The sections, word for word
Every section on this subject, exactly as printed in the Official Gazette (Act No. 3 of 2020). The explanation follows beneath.
Section 393. Entitlement to deliver financial statements in modified form
(1) In certain cases a company’s directors may, in accordance with Part 1 of the Sixth Schedule to this Act, deliver modified financial statements in respect of a year as a small company.
(2) For the purposes of sections 395-397 and the Sixth Schedule to this Act, “deliver” means deliver to the Commission.
Section 394. Qualification of a small company
(1) A company qualifies as small in relation to its first financial year if the qualifying conditions are met in that year.
(2) A company qualifies as small in relation to a subsequent financial year if the qualifying conditions—
(a) are met in that year and the preceding financial year ;
(b) are met in that year and the company qualified as small in relation to the preceding financial year ; or
(c) were met in the preceding financial year and the company qualified as small in relation to that year.
(3) The qualifying conditions are met by a company in a year in which it satisfies the following requirements—
(a) it is a private company ;
(b) its turnover is not more than N120,000,000 or such amount as may be fixed by the Commission from time to time ;
(c) its net assets value is not more than N60,000,000 or such amount as may be fixed by the Commission from time to time ;
(d) none of its members is an alien ;
(e) none of its members is a government, government corporation or agency or its nominee ; and (f ) in the case of a company having share capital, the directors between themselves hold at least 51% of its equity share capital.
(4) For a period that is a company’s financial year but not in fact a year the maximum figures for turnover shall be proportionately adjusted.
(5) The “balance sheet total” means the aggregate of the amounts shown as assets in the company’s balance sheet.
(6) The “number of employees” means the average number of persons employed by the company in that year, determined as follows—
(a) find for each month in the financial year the number of persons employed under contracts of service by the company in that month (whether throughout the month or not),
(b) add together the monthly totals, and
(c) divide by the number of months in the financial year.
(7) This section is subject to section 393.
Section 395. Companies qualifying as small: parent companies
(1) A parent company qualifies as a small company in relation to a financial year only if the group headed by it qualifies as a small group.
(2) A group qualifies as small in relation to the parent company’s first financial year if the qualifying conditions are met in that year.
(3) A group qualifies as small in relation to a subsequent financial year of the parent company if the qualifying conditions—
(a) are met in that year and the preceding financial year ;
(b) are met in that year and the group qualified as small in relation to the preceding financial year ; or
(c) were met in the preceding financial year and the group qualified as small in relation to that year.
(4) The qualifying conditions are met by a group in a year in which it satisfies the following requirements—
(a) it is a private company ;
(b) its turnover is not more than N120,000,000 or such amount as may be fixed by the Commission from time to time ;
(c) its net assets value is not more than N60,000,000 or such amount as may be fixed by the Commission ;
(d) none of its members is an alien ;
(e) none of its members is a government or government corporation or agency or its nominee ; and (f ) in the case of a company having share capital, the directors between themselves hold at least 51% of its equity share capital.
(5) The aggregate figures are ascertained by aggregating the relevant figures determined in accordance with section 394 for each member of the group.
(6) The figures for each subsidiary undertaking are those included in its individual accounts for the relevant financial year, if—
(a) its financial year ends with that of the parent company, that financial year ;
(b) not, its financial year ending last before the end of the financial year of the parent company ; and
(c) those figures cannot be obtained without disproportionate expense or undue delay, the latest available figures shall be taken.
Section 396. Modified individual financial statements
(1) The directors of a company may (subject to section 397 where the company has subsidiaries) deliver individual financial statements modified as for a small company in the cases specified in subsections (2) and (3), and Part 1 of the Sixth Schedule apply with respect to the delivery of financial statements so modified.
(2) In respect of the company’s first year the directors may deliver financial statements modified as for a small company, if in that year it qualifies as small.
(3) The directors may in respect of a company’s year subsequent to the first deliver financial statements modified as for a small company,—
(a) if the company qualifies as small and it also so qualified in the preceding year ;
(b) although not qualifying in that year as small, if in the preceding year it so qualified and the directors were entitled to deliver financial statements so modified in respect of that year ; or
(c) if, in that year the company qualifies as small and the directors were entitled under paragraph (b) to deliver financial statements so modified for the preceding year (although the company did not in that year qualify as small).
Section 397. Modified financial statements of holding company
(1) This section applies to a holding company where in respect of a year section 379 requires the preparation of group financial statements for the company and its subsidiaries.
(2) The directors of the holding company may not under section 396 of this Act deliver financial statements modified as for a small company, unless the group (that is to say, the holding company and its subsidiaries together) is in that year a small group and the group is small if it qualifies under section 394 of this Act (applying that section as provided under subsections (3) and (4), as if it were all one company).
(3) The figures to be taken into account in determining whether the group is small are the group account figures, that is—
(a) where the group financial statements are prepared as consolidated financial statements, the figures for turnover and balance sheet total ; and
(b) where the group financial statements are not prepared as consolidated financial statements, the corresponding figures given in the group financial statements, with such adjustment as would have been made if the statements had been prepared in consolidated form, and aggregated in either case with the relevant figures for the subsidiaries (if any) omitted from the group accounts (excepting those for any subsidiary omitted under section 379 (3) ( ground of impracticability).
(4) In the case of each subsidiary omitted from the group financial statements, the figures relevant as regards turnover, and balance sheet total are those which are included in the financial statements of that subsidiary prepared in respect of its relevant year (with such adjustment as would have been made if those figures had been included in group financial statements prepared in consolidated form).
(5) For the purposes of subsection (4), the relevant year of the subsidiary is—
(a) if its year ends with that of the holding company to which the group financial statements relate, that year ; and
(b) if not, the subsidiary’s year ending last before the end of the year of the holding company.
(6) If the directors are entitled to deliver modified financial statements, they may also deliver modified group financial statements, and such group financial statements if—
(a) consolidated, may be in accordance with Part II of the Sixth Schedule (while otherwise comprising or corresponding with group financial statements prepared under section 379 of this Act) ; and
(b) not consolidated, may be such as (together with any notes) give the same or equivalent information as required by paragraph (a), and Part III to the Sixth Schedule to this Act applies to modified group financial statements whether consolidated or not.
What this means
Short answer
A company qualifies as small if it is a private company with turnover of not more than ₦120,000,000 and net assets of not more than ₦60,000,000, none of its members is an alien or a government body, and, if it has share capital, its directors together hold at least 51% of the equity (section 394(3)). The Commission can change the two money limits.
Amended since the gazette
Section 394(2) was cut back in 2023. A company qualifies as small for a later financial year if the conditions are met in that year and in the preceding year, and the two overlapping paragraphs were deleted. See all the amendments.
The qualifying conditions
Section 394(3) says a company meets the conditions in a year if all of these are true:
- it is a private company;
- its turnover is not more than ₦120,000,000, or another amount the Commission fixes from time to time;
- its net assets value is not more than ₦60,000,000, or another amount the Commission fixes;
- none of its members is an alien;
- none of its members is a government, a government corporation or agency, or its nominee; and
- if it has share capital, its directors between them hold at least 51% of its equity share capital.
For a financial period that is not a full year, the turnover limit is adjusted in proportion (section 394(4)).
How the test works from year to year
A company qualifies as small for its first financial year if it meets the conditions in that year (section 394(1)). For a later year it qualifies if any one of these is true (section 394(2)):
- it meets the conditions in that year and in the year before;
- it meets the conditions in that year and it qualified as small the year before; or
- it met the conditions in the year before and it qualified as small that year.
In practice, a small company that breaches a limit does not lose small status immediately. Under the third test it keeps the status for one more year.
Parent companies
A parent company qualifies as small only if the group it heads qualifies as a small group (section 395(1)). The group must meet the same conditions, using figures aggregated across the members of the group (section 395(4) and (5)). A holding company may deliver modified financial statements only if the group is small (section 397).
What small status changes
- Directors. The two-director minimum applies to companies other than small companies (section 271(1)).
- Secretary. A small company does not have to have a secretary (section 330(1)).
- Accounts. The directors may deliver modified financial statements to the Commission (sections 393 and 396).
- Audit. A small company is exempt from the audit requirement (section 402(1)(b)). See audit exemption.
- Annual return. A small company files the small-company form (section 419), with a certificate that it meets the conditions (section 423(2)), and does not have to annex its accounts, as long as it complies with section 394 (section 424(2)).
- Certification. The chief executive and chief financial officer certification duty in section 405 applies to companies other than small companies.
Checking your own company
Test the conditions each year, not just once. Record turnover and net assets against the current limits, confirm the shareholder list for aliens and government holdings, and check the directors’ combined equity. Check with the Commission whether it has changed the figures.
Questions and answers
What is the turnover limit for a small company?
Not more than ₦120,000,000, or another amount the Commission fixes from time to time (section 394(3)(b)).
What is the net assets limit?
Not more than ₦60,000,000, or another amount the Commission fixes (section 394(3)(c)).
Can a company with a foreign shareholder be small?
No. Section 394(3)(d) requires that none of its members is an alien.
Do the directors have to own shares in a small company?
If the company has share capital, the directors between them must hold at least 51% of its equity share capital (section 394(3)(f)).
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