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Epica Guide Series

Audit Exemption in Singapore Explained: The New 'Small Company' Concept?

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Is Audit Compulsory for every Singapore Company? If not for which Companies is it Compulsory?

Singapore has always been topped as one of the best economies by the World Bank in the 'ease of doing business' rankings. It has always been among the top three countries in this list for 12 consecutive years. The city-state holds the reputation of a pro-business economy and offers different business models to suit the needs of budding entrepreneurs and the enterprise ecosystem.

LLC business model and audit requirements in Singapore

An LLC or a Limited Liability Company (also called Private Limited Company) is the most preferred business model in Singapore that provides an edge to Singapore-registered companies over their counterparts. This company model offers multiple benefits like lower compliance costs, limited liability, simple compliance regulations, and lower taxes.

However, the Companies Act of Singapore states that all the Singapore-registered companies must get their accounting records and financial statements audited annually by a public accountant or an auditor unless they fulfill the audit exemption criteria. Companies must maintain proper records and make them available for yearly review and inspection by the auditor.

Companies Amendment Act 2014 has revised the criteria for audit exemption by introducing the new concept of 'small companies' that are exempted from the statutory annual audit.

This guide will help you develop a comprehensive understanding of the 'small company' concept and the new audit exemption requirements. This guide will cover these topics:

Statutory Audit Requirement

Companies are legally bound to audit their accounts at least once in a fiscal year. It is compulsory because:

Small company concept - Audit requirement
  • There are several stockholders of the company.
  • Many shareholders are different from the directors.
  • The public also invests money in Companies that are open for public funding.

Hence, an independent audit is crucial to protect their interests.

Who can audit company accounts in Singapore?

A qualified chartered accountant registered with ACRA can conduct an audit in Singapore.


Small company concept - Audit procedure

Audit Procedure

The auditor visits a Singapore company once in a fiscal year and examines the financial statements, including various transaction receipts, to verify its accounting records. He must report whether the company's financial statements comply with the respective financial reporting standards. He is also required to provide an objective analysis of the financial performance of the said company.

It ensures that no fraudulent behavior is committed in the company, and the revenue is used in a fair manner per the Company Constitution.

Concept of a small company

Before the enforcement of the Singapore Companies Amendment Act 2014, only two types of companies could enjoy the audit exemption.

  • A dormant company
  • An exempt private company
Small company concept - Private company

Exempt Private Company

An Exempt Private Company has the following characteristics:

  • No more than S$ 5 million in annual turnover
  • No more than 20 shareholders
  • No corporate entity as a shareholder

Small company concept - Small company

Need for the concept of 'small company.'

Other companies that do not fall into this category were liable to audit their financial records once in a year. For small businesses that do not make hefty profits and have a below-average turnover, these statutory audits were proved to be too impractical and costly. In most cases, they did not add any value to the company's shareholders as they affected the company's meager profits adversely.


Small company concept - Introduction of small company

Introduction of the 'small company' concept

Therefore, the ACRA (Accounting & Corporate Regulatory Authority) created a new concept of 'small company' to foster a pro-business regulatory framework.

The companies qualified as a 'small company' started to enjoy audit exemption on or after the law change, i.e., 1 January 2015. This provision is also applicable for all the newly registered Singapore companies that fulfill the requirements to be qualified as a 'small company.'

New Audit Exemption Criteria

To be exempted from the statutory audit, a company must meet the 'small company' criteria. To qualify as a 'small company,' a company must meet two out of the following three criteria.

  • Total revenue is less than S$10 million in the preceding financial year
  • Total assets worth less than S$10 million in the preceding financial year
  • The full-time employees' number does not exceed 50 at the end of the preceding financial year

SFRS (Singapore Financial Reporting Standards) determine the assets and revenue of the company for this provision. Full-time workers who are on payroll are regarded as company employees.

Small company concept - Small business

Advantages of audit exemption for small businesses

Companies exempted from statutory audit requirements are also relieved from the obligation of two things:

  • Presenting audited account statements to the directors
  • Presenting audited account statements at the company's Annual General Meeting

Thus, the exemption reduces the company's compliance cost, which is a massive relief for small businesses with below-average turnover.

Group Exemption Criteria

A group is defined as a group of companies with a holding company and its subsidiaries. These companies are together referred to as a group due to the common controlling source.

A group company is eligible for audit exemption, if:

  • It passes as a 'small company' by fulfilling 2 out of 3 qualifying requirements for a 'small company.'
  • It is a subset of a 'small group.'

The group criteria are applicable even if the holding company is located overseas.

To qualify as a 'small group,' a group must meet two out of the following three eligibility criteria:

  • Group's consolidated revenue does not exceed S$10 million for the preceding financial year
  • Group's consolidated asset does not exceed S$10 million for the preceding financial year
  • Total employees are less than 50, i.e., the total number of employees in the holding company and its subsidiaries

The criteria of audit exemption for a company or a group are the same. It means that a holding company and its subsidiaries must fulfill all the requirements to be a 'small company.' As a group, they must also satisfy the requirements to be a 'small group' to qualify for audit exemption.

Small company concept - Examples

Examples

Let's look at the two different scenarios to understand it further.

Scenario 1

Company A is a part of group A1.

Company A has:

  • S$2 million revenue in the preceding fiscal year
  • Assets worth S$4 million in the preceding fiscal year
  • Ten employees

In this scenario, the company fulfills all three requirements to qualify as a 'small company.'

Let's look at the group data now.

Group A1 has:

  • S$6 million revenue in the preceding financial year
  • Assets worth S$15 million in the prior financial year
  • 40 employees

Group A1 also qualifies as a small group as it fulfills 2 out of 3 requirements.

In this scenario, company A is exempted from the statutory audit requirement.

Scenario 2

Company B is a subset of group B1.

Company B has:

  • S$5 million annual turnovers in the preceding fiscal year
  • Assets worth S$12 million in the prior fiscal year
  • 45 employees

In this scenario, the company fulfills two out of the three requirements. Hence, it will be considered a 'small company.'

Now, let's look at the group statistics.

Group B1 has:

  • S$8 million turnovers in the preceding fiscal year
  • Assets worth S$20 million in the prior fiscal year
  • 100 employees

In this scenario, the group only fulfills one out of the three mandatory requirements. Hence, it will not qualify as a 'small group.'

Company B will not enjoy the audit exemption even after qualifying as a 'small company' in this case.

Change in the company's audit exemption status

Small company concept - Scenarios

A 'small company' will automatically disqualify and renounce its audit exemption privilege in one of the following scenarios:

  • Cease to function as a private company means it takes a 51st shareholder or issues company shares to the public
  • Fail to meet any two out of the three quantitative criteria for the past two financial years

Transitional Provision

The applicability of provision is not much different for existing companies and newly incorporated companies.

Small company concept - Incorporated small company

For existing companies

A company incorporated before 1 July 2015 can also qualify as a 'small company' if:

  • The company keeps operating as a private company within the period
  • Fulfill the quantitative requirement in its first or second fiscal year after the commencement of the new amendment

The following tables help you understand the transitional provisions for existing companies.

Table 1.1

Scenario 1.1

Meets Quantitative Criteria

Qualifies as 'small company.'

Remarks

FY 2015 Yes Yes First FY after amendment hence company qualifies as a 'small company' for meeting the quantitative criteria
FY 2016 No Yes An already qualified company cannot be disqualified if it fails to meet the criteria for one of the two preceding FY
FY 2017 Yes Yes Continue to qualify as a small company as it meets the quantitative criteria even after failing it in the preceding year
FY 2018 No Yes Already a qualified company cannot be disqualified even if it does not meet the quantitative criteria in its current FY and one of the two preceding FYs
FY 2019 No Yes
FY 2020 Yes No Even after meeting the 'small company' criteria in its current FY, the company is disqualified because it failed to meet the requirements in its two preceding FYs

Table 1.2

Scenario 1.2

Meets Quantitative Criteria

Qualifies as 'small company.'

Remarks

FY 2015 No No First FY after amendment, so the company does not qualify as a 'small company' for not meeting the quantitative criteria
FY 2016 Yes Yes Second FY after amendment, so the company qualifies as a 'small company' for meeting the quantitative criteria
FY 2017 Yes Yes Continue to qualify as a 'small company' as already qualified in FY 2016
FY 2018 No Yes Cannot be disqualified for not meeting the quantitative criteria for only current FY
FY 2019 No Yes Cannot be disqualified for not meeting the quantitative criteria for current FY and one of the preceding FYs
FY 2020 Yes No Could not meet the quantitative criteria for two preceding consecutive years hence disqualified even after meeting the quantitative criteria for current FY

Small company concept - Registered company

For newly registered companies (after 1 July 2015)

Newly incorporated companies cannot meet the quantitative criteria for two preceding FYs. However, the transitional provision allows a freshly registered company to qualify as a 'small company' if:

  • It operates as a private limited company
  • It fulfills quantitative requirements in its first or second financial year after incorporation

There are three different scenarios for explaining the applicability of the 'small company' criteria. The following three tables will give you a better insight into them.

Scenario 2.1

  • The company meets the 'small company' criteria in FY 2015 & 2016
  • The company qualifies as a 'small company' in FY 2016

Table 2.1

FY

Meets Quantitative Criteria

Qualifies as 'small company.'

Remarks

FY 2017 Yes Yes Already qualifies as a 'small company.'
FY 2018 No Yes An already qualified company cannot be disqualified if it fails to meet the criteria for one FY
FY 2019 Yes Yes An already qualified company cannot be disqualified if it fails to meet the criteria for one of the two preceding FY
FY 2020 No Yes Already a qualified company cannot be disqualified even if it does not meet the quantitative criteria in its current FY and one of the two preceding FYs
FY 2021 No Yes
FY 2022 Yes No Even after meeting the 'small company' criteria in its current FY, the company is disqualified because it failed to meet the requirements in its last two preceding FYs

Scenario 2.2

  • The company does not fulfill the quantitative requirements for FY 2015 & 2016
  • The company is not a 'small company' in 2016

Table 2.2

FY

Meets Quantitative Criteria

Qualifies as 'small company.'

Remarks

FY 2017 Yes No Fail to meet quantitative criteria in the last two preceding FYs, hence does not qualify as 'small company' even after fulfilling requirements in the current FY
FY 2018 Yes No It only fulfills the 'small company' criteria for one preceding FY and does not qualify as a 'small company.'
FY 2019 Yes Yes Qualifies as a 'small company' for fulfilling the 'small company' requirements for two preceding FYs
FY 2020 No Yes Already a qualified company cannot be disqualified even if it does not meet the quantitative criteria in its current FY and one of the two preceding FYs
FY 2021 No Yes
FY 2022 Yes No Even after meeting the 'small company' criteria in its current FY, the company is disqualified because it failed to meet the requirements in its last two preceding FYs

Scenario 2.3

  • The company fulfill the quantitative requirements for a 'small company' in FY 2015 and 2016
  • The company qualifies as a 'small company' in 2016

Table 2.3

Scenario 1.2

Meets Quantitative Criteria

Qualifies as 'small company.'

Remarks

FY 2017 No Yes Already a qualified company cannot be disqualified even if it does not meet the quantitative criteria in its current FY and one of the two preceding FYs
FY 2018 No Yes
FY 2019 Yes No Even after meeting the 'small company' criteria in its current FY, the company is disqualified because it failed to meet the requirements in its last two preceding FYs
FY 2020 Yes No Even after meeting the 'small company' criteria in its current FY, the company is disqualified because it failed to meet the requirements in its last two preceding FYs
FY 2021 Yes Yes Qualifies as a 'small company' for fulfilling the 'small company' requirements for two consecutive FYs preceding the current FY
FY 2022 Yes Yes Continue to enjoy the 'small company' privilege for qualifying as a 'small company' in FY 2021

Some Essential Pointers to Note

Small company concept - Essential
  • Audit exemption does not mean that companies are obviated from the obligation to maintain proper accounting records. Even a small company is legally required to prepare its financial statements that must be present during the Annual General Meeting. Shareholders with a minimum of 5% voting rights can demand the company to audit its accounting records and prepare audited financial statements.
  • Foreign companies' branches do not qualify for audit exemption even if they fulfill the 'small company' requirements.
  • Many Singapore companies have foreign holding companies. In this case, you must take the consolidated revenue and assets into account. In complex cases, it is best to seek the advice of a registered corporate service provider.
  • Singapore-registered companies must hold an Annual General Meeting within six months after their Financial Year End. Audited financial statements are presented to the directors at least two weeks before the AGM. If you are unsure about your 'small company' or audit exemption status, it is best to seek expert advice from a professional corporate service provider.

Conclusion

With the Companies Amendment Act 2014, the new audit exemption provision has reduced small companies' compliance costs and simplified their compliance obligations.

This guide has covered all the essential details about the audit exemption provision in the Companies Amendment Act 2014. If you want to confirm your company's status as a 'small company,' you can contact us. Our team of experts with the required experience will be glad to assist you through all the phases of your business.
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