QUALIFYING CRITERIA FOR AUDIT EXEMPTION FOR MALAYSIA PRIVATE LIMITED COMPANIES

In a recent announcement made by the Companies Commission of Malaysia (“SSM”) on August 4, 2017, Practice Directive No. 3/2017 titled “Qualifying Criteria for Audit Exemption for Certain Categories of Private Companies” was introduced. This directive outlines the criteria for audit exemption applicable to specific private companies.

Issued under Section 20C of the Companies Commission of Malaysia Act 2001 and Subsection 267(2) of the Companies Act 2016 (“CA 2016”), Practice Directive No. 3/2017 specifies the qualifying criteria for private companies to be exempted from appointing an auditor for a financial year, known as audit exemption.

According to Practice Directive No. 3/2017, the following types of companies are eligible for audit exemption:
(a) Dormant companies
(b) Zero-revenue companies
(c) Threshold-qualified companies

It’s important to note that audit exemption does not apply to exempt private companies that have opted to submit a certificate regarding their exempt private company status to the SSM.

(a) Dormant Company Audit Exemption:

  1. A company is considered dormant for a financial year if:

    – The company is not engaged in any business activities, and

    – There are no accounting transactions recorded.

    (An “accounting transaction” refers to any transaction for which records must be maintained under section 245(1) of the Companies Act 2016, excluding transactions arising from legal obligations for payment and associated compliance costs.)

  2. A dormant company, as defined by the Malaysian Accounting Standards Board (MASB), qualifies for audit exemption under the following conditions:

    – It has been dormant since its incorporation, or

    – It has remained dormant throughout the current financial year and the immediately preceding financial year.

iii. The implementation takes effect as follows:
– For companies incorporated on or after January 31, 2017, the audit exemption applies to financial statements with annual periods starting on or after January 31, 2017.
– For companies incorporated on or before January 30, 2017, the audit exemption applies to financial statements with annual periods starting on or after September 1, 2017.

(b) Zero-revenue Company Audit Exemption:

  1. A zero-revenue company, as defined by the Malaysian Accounting Standards Board (MASB), qualifies for audit exemption under the following conditions:

    – It has no revenue during the current financial year,

    – It has had no revenue in the immediate past two financial years, and

    – Its total assets in the current Statement of Financial Position (FS) do not exceed RM300,000, as well as in the FS of the immediate past two financial years.

  2. “Revenue” excludes:

    – Credit entries for reversing accounting entries from earlier transactions,

    – Accounting entries related to taxation,

    – Reversal of previously made provisions, and

    – Gains on the recognition of property, plant, equipment, and investment property in the Statement of Comprehensive Income.

iii. A company loses its inactive status if it receives or is due to receive revenue.

  1. Any expenses incurred in maintaining the company are not considered.

  2. This provision applies to financial statements with annual periods beginning on or after January 1, 2018.

(c) Threshold-qualified Company Audit Exemption:

  1. A threshold-qualified company, as defined by the Malaysian Accounting Standards Board (MASB), qualifies for audit exemption under the following conditions:

    – Its revenue (including revenue receivable during the year) does not exceed RM100,000 in the current financial year and in the immediate past two financial years,

    – Its total assets in the current Statement of Financial Position (FS) do not exceed RM300,000, as well as in the immediate past two financial years, and

    – It has no more than five employees at the end of its current financial year and in each of its immediate past two financial years.

  2. This provision applies to financial statements with annual periods beginning on or after July 1, 2018.

What is Private Entity?

A private entity, as per the revised definition by the MASB effective from January 31, 2017, is defined as follows:

A private entity is a private company as defined in section 2 of the Companies Act 2016, meeting the following criteria:
– It is not required to prepare or submit any financial statements under any law governed by the Securities Commission Malaysia or Bank Negara Malaysia.
– It is not a subsidiary or associate of, or jointly controlled by, an entity mandated to prepare or submit financial statements under any law governed by the Securities Commission Malaysia or Bank Negara Malaysia.

However, it’s important to note that a private company, or one that is a subsidiary or associate of, or jointly controlled by, an entity defined as a management company under section 2 of the Interest Schemes Act 2016, is not considered a private entity.

Summary

Companies choosing audit exemption must submit their unaudited financial statements to the Registrar along with the necessary certificate, as per sections 258 and 259 of the Companies Act 2016. This submission must include a statement affirming the company’s eligibility for audit exemption and confirmation that no shareholder requests for audit have been received for the specific year. These unaudited financial statements, accompanied by the directors’ report, director’s statement, and statutory declaration per sections 251 and 252 of the Companies Act 2016, must be lodged with the Registrar.

It’s important to note that while unaudited financial statements are required, the signature of an auditor is no longer necessary, which can lead to cost savings.

At Bayabumi Sdn Bhd, we offer affordable services for preparing unaudited financial statements, backed by over 5 years of experience in this field. If you’re uncertain about audit exemption, feel free to reach out to us. Our professional team will provide timely assistance in navigating the audit exemption process.