIC (but not from the requirement to prepare a financial report and directors' report or from the requirement to have the financial report audited). However, one of the requirements of old s319(4) is that a company must continue to meet the definition of exempt proprietary company at all times. [Historical note: PS 58.9 amended 3/2/2005 by inserting the word old before references to s319(4) and by inserting the text (which continues to apply by virtue of s1408) after the first reference to s319(4).] [PS 58.10] It is ASIC s view that it would be incongruous not to permit grandfathering for large proprietary companies which have foreign company shareholders where those shareholders would have Page 4

5 been exempt foreign companies under earlier s349(7) declarations, provided that those shareholders do not have control. [PS 58.11] ASIC believes that Australian large proprietary companies which are controlled by foreign companies should not be treated more favourably than Australian small proprietary companies which are controlled by foreign companies Small proprietary companies which are controlled by foreign companies are required to prepare and lodge a financial report, directors' report and auditors' report in compliance with Chapter 2M and do not qualify for grandfathering under s319(4). [PS 58.12] Class Order [CO 98/99] provides lodgment relief to large proprietary companies which have not been controlled by foreign companies at any time since 9 December 1995 (the commencement date of the First Corporate Law Simplification Act 1995 which introduced the large/small test for proprietary companies and grandfathering for certain large proprietary companies subject to similar conditions to those contained in s319(4). Paragraph (i) of the order applies to large proprietary companies which would have met the definition of exempt proprietary company if the previous s349(7) declarations had not expired on 31 December [PS 58.13] Companies which choose to take advantage of the relief offered under paragraph (i) of Class Order [CO 98/99] were required to lodge a notice (in the form of Form 385) with ASIC within four months after the end of the first financial year ended after 24 April Given that the very latest Form 385 could be lodged was 24 February 1999 for companies with financial years of 18 months ended 24 October 1998, ASIC will no longer grant extensions of time to lodge Form 385. This is consistent with ASIC policy not to grant extensions of time to lodge notice under s 319(4)(c). Under s319(4), the latest lodgement date for lodging notice would be 9 October 1997, assuming a company had a financial year of 18 months ended 9 June Subsection 319(4) continues to apply by virtue of s1408 of the Act. [Historical note: PS amended 3/2/2005 by inserting the sentence Subsection 319(4) continues to apply by virtue of s1408 of the Act. at the end of the paragraph.] PS replaced 5/4/2000. The paragraph formerly read: Companies which choose to take advantage of the relief offered under paragraph (i) of Class Order [CO 98/99] must lodge a notice with ASIC within four months after the end of the first financial year ending after 24 April 1997 (ie by 24 August 1998 for companies with 24 April 1998 year ends). ASIC Form 385 should be used for this purpose. ASIC will only consider extensions of time to lodge Form 385 in rare and exceptional circumstances. Any applications for such extensions should be made in writing to an ASIC Regional Office, be signed by a director and state the Page 5

6 rare and exceptional circumstances which the company believes ASIC should consider in assessing its application..] [PS 58.14] Class Order [CO 98/99] also enables grandfathering of certain large proprietary companies which have: an authorised trustee company as a non-beneficial member; or taken advantage of ASIC relief to complete their financial reporting obligations for a year ending in June or July 1996 one month late. Only companies taking advantage of paragraph (i) are required to lodge notice using Form 385. All other companies taking advantage of Class Order [CO 98/99] were required to lodge Form 373 within 4 months after the end of the first financial year that ended after 9 December ASIC will only grant extensions of time to lodge Form 373 in rare and exceptional circumstances. [PS 58.15] Relief under Class Order [CO 98/99] is not available to large proprietary companies which have been disclosing entities, borrowing corporations or guarantors of borrowing corporations at any time since 9 December Small proprietary companies which are controlled by foreign companies [PS 58.16] Subsection 292(2) requires certain small proprietary companies which are controlled by foreign companies to prepare and lodge an audited financial report and a directors' report with ASIC. Within the context of this legislative framework, ASIC has executed two class orders to ensure parity with the reporting requirements for other Australian proprietary companies: Relief from preparing and lodging an audited financial report and a directors' report Relief from the requirement to prepare and lodge a financial report and directors' report with ASIC and relief from the requirement to have the financial report audited is available to small proprietary companies which are controlled by foreign companies but which are not part of a large group (the concept of a large group is discussed later in this policy statement at [PS 58.18]-[PS 58.23]): refer Class Order [CO 98/98]. The directors of the small proprietary company must have resolved to apply the relief available under the order for the relevant financial year and a notice of this resolution must be lodged with ASIC using ASIC Form 384 before the deadline specified in the order (generally before commencement of the financial year). Shareholders holding 5% or more of the voting shares in the Page 6

7 company may request the company to prepare a financial report and directors' report and to have the financial report audited. Audit relief Relief is also available to small proprietary companies which are controlled by foreign companies from the requirement to have their financial statements audited. Relief is available under Class Order [CO 98/1417]. For more information, please refer to Policy Statement 115 [PS 115] Audit relief for proprietary companies. One of the conditions of relief is that unanimous resolutions of shareholders and directors be made to take advantage of Class Order [CO 98/1417] within the 3 months immediately prior to the commencement of the financial year or the 1 month immediately after the commencement of the financial year. Notification of these resolutions must be lodged with ASIC using Form 382 within the same time frame. [PS 58.17] In relation to extensions of time to lodge Form 382, refer to [PS A] [PS G], [PS ] and [PS ]. [Historical note: PS inserted 5/4/2000. Original PS renumbered as PS 58.17G.] [PS 58.17A] The Act requires small proprietary companies controlled by foreign companies to prepare and lodge audited financial statements and reports. Relief from preparing and lodging financial statements and reports under Class Order [CO 98/98] is a privilege rather than a right. [Historical note: PS 58.17A inserted 5/4/2000.] [PS 58.17B] Timely lodgement of the notice that directors have resolved to take advantage of relief under Class Order [CO 98/98] (in the form of Form 384) is intended to provide information to creditors and others who access the public record. It also evidences that the directors have applied their minds to the appropriateness of adopting the relief available under the class order. [Historical note: PS 58.17B inserted 5/4/2000.] [PS 58.17C] ASIC will consider granting extensions of time to make the resolution and to lodge notice in the form of Form 384 only in rare and exceptional circumstances. For example, subparagraphs (ii) and (iii) of Class Order [CO 98/98] generally allow newly registered companies 3 months from the date of registration to make these agreements and small proprietary companies will generally have 3 months from the date of becoming foreign controlled. In addition, ASIC will consider cases where a proprietary company which is not controlled by a foreign company becomes large for the first time as a Page 7

8 result of an event which was not planned and could not have been anticipated prior to the deadline for making the resolutions (eg the acquisition of a significant new business late in the financial year). [Historical note: PS 58.17C inserted 5/4/2000.] [PS 58.17D] Many companies engage accountants, lawyers or other advisers to prepare draft resolutions and forms. In some cases, these advisers may fail to prepare draft resolutions or forms, or to lodge forms, within the times required by the class order. The fact that a company has chosen to outsource certain functions rather than those functions being performed by the directors or an employee does not absolve the company of its responsibilities. Extensions of time will still only be granted in rare and exceptional circumstances. For example, a mere oversight by an adviser or a lack of due care by an adviser will not be considered to constitute rare and exceptional circumstances even if the resolutions were made, and the forms lodged, on time in prior years. [Historical note: PS 58.17D inserted 5/4/2000.] [PS 58.17E] Refusal to grant an extension of time to make resolutions or to lodge Form 384 should not be considered a penalty on the company. It would be inappropriate to penalise creditors or others who may deal with the company for a failure by the company. Timely completion of resolutions, and the evidencing of those resolutions by lodgment of Form 384, serves other objectives, such as ensuring that directors are not pressured to agree to relief at a point in the financial year when it is no longer possible to obtain an unqualified audit opinion. [Historical note: PS 58.17E inserted 5/4/2000.] [PS 58.17F] Lodgment of a Form 384 for ASIC's public database and the processing of that form onto the database does not indicate that ASIC has given any form of approval and does not alone enable a company to take advantage of relief under class order [CO 98/98]. A company will only have the benefit relief if it meets all of the requirements of the class order. Where the form is late, a company will only have the benefit relief if it is specifically granted an extension of time by ASIC in accordance with the class order. [Historical note: PS 58.17F inserted 5/4/2000.] [PS 58.17G] ASIC will only grant an extension of time to make the required resolution or to lodge Form 384 in rare and exceptional circumstances. Applications for extensions of time must: be made to the ASIC Regional Office in the state or territory in which the company's registered office is located; Page 8

9 (c) (d) (e) in the case of applications for extensions of time in relation to Form 382, confirm that the company and its directors have complied with all of the other conditions of the class order within the required time; detail the rare and exceptional circumstances which the company believes ASIC should consider in assessing the company's application; be made in writing and be signed by a director or by the company secretary; and be accompanied by the completed form. Late lodgment fees will apply to late forms whether or not an extension of time is granted. [Historical note: PS renumbered PS 58.17G on 5/4/2000. The paragraph formerly read: ASIC will only grant an extension of time to lodge Form 384 or Form 382 (or to make the required resolutions) in rare and exceptional circumstances..] [PS 58.17H] ASIC may seek further evidence concerning the rare and exceptional circumstances outlined in an application, including, but not limited to, statutory declarations. [Historical note: PS 58.17H inserted 5/4/2000.] Concept of a large group [PS 58.18] The concept of a large group is the basis for lodgment relief provided to registered foreign companies and small proprietary companies which are controlled by foreign companies: see [PS 58.7] and para of [PS 58.14]. [PS 58.19] (c) (d) For the purpose of the orders a group comprises: the company in question; entities which control the company in question and which are incorporated or formed in Australia or carry on business in Australia; any other entities ( the other entities ) controlled by any foreign company which controls the company in question, which are incorporated or formed in Australia or carry on business in Australia; and any entities which are controlled by the company in question or the other entities. [PS 58.20] The controlled entities of the company and the other entities need not carry on business in Australia, or be formed or incorporated in Australia, to be included in the group. Page 9

10 [PS 58.21] A group is a large group when, on a combined basis, the group satisfies at least two of the following paragraphs for the financial year of the company in question: (c) the combined gross operating revenue of the group for the financial year is $10 million or more; the combined value of gross assets of the group at the end of the financial year is $5 million or more; the group has 50 or more employees (part-time employees being counted as an appropriate faction of a full-time equivalent) at the end of the financial year. This test is based on the test contained in s45a. [PS 58.22] Combining the financial information of the group is a process similar to consolidation, except that foreign parent companies which do not carry on business in Australia are excluded from the consolidation. The combination process also excludes any controlled entities of the foreign controlling company which do not carry on business in Australia and are not incorporated or formed in Australia, unless they are controlled by an entity operating or incorporated in Australia. [PS 58.23] Elimination entries required by accounting standard AASB 1024 Consolidated Accounts (for financial years commencing before 1 January 2005) or accounting standard AASB 127 Consolidated and Separate Financial Statements (for financial years commencing on or after 1 January 2005) in relation to intercompany debts, investments, revenue, etc should be made as a part of the combination process. Entities should be included in the combination only for the part of the year during which they were controlled by a common foreign company. Entities incorporated or formed in Australia or carrying on business in Australia for only part of the year are to be included in the combination (together with their controlled entities) for that part of the year, even if they ceased to operate in Australia and/or were deregistered prior to the end of the financial year. [Historical note: PS amended 3/2/2005 by inserting the text (for financial years commencing before 1 January 2005) or accounting standard AASB 127 Consolidated and Separate Financial Statements (for financial years commencing on or after 1 January 2005).] Lodgment of foreign company financial statements for the purposes of s292(2) [PS 58.24] Under s292(2) a small proprietary company which is controlled by a foreign company is only required to prepare and lodge a financial report where the small proprietary company was Page 10

11 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: (i) a registered foreign company; or (ii) a company, registered scheme or disclosing entity (emphasis added). In the view of ASIC, this subsection was not intended to allow a foreign company to lodge its financial statements with ASIC where no lodgment facility for that company is provided under the Act. Further, the subsection does not permit the small proprietary company to lodge the financial statements of a foreign company under the small proprietary company's own ACN the subsection only refers to a foreign company itself lodging its own financial statements. [PS 58.25] The Act only requires the lodgment of financial statements by companies which are registered foreign companies. Accordingly, ASIC cannot accept the lodgment of financial statements by foreign companies which are not registered foreign companies in substitution for the financial report, directors' report and auditors' report of a controlled small proprietary company. [PS 58.26] Registered foreign companies are required to lodge financial information in accordance with s601ck, that is, once in every calendar year and at intervals of not more than 15 months. However, the deadline for a financial year for a small proprietary company which is controlled by a foreign company is four months after the end of the year. If a registered foreign company is to lodge consolidated financial statements such that a controlled Australian small proprietary company is not required to prepare and lodge its own financial report and directors' report (and auditors' report on the financial report), the registered foreign company must lodge its consolidated financial statements within four months of the end of the financial year of the Australian small proprietary company. ASIC will consider applications for individual relief pursuant to s340 to extend this time: refer Policy Statement 43 [PS 43] Financial Reports and Audit Relief in relation to the pre-conditions for relief contained in s342. [PS 58.27] The controlling foreign company is not required to be a registered foreign company as at the end of the financial year of the controlled small proprietary company. However, the foreign company would need to be registered under Part 5B.2 at the time it lodges its consolidated financial statements. Page 11

12 Subsection 292(2)and control test [PS 58.28] Through the definition of control in s9, the control test in AASB 1024 (for years commencing before 1 January 2005) or AASB 127 (for financial years commencing on or after 1 January 2005) applies for the purposes of Chapter 2M of the Act (which includes s292(2)). Accordingly, the control test in AASB 1024 or AASB 127 (as applicable) must be used in determining whether a small proprietary company is controlled by that foreign company for the purposes of s292(2). This is irrespective of whether that control test is applied by a foreign company in preparing financial statements in its place of origin. [Historical note: PS 58.5 replaced 3/2/2005. The paragraph formerly read: Section 283b and control test [PS 58.28] Through the definition of control in s9, the control test in Accounting Standard 1024 Consolidated Accounts ( AASB 1024 ) applies for the purposes of Chapter 2M of the Law (which includes s292(2)). Accordingly, the control test in AASB 1024 must be used in determining whether a small proprietary company is controlled by that foreign company for the purposes of s292(2). This is irrespective of whether that control test is applied by a foreign company in preparing financial statements in its place of origin..] Synchronisation of financial year with foreign parent [PS 58.29] Under s323d(4) of the Act a company, registered scheme or disclosing entity ( an entity ) may only have a financial year other than 12 months: (c) for its first financial year; where the financial year varies from 12 months by no more than seven days; or in order to synchronise the year with a parent which is also a company, registered scheme or disclosing entity. [PS 58.30] Subject to certain conditions, Class Order [CO 98/96] allows an entity to synchronise its financial year with that of a foreign parent where: the entity s foreign parent is required by the law in its place of origin to cause the financial year of the entity to be changed; and the financial year of the entity is changed in accordance with that requirement. [PS 58.31] ASIC will also consider applications for individual relief under s340 for entities to synchronise their financial year with that of a foreign parent. In accordance with s342, the applicant must Page 12

13 demonstrate to the satisfaction of ASIC that complying with the requirement for the entity's financial year to be a period of 12 months would impose unreasonable burdens. [PS 58.32] In making an application for relief, the directors of an entity should include: A realistic estimate of the additional costs of preparing information necessarily required for preparation of consolidated financial statements by a foreign parent and the realistic additional costs of an audit of that information (where applicable). These costs should be only those costs in excess of costs associated with normal management reporting. If a financial year of greater than 12 months is requested, the reasons why the entity's directors believe that users of the financial report such as investors, creditors, employees, potential investors, potential creditors and potential employees will not be disadvantaged. (c) If a financial year of greater than 12 months is requested, whether the entity has been, or is expected to be, affected by any material unusual transactions or events, extraordinary items, significant operating losses, acquisitions or sales of major assets (including businesses and controlled entities), and any factors which significantly affect the financial condition of the company. (d) Whether, in the directors' opinion, there are reasonable grounds to believe that the entity will be able to pay its debts as and when they become due and payable. (e) If the entity is a proprietary company, whether the change in financial year will result in the company being treated as a small proprietary company when it would otherwise be a large proprietary company: see also [PS 58.34]. (f) Whether all other entities controlled by the entity's ultimate foreign parent will be synchronised with the ultimate foreign parent at the same time (and if not, the reasons why not). (g) Any other information which may be relevant to ASIC's decision as to whether to grant relief. (h) Written confirmation from the ultimate worldwide parent that all group companies worldwide are synchronising and that synchronisation is not required by the law in the place of origin of the ultimate parent or of any other parents of the company seeking ASIC relief. [Historical note: PS amended 5/4/2000 by inserting para (h).] [PS 58.33] ASIC will not consider individual relief which allows an entity to have a financial year in excess of 18 months. Applications for relief which result in the financial year of an entity being desynchronised with that of a parent will only be considered if there are rare and exceptional circumstances. Page 13

14 [PS 58.34] A proprietary company may apply for a financial year of less than 12 months. This may result in the company being treated as a small proprietary company under s45a for the financial year when it may otherwise be expected to be a large proprietary company if it had a financial year of 12 months. This could occur where, for example: the company's revenue is $10 million or more for a 12 month period and it proposes to have a financial year of less than 12 months; or the company has assets of $5 million or more and wishes to extend its financial year in anticipation of having less than $5 million of assets at a later financial year end. If ASIC were to grant unconditional relief the company would not be required to prepare and lodge an audited financial report or a directors' report unless it is controlled by a foreign company, is not part of a large group and its parent does not lodge consolidated financial statements with ASIC. In these cases, ASIC may grant the relief but is likely to either impose a condition or make a direction under s294 requiring the company to prepare and lodge an audited financial report and a directors' report in relation to the financial year. [Historical note: PS amended 5/4/2000 by in the last paragraph inserting either impose a condition or before the words make a direction under s294.] [PS 58.35] Applications should comply with the requirements of the Act and applicants should also refer to Policy Statement 43 [PS 43] Financial reports and audit relief and Policy Statement 51 [PS 51] Applications for relief. Policy proposal and other papers ASIC issues paper Secondary sales of securities that require disclosure under s707(3) and (4), 21 December 2001 ASIC discussion paper Disclosure for on-sale of securities and other financial products, 27 June 2002 ASIC policy proposal CLERP 9 Bill: Product disclosure: discretionary powers, April 2004 Page 14