In a recent announcement by the Companies Commission of Malaysia (“SSM”) on August 4, 2017, a directive titled “Qualifying Criteria for Exempting Certain Categories of Private Companies from Audits” (Practice Directive No. 3/2017) outlines the conditions under which specific private companies are exempt from mandatory audits.
Issued under Section 20C of the Companies Commission of Malaysia Act 2001 and Subsection 267(2) of the Companies Act 2016 (“CA 2016”), this directive sets out the criteria for granting audit exemption to certain private companies, relieving them from the obligation to appoint an auditor for a financial year.
Practice Directive No. 3/2017 enumerates the types of companies eligible for audit exemption as follows:
(a) Dormant Companies
(b) Zero-Revenue Companies
(c) Threshold-Qualified Companies
It’s important to note that the audit exemption does not apply to an exempt private company that has chosen to submit a certificate regarding its exempt status to the SSM.
(a) Audit Exemption for Dormant Companies
- A company is considered dormant in a financial year if it:
Does not engage in business activities, and
Has no accounting transactions.
“Accounting transaction” refers to a transaction for which records must be kept under Section 245(1) of the Companies Act 2016, excluding transactions arising from legal obligations that require the company to make payments and incur related costs.
- A dormant company, as defined by the Malaysian Accounting Standards Board (MASB), qualifies for audit exemption if it meets either of the following conditions:
It has been dormant since its incorporation, or
It remains dormant for the current financial year and the immediate preceding financial year.
iii. The application of this exemption is as follows:
For companies incorporated on or after January 31, 2017, it applies to financial statements with annual periods starting from January 31, 2017.
For companies incorporated on or before January 30, 2017, it applies to financial statements with annual periods starting from September 1, 2017.
(b) Audit Exemption for Zero-Revenue Companies
- A zero-revenue company, as defined by the MASB, qualifies for audit exemption if it meets the following criteria:
It generates no revenue in the current financial year,
It generates no revenue in the immediate past two financial years, and
The total assets in its current Statement of Financial Position (FS) do not exceed RM300,000 in the current financial year and the immediate past two financial years.
- “Revenue” excludes credit entries related to accounting reversals, taxation-related accounting entries, reversals of previous provisions, and gains from recognizing property, plant, equipment, and investment property in the Statement of Comprehensive Income.
iii. A company loses its inactive status upon receiving or being eligible to receive revenue.
- Incurred expenses for maintaining the company are not considered.
- This exemption applies to financial statements with annual periods starting from January 1, 2018.
(c) Audit Exemption for Threshold-Qualified Companies
- A threshold-qualified company, as defined by the MASB, qualifies for audit exemption if it meets the following conditions:
Its revenue (including receivables) does not exceed RM100,000 in the current financial year and the immediate past two financial years,
The total assets in its current Statement of Financial Position (FS) do not exceed RM300,000 in the current financial year and the immediate past two financial years, and
At the end of the current financial year and each of the immediate past two financial years, it has no more than five employees.
- This exemption applies to financial statements with annual periods starting from July 1, 2018.
Definition of Private Entity
On February 28, 2017, the MASB revised the definition of a private entity due to the enactment of the Companies Act 2016 and the Interest Schemes Act 2016 on January 31, 2017. The revised definition, applicable to financial statements with annual periods ending on or after January 31, 2017, states that a private entity:
Is a private company as defined in Section 2 of the Companies Act 2016,
Is not obligated to prepare or lodge financial statements under laws administered by the Securities Commission Malaysia or Bank Negara Malaysia,
Is not a subsidiary, associate, or jointly controlled by an entity required to prepare or lodge financial statements under laws administered by the Securities Commission Malaysia or Bank Negara Malaysia.
However, a private company considered a management company under Section 2 of the Interest Schemes Act 2016, or affiliated with such an entity, is not classified as a private entity.
Summary
Companies seeking audit exemption must submit unaudited financial statements to the Registrar, accompanied by the requisite certificate, adhering to Sections 258 and 259 of the Companies Act 2016. These statements should include a declaration of qualification for audit exemption and the absence of shareholder requests for an audit in the specific year. The unaudited financial statements are filed alongside the directors’ report, directors’ statement, and statutory declaration, as per Sections 251 and 252 of the Companies Act 2016.
It’s important to note that while the same set of unaudited financial statements is required, the auditor’s signature is no longer mandatory, offering potential cost savings.
At 3E Accounting, we offer assistance in preparing affordable unaudited financial statements. With over five years of experience, our professional team can help you navigate audit exemption procedures in a timely and efficient manner.
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