Wholly owned subsidiaries and SRS Act changes 
as reported in ANT41/2007 
 
Q: My client was previously a wholly-owned large proprietary company which had entered into a deed of cross guarantee with its parent. Accordingly, it gained relief from the preparation and lodgment of financial statements using class order 98/1418, which required it to lodge a form 389 "Annual notice by wholly-owned entity relieved from financial reporting obligations." 
 
With the recent Corporations Act changes, the entity is now small. The deeds of cross guarantee still exist - so do we still have to lodge the relevant form each year? 
 
 
A: No. Lodgement of Form 389 is a condition of relief under Class Order 98/1418. As the company would no longer be relying on CO 98/1418 for relief from the requirement to prepare and lodge financial reports, lodgement of Form 389 is no longer required. 
 
 

• consolidate the remuneration disclosure requirements currently contained in section 300A of the Act and the accounting standards solely into the Corporations Act and Corporations Regulations. This means remuneration disclosures must now be made for any individual who falls within the definition of ‘key management personnel’, in addition to the existing directors and executives required to be disclosed under section 300A  
  
• replace the terms of “directors, secretaries, senior management and other group executives” in section 300A with the term “key management personnel” which for the purposes of the Corporations Act will be defined as it is in the accounting standards to ensure consistency and ease of change as the accounting standards change  
  
• modify the scope of all the remuneration disclosure requirements from listed companies to disclosing entities that are companies. 
  
• require the remuneration information to be disclosed in the directors report rather than the audited financial report and require the company’s auditor to specifically express an opinion on the remuneration information. A strict liability offence in relation to the audit of the information in the directors’ report will be imposed  
  
• require companies to disclose board policy in relation to directors and executives hedging their incentive remuneration and the mechanism that the company uses to enforce this policy 
  
• clarify the disclosure requirement in section 300A(1)(e)(iv) concerning options lapsing to ensure that the policy intention of the requirement is achieved, and remove the requirement under subparagraph 300A(1)(e)(v) for companies to disclose the aggregate of options granted, exercised and that have lapsed during the year, on the grounds that is not being used by shareholders

• incorporating into the Corporations Act the accounting standards requirements for executive and director remuneration disclosure for listed entities to improve consistency and reduce duplication; 
  
• increasing the thresholds used to define a large proprietary company and allow for future changes to the thresholds to be prescribed by regulations (refer ANT25: 29 June 2007)  
  
• changing the notification requirements, payment of annual fees and the company deregistration procedure; and 
  
• allowing companies to make annual reports available on the internet and only require hard copies to be sent to members who request them.

1. If you have not already done so, advise your client of the changes immediately, including the fact that they will no longer be required to undergo a statutory audit for the 30 June 2007 financial year.  
   
2. Discuss with your client whether they still wish to avail themselves of your audit services. Audits provide many benefits to clients over and above the statutory obligations fulfilled. You and your client should discuss these benefits and make an appropriate decision in the circumstances. It is possible that shareholders and / or providers of finance may nevertheless require an audit to be performed. 
   
3. If the client chooses not to have an audit you should resign as promptly as possible. You should do so in writing to the directors. However because the audit is of a proprietary company that no longer requires an audit under the provisions of the Corporations Act, you do not have to notify ASIC. The question of an audit engagement at 30 June 2007 thus becomes a matter between you and your client. 
   
4. The company will need to notify ASIC within 14 days of receiving your notice of resignation.<p> 
   
5. Be aware of your section 311 responsibilities up until the date of your resignation and your obligations under the auditing standards especially ASA 300" Planning an audit of a financial report". You may also need to remind the client of their obligations under section 331 to pay your reasonable fees and expenses for any work necessarily performed up until such time as your resignation takes effect. This may include year end physical inventory counts or other asset verification procedures, audit planning work or other interim audit procedures you may have performed.

1. If you have not already done so, advise your client of the changes immediately, including the fact that they will no longer be required to undergo a statutory audit for the 30 June 2007 financial year. 
   
2. Discuss whether they still wish to avail themselves of your audit services. Audits provide many benefits to clients over and above the statutory obligations fulfilled. You and your client should discuss these benefits and make an appropriate decision in the circumstances.  
   
3. If the client chooses not to require an auditor then you should resign as promptly as possible. A letter to the directors is required and ASIC is required to be notified under section 327(5). However because the audit is of a proprietary company, ASIC permission is not required and therefore the resignation can take effect from (at the earliest) the date the client receives your letter). 
   
4. Be aware of your section 311 responsibilities up until the date of your resignation and your obligations under the auditing standards especially ASA 300" Planning an audit of a financial report". You may also need to remind the client of their obligations under section 331 to pay you reasonable fees and expenses for any work necessarily performed up until such time as your resignation takes effect. This may include year end cash counts/stocktakes and preliminary planning work that you may have already performed.