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Background of Audit Exemption in Malaysia
If you are the owner of a Private Company (Sdn Bhd) you will know exactly how much work is involved in preparing your annual audited report. If you are not aware, let\’s have a look at our previous article HERE.
In short, a Private Company must appoint an auditor for each financial year of the company for purposes of auditing its financial statements. But with the coming into force of the Practice Directive No. 3/2017, it has been confirmed that a Private Company may not need to appoint an auditor in a Financial Year.
How to Qualify for Audit Exemption in Malaysia?
A private company which falls within the following categories may opt for Audit Exemption:
- Dormant Company;
- Zero Revenue Company;
- Threshold Qualified Company.
Important Note: Just be mindful that if you are in year 2020 you will normally be preparing the audited report for financial year 2019
What is a Dormant Company?
- You have incorporated a company but you have not been active since the day of incorporation; or
- There is no financial transaction(s) made throughout the current financial year and the preceding financial year.
For the purpose of qualifying under this category, the company must not carry any business and does not have any accounting transactions. But expenses incurred to comply with the law, such as Company Secretary Fee, filing fee, and administrative fee does not fall under accounting transaction.
This means that if your company is dormant but you have expenditure incurred in order to comply with the law, you may still qualify for audit exemption.
EXAMPLE:
Situation 1: Company A was incorporated on 1st January 2016. From 1st January 2016 until today Company A has not conducted any business activity. Company A may apply for audit exemption.
Situation 2: Company B was incorporated on 1st January 2016. Assuming that the financial year-end is on 31 December every year.
- In the financial year ending 31 December 2017 there are financial activity;
- In the financial year ending 31 December 2018 there is no financial activity;
- In the financial year ending 31 December 2019 there is no financial activity;
For the financial year ending 31 December 2019, Company B may apply for Audit Exemption.
What are Zero Revenue Companies?
You may qualify for this category if:
- no revenue in the current financial year;
- no revenue in immediate past 2 financial years; and
- total assets in the current statement of financial position do not exceed RM300,000 for the current financial year as well as the immediate past 2 financial years.
EXAMPLE:
Company C was incorporated on 1st January 2017. Assuming that the financial year-end is on 31 December every year.
- In the financial year ending 31 December 2017 there is revenue;
- In the financial year ending 31 December 2018 there is no revenue;
- In the financial year ending 31 December 2019 there is no revenue;
- In the financial year ending 31 December 2020 there is no revenue;
- Total Assets in the current statement for all financial year-end above is less than RM300,000
Company C may apply for audit exemption for financial year-end 2020 but not for financial year-end 2017, 2018 and 2019.
What are the Threshold Qualified Companies?
Your company is regarded as a Threshold Qualified Company when
- the company’s revenue does not exceed RM100,000 in the current financial year and the immediate past 2 financial years;
- the total asset in the statement of financial position for the current financial year does not exceed RM300,000 and for the immediate past 2 financial years; and
- at the end of the current financial year and immediate past 2 financial years, does not have more than 5 employees.
EXAMPLE:
Company D was incorporated on 1st January 2017. Assuming that the financial year-end is on 31 December every year.
- In financial year ending 31 December 2017 – revenue RM500,000;
- In financial year ending 31 December 2018 – revenue RM50,000;
- In financial year ending 31 December 2019 – revenue RM50,000;
- In financial year ending 31 December 2020 – revenue RM50,000;
- Total Assets in the current statement for all financial year-end above is less than RM300,000;
- Number of Employees is always less than 5 in all financial year-end above;
Company D may apply for audit exemption for financial year-end 2020, but not for financial year-end 2017, 2019 and 2018.
How do I Apply for Audit Exemption in Malaysia?
Refer to your Company Secretary and let them guide you through the application process.
Does This Mean Companies Don’t Have to do Any More Accounting?
Nope, one of the requirements to apply for audit exemption is that the Private Company must submit their unaudited financial statement. If you don’t do accounting there is no financial statement. Plus you will need your financial statement to file your tax return for the company. Therefore accounting is still required.
This Sounds Too Good to be True, What is the Catch?
We foresee three major problems with Audit Exemption in Malaysia (amongst other smaller problems) with not having an audited account:
- Banks may reject your financing application – this is because banks will usually depend on the audited financial statements to do a risk assessment before granting any loan facility. The absence of an audited account may affect your ability to apply for bank financing.
- Investor may not be attracted to finance – if there is no audited account there is no guarantee that the numbers in the management account are correct, so it may dissuade an investor to invest in the company.
- Tax submission is usually be based on an audited financial statement. We foresee some tax filing implications in relation to this practice directive.
Important Note: Best to consult your company secretary.
Background of Audit Exemption in Malaysia
If you are the owner of a Private Company (Sdn Bhd) you will know exactly how much work is involved in preparing your annual audited report. If you are not aware, let\’s have a look at our previous article HERE.
In short, a Private Company must appoint an auditor for each financial year of the company for purposes of auditing its financial statements. But with the coming into force of the Practice Directive No. 3/2017, it has been confirmed that a Private Company may not need to appoint an auditor in a Financial Year.
How to Qualify for Audit Exemption in Malaysia?
A private company which falls within the following categories may opt for Audit Exemption:
- Dormant Company;
- Zero Revenue Company;
- Threshold Qualified Company.
Important Note: Just be mindful that if you are in year 2020 you will normally be preparing the audited report for financial year 2019
What is a Dormant Company?
- You have incorporated a company but you have not been active since the day of incorporation; or
- There is no financial transaction(s) made throughout the current financial year and the preceding financial year.
For the purpose of qualifying under this category, the company must not carry any business and does not have any accounting transactions. But expenses incurred to comply with the law, such as Company Secretary Fee, filing fee, and administrative fee does not fall under accounting transaction.
This means that if your company is dormant but you have expenditure incurred in order to comply with the law, you may still qualify for audit exemption.
EXAMPLE:
Situation 1: Company A was incorporated on 1st January 2016. From 1st January 2016 until today Company A has not conducted any business activity. Company A may apply for audit exemption.
Situation 2: Company B wasincorporated on 1st January 2016. Assuming that the financial year-end is on 31 December every year.
- In the financial year ending 31 December 2017 there are financial activity;
- In the financial year ending 31 December 2018 there is no financial activity;
- In the financial year ending 31 December 2019 there is no financial activity;
For the financial year ending 31 December 2019, Company B may apply for Audit Exemption.
What are Zero Revenue Companies?
You may qualify for this category if:
- no revenue in the current financial year;
- no revenue in immediate past 2 financial years; and
- total assets in the current statement of financial position do not exceed RM300,000 for the current financial year as well as the immediate past 2 financial years.
EXAMPLE:
Company C wasincorporated on 1st January 2017. Assuming that the financial year-end is on 31 December every year.
- In the financial year ending 31 December 2017 there is revenue;
- In the financial year ending 31 December 2018 there is no revenue;
- In the financial year ending 31 December 2019 there is no revenue;
- In the financial year ending 31 December 2020 there is no revenue;
- Total Assets in the current statement for all financial year-end above is less than RM300,000
Company C may apply for audit exemption for financial year-end 2020 but not for financial year-end 2017, 2018 and 2019.
What are the Threshold Qualified Companies?
Your company is regarded as a Threshold Qualified Company when
- the company’s revenue does not exceed RM100,000 in the current financial year and the immediate past 2 financial years;
- the total asset in the statement of financial position for the current financial year does not exceed RM300,000 and for the immediate past 2 financial years; and
- at the end of the current financial year and immediate past 2 financial years, does not have more than 5 employees.
EXAMPLE:
Company D wasincorporated on 1st January 2017. Assuming that the financial year-end is on 31 December every year.
- In financial year ending 31 December 2017 – revenue RM500,000;
- In financial year ending 31 December 2018 – revenue RM50,000;
- In financial year ending 31 December 2019 – revenue RM50,000;
- In financial year ending 31 December 2020 – revenue RM50,000;
- Total Assets in the current statement for all financial year-end above is less than RM300,000;
- Number of Employees is always less than 5 in all financial year-end above;
Company D may apply for audit exemption for financial year-end 2020, but not for financial year-end 2017, 2019 and 2018.
How do I Apply for Audit Exemption in Malaysia?
Refer to your Company Secretary and let them guide you through the application process.
Does This Mean Companies Don’t Have to do Any More Accounting?
Nope, one of the requirements to apply for audit exemption is that the Private Company must submit their unaudited financial statement. If you don’t do accounting there is no financial statement. Plus you will need your financial statement to file your tax return for the company. Therefore accounting is still required.
This Sounds Too Good to be True, What is the Catch?
We foresee three major problems with Audit Exemption in Malaysia (amongst other smaller problems) with not having an audited account:
- Banks may reject your financing application – this is because banks will usually depend on the audited financial statements to do a risk assessment before granting any loan facility. The absence of an audited account may affect your ability to apply for bank financing.
- Investor may not be attracted to finance – if there is no audited account there is no guarantee that the numbers in the management account are correct, so it may dissuade an investor to invest in the company.
- Tax submission is usually be based on an audited financial statement. We foresee some tax filing implications in relation to this practice directive.
Important Note: Best to consult your company secretary.
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