For Companies Becoming Subject to Audit for the First Time, How Are Total Assets and Annual Net Sales Calculated? What Else Should Companies with Subsidiaries and/or Associates Consider?

For companies becoming subject to audit for the first time, in determining whether they are subject to audit, total assets and annual net sales are calculated on the basis of the balance sheets and income statements for the last two financial periods prepared under tax legislation for submission to public authorities (for foreign subsidiaries and associates, their audited financial statements prepared under international accounting standards, if any, and otherwise the financial statements prepared under the legislation to which they are subject).

In calculating total assets, the total assets and annual net sales of the company's subsidiaries and associates, if any, are also taken into account on the basis of the financial statements mentioned above.

For companies with subsidiaries or associates, the following steps are taken to calculate total assets and annual net sales:

1. In calculating total assets, the carrying amounts of the subsidiaries and associates are deducted from the company's own total assets. To the resulting amount, the entire total assets of the subsidiaries and the company's share of the total assets of its associates are added.

2. In calculating annual net sales, the entire annual net sales of the subsidiaries and the company's share of the annual net sales of its associates are added to the company's own annual net sales.

3. Of the assets, liabilities, income and expenses arising from intra-group transactions, those with subsidiaries are eliminated in full, and those with direct associates of the company and its subsidiaries are eliminated to the extent of the company's share.

In addition, subsidiaries and associates held indirectly through the company's subsidiaries are also treated as the company's subsidiaries and associates. For example, if Company A holds 70% of the voting rights in Company B, and Company B holds 60% and 15% of the voting rights in Companies C and D respectively, then in calculating its total assets and annual net sales Company A treats Company C as its subsidiary and Company D as an associate in which it holds 15% of the voting rights.

On the other hand, subsidiaries and associates held by the associates of the company or of its subsidiaries are taken into account at the amounts in the relevant associate's financial statements. For this reason, the subsidiaries and associates of the associates of the company or its subsidiaries are not included in the elimination entries. For example, if Company A holds 40% of the voting rights in Company B, and Company B holds 60% and 15% of the voting rights in Companies C and D respectively, then in calculating its total assets and annual net sales Company A treats only Company B as its associate. It does not take into account the total assets and annual net sales of Companies C and D. Consequently, transactions of Companies C and D with Companies A and B are not included in the elimination

In calculating total assets and annual net sales, the total assets and annual net sales of the company's foreign subsidiaries and associates are also taken into account.