Foreign controlled companies – Financial Reporting obligations and applicable exemptions

What are the commercial and statutory requirements of a foreign controlled company?

The financial reporting and audit obligations of foreign controlled companies in Australia can be imposed under various requirements. These requirements can be divided into two categories as listed below. The commercial requirements appears to be quite straightforward to understand for directors and local management. The statutory requirements and related exemption class orders are not as easy to follow and to interpret.

This article focuses on the circumstances under which the Corporations Act 2001 (hereafter the “Act”) imposes an obligation on foreign controlled companies to prepare and lodge audited financial reports and the conditions that must be met to obtain relief from such obligation including lodging a directors’ report.

Commercial Requirements

It is a common practice that oversea parent companies impose group financial reporting and management accounting policies to local subsidiaries as part of the group consolidation and audit requirements. The obligations can also derive from compliance requirements under the corporate governance standards in the jurisdiction of the parent company.

The local subsidiary may have to comply with any reporting and audit requirements introduced by their local financial institutions as part of the finance facility agreements.

Statutory Requirements

The financial reporting and audit obligations of foreign controlled companies are governed by the Act and other corporate regulations in Australia.

Subject to the reporting exemptions outlined below, Chapter 2M of the Act prescribes that all subsidiary companies that are ‘foreign owned and controlled’ are required to lodge audited financial reports (including a directors’ report) with ASIC (section 292(2) (b)) within 4 months of reporting year end.

Reporting and Audit Exemptions:

The following exemptions are available to foreign owned and controlled companies from the requirement to prepare and lodge audited financial reports with ASIC.

  • If the company is controlled by foreign company for all or part of the financial year where a parent company (which must be an Australian company or a registered foreign company) lodged consolidated financial statements for that financial year with ASIC; or
  • If the company is ‘small’ and is not part of a large ‘group’ and applies for the relief available under ASIC Corporations (Foreign-Controlled Company Reports) Instrument 2017/204 (effective 28 March 2017).

A company is classified as small if it meets two of the following three criteria:

  • consolidated gross operating revenue for the financial year of the company and the entity it controls (if any) is less than $25 million for the year;
  • the value  of  the  consolidated  gross  assets  at  the  end  of  the  financial  year  of  the company and the entity it controls (if any) is less than $12.5 million; and/or
  • the number of employees for the company and the entity it controls (if any) is less than 50 at the end of the financial year.

ASIC Regulatory Guide (RG) 58.55 prescribes that combining the financial information of the group is a process similar to consolidation, except that foreign parent companies that 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 that do not carry on business in Australia and are not registered or formed in Australia, unless they are controlled by an entity operating or incorporated in Australia.

Audit Exemption:

Foreign owned and controlled companies may be able to apply for an exemption from an audit if ASIC is satisfied that the company is well-managed and in a sound financial condition. They must apply for the relief under ASIC Corporations (Audit Relief) Instrument 2016/784  (effective 1 January 2017) directed by ASIC Regulatory Guide (RG) 115.

With respect to the exemptions above, we recommend that an assessment be undertaken by the directors to determine if it will meet the criteria. With solid experience accumulated from working with an abundance of clients, our Audit Specialists can assist with this assessment and any exemption applications to ASIC. Contact us today on 03 9835 8200 or alternatively complete your details below and we’ll be in touch.

About the Author
Bruce Wang - Accru Melb
Bruce Wang
Bruce has obtained diverse knowledge and experience in the accounting profession at Accru Melbourne for more than 10 years. He specialises in Audit, Assurance and Data Analytics and manages a portfolio of clients.
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