Solutions Manual for Company Accounting, 11th Edition (Australia)
Ken Leo, Jeffrey Knapp, Susan McGowan, John Sweeting A+
Chapter 1: Nature and regulation of companies
Review questions
1. Outline the advantages of incorporation over other forms of organisation such as
partnerships. (LO1)
The corporate form of organisation permits individuals to have "limited liability". This confers
on shareholders a limit on their liability in the event of a winding up of the company to the
amount (if any) unpaid on their shares. (S516).
In the case of a partnership no such limitation applies (unless the partnership specifically adopts
limited liability) and the insolvency of one or more partners can result in other solvent partners
having to contribute any losses and debts out of their own private assets.
2. Distinguish between a proprietary company and a public company. (LO2)
A public company is one in which there is usually a substantial public interest in that the
ownership of the company's share capital is widely spread. Public companies are entitled to raise
capital through a share issue by issuing a disclosure document which entitles them to have their
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shares or debentures etc. listed on a stock exchange, such as the Australian Securities Exchange,
to facilitate transferability.
Proprietary companies on the other hand have specific limitations in terms of the amount and
restrictions on its fundraising activities.
Specific features of a proprietary company include the need to have a share capital (unlike a
public company which may be limited by guarantee and not merely shares):
• a requirement to have at least one shareholder and only one director (three directors for a
public company) and not more than 50 shareholders (not including employee shareholders)
• not required to restrict the transfer of its shares (however it may elect to do so)
• the use of the designation "Pty" or “Proprietary” in its name
• a requirement not to engage in any fundraising activity which would require it to lodge a
disclosure document with ASIC.
3. Distinguish between a large and a small proprietary company. What are the implications
of being classified large rather than small? (LO2)
A small proprietary company is defined in Section 45A of Corporations Act 2001, as amended,
as one which meets 2 of the following three criteria:
• consolidated annual revenue less than $25 million#
• consolidated gross assets at the end of the financial year is less than $12.5 million#
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• the companies and the entities it controls have fewer than 50 employees^ at the end of the
financial year.
#These figures must be determined in accordance with accounting standards.
^ Part-time employees measured at appropriate fraction of full-time.
If these criteria are not met the company will be a large proprietary company.
Small proprietary companies do not have to prepare formal financial statements or have them
audited. However, they must keep sufficient accounting records to allow preparation and audit of
accounts if either 5% of their voting shareholders or ASIC request this to be done. Large
proprietary companies, must prepare financial reports in accordance with accounting standards,
have them audited, send them to shareholders and lodge them with ASIC (Section 292)
4. Outline the special features of a no liability company. (LO2)
Companies engaged in the more speculative area of mining exploration are most often registered
as no liability. Such companies have NL at the end of the company name and have the advantage
of being more attractive to potential investors as unlike companies limited by the unpaid amount
on their shares; there is no such liability on the part of shareholders to contribute to the debts and
liabilities of the companies.
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5. What is the purpose of a certificate of registration? (LO3)
A certificate of registration is issued by ASIC as a part of the registration procedure. Provided
the company complies with S117 of the Corporations Act, ASIC will:
• give the company an ACN Number
• register the company
• issue a certificate that states the company's name, ACN No. etc.
Once registered, the company is capable of performing all the functions of a corporate body.
6. What are replaceable rules and how do they differ from a constitution? (LO3 and LO4)
Replaceable rules are the set of internal rules (contained in the Corporations Act) governing the
conduct of its operations between the company and its member directors and between members
themselves.
If the rules are not adopted by the company then they must draw up a constitution which will
cover much of the same issues covered by the replacement rules but may be extended or
modified by the promoters of the company.
7. Outline the main features and purpose of a disclosure document. (LO5)
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