Commonwealth of Australia Explanatory Memoranda Commonwealth of Australia Explanatory Memoranda[Index] [Search] [Download] [Bill] [Help]
2008-2009-2010
THE PARLIAMENT OF THE COMMONWEALTH OF AUSTRALIA
SENATE
corporations amendment (Corporate reporting reform) Bill 2010
REVISED EXPLANATORY MEMORANDUM
(Circulated by the authority of the
Minister for Financial Services, Superannuation, Corporate Law and Human
Services,
the Hon Chris Bowen)
THIS EXPLANATORY MEMORANDUM TAKES ACCOUNT OF AMENDMENTS MADE BY THE HOUSE
OF REPRESENTATIVES TO THE BILL AS INTRODUCED
Table of contents
Glossary 1
General outline and financial impact 3
Chapter 1 Companies limited by guarantee 5
Chapter 2 Parent-entity financial statements 15
Chapter 3 Requirements for paying dividends 19
Chapter 4 Changing reporting periods 23
Chapter 5 Extending section 299A of the Corporations Act 27
Chapter 6 IFRS declaration 29
Chapter 7 Lost capital reductions 31
Chapter 8 FRC functions and funding 33
Chapter 9 CALDB processes 35
Chapter 10 Regulation Impact Statement 41
Index 77
Glossary
The following abbreviations and acronyms are used throughout this
explanatory memorandum.
|Abbreviation |Definition |
|AASB |Australian Accounting |
| |Standards Board |
|APRA |Australian Prudential |
| |Regulation Authority |
|ASIC |Australian Securities and |
| |Investments Commission |
|ASIC Act |Australian Securities and |
| |Investments Commission Act |
| |2001 |
|AUASB |Auditing and Assurance |
| |Standards Board |
|CAC Act |Commonwealth Authorities and |
| |Companies Act 1997 |
|CALDB |Company Auditors and |
| |Liquidators Disciplinary |
| |Board |
|Corporations Act |Corporations Act 2001 |
|CPAA |CPA Australia |
|FMA Act |Financial Management and |
| |Accountability Act 1997 |
|FRC |Financial Reporting Council |
|GRI Act |Governance Review |
| |Implementation (AASB and |
| |AUASB) Act 2008 |
|IASB |International Accounting |
| |Standards Board |
|ICAA |Institute of Chartered |
| |Accountants in Australia |
|IFRS |International Financial |
| |Reporting Standards |
|IPAA |Insolvency Practitioners |
| |Association of Australia |
|NIA |National Institute of |
| |Accountants |
|RIS |Regulation Impact Statement |
General outline and financial impact
General outline
A robust financial reporting framework is an essential component of
an efficient market. The Corporations Amendment (Corporate
Reporting Reform) Bill 2010 will improve Australia's corporate
reporting framework by reducing unnecessary red-tape and regulatory
burden on companies, improving disclosure requirements and
implementing a number of other important refinements to the
corporate regulatory framework.
Date of effect: The Act commences on the day it receives the
Royal Assent.
Summary of regulation impact statement
Regulation impact on business
Impact: A draft Regulation Impact Statement (RIS) has been
prepared in accordance with the Government's best practice
regulation requirements. The draft RIS has been released publicly
as part of the consultation process.
Context of amendments
1. Under the existing reporting framework, all companies limited by
guarantee are required to prepare an audited financial report in
accordance with the Australian accounting standards and a
directors' report in accordance with the Corporations Act 2001
(Corporations Act), regardless of their size.
2. The company limited by guarantee structure is used predominantly by
not-for-profit entities to incorporate their operations. Research
conducted by The University of Melbourne found that approximately
21 per cent of companies limited by guarantee were sports and
recreation related organisations, 19 per cent were community
service organisations, 15 per cent were education-related
institutions and 10 per cent were religious organisations.
3. The vast majority of companies limited by guarantee are relatively
small. The table below outlines the relative size of companies
limited by guarantee based on a sample of companies that lodged
financial reports with Australian Securities and Investments
Commission (ASIC). The small size of companies limited by
guarantee means that they may not have the capacity to comply with
extensive reporting requirements. However, as discussed below, it
is recognised that reporting by companies limited by guarantee is
an important governance and transparency mechanism given the public
nature of these companies.
1. : Size of companies limited by guarantee[1]
| |Revenue|Cumulative|Assets |Cumulativ|
| |(%) |Total: |(%) |e Total: |
| | |Revenue | |Assets |
| | |(%) | |(%) |
|Less than $20,000 |14 |14 |12 |12 |
|Between $20,000 and |9 |23 |9 |21 |
|$50,000 | | | | |
|Between $50,001 and |24 |47 |16 |37 |
|$250,000 | | | | |
|Between $250,001 and |7 |54 |8 |45 |
|$500,000 | | | | |
|Between $500,001 and |14 |68 |18 |63 |
|$1,000,000 | | | | |
|Between $1,000,000 and|28 |96 |30 |93 |
|$12,500,000 | | | | |
|Greater than |4 |100 |5 |100 |
|$12,500,000 | | | | |
4. In June 2007, Treasury released a discussion paper on financial
reporting by unlisted public companies. The paper sought comments
on whether the existing reporting framework was appropriate for the
11,000 companies limited by guarantee and the 7,000 unlisted public
companies limited by shares preparing financial reports under the
Corporations Act.
5. The majority of respondents to the discussion paper indicated that
for reporting purposes, companies limited by guarantee could be
differentiated on the basis of the size of their operating revenue.
Tests based on assets or number of employees may not be accurate
indicators of the 'size' of the company. For example, a company
limited by guarantee may have a large number of assets, but there
may be restrictions on the company disposing of these assets. In
addition, indicators based on employee numbers are likely to be
distorted by the large number of volunteers that generally
participate in not-for-profit entities.
6. The submissions also noted that some types of companies limited by
guarantee will have a higher level of public interest due to the
nature of their activities. Charities, for instance, were
identified as being in this category because of their public
fundraising activities (for example, donation drives) and
significant community involvement. In contrast, member-focused
companies limited by guarantee (for example, sporting clubs) may
have a significantly lower level of public interest. Such factors
need to be considered when differentiating between companies
limited by guarantee for reporting purposes.
7. Any differentiation between companies limited by guarantee on the
basis of the nature of their activities needs to be sufficiently
clear to ensure that companies are certain of their reporting
obligations. For this reason, it is proposed that classification
as a deductible gift recipient for the purposes of the Income Tax
Assessment Act 1997 be used to differentiate between companies
limited by guarantee in terms of the nature of their activities.
Deductible gift recipients may receive tax deductible donations
from the public. As such, it is considered to be indicative of a
high degree of public interest in the activities of the company.
Summary of new law
8. A three tiered differential reporting framework will be introduced
exempting small companies limited by guarantee from reporting and
auditing requirements and providing other companies limited by
guarantee with streamlined assurance requirements and simplified
disclosures in the directors' report. In addition, the process for
companies to distribute the annual report to their members will be
streamlined.
9. Companies limited by guarantee will be prohibited from paying a
dividend, as the corporate structure of companies limited by
guarantee means that they are not suited for conducting for-profit
activities which could legitimately warrant the payment of
dividends to members. This prohibition applies only to companies
limited by guarantee incorporated on or after commencement of these
provisions.
10. This proposal is aimed at introducing a tailored financial
reporting regime for companies limited by guarantee that will
reduce the regulatory burden on these entities while ensuring that
appropriate levels of financial transparency and governance are
maintained.
Comparison of key features of new law and current law
|New law |Current law |
|A three tiered |Companies limited by |
|differential reporting |guarantee must prepare a |
|framework will be |full audited financial |
|introduced exempting |report in accordance with|
|small companies limited |accounting standards and |
|by guarantee from |a directors' report |
|reporting and auditing |in accordance with the |
|requirements and |Corporations Act. |
|providing other companies| |
|limited by guarantee with| |
|streamlined assurance | |
|requirements and | |
|simplified disclosures in| |
|the directors' report. | |
|The process for companies|Companies limited by |
|to distribute the annual |guarantee must comply |
|report to their members |with section 314 of the |
|will be streamlined, by |Corporations Act, which |
|allowing companies |allows companies to |
|limited by guarantee to |distribute their annual |
|write to members |report to members via the|
|informing them that an |Internet, and if the |
|annual report has been |company does not maintain|
|prepared and how they can|a website, it must send |
|obtain a copy. |members a hard copy |
| |report. |
|Companies limited by |The Corporations Act does|
|guarantee, incorporated |not prohibit companies |
|on or after commencement |limited by guarantee from|
|of these provisions, will|paying dividends. |
|be prohibited from paying| |
|a dividend. | |
Detailed explanation of new law
Differential reporting framework
11. Under the proposed new law, a three tiered differential reporting
framework would be introduced for companies limited by guarantee.
12. Under the first tier, companies would be exempt from preparing the
financial report and the directors' report. As a result, companies
in this tier would not be required to have the annual report
audited, or be required to appoint an auditor. This tier comprises
of companies limited by guarantee with annual revenue less than
$250,000 which do not have deductible gift recipient status.
13. Under the second tier, companies would:
. prepare a financial report, which they could elect to have
reviewed rather than audited;
. prepare a streamlined directors' report, rather than a full
director's report; and
. be subject to a streamlined process for distributing the
annual report to members.
The second tier comprises of the following companies limited by
guarantee:
. companies with an annual revenue of less than $250,000
that are a deductible gift recipient; and
. companies with an annual revenue of $250,000 or more but
less than $1 million, irrespective of whether the company
is a deductible gift recipient.
14. Under the third tier, companies would:
. continue to prepare an audited financial report;
. prepare a streamlined directors' report, rather than a
full director's report; and
. be subject to a streamlined process for distributing the
annual report to members.
The third tier comprises of companies limited by guarantee with an
annual revenue of $1 million or more, irrespective of whether the
company is a deductible gift recipient.
15. The Bill provides a regulation making power to vary the amount of
the threshold, to ensure that the threshold can be easily updated
over time. In addition, the Bill provides that the revenue and
consolidated revenue are to be calculated in accordance with
accounting standards.
[Schedule 1, Part 1, item 14, section 285A]
Exception where direction by ASIC or members
16. Appropriate safeguards would be put in place requiring companies
limited by guarantee to prepare a financial report or a directors'
report if they are directed to by ASIC or by at least five per cent
of members [Schedule 1, Part 1, item 16, sections 294A and 294B].
The requirements relating to a direction from ASIC or at least five
per cent of members are similar to the existing requirements
applying to small proprietary companies in sections 293 and 294 of
the Corporations Act.
17. The Bill provides a strict liability offence where a company fails
to comply with a direction given by ASIC [Schedule 1, Part 1, item
16, subsection 294B(2)]. This will facilitate effective
enforcement and compliance of this requirement.
18. A direction by ASIC under subsection 294B(1) is not a legislative
instrument within the meaning of section 5 of the Legislative
Instruments Act 2003 [Schedule 1, Part 1, item 16, subsection
294B(6)].
Exception for Commonwealth companies or subsidiaries of
Commonwealth companies and Commonwealth authorities
19. The following entities are excluded from the proposed reforms
applying to companies limited by guarantee:
. a Commonwealth company;
. a subsidiary of a Commonwealth company; or
. a subsidiary of a Commonwealth authority.
[Schedule 1, Part 1, items 4 and 30, paragraphs 45B(d) and
301(3)(a)]
20. The directors of a Commonwealth company (a company subject to the
Corporations Act that the Commonwealth controls, whether they are
companies limited by shares or companies limited by guarantee) are
required to comply with the annual reporting requirements in the
Commonwealth Authorities and Companies Act 1997 (CAC Act).
21. The annual reporting requirements in the CAC Act currently require
the directors of a Commonwealth company to provide to their
responsible Minister the company's financial report, directors'
report and auditor's report required by the Corporations Act for a
financial year, as if the company were a public company under the
Corporations Act.
22. The CAC Act also requires the directors of Commonwealth authorities
and companies to ensure that certain information regarding
subsidiaries is included in their reports and that the financial
statements of those subsidiaries are audited by the Auditor-
General.
23. By excluding Commonwealth companies and subsidiaries of
Commonwealth companies and Commonwealth authorities from the
coverage of these reforms, such entities will continue to maintain
the higher level of reporting that is appropriate given that the
entity is controlled by the Commonwealth, and their reports are
tabled in Parliament.
Exception for certain bodies corporate
24. The following entities are excluded from the proposed reforms
applying to companies limited by guarantee:
. a transferring financial institution of a State or
Territory; or
. a company that is permitted to use the expression
'building society', 'credit society' or 'credit union'
under section 66 of the Banking Act 1959.
[Schedule 1, Part 1, items 4 and 30, paragraphs 45B(d) and
301(3)(a)]
25. These entities are currently subject to a tailored financial
reporting regime under Part 12.6 of the Corporations Regulations
2001, and as such, the proposed reforms will not apply to such
entities.
Audits and reviews
26. The current framework requires companies limited by guarantee to
have their financial reports audited by a registered company
auditor in accordance with Australian auditing standards.
Stakeholders have suggested that many small companies limited by
guarantee are currently spending a disproportionate amount on audit
fees. This reduces the resources that the company has available
for member services.
27. Under the new law, companies falling within the second tier would
be given the option of having their annual report subject to a
review, rather than an audit. [Schedule 1, Part 1, item 30,
subsection 301(3)]
28. A review, in contrast to an audit, is not designed to obtain
reasonable assurance that the financial information reported by the
company is free from material misstatement. A review consists of
making enquiries, primarily of persons responsible for financial
and accounting matters, and applying analytical and other review
procedures. A review may bring significant matters affecting the
financial information to the assurance practitioner's attention,
but it does not provide all of the evidence that would be required
in an audit.
29. This measure is intended to reduce the time and costs associated
with having the financial statements audited, whilst ensuring that
the financial information is still subject to an appropriate degree
of assurance.
30. The review would be conducted in accordance with a standard on
review engagements developed (and modified as appropriate) by the
Auditing and Assurance Standards Board (AUASB).
31. The review could be undertaken by either a registered company
auditor, or a member of a professional accounting body that holds a
prescribed practising certificate. [Schedule 1, Part 1, item 45,
section 324BE]
32. The associated regulations prescribe the following practising
certificates:
. the Certificate of Public Practice issued by the Institute
of Chartered Accountants in Australia (ICAA);
. the Public Practice Certificate issued by CPA Australia
Ltd or the National Institute of Accountants (NIA).
33. This measure will expand the category of individuals that are
permitted to undertake a review, which will provide greater
flexibility and reduce unnecessary burden on companies limited by
guarantee and their auditors, particularly during peak periods.
Streamlined directors' report
34. Currently, all companies limited by guarantee are required to
prepare a directors' report. The existing directors' report
disclosure requirements for companies include a large number of
provisions that are not relevant for not-for-profit companies.
These include disclosures relating to the payment of dividends and
options issued to directors as remuneration. In addition, not-for-
profit companies are generally purpose or objective driven. As
such, stakeholders in not-for-profit companies are likely to be
particularly interested in the objectives of the organisation and
how the activities conducted during the period contributed to
achieving those objectives.
35. Under the new law, companies falling within the second and third
tiers would be exempt from complying with the existing directors'
report disclosure requirements, and would instead prepare a
simplified directors' report. [Schedule 1, Part 1, item 14,
section 285A]
36. The simplified directors' report would contain the following
disclosures:
. a description of the short and long term objectives of the
entity;
. the entity's strategy for achieving those objectives;
. the entity's principal activities during the year;
. how those activities assisted in achieving the entity's
objectives; and
. how the entity measures its performance, including any key
performance indicators used by the entity.
[Schedule 1, Part 1, item 29, subsections 300B(1) and (2)]
37. In addition, the simplified directors report would contain details
of:
. the name of each person who has been a director of the
company at any time during or since the end of the year
and the period for which the person was a director;
. each director's qualifications, experience and special
responsibilities;
. the number of meetings of the board of directors held
during the year and each director's attendance at those
meetings;
. for each class of membership in the company, the amount
which a member of that class is liable to contribute if
the company is wound up; and
. the total amount that members of the company are liable to
contribute if the company is wound up.
[Schedule 1, Part 1, item 29, subsection 300B(3)]
38. By creating a set of tailored, non-financial disclosure
requirements for companies limited by guarantee that recognises the
not-for-profit nature of these entities, the measure will result in
more relevant information being provided to stakeholders. In
addition, it will reduce the range of reporting requirements
currently imposed on companies limited by guarantee.
Distribution of annual reports
39. The Corporations Act currently allows companies limited by
guarantee to distribute their annual reports to members via the
Internet. However, small companies limited by guarantee may not
have sufficient resources to maintain a website. In these
circumstances, companies are required to send members a hard copy
of the annual report. This can be a considerable burden if the
company limited by guarantee has a large number of members.
40. Under the new law, members wishing to obtain a hard copy or an
electronic copy of the company's latest annual report can elect to
obtain this from the company free of charge, and the company
limited by guarantee must comply with this request. This will
minimise the regulatory burden on companies limited by guarantee by
ensuring that they do not need to write to members each year
informing them that the report has been prepared. [Schedule 1,
Part 1, item 40, section 316A]
41. An election made by members to either receive a hard copy or an
electronic copy is a standing election for subsequent financial
years until the member changes the election [Schedule 1, Part 1,
item 40, subsection 316A(3)]. This will ensure that members do not
need to repeat their requests for a copy of the report each year.
42. The Bill provides a strict liability offence where a company fails
to send a member a copy of the report in accordance with
subsections 316A(3) and (4) [Schedule 1, Part 1, item 40,
subsection 316A(5)]. This will facilitate effective enforcement
and compliance of this requirement, and will safeguard member's
rights to access financial information relating to the company.
Payment of dividends
43. Currently, the Corporations Act does not prohibit companies limited
by guarantee from paying dividends. Despite this, the corporate
structure of companies limited by guarantee means that they are not
suited for conducting for-profit activities which could
legitimately warrant the payment of dividends to members. Some
companies limited by guarantee have already remedied this situation
by providing in their constitution a prohibition on the payment of
dividends.
44. In order to address this situation for all companies limited by
guarantee, the new law prohibits companies limited by guarantee,
incorporated on or after the commencement this provision, from
paying dividends to members. [Schedule 1, Part 1, item 6, section
254SA]
45. This prohibition does not apply to entities that have been exempt
from this reform, such as transferring financial institutions,
building societies, credit societies or credit unions.
Chapter 2
Parent-entity financial statements
Context of amendments
46. Under the Corporations Act, each public company, large proprietary
company, registered scheme and disclosing entity (subsequently
referred to as 'entity') is required to prepare a financial
statement in relation to the entity reported on for each financial
year. In addition, where an entity is a parent entity it is
required to prepare financial statements in relation to the
consolidated entity if the preparation of such statements is
required by the accounting standards. The Act also contains
equivalent requirements in respect of the half-year financial
statements of a disclosing entity.
47. This results in parent entities having to include a minimum of four
columns in their financial statements (that is, figures for the
current financial year and the preceding financial year for both
the parent entity and the consolidated entity).
48. The issue of the usefulness of separate parent entity financial
statements has been debated in Australia for a number of years. In
2003, the Australian Accounting Standards Board (AASB) commissioned
a research project on the relevance of parent entity financial
reports and issued a discussion paper titled The Relevance of
Parent Entity Financial Reports. The AASB believes that there is a
need for revision in respect of parent entity reporting.
49. An industry group, the Group of 100 (comprising the Chief Financial
Officers of Australia's largest entities) has also noted, in a
submission to Treasury, that the replacement of full parent entity
financial statements with summary information would reduce the
burden of regulation on business, reduce business costs and remove
unnecessary disclosures from an entity's annual report.
Summary of new law
50. It is proposed that subsections 295(2) and 303(2) of the
Corporations Act be repealed and replaced by new provisions that
provide that, where the accounting standards require an entity to
prepare financial statements in relation to a consolidated entity,
separate financial statements do not have to be prepared in
relation to the entity itself.
51. It is also proposed that regulations will be made for the purposes
of paragraph 295(3)(a) of the Corporations Act requiring the
inclusion of a note in the consolidated financial statements
containing the following supplementary information about the parent
entity:
. current and total assets;
. current and total liabilities;
. shareholders' equity, showing separately issued capital
and each reserve;
. profit or loss;
. total comprehensive income;
. details of any guarantees entered into by the parent
entity in relation to the debts of its subsidiaries;
. details of any contingent liabilities; and
. details of any contractual commitments for the acquisition
of property, plant or equipment.
52. The proposed regulations will also provide that the supplementary
information is to be calculated in accordance with accounting
standards in force in the financial year to which the disclosure
relates.
Comparison of key features of new law and current law
|New law |Current law |
|Under the new law, an |Under the current law, an|
|entity would be required |entity is required to |
|to prepare financial |prepare a financial |
|statements either: in |statement in relation to |
|relation to itself (if |itself. In addition, |
|the accounting standards |where an entity is a |
|did not require the |parent entity it is |
|preparation of |required to prepare |
|consolidated financial |financial statements in |
|statements); or in |relation to the |
|relation to the |consolidated entity if |
|consolidated entity (if |the preparation of such |
|the preparation of such |statements is required by|
|statements is required by|the accounting standards.|
|the accounting | |
|standards). | |
|Where the entity is | |
|required to prepare | |
|financial statements in | |
|relation to the | |
|consolidated entity, the | |
|Corporations Regulations | |
|will specify | |
|supplementary information| |
|about the parent entity | |
|that is to be included in| |
|a note to the | |
|consolidated financial | |
|statements. | |
Detailed explanation of new law
53. Subsection 295(2) will be replaced by a new provision that provides
that the financial statements of the entity for the year are either
the financial statements in relation to the entity or, where the
accounting standards require the preparation of financial
statements in relation to the consolidated entity, the financial
statements in relation to the consolidated entity.
54. An equivalent amendment will be made to subsection 303(2) in
respect of the half-year financial statements of a disclosing
entity. [Schedule 1, Part 1, items 17 and 31]
55. In addition, regulations made for the purposes of
paragraphs 295(3)(a) and 303(3)(a) will specify supplementary
information about the parent entity to be included in the notes to
the financial statements for the consolidated entity prepared under
proposed paragraphs 295(2)(b) and 303(2)(b).
Application and transitional provisions
56. Proposed subsections 1510B(5) and 1515(5) provide that the proposed
amendment to subsection 295(2) will apply to a financial report of
an entity for financial years of the entity ending on or after
30 June 2010.
57. Similarly, proposed subsections 1510B(8) and 1515(8) provide that
the proposed amendment to subsection 303(2) will apply to a
financial report of a disclosing entity for half-years of the
disclosing entity ending on or after 30 June 2010.
58. Proposed subsections 1510B and 1515 (4) and (7) are savings
provisions that provide that the substitution of subsections 295(2)
and 303(2) respectively do not affect the operation of the
accounting standards made for the purposes of those subsections.
[Schedule 1, Parts 2 and 3, items 52 and 54]
Chapter 3
Requirements for paying dividends
Context of amendments
59. Currently, section 254T of the Corporations Act provides that a
dividend may only be paid out of company profits. This is commonly
referred to as the 'profits test'.
60. Industry has raised the following concerns with the profits test:
. the Corporations Act does not provide guidance about, or a
definition of, the term 'profits'. In addition, the legal
precedents on this issue are outdated and complex and not
in line with current accounting principles. This makes it
difficult for directors to understand the legal
requirements when paying dividends;
. the nature of accounting principles for the calculation of
profits has changed over time. Australian accounting
standards, particularly following the adoption of
International Financial Reporting Standards (IFRS), are
increasingly linked to the fair value (whether realised or
unrealised) impacting on the profitability of the company.
This makes the profitability of Australian companies
increasingly volatile with a large number of non-cash
expenses being included in the net result. In these
circumstances a company may have sufficient cash to pay a
dividend to shareholders but is unable to do so because
the accounting profits of the company have been eliminated
by non-cash expenses; and
. the requirement for companies to pay dividends only out of
profits is inconsistent with the trend to lessen the
capital maintenance doctrine in Australia.
61. In 2002, the Australian Accounting Research Foundation released a
discussion paper recommending that Australia move away from the
current profits test.
Summary of new law
62. The profits test will be repealed and replaced with a more flexible
requirement that allows a company to pay dividends if:
. the company's assets exceed its liabilities immediately
before the dividend is declared and the excess is
sufficient for the payment of the dividend;
. it is fair and reasonable to the company's shareholders as
a whole;
. it does not materially prejudice the company's ability to
pay its creditors.
- Where the payment results in the company becoming
insolvent, it will clearly prejudice the company's
ability to pay its creditors.
[Schedule 1, Part 1, item 7, section 254T]
63. The existing directors' duty to prevent insolvent trading in
section 588G of the Corporations Act will continue to apply.
64. The Bill provides that the assets and liabilities referred to in
the first limb of the test are to be calculated in accordance with
accounting standards.
65. See 'detailed explanation of new law' below for an overview of the
taxation issues relating to this proposal.
Comparison of key features of new law and current law
|New law |Current law |
|A company may pay a |A company may pay a |
|dividend if: |dividend only from |
|the company's assets |profit. |
|exceed its liabilities |In addition, section 588G|
|immediately before the |sets out the directors' |
|dividend is declared and |duty to prevent insolvent|
|the excess is sufficient |trading. |
|for the payment of the | |
|dividend; | |
|it is fair and reasonable| |
|to the company's | |
|shareholders as a whole; | |
|and | |
|it does not materially | |
|prejudice the company's | |
|ability to pay its | |
|creditors. | |
|The existing directors' | |
|duty to prevent insolvent| |
|trading in section 588G | |
|will continue to apply. | |
Detailed explanation of new law
66. The first limb of the new test establishes an important safeguard
by requiring companies to have sufficient assets in excess of their
liabilities in order to pay the dividend. This is similar to the
balance sheet tests currently in operation in New Zealand and
Canada.
67. The second and third limbs of the new test align with the
requirements imposed on companies in relation to conducting share
capital reductions and share buy-backs under Part 2J of the
Corporations Act.
68. The new test is designed to ensure that creditors and shareholders
who are not entitled to dividends are sufficiently protected.
69. In addition to the limbs outlined above, companies may also be
subject to additional regulatory requirements. For example,
prudentially regulated entities must comply with regulatory
requirements governing the payment of a dividend or reduction in
capital. The proposal outlined above will in no way impact upon
these requirements.
Companies not required to prepare an audited financial report
70. If a company is not required to prepare an audited financial report
(for example, because it is a small proprietary company), then the
first component of the test which requires the company to be
balance sheet solvent can be determined by reference to the
accounting records which are required to be kept under section 286
of the Corporations Act.
Consequential amendments
General consequential amendments
71. Consequential amendments to other provisions that currently refer
to profits are made to Part 1.5 of the Corporations Act and other
statutes such as the Medibank Private Sale Act 2006 and the
Financial Sector (Business Transfer and Group Restructure) Act
1999. [Schedule 1, Parts 1 and 4, items 5, 55, 58 and 59]
72. Importantly, the share capital concept will remain in the
Corporations Act for other purposes, such as the provisions dealing
with share buy-backs in Part 2J of the Act.
Consequential amendments to the income tax law
73. For income tax purposes, a dividend is defined to mean, broadly,
any distribution made by a company to its shareholders, other than
an amount that is debited against the company's share capital
account (subsection 6(1) of the Income Tax Assessment Act 1936).
Therefore, distributions made as a result of the amendments to
section 254T of the Corporations Act will generally be
dividends for income tax purposes.
74. Dividends paid to shareholders are included in assessable income
provided that the dividends are paid by the company out of its
profits (section 44 of the Income Tax Assessment Act 1936). As a
result of these amendments, some corporate distributions that are
dividends for Corporations Act purposes may not be paid by the
company out of its profits.
75. Therefore, a consequential amendment to section 44 will deem these
distributions to be paid by a company out of profits for the
purposes of the income tax law. This will ensure that shareholders
include these distributions in assessable income. [Schedule 1,
Part 4, item 56]
76. Subject to the operation of the current imputation integrity rules,
these distributions will be frankable under section 202-40 of the
Income Tax Assessment Act 1997.
Chapter 4
Changing reporting periods
Context of amendments
77. In Australia, close to 33,000 companies, registered schemes and
disclosing entities (entities) have financial reporting obligations
as outlined in Chapter 2M of the Corporations Act.
78. Under section 323D of the Act, a financial year is 12 months long
(plus or minus seven days). The balance date can normally only be
changed by up to seven days each year to accommodate entities with
week-based internal reporting. The restrictions on changing
financial years were introduced by the Company Law Review Act 1988,
which came into effect on 1 July 1998.
79. The existing arrangements in Australia make it difficult for
entities to change their year-end date for reasons other than those
contained in the Corporations Act - generally, to synchronise the
financial years of an entity and its controlled entities to
facilitate the preparation of consolidated financial statements.
In this regard, the Australian requirements are more stringent than
the requirements of comparable jurisdictions.
Summary of new law
80. It is proposed that section 323D be amended to allow a financial
year of an entity subsequent to the first year to last for a period
other than 12 months provided that the period is not longer than
12 months, there has not been a period during the last five
financial years in which there was a financial year of other than
12 months, and the change to the subsequent financial year is made
in good faith in the best interests of the entity.
Comparison of key features of new law and current law
|New law |Current law |
|The amended law will |Under the current law, |
|retain the existing |the financial year of an |
|requirements. |entity is to be 12 months|
| |long (plus or minus seven|
| |days). |
| |An entity that is |
| |required to prepare |
| |consolidated financial |
| |statements is to ensure |
| |that the financial years |
| |of its consolidated |
| |entities are synchronised|
| |with its own financial |
| |year. |
|Under the amended law, an|There is no equivalent |
|entity will be permitted |provision in the current |
|to vary the length of a |law. |
|financial year subsequent| |
|to its first financial | |
|year provided that: the | |
|financial year is not | |
|longer than 12 months, | |
|the previous five | |
|financial years have all | |
|been of 12 months | |
|duration, and the change | |
|in the length of the | |
|subsequent financial year| |
|is made in good faith in | |
|the best interests of the| |
|entity. | |
Detailed explanation of new law
81. The Bill provides for the insertion of a proposed
subsection 323D(2A) which provides a more flexible regime for
changing an entity's financial year. Subsection 323D(2) will also
be amended to provide a cross-reference to proposed subsection
323D(2A). [Schedule 1, Part 1, items 43 and 44]
82. Proposed subsection 323D(2A) provides that a subsequent financial
year of an entity may last for a period other than 12 months
provided the following requirements are satisfied:
. the financial year commences at the end of the previous
financial year and it not longer than 12 months;
. during the previous five financial years each financial
year has been of 12 months duration; and
. the change in length of the subsequent financial year is
made in good faith in the best interests of the entity.
Application and transitional provisions
83. Proposed subsections 1510B(9) and 1515(9) provide that the proposed
amendments to section 323D apply where the previous financial year
of the entity ends on or after 30 June 2010 (that is, the
amendments apply to subsequent financial years commencing on or
after 1 July 2010). [Schedule 1, Parts 2 and 3, items 52 and 54]
Chapter 5
Extending section 299A of the Corporations Act
Context of amendments
84. Under section 299A of the Corporations Act, a listed public company
is required to provide, in its director's report, all information
reasonably required to allow an informed assessment of its
operations, financial conditional and business strategies and
prospects for future financial years. Guidance on this requirement
refers to it as a review of operations and financial condition.
85. The requirement for companies to disclose a review of operations
and financial condition was introduced as a result of the
recommendations of the HIH Royal Commission. The rationale for its
introduction was to address a lack of contextual information which
explained the results set out in a company's financial statements.
Accordingly, the review of operations and financial condition was
introduced to provide stakeholders with an overview which would
enable users to understand a business' performance and the factors
underlying its results and financial position.
86. Extending the application of section 299A to all listed entities
was a recommendation of the Corporations and Markets Advisory
Committee (CAMAC)'s 2006 report The social responsibility of
corporations.
Summary of new law
87. All listed entities, that is both listed registered schemes and
listed companies will be required to report under section 299A.
Comparison of key features of new law and current law
|New law |Current law |
|All listed entities will |Only listed public |
|be required to report |companies are required to|
|under section 299A. |report under section |
| |299A. Listed registered |
| |schemes are not. |
Detailed explanation of new law
88. The Bill amends subsection 299A(1) and paragraph 299A(2)(a) to
provide that listed registered schemes, in addition to listed
companies, are required to disclose the information that members
would reasonably require to make an informed assessment of the
operations, financial position and business strategies and
prospects for future financial years of the entity reported on.
[Schedule 1, Part 1, items 24 and 27]
89. The Bill amends paragraphs 299A(1)(b)(c) to make the
phrasing consistent with that which is used paragraph 299A(1)(a)
and subsection 299A(2) with respect to using the term 'entity
reported on' rather than the term entity. [Schedule 1, Part 1,
items 25 and 26]
90. The Bill amends subsection 299(3) to provide that listed registered
schemes, in addition to listed companies, may omit material that
would otherwise need to be disclosed under paragraph 299A(1)(c) if
it is likely to result in unreasonable prejudice to the listed
registered scheme or listed company or if consolidated financial
statements are required, the consolidated entity or entity
(including the company, registered scheme or disclosing entity)
that is part of the consolidated entity. [Schedule 1, Part 1, item
28]
Chapter 6
IFRS declaration
Context of amendments
91. Some feedback from foreign jurisdictions has suggested there is a
lack of awareness that the financial statements of Australian
companies and other reporting entities are compliant with IFRS made
by the International Accounting Standards Board (IASB). In
particular, as accounting standards in Australia are commonly
referred to as 'Australian-equivalent International Financial
Reporting Standards (AIFRS)', there is a perception that they are
not identical to IFRS.
92. Lack of international recognition of Australia's IFRS adoption
prevents Australia from realising the full benefits of IFRS in
relation to the facilitation of foreign investment.
93. Companies are already required by the accounting standards to make
a statement of IFRS compliance in the notes to their financial
statements. Auditing standards also require auditors to make a
declaration of IFRS compliance in the audit report. However, there
is no corresponding requirement in the directors' declaration and
this may create some confusion.
Summary of new law
94. Where a company, disclosing entity or registered scheme has
included in the notes to the financial statements, in compliance
with the accounting standards, an explicit and unreserved statement
of compliance with IFRS, the directors' declaration included in the
annual report must indicate that this statement has been included
in the notes to the financial statements.
Comparison of key features of new law and current law
|New law |Current law |
|Under the new law, where |Under the current law, no|
|the notes to the |such statement has to be |
|financial statements |included in the |
|include an explicit and |directors' declaration. |
|unreserved statement of |However, companies are |
|compliance with IFRS, the|required by accounting |
|directors' declaration |standards to make a |
|included in the annual |statement of IFRS |
|report must indicate that|compliance in the notes |
|this statement has been |to their financial |
|included in the notes to |statements. Auditing |
|the financial statements.|standards also require |
| |auditors to make a |
| |declaration of IFRS |
| |compliance in the audit |
| |report. |
Detailed explanation of new law
95. The Bill requires that a new paragraph, 295(4)(ca) be inserted to
require the directors' declaration to include, where the notes to
the financial statements include an explicit and unreserved
statement of compliance with IFRS, advice that this statement has
been included in the notes to the financial statements. [Schedule
1, Part 1, Item 18]
96. Subsection 295(1) of the Act provides that a company's financial
report for a financial year includes the directors' declaration
about the statements and notes. The details required in the
directors' declaration are provided under subsection 295(4).
97. The purpose of this amendment is to ensure international
recognition of Australia's adoption of IFRS. This will also create
consistency between the auditor's report, directors' declaration
and the notes to the financial statements.
Chapter 7
Lost capital reductions
Context of amendments
98. Under section 258F of the Corporations Act, companies are allowed
to cancel paid-up capital that is lost or not represented by
available assets of the company. The provision is intended to
allow companies to write down the value of the company's capital in
situations where a company incurs certain types of losses. This is
done by writing-off past accumulated losses against the share
capital of the company.
99. However, concerns have been expressed that companies may be able to
use section 258F to overstate the profitability of the company by
taking expenses directly to share capital rather than recognising
them in the statement of financial performance. Such action would
be in breach of Australian accounting standards.
Summary of new law
100. It is proposed that section 258F be amended to make it clear that a
company can only cancel share capital in circumstances where it is
not inconsistent with the requirements in Australian accounting
standards. The proposed amendment will still allow companies to
write off accumulated losses to share capital but will not allow
companies to take expenses directly to share capital.
101. The proposed amendment is of a technical nature and is designed to
clarify the manner in which section 258F is intended to operate.
Comparison of key features of new law and current law
|New law |Current law |
|Under the new law, a |Under the current law, a |
|company may not reduce |company may reduce its |
|its share capital by |share capital by |
|cancelling any paid-up |cancelling any paid-up |
|capital that is lost or |capital that is lost or |
|not represented by |not represented by |
|available assets if the |available assets. |
|cancellation is | |
|inconsistent with the | |
|requirements of any | |
|accounting standard. | |
Detailed explanation of new law
102. The Bill provides for section 258F to be recast, with a proposed
paragraph 258F(2)(b) providing that a company's ability to reduce
its share capital by cancelling any paid-up share capital that is
lost or is not represented by available assets will not apply if
the cancellation is inconsistent with the requirements of any
accounting standard. [Schedule 1, Part 1, items 8, 9 and 10]
Application and transitional provisions
103. Proposed subsections 1510B(3) and 1515(3) provide that the proposed
amendments to section 258F apply in relation to the cancellations
of paid-up share capital that occur on or after the commencement of
items 8, 9 and 10 of Schedule 1. [Schedule 1, Parts 2 and 3, items
52 and 54]
Chapter 8
FRC functions and funding
Context of amendments
104. Prior to the enactment of the Governance Review Implementation
(AASB and AUASB) Act 2008 (GRI Act), the AASB and the AUASB were
statutory bodies governed by the CAC Act. The GRI Act has
transferred the AASB and the AUASB from the CAC Act to the
Financial Management and Accountability Act 1997 (FMA Act)
framework.
105. As a consequence of the enactment of the GRI Act, the specific
accounting and auditing standards functions given to the Financial
Reporting Council (FRC) under paragraphs 225(2)(i) and (j) and
225A(2)(i) and (j) of the ASIC Act are now obsolete and
unnecessary. These provisions require the FRC to:
. seek contributions towards the costs of the Australian
accounting standard and auditing standard setting
processes; and
. monitor the level of funding, and the funding
arrangements, for those processes.
Summary of new law
106. The Bill repeals paragraphs 225(2)(i) and (j) and 225(2A)(2)(i) and
(j) of the ASIC Act.
Comparison of key features of new law and current law
|New law |Current law |
|Paragraphs 225(2)(i) and |Paragraphs 225(2)(i) and |
|(j) and 225(2A)(i) and |(j) and 225(2A)(i) and |
|(j) will be repealed. |(j) set out the FRC's |
| |functions in relation to |
| |the funding arrangements |
| |for the AASB and the |
| |AUASB. |
Detailed explanation of new law
107. Paragraphs 225(2)(i) and (j) and 225(2A)(2)(i) and(j) of the ASIC
Act will be repealed as they are no longer necessary or appropriate
having regard to the fact that the AASB and the AUASB are now
financial management and accountability agencies for purpose of the
FMA Act. [Schedule 2, Part 1, items 9 to 12]
Chapter 9
CALDB processes
Context of amendments
108. The CALDB is a disciplinary body which receives and reviews
applications made to it by the ASIC or the Australian Prudential
Regulation Authority (APRA) in respect of the conduct of either
registered company auditors or liquidators.
109. Membership of the CALDB consists of:
. a Chairperson and a Deputy Chairperson, each of whom must
be enrolled as a barrister and/or a solicitor or a legal
practitioner in Australia;
. three members selected from a panel of seven nominated by
the Board of the ICAA;
. three members selected from a panel of seven nominated by
the Board of CPA Australia (CPAA); and
. six business members. Business members need not be
nominated by any particular body. The Minister must be
satisfied that a business representative has knowledge or
qualifications in a business or law-related discipline.
110. There are three professional accounting bodies in Australia, the
ICAA, CPAA and the NIA. Additionally, there is also a recognised
professional body representing insolvency practitioners, the
Insolvency Practitioners Association of Australia (IPAA). Under
the current framework, the NIA and other professional and
interested parties are unable to nominate members for CALDB.
111. Under section 221 of the ASIC Act, immunity consistent with that of
a Justice of the High Court is conferred on Panel Members of the
CALDB when exercising powers in relation to a hearing. Witness and
legal and other representatives receive immunity equivalent to that
which they would receive in appearing before the High Court.
112. However, section 1294A of the Corporations Act also allows the
Chairperson and Deputy Chairperson to conduct pre-hearing
conferences. This was introduced to streamline the hearing
process.
113. Under the current framework, the immunity under section 221 of the
ASIC Act is not available for pre-hearing conferences conducted by
the Chairperson of the CALDB. It is only available if the full
Panel conducts the pre-hearing conference.
114. The Bill introduces amendments to the ASIC Act to improve both the
membership process and pre-hearing conferences immunities for the
CALDB. These modifications will provide efficiency in the
functioning of the CALDB.
Summary of new law
115. The Bill modifies the membership requirements of the CALDB by
repealing the requirement for three members to be selected from a
panel of seven nominated by the Board of the ICAA and for three
members to be selected from a panel of seven nominated by the Board
of the CPAA. Under the new arrangements, the Minister appoints six
members as accounting members of the CALDB.
116. The new arrangements will not apply retrospectively to existing
members of the CALDB. The new arrangements will apply to members
appointed once the provisions commences.
117. In addition, the Bill extends the protection and immunities
provisions in section 221 of the ASIC Act to include a pre-hearing
conference convened by the Chairperson of the CALDB.
118. This arrangement will apply both retrospectively and on or after
the commencement of the provisions.
Comparison of key features of new law and current law
|New law |Current law |
|Six members selected by |Three members to be |
|the Minister who are |selected from a panel of |
|eligible for appointment |seven nominated by the |
|as accounting members of |Board of the ICAA and |
|the CALDB. |three members to be |
| |selected from a panel of |
| |seven nominated by the |
| |Board of CPAA. |
|Immunity under section |Immunity under section |
|221 of the ASIC Act is |221 of the ASIC Act is |
|extended to include |not available for |
|pre-hearing conferences |pre-hearing conferences |
|convened by the |conducted by the |
|Chairperson of the CALDB.|Chairperson. |
Detailed explanation of new law
Definitions
119. The Bill repeals some terms used in Schedule 2. [Schedule 2,
Part 1, items 1 and 2]
Modifying the membership requirements
120. Section 203 of the ASIC Act prescribed the membership conditions of
the CALDB. The Bill repeals the existing requirements for the
appointment of ICAA and CPAA members and introduces a new provision
for the Minister to select 6 members who are eligible for
appointment as accounting members of the CALDB [Schedule 2, Part 1,
items 3 and 4, paragraphs 203(1)(c) and (d), subsection 203(1A)].
The new arrangement will mean that accounting members are appointed
to the CALDB in the same manner in which business members are
appointed.
121. The Bill sets out the conditions that must be met for a person
to be eligible for appointment as an accounting member in
subsection 203(1B) [Schedule 2, Part 1, item 5, subsection
203(1B)]. This includes a person who is a resident of Australia
and a member of a professional accounting body. The ICAA, CPAA and
NIA are taken to be professional accounting bodies in Australia.
122. Additionally, the Bill contains a regulation making power to create
regulations which prescribe bodies to which a person can be a
member of and considered eligible for appointment as an accounting
member [Schedule 2, Part 1, item 5, subparagraph 203(1B)(b)(ii)].
This is to ensure that all relevant professional bodies, for
example, the IPAA, are able nominate members for appointment to the
CALDB.
123. Consequential changes to existing references to ICAA member and
CPAA member are made in this Bill. [Schedule 2, Part 1, item 6,
subsection 210A(5)]
Protection and immunity for pre-hearing conferences
124. Section 221 of the ASIC Act confers immunity consistent with that
of a Justice of the High Court onto Panel Members of the CALDB when
exercising powers in relation to a hearing. Also, witness and
legal and other representatives receive immunity equivalent to that
which they would receive in appearing before the High Court.
125. The Bill extends the scope of the provisions to apply to pre-
hearing conferences convened by the Chairperson of the CALDB under
section 1294A of the Corporations Act [Schedule 2, Part 1, item 7,
subsection 221(1A)]. This arrangement will make the legislation
more complete as the current immunity relies on a full Panel
conducting a pre-hearing conference rather than just the
Chairperson.
126. The Bill also extends the protection and immunity to include a
barrister, solicitor or other person appearing on behalf of a
person at a pre-hearing conference. [Schedule 2, Part 1, item 8,
subsection 221(2A)].
Application and transitional provisions
127. Schedule 2, Part 2 of the Bill prescribes the application, saving
and transitional provisions relevant to the new arrangements.
[Schedule 2, Part 2, item 13]
128. The Bill defines several terms used in Schedule 2, Part 2.
[Schedule 2, Part 2, item 13, section 289]
Application of membership amendments
129. The new membership arrangements will not apply retrospectively to
existing members of the CALDB. Rather, the Bill provides for a
transition period whereby a member appointed after the commencement
of the new provisions must be eligible as an accounting member. At
the same time, however, a person already appointed as an ICAA or
CPAA member prior to the commencement of the new provisions
continues to hold the position for the remainder of their term.
[Schedule 2, Part 1, item 13, section 290]
Application of pre-conference amendments
130. The provisions extending immunity to pre-hearing conferences
convened by the Chairperson of the CALDB will apply to hearings
conducted before, on or after the commencement. [Schedule 2, Part
2, item 13, section 291]
131. This arrangement will apply retrospectively to ensure that the
protections and immunities available for the Chairperson, witness
and legal and other representatives cover any hearings that have
been convened prior to the commencement of the provisions.
Chapter 10
Regulation Impact Statement
Corporations Amendment (Corporate Reporting Reform) Bill 2010
Regulatory Impact Statement
Background
132. A robust financial reporting framework is an essential component of
an efficient market. Appropriate financial reporting and auditing
requirements enhance the accuracy of financial information, ensure
transparency and comparability and promote confidence.
133. The proposed reforms seek to reduce red-tape, improve
accountability and transparency of disclosures, and implement a
number of other important refinements to the corporate regulatory
framework. This work would also ensure that Australia's financial
reporting framework remains strong and in line with or ahead of
world's best practice. An overview of each of the recommended
options is set out below.
Reducing red-tape
134. The proposals that are designed to cut red-tape in financial
reporting with a view to reducing the regulatory burden on business
include:
. simplifying financial reporting requirements for smaller
companies limited by guarantee (which predominantly have a
not-for-profit focus);
. relieving companies that are parent entities of the
requirement to prepare financial statements for both the
parent entity and the consolidated group;
. relaxing the statutory requirement that companies may only
pay dividends from profits; and
. facilitating a change of balance date by a company.
Improving accountability
135. The proposals enhance the transparency and utility of disclosures
contained in the directors' report include extending the
requirement to disclose a review of operations and financial
condition to all listed entities (currently, these requirements
apply to listed public companies).
Refining the framework
136. The proposal for refining aspects of the financial reporting
framework include amending the directors' declaration to refer to
compliance with International Financial Reporting Standards (IFRS).
Identification of options, impact analysis, conclusions and recommendations
Impact assessment methodology
137. Impacts can be divided between three impact groups (consumers,
business and government). Typical impacts of an option on
consumers might be changes in access to a market, the level of
information and disclosure provided, or prices of goods or
services. Typical impacts of an option on business would be the
changes in the costs of compliance with a regulatory requirement.
Typical impacts on government might be the costs of administering a
regulatory requirement. Some impacts, such as changes in overall
confidence in a market, may impact on more than one impact group.
138. The assessment of impacts in this regulation statement is based on
a seven-point scale (-3 to +3). The impacts of each option are
compared with the equivalent impact of the 'do nothing' option. If
an impact on the impact group would, relative to doing nothing, be
beneficial, the impact is allocated a positive rating of +1 to +3,
depending on the magnitude of the relative benefit. On the other
hand, if the impact imposes an additional cost on the impact group
relative to the status quo, the impact is allocated a negative
rating of -1 to -3, depending on the magnitude of the relative
cost. If the impact is the same as that imposed under the current
situation, a zero score would be given, although usually the impact
would not be listed in such a case.
139. The magnitude of the rating of a particular impact associated with
an option has been assigned taking into account the overall
potential impact on the impact group. The reference point is
always the status quo (or 'do nothing' option). Whether the cost
or benefit is one-off or recurring, and whether it would fall on a
small or large proportion of the impact group (in the case of
business and consumers), is factored into the rating. For example,
a cost or benefit, even though large for the persons concerned, may
not result in the maximum rating (+/-3) if it is a one-off event
that only falls on a few individuals. Conversely, a small increase
in costs or benefits might be given a moderate or high rating if it
would be likely to recur or if it falls on a large proportion of
the impact group. The rating scale for individual impacts is
explained in the table below.
Rating an individual impact
|+3 |+2 |+1 |0 |-1 |-2 |-3 |
|Large |Moderat|Small |No |Small |Moderat|Large |
|benefit|e |benefit|substan|cost/ |e cost/|cost/ |
|/ |benefit|/ |tial |disadva| |disadva|
|advanta|/ |advanta|change |ntage |disadva|ntage |
|ge |advanta|ge |from |compare|ntage |compare|
|compare|ge |compare|'do |d to |compare|d to |
|d to |compare|d to |nothing|'do |d to |'do |
|'do |d to |'do |' |nothing|'do |nothing|
|nothing|'do |nothing| |' |nothing|' |
|' |nothing|' | | |' | |
| |' | | | | | |
140. The ratings for the individual impacts compared to the status quo
are then tallied to produce an overall outcome for the option. If
it is positive, it indicates that the option is likely to produce a
more favourable cost/benefit ratio than the status quo. If it is
zero there would be no overall benefit from adopting the option,
and if negative the option would provide overall a less favourable
cost/benefit ratio than the 'do nothing' option. Ordinarily,
options that have the highest positive score would be the favoured
courses of action.
141. What is classed as a 'large', 'moderate' or 'small' cost or benefit
depends on the nature of the problem and options being considered.
Of course, the costs and benefits associated with options to
address a problem costing billions of dollars per year are likely
to be of a much greater absolute magnitude than the costs and
benefits of options for dealing with a rather modest issue that
affects only a handful of persons. However, as all the ratings are
made relative to the status quo/ do nothing option for a particular
problem, the absolute value of 'large' or 'moderate' or 'small' is
not really important. All that matters is that within a problem
assessment, the impacts of each option are given appropriate
ratings relative to the status quo and each other. If that occurs,
it will be sufficient for the methodology to yield an overall
rating that assists in assessing the relative merits of options,
from a cost/benefit perspective, to address the particular problem.
142. An example of the rating calculation for an option, using the seven-
point scale ratings of impacts, is in the table below. The example
is based on a purely hypothetical scenario that a new type of long-
wearing vehicle tyre is being sold and marketed, but it has become
apparent that the new style of tyres have a higher risk of
exploding while in motion than conventional tyres. The example is
designed merely to illustrate how the rating scale might be used to
compare a proposal's costs and benefits option to the 'do nothing'
option - it is not intended to be a comprehensive or realistic
assessment of options to address such a problem.
Illustrative rating for the problem of a long-wearing tyre that may fail
Option A: Do nothing
| |Benefits |Costs |
|Consumers |Access to a |Risk of tyre failure|
| |cheaper solution |that can result in |
| |for vehicle tyres |personal and |
| | |property damage as a|
| | |result of collision.|
| | |Damage can be severe|
| | |but cases are rare |
|Industry | |Some compensation |
| | |payments to persons |
| | |as a result of |
| | |collisions caused by|
| | |the tyre |
|Government |Advantages for | |
| |waste management | |
| |perspective | |
Option B: Ban on sale of the new tyre
| |Benefits |Costs |
|Consumers |No persons will be|Lack of access by |
| |affected by tyre |consumers to |
| |failure and |long-wearing |
| |resultant damage |vehicle tyres, |
| |(+3) |increasing the |
| | |cost of vehicle |
| | |maintenance [-2] |
|Industry |No compensation |Transitional costs|
| |payments for |involved with |
| |accident victims |switching back all|
| |[+1] |manufacturing/mark|
| | |eting operations |
| | |to conventional |
| | |tyres [-3] |
|Government | |Conventional tyres|
| | |produce more waste|
| | |which is costly to|
| | |deal with [-1] |
|Sub-rating |+4 |-6 |
|Overall rating |-2 |
Option C: Industry-developed quality control standards
| |Benefits |Costs |
|Consumers |Much lower risk of| |
| |tyre failure and | |
| |resultant damage | |
| |than status quo | |
| |[+2] | |
|Industry |Significantly less|Developing and |
| |compensation |monitoring |
| |payments for |industry-wide |
| |accident victims |quality control |
| |[+1] |standards [-2] |
|Government | | |
|Sub-rating |+3 |-2 |
|Overall rating |+1 |
In the above hypothetical example, Option C appears to have a
better impact for consumers and a better overall cost/benefit
rating than Option B.
Simplifying the reporting and auditing requirements of companies limited by
guarantee
Problem
143. Currently, all public companies, disclosing entities, large
proprietary companies and registered schemes are required to
prepare a full audited annual report in accordance with Australian
accounting standards. As a result, the requirement to prepare a
full audited annual report also applies to all public companies
limited by guarantee, regardless of their size. Consequently,
companies limited by guarantee are required to comply with the same
level of reporting and auditing requirements as a large listed
company.
144. The company limited by guarantee structure is used predominantly by
not-for-profit entities to incorporate their operations. There are
approximately 11,000 companies limited by guarantee, the majority
of which are relatively small. Research conducted by The
University of Melbourne found that 21 per cent of companies limited
by guarantee were sports and recreation related organisations, 19
per cent were community service organisations, 15 per cent were
education-related institutions and 10 per cent were religious
organisations.
145. Given that companies limited by guarantee are mostly small not-for-
profit entities, the current financial reporting requirements can
impose onerous costs and regulatory burden in the form of
preparation costs, audit costs, printing and distribution costs.
Quantifying such costs can be difficult, as they vary significantly
depending the size and complexity of the report. It is estimated
that the average cost of preparing and auditing an annual report is
$60,000 per company. This figure is based on approximate costs
obtained in relation to large proprietary companies.
146. The table below outlines the relative size of companies limited by
guarantee based on a sample of companies that lodged financial
reports with the Australian Securities and Investments Commission
(ASIC). The small size of companies limited by guarantee means
that the costs of extensive reporting requirements are
disproportionate to the size of the entity. However, reporting by
such companies is also an important governance and transparency
mechanism, particularly for larger companies or companies that seek
donations from the public, as it provides users with information on
how their donations have been spent, how the company is performing
and how it is being managed.
Table 1: Size of companies limited by guarantee[2]
| |Revenue (%)|Cumulative |Assets (%) |Cumulative |
| | |Total: | |Total: |
| | |Revenue (%)| |Assets (%) |
|Less than |14 |14 |12 |12 |
|$20,000 | | | | |
|Between |9 |23 |9 |21 |
|$20,000 and| | | | |
|$50,000 | | | | |
|Between |24 |47 |16 |37 |
|$50,001 and| | | | |
|$250,000 | | | | |
|Between |7 |54 |8 |45 |
|$250,001 | | | | |
|and | | | | |
|$500,000 | | | | |
|Between |14 |68 |18 |63 |
|$500,001 | | | | |
|and | | | | |
|$1,000,000 | | | | |
|Between |28 |96 |30 |93 |
|$1,000,000 | | | | |
|and | | | | |
|$12,500,000| | | | |
|Greater |4 |100 |5 |100 |
|than | | | | |
|$12,500,000| | | | |
Objective
147. The objective is to reduce the regulatory burden and administration
costs for small companies limited by guarantee to allow greater
resources to be devoted to their not-for-profit work, whilst
ensuring that large companies limited by guarantee or companies
that seek tax deductible donations from the public remain
accountable and transparent.
Options
Option A: Do nothing
148. Under this option, all companies limited by guarantee would
continue to prepare a full audited annual report in accordance with
Australian accounting standards regardless of their size.
149. This would require a company limited by guarantee to provide the
same level of annual reporting as companies listed on the
Australian Stock Exchange. As noted above, it is estimated that
the average cost of preparing and auditing an annual report is
$60,000 per company, although this would vary depending on the size
and complexity of the report.
150. A significant proportion of companies limited by guarantee (almost
half) have consolidated revenue of less than $250,000, resulting in
the compliance costs that are disproportionate to the size of the
organisation.
Option B: Establish a differential reporting and auditing framework
and streamline requirements
151. Under this option, small companies limited by guarantee would be
exempt from preparing audited financial reports and directors'
reports under Chapter 2M of the Corporations Act. Large companies
limited by guarantee, or companies that seek tax deductible
donations from the public, will continue to prepare financial
reports with simplified auditing and directors' report
requirements.
152. It is proposed that the threshold be determined by reference to the
company's consolidated revenue. Tests based on assets or number of
employees may not be accurate indicators of the "size" of the
company. For example, a company limited by guarantee may have a
large number of assets, but there may be restrictions on the
company disposing of these assets. In addition, indicators based
on employee numbers are likely to be distorted by the large number
of volunteers that generally participate in not-for-profit
entities. This is also consistent with the recommendations of the
recent Senate Economics Committee report on the disclosure regimes
for not-for-profit organisations, which recommended the
introduction of a tiered reporting system based on revenue
thresholds.
153. In addition, it is proposed that the threshold be set at $250,000
of consolidated revenue. Companies below this threshold would be
exempt from the reporting and auditing requirements of Chapter 2M
of the Corporations Act, unless they are a deductible gift
recipient. As indicated in Table 1 above, 47 per cent (or
approximately one half) of companies limited by guarantee would
fall below the $250,000 threshold. On balance, this is considered
to be an appropriate threshold, as it would ensure that the
remaining half is still required to prepare financial reports.
Appropriate safeguards will be put in place by requiring companies
below this threshold to prepare a financial report if they are
directed to by ASIC or by 5 per cent of members (similar to the
requirements applying to small proprietary companies in sections
293 and 294 of the Corporations Act).
154. Some types of companies limited by guarantee will have a higher
level of public interest due to the nature of their activities.
Charities, for instance, generally fall within this category
because of their public fundraising activities (for example,
donation drives) and significant community involvement. In
contrast, member-focused companies limited by guarantee (for
example, sporting clubs) may have a significantly lower level of
public interest. Such factors need to be considered when
differentiating between companies limited by guarantee for
reporting purposes. As such, it is proposed that all deductible
gift recipients (that is, companies which seek tax deductible
donations from the public) continue to prepare a financial report,
irrespective of whether they fall above or below the threshold.
155. Companies above the threshold, or companies that seek tax
deductible donations from the public, would continue to prepare
financial reports in accordance with Australian Accounting
Standards. However, these companies will have simplified
directors' report requirements, as they will prepare a summarised
directors' report containing approximately five key qualitative
disclosures (rather than a full directors' report which would
typically require compliance with sections 299 and 300). The
existing directors' report disclosure requirements for companies
include a large number of provisions that are not relevant for not-
for-profit companies. These include disclosures relating to the
payment of dividends and options issued to directors as
remuneration. In addition, it is noted that not-for-profit
companies are generally purpose or objective driven. As such,
stakeholders in not-for-profit companies are likely to be
particularly interested in the objectives of the organisation and
how the activities conducted during the period contributed
achieving those objectives. By creating a set of tailored, non-
financial disclosure requirements for companies limited by
guarantee that recognises the not-for-profit nature of these
entities, the proposal will result in more relevant information
being provided to stakeholders whilst reducing the range of
reporting requirements currently imposed on companies limited by
guarantee.
156. Companies above the threshold will also have simplified auditing
requirements if their consolidated revenue is below $1 million.
Such companies would have the option of having either a full audit
or a review of the financial report conducted by a registered
company auditor or by a member of a professional accounting body
with a practising certificate. This will streamline the auditing
requirements for a further 21 per cent of companies limited by
guarantee. Companies with a consolidated revenue greater than
$1 million will continue to be required to undertake a full audit
of the financial report by a registered company auditor.
157. In addition, other minor and technical amendments would be
implemented, such as providing streamlined methods for companies
limited by guarantee to distribute the annual report to their
members and removing the ability of companies limited by guarantee
to pay dividends as their corporate structure means they are not
suited for conducting for-profit activities which could
legitimately warrant the payment of dividends to members.
Option C: Exempt all companies limited by guarantee from reporting
and auditing requirements irrespective of size
158. Under this option, all companies limited by guarantee, regardless
of their size, would be exempt from preparing audited financial
reports under Chapter 2M of the Corporations Act.
159. This option is not considered ideal, as it would diminish
accountability and transparency for companies which ought to be
subject to reporting requirements given the public nature of the
company and the fact that it seeks donations from the public.
Impact analysis
Impact group identification
160. Affected groups:
. users of financial reports (such as employees, donators)
etc;
. companies limited by guarantee; and
. Government and regulators.
Assessment of costs and benefits
Option A: Do nothing
| |Benefits |Costs |
|Users |Financial details | |
| |of all companies | |
| |limited by | |
| |guarantee are | |
| |available to users | |
| |All financial | |
| |reports are | |
| |required to be | |
| |audited resulting | |
| |in confidence that | |
| |the figures are | |
| |transparent and | |
| |accurate | |
|Companies limited | |There are |
|by guarantee | |significant |
| | |compliance costs |
| | |for small companies|
| | |limited by |
| | |guarantee |
| | |associated with |
| | |producing financial|
| | |reports |
| | |Compliance costs in|
| | |the form of |
| | |preparation costs, |
| | |audit fees, |
| | |printing costs and |
| | |distribution costs |
| | |can be significant |
| | |for small companies|
| | |limited by |
| | |guarantee |
|Government/regulato| | |
|rs | | |
Option B: Establish a differential reporting and auditing
framework and streamline requirements
| |Benefits |Costs |
|Users |Users will have |Decrease in |
| |access to more |availability of |
| |tailored |financial |
| |disclosures, which |information in |
| |are better suited |relation to small |
| |to the |companies limited |
| |not-for-profit |by guarantee [-1] |
| |nature of the | |
| |company [+3] | |
|Companies limited |Significantly | |
|by guarantee |reduced compliance | |
| |costs for small | |
| |companies limited | |
| |by guarantee [+2] | |
|Government/regulato| | |
|rs | | |
|Sub-rating |+5 |-1 |
|Overall rating |+4 |
Option C: Exempt all companies limited by guarantee from
reporting and auditing requirements
| |Benefits |Costs |
|Users | |Decrease in |
| | |transparency and |
| | |accountability for |
| | |all companies |
| | |limited by |
| | |guarantee [-3] |
|Companies limited |Significantly | |
|by guarantee |reduced compliance | |
| |costs relating to | |
| |reporting and | |
| |auditing [+3] | |
|Government/regulato| | |
|rs | | |
|Sub-rating |+3 |-3 |
|Overall rating |0 |
Consultation
161. In June 2007, Treasury released a discussion paper on financial
reporting by unlisted public companies. The paper sought comments
on whether the existing reporting framework was appropriate for the
11,000 companies limited by guarantee and the 7,000 unlisted public
companies limited by shares preparing financial reports under the
Corporations Act.
162. The discussion paper elicited submissions from a broad range of
stakeholders including preparers and auditors of unlisted public
company financial reports as well as industry groups and other
interested parties.
163. As part of the consultation process, there was broad support for
the introduction of a differential reporting framework for
companies limited by guarantee, consistent with Option B above.
Conclusion and recommended option
164. Option A is not preferred, as it requires a company limited by
guarantee to provide the same level of annual reporting as
companies listed on the Australian Stock Exchange. A significant
proportion of companies limited by guarantee are relatively small,
resulting in the compliance costs that are disproportionate to the
size of the organisation.
165. Option B is the preferred option as the introduction of a
differential reporting and auditing framework will ease the
regulatory burden on smaller companies limited by guarantee, while
ensuring that the larger companies limited by guarantee remain
transparent and accountable. Also, by creating a set of tailored,
non-financial disclosure requirements for companies limited by
guarantee that recognises the not-for-profit nature of these
entities, this option will result in more relevant information
being provided to stakeholders whilst reducing the range of
unnecessary reporting requirements currently imposed on companies
limited by guarantee. The costs of this approach are expected to
be minimal and outweighed by the benefits to users and companies
limited by guarantee. In addition, this option is consistent with
the recommendations of the recent Senate Economics Committee report
on the disclosure regimes for not-for-profit organisations. The
committee recommended the introduction of a tiered reporting system
based on revenue thresholds.
166. Option C is not preferred, as it would weaken the existing
framework for companies limited by guarantee that ought to be
subject to greater accountability given their size or public
fundraising activities. This option would weaken existing
corporate governance arrangements and would result in users (such
as donators) no longer having access to information about the
financial performance and position of the company. The costs to
users are likely to outweigh the benefits to companies as a result
of this approach.
Parent entity financial statements
Problem
167. The Corporations Act requires companies to prepare audited financial
statements for both the consolidated entity and the parent entity.
This results in companies having to include a minimum of four columns
in their financial statements ie figures for the current financial
year and the preceding financial year for both the parent entity and
the consolidated entity.
168. The presentation of full parent entity financial statements together
with the consolidated financial statements clutters the annual report
with unnecessary detail and is potentially confusing to users. The
Group of 100 (comprising the Chief Financial Officers of Australia's
largest entities) in a submission to Treasury noted that the
replacement of full parent entity financial statements with summary
information would reduce the burden of regulation on business, reduce
business costs and remove unnecessary disclosures from an entity's
annual report.
169. The issue of the usefulness and value of separate parent entity
financial statements has been debated in Australia for a number of
years. In 2003, the Australian Accounting Standards Board (AASB)
commissioned a research project on the relevance of parent entity
financial reports and issued a discussion paper titled The Relevance
of Parent Entity Financial Reports. The AASB believes that there is a
need for revision in respect of parent entity reporting.
170. The costs associated with the preparation and audit of full parent
entity financial statements will be dependent on the size and
complexity of the entity and relativities around the size of the
parent as opposed to the consolidated entity. The Group of 100 have
indicated that the removal of the requirement to prepare parent entity
financial statements would result in significant cost savings in
external audit alone with the incremental audit costs for parent
entity financial statements being in the vicinity of $20,000 to
$25,000 for the top 150 ASX companies.
171. While a number of stakeholders have indicated that full parent entity
financial statements do not provide useful and relevant information to
most users of financial information, they have noted that there would
be value in the presentation of key financial information on the
parent entity in a summarised form.
Objective
172. The objectives are: to ensure that all stakeholders have access to an
appropriate level of parent entity financial information; and, at the
same time, to reduce the compliance burden on entities that produce
full parent entity financial statements.
Options
Option A: Do nothing
173. The current requirement to prepare and have audited full parent entity
financial statements would be retained under this option.
Option B: Allow companies to prepare summary financial information
in relation to the parent entity
174. Under this option, full parent entity financial statements would be
replaced by summary data for the parent entity consisting of: the
parent entity's current and total assets; current and total
liabilities and total shareholders' equity; the parent entity's net
profit after tax and total retained earnings; details of any
guarantees entered into by the parent entity in relation to the debts
of its subsidiaries; and details of any contingent liabilities
applicable to the parent entity and the parent entity's capital
commitments.
Option C: Allow companies to not report any financial information
in relation to the parent entity
175. This option proposes that the parent entity would not include any
separate parent entity financial information in its financial
statements.
Impact analysis
Impact group identification
176. Affected groups:
. users of financial statements;
. preparers of financial statements; and
. regulatory Government agencies that rely on financial
statements to conduct their supervisory duties.
Assessment of costs and benefits
Option A: Do nothing
| |Benefits |Costs |
|Users |Users of company |Retains an added |
| |financial |level of complexity|
| |statements would |in the presentation|
| |continue to have |of the financial |
| |the access to a |reports for those |
| |full range of |users who may not |
| |information on the |understand the |
| |parent entity and |correlation, if |
| |the consolidated |any, between the |
| |entity |operations of the |
| | |company and the |
| | |parent entity |
|Preparers | |Significant |
| | |resource and time |
| | |costs would |
| | |continue to be |
| | |incurred in |
| | |preparing and |
| | |auditing parent |
| | |entity information |
|Government/regulato| | |
|rs | | |
Option B: Allow companies to prepare summary financial
information in relation to the parent entity
| |Benefits |Costs |
|Users |Reduced complexity |Decrease in the |
| |for users of |level of |
| |company financial |information |
| |statements [+1] |available to users |
| | |of company |
| | |financial |
| | |statements [-1] |
|Preparers |Substantial |A reduction in |
| |decrease in |potential savings |
| |compliance costs |through having to |
| |resulting from a |maintain separate |
| |reduction in the |parent entity |
| |level of resources |financial |
| |needed to prepare |statements for |
| |and audit parent |prudential purposes|
| |entity data [+2] |[-1] |
|Government/regulato| | |
|rs | | |
|Sub-rating |+3 |-2 |
|Overall rating |+1 |
Option C: Allow companies to not report any financial
information in relation to the parent entity
| |Benefits |Costs |
|Users |Reduced complexity |Decrease in the |
| |for users of |level of |
| |company financial |information |
| |reports [+1] |available to users |
| | |of company |
| | |financial reports |
| | |[-3] |
|Preparers |Significant |A reduction in |
| |decrease in |potential savings |
| |compliance costs |through having to |
| |resulting from a |produce parent |
| |reduction in the |entity financial |
| |level of resources |statements on |
| |needed to prepare |request for |
| |and audit parent |specific |
| |entity data [+3] |shareholders and |
| | |creditors as well |
| | |as APRA [-2] |
|Government/regulato| | |
|rs | | |
|Sub-rating |+4 |-5 |
|Overall rating |-1 |
Consultation
177. Targeted consultation occurred on this proposal in August 2008.
178. A number of stakeholders have called for the removal of the
requirement to prepare (and audit) separate parent entity financial
statements to be replaced by summarised information. Stakeholders
include the Group of 100, the professional accounting bodies (The
Institute of Chartered Accountants Australia, CPA Australia and the
National Institute of Accountants), a number of audit firms and
individual companies.
Conclusion and recommended option
179. Option A is not preferred. While the current requirements provide
significant information to stakeholders, questions have been raised as
to whether stakeholders require or understand the financial statements
as presented. As compliance costs associated with preparing and
auditing parent entity financial statements are significant, the value
of this information appears to be disproportionate to its cost.
180. Option B is the preferred option. This option strikes a more
effective balance between the needs of users of parent entity
financial information and the cost of preparing such information.
Users of parent entity financial statements, including shareholders
would still retain access to relevant financial information relating
to the parent entity through the summary report. While some
information on the parent entity would no longer be reported,
stakeholders have indicated that this information is not widely used
and only adds to the complexity of the financial statements. The
costs to prepare and audit of summary financial information will be
significantly lower than the costs to prepare and audit separate
parent entity financial statements - the extent of these costs savings
will be dependent on the size and complexity of the entity and the
relativities around the size of the parent as opposed to the
consolidated entity. The Group of 100 estimates that the incremental
savings from audit alone would be in the vicinity of $20,000 to
$25,000 for large listed companies.
181. Option C is not preferred because the trade-off in reduced preparation
expenses for industry is likely to be offset by the need to produce
parent entity financial statements, or some form of summary parent
entity information, on request for specific stakeholders. The impact
of producing this information may be compounded by the fact that
different data would be requested by different stakeholders, meaning
that information may need to be customised. The impact on those
stakeholders who do not have the capacity to request this information
is also increased, as these users would then have no way of accessing
financial information on the parent entity.
Dividends from profits
Problem
182. The Corporations Act provides that dividends can only be paid from
profits. There are a number of difficulties with this requirement,
including:
. the fact that the Corporations Act does not provide
guidance or a definition for the term 'profits', making
the legal requirements of dividend distribution unclear.
In addition, the legal precedents on this issue are
outdated, complex and not in line with current accounting
principles. This makes it difficult for directors to
understand the legal requirements when paying dividends;
. the nature of accounting principles for the calculation of
profits has changed over time. Australian accounting
standards, particularly following the adoption of IFRS,
are increasingly linked to the fair value of the company's
assets with changes in the fair value (whether realised or
unrealised) impacting on the profitability of the company.
This makes the profitability of Australian companies
increasingly volatile with a larger number of non-cash
expenses being included in the net result. In these
circumstances a company may have sufficient cash to pay a
dividend to shareholders but is unable to do so because
the accounting profits of the company have been eliminated
by non-cash expenses; and
. the requirement for companies to pay dividends only out of
profits is inconsistent with the trend to lessen the
outdated capital maintenance doctrine in Australia. The
capital maintenance doctrine is no longer supported by
other provisions of the Corporations Act, such as the
requirements relating to capital reconstructions and share
buy-backs.
The concerns support recommendations made in a discussion paper by
the Australian Accounting Research Foundation in 2002 that
Australia move away from the current profits test for the payment
of dividends.
Objective
183. The objective is to ensure that companies have the ability to
distribute dividends if they have the ability to do so without causing
detriment to ongoing operation. Given the current reporting framework
focusing on fair valuation, this will allow companies to distribute a
dividend even though profit may be impacted by non-cash revaluations.
Options
Option A: Do nothing
184. Under this option companies would still be limited in the amount of
dividend that can be distributed to accounting profit; known as the
profits test.
Option B: Broaden the ability of companies to pay dividends
ensuring safeguards to protect shareholders and creditors are in
place
Under this option companies would be allowed to pay a dividend if
it:
. is fair and reasonable to the company's shareholders as a
whole;
. does not materially prejudice the company's ability to pay
its creditors; and
. has sufficient assets in excess of its liabilities to make
the dividend payment.
This would replace the existing profits test.
. If a company is not required to prepare an audited
financial report (for example, because it is a small
proprietary company), then the last component of the test
which requires the company to be balance sheet solvent
will be determined by reference to the accounting records
which are required to be kept under section 286 of the
Corporations Act 2001.
185. Share buy-backs would continue to be governed by the requirements in
Part 2J of the Corporations Act. Some consequential amendments may be
required to the income tax law to ensure that there is no change in
taxing arrangements as a result of this reform.
Option C: Broaden the ability of companies to pay dividends without
ensuring safeguards to protect shareholders and creditors are in
place
186. This option allows companies to distribute dividends without applying
any safeguards such as the balance sheet test.
Impact analysis
Impact group identification
187. Affected groups:
. shareholders;
. companies paying dividends; and
. regulatory Government agencies responsible for
corporations and taxation.
Assessment of costs and benefits
Option A: Do nothing
| |Benefits |Costs |
|Shareholders |Prevents companies|Shareholders of |
| |from distributing |solvent companies |
| |amounts that would|that have mark |
| |be detrimental to |downs to profit |
| |the share value |resulting from |
| | |valuation changes |
| | |are limited in |
| | |their ability to |
| | |receive dividends.|
| | |Shareholders who |
| | |have a preference |
| | |for cash flow but |
| | |cannot receive |
| | |dividends will |
| | |need to sell their|
| | |shares which will |
| | |incur transaction |
| | |costs and may have|
| | |tax implications. |
|Companies |Prevents companies|Solvent companies |
| |from distributing |that have mark |
| |amounts that would|downs to profit |
| |be detrimental to |resulting from |
| |the share value. |valuation changes |
| | |are limited in |
| | |their ability to |
| | |distribute |
| | |dividends |
|Government/regulat| | |
|ors | | |
Option B: Broaden the ability of companies to pay dividends
ensuring safeguards to protect shareholders and creditors are in
place
| |Benefits |Costs |
|Shareholders / |Shareholders of | |
|creditors |solvent companies | |
| |that have mark | |
| |downs to profit | |
| |resulting from | |
| |valuation changes | |
| |can receive | |
| |dividends which | |
| |will facilitate | |
| |cash flow to the | |
| |investor and | |
| |potentially make | |
| |the investment | |
| |more | |
| |attractive[+2] | |
| |Greater protection| |
| |for shareholders | |
| |arising from the | |
| |introduction of | |
| |the balance sheet | |
| |test [+1] | |
|Companies |Solvent companies |Potential increase|
| |that have mark |in monitoring |
| |downs to profit |costs for |
| |resulting from |companies that are|
| |valuation changes |not required to |
| |can pay dividends |prepare a |
| |if not detrimental|financial report |
| |to the creditors |(in assessing |
| |and shareholders. |whether they |
| |This provides |satisfy the |
| |greater |balance sheet |
| |flexibility to pay|test) [-1] |
| |dividends which | |
| |may increase their| |
| |attractiveness as | |
| |an investment and | |
| |provide greater | |
| |ability to attract| |
| |and raise capital | |
| |[+2]. | |
|Government/regulat| | |
|ors | | |
|Sub-rating |+5 |-1 |
|Overall rating |+4 |
Option C: Broaden the ability of companies to pay dividends
without ensuring safeguards to protect shareholders and creditors
are in place
| |Benefits |Costs |
|Shareholders/ |Shareholders of |Shareholders could|
|creditors |solvent companies |have the value of |
| |that have mark |their shares |
| |downs to profit |significantly |
| |resulting from |reduced if the |
| |valuation changes |ongoing operation |
| |can receive |of the company are|
| |dividends [+2] |damaged by a |
| | |dividend payment |
| | |[-3] |
| | |Creditors of |
| | |companies could |
| | |have their debts |
| | |reneged on if the |
| | |company |
| | |distributes a |
| | |dividend that |
| | |results in default|
| | |[-3] |
|Companies |Solvent companies | |
| |that have mark | |
| |downs to profit | |
| |resulting from | |
| |valuation changes | |
| |can pay dividends | |
| |if not detrimental| |
| |to the creditors | |
| |and shareholders | |
| |[+2] | |
|Government/regulat| | |
|ors | | |
|Sub-rating |+4 |-6 |
|Overall rating |-2 |
Consultation
188. In August 2008, Treasury undertook targeted consultation on this
issue with key stakeholders including representatives of industry,
business, professional accounting bodies and other interested
parties.
189. Overall, stakeholders were generally supportive of providing
greater flexibility for paying dividends while maintaining
appropriate safeguards, consistent with Option B above.
Conclusion and recommended option
190. Option A is not preferred as the environment that companies operate in
has significantly changed since the creation of the 'profit test'.
The adoption of IFRS has resulted in accounting practices that involve
significant movements in the income statement that affect profit, but
have no impact on the liquidity or ongoing operations of the company.
This results in instances where a company is unable to distribute a
dividend when it has the ability to do so.
191. Option B is the preferred option as it provides companies with the
ability to distribute dividends greater than accounting profit, whilst
ensuring that appropriate safeguards are in place to protect the
shareholders and creditors of the company. The proposed new
safeguards will also significantly improve the existing safeguards
contained in the Corporations Act. The benefits of this approach are
expected to outweigh the costs.
192. Option C is not preferred because of the significant risk to
shareholders and creditors that would be exist if there were no
safeguards in place relating to the payment of a dividend. Under this
option a company would be able to distribute a dividend that could
result in the company not being able to pay it's debts as and when
they fall due. These are large and unacceptable risks.
Changing reporting periods
Problem
193. In Australia, close to 33,000 companies, registered schemes and
disclosing entities have financial reporting obligations as outlined
in Chapter 2M of the Corporations Act. Under the provisions of the
Act, a financial year is 12 months long (plus or minus seven days).
The balance date can normally only be changed by up to seven days each
year to accommodate entities with week-based internal reporting. The
restrictions on changing financial years were introduced by the
Company Law Review Act 1998, which came into effect on 1 July 1998.
194. The existing arrangements in Australia make it difficult for companies
to change their year-end date for reasons other than those contained
in the Corporations Act. In this regard, the Australian requirements
are more stringent than the requirements of comparable jurisdictions.
This inflexibility has the potential to unnecessarily burden companies
and their auditors, particularly during peak reporting periods.
195. An added issue that could arise through the adoption by companies of a
new financial reporting period is an increase in compliance costs as
it could result in a lack of alignment between a company's income
years for financial reporting and tax purposes. While a taxpayer can
apply to the Commissioner of Taxation to adopt a substituted
accounting period for income tax purposes, the Commissioner will not
allow the adoption of a substituted accounting period merely for
convenience, such as to align with a taxpayer's financial reporting
obligations.
Objective
196. In principle, there is no reason why a company should not be free to
change its year-end date, provided that any change is made in good
faith, investors and other users of company information are not
disadvantaged and the change does not conflict with the requirements
of other legislation. However, entities may need to be made aware
that such a change could result in increased compliance costs in
respect of their taxation and other reporting obligations.
Options
Option A: Do nothing
197. Under this option the requirement that an entity's reporting date be
within seven days of its current reporting date would remain. In
practical terms, this would mean that the majority of entities would
have a reporting date of 30 June.
Option B: Allow companies flexibility to change their reporting
periods
198. Under this option the restrictions on reporting date for a company
would be eased to allow reasonable movement. Any changes would have
to be made in good faith in the best interests of the company to
ensure that companies are not changing their reporting date to alter
the appearance of their financial information. Companies would also
face potential compliance costs as they would still be required to
lodge figures with the Australian Taxation Office, for taxation
purposes, under the current timeframe.
Impact analysis
Impact group identification
Affected groups:
. users;
. companies;
. preparers and auditors of financial statements; and
. Government agencies.
Assessment of costs and benefits
Option A: Do nothing
| |Benefits |Costs |
|Users | | |
|Companies | |Significant impact|
| | |on availability of|
| | |accounting and |
| | |auditing resources|
| | |for the |
| | |preparation of |
| | |financial reports |
| | |due to companies |
| | |and other members |
| | |of the community |
| | |being required to |
| | |prepare and submit|
| | |taxation returns |
| | |at the same time |
|Preparers and | | |
|auditors | | |
|Government/regulat|Annual reporting | |
|ors |timeframes for | |
| |most companies | |
| |align with the ATO| |
| |cycle | |
Option B: Allow companies flexibility to change their reporting
periods
| |Benefits |Costs |
|Users | |Users could face |
| | |slight delays in |
| | |accessing |
| | |financial |
| | |information about |
| | |the company [-1] |
|Companies |Companies would |Companies could |
| |have greater |face additional |
| |access to |costs in complying|
| |accounting and |with the ATO tax |
| |auditing services |cycle if a |
| |[+2] |reporting date |
| | |other than 30 June|
| | |is chosen [-2] |
|Preparers and |Accounting and | |
|auditors |auditing firms | |
| |would have the | |
| |ability to spread | |
| |their work more | |
| |evenly throughout | |
| |the year [+2] | |
|Government/regulat| | |
|ors | | |
|Sub-rating |+4 |-3 |
|Overall rating |+1 |
Consultation
199. Targeted consultation on this proposal occurred in August 2008.
200. A number of stakeholders have called for additional flexibility in
this area. Stakeholders include audit firms and preparers, the
Group of 100 and the professional accounting bodies (The Institute
of Chartered Accountants Australia, CPA Australia and the National
Institute of Accountants).
Conclusion and recommended option
201. Option A is not preferred, primarily because of the restrictions it
places on an entity's ability to program accounting and auditing work
to minimise the cost and resource pressures on the entity.
Maintaining the status quo will also result in the potentially
inefficient use of resources within accounting and other professional
firms being continued.
202. Option B is the preferred option. Greater flexibility around year-end
reporting dates, would result in benefits to auditing and accounting
firms which would in-turn flow through to cost savings for companies.
With protections in place to ensure that changes are made in good
faith in the best interests of the company there should be minimal
costs for users of reports. There would be some costs to companies
that have different reporting and taxation years but this would be
optional and it is expected that companies would weigh up these costs
when choosing alternative reporting dates. This option achieves an
appropriate balance between minimising the costs incurred by entities
for accounting and auditing work (including more efficient use of
resources by professional accounting and auditing firms) and any
additional compliance costs incurred in complying with the taxation
reporting requirements.
Extend the requirement to disclose a review of operations and financial
condition to all listed entities
Problem
203. Under section 299A of the Corporations Act, a listed public company is
required to provide, in its director's report, all information
reasonably required to allow an informed assessment of its operations,
financial conditional and business strategies and prospects for future
financial years. Guidance on this requirement refers to it as a
review of operations and financial condition.
204. The requirement for companies to disclose a review of operations and
financial condition was introduced as a result of the recommendations
of the HIH Royal Commission. The rationale for its introduction was
to address a lack of contextual information which explained the
results set out in a company's financial statements. Accordingly, the
review of operations and financial condition was introduced to provide
stakeholders with an overview which would enable users to understand a
business' performance and the factors underlying its results and
financial position.
205. However, the requirement to disclose a review of operations and
financial condition only applies to listed public companies (of which
there are approximately 2200) does not apply to listed managed
investment schemes (of which there are approximately 200).
206. Managed investment schemes were not involvement in the HIH Collapse
and as such were not considered in Commission's recommendations.
Nonetheless, the size and degree of public investment in these listed
managed is analogous to the degree of public investment in listed
companies. The complexity and potential for confusion in the
financial statements of managed investment schemes is also similar to
that of companies.
207. As such, the same reasons which suggested a need to introduce
additional narrative reporting for listed companies also suggest a
need to introduce additional narrative reporting for listed managed
investment schemes.
208. Extending 299A to all listed entities was a recommendation of the
Corporations and Markets Advisory Committee (CAMAC) in 2006.
Objective
209. To improve decision making by investors and oversight by regulators in
relation listed managed investment schemes.
Options
Option A: Do nothing
210. Under this option listed entities would continue to have different
reporting requirements, depending on whether they were companies or
managed investment schemes.
Option B: Consistent requirements
211. Under this option, all listed entities would have consistent
reporting requirements in relation to disclosure of a review of the
entity's operations and financial condition.
Impact analysis
Impact group identification
Affected groups:
. investors and other users of annual reports;
. listed managed investment schemes; and
. Government/regulators.
Assessment of costs and benefits
Option A: Do nothing
| |Benefits |Costs |
|Investors and | |Users of listed |
|other users of | |managed investment|
|annual reports | |schemes' annual |
| | |reports do not |
| | |have access to a |
| | |narrative |
| | |discussion which |
| | |would help them |
| | |understand a |
| | |business' |
| | |performance and |
| | |the factors |
| | |underlying its |
| | |results and |
| | |financial |
| | |position. |
|Listed managed |Preparers of | |
|investment schemes|listed managed | |
| |investment schemes| |
| |do not have to | |
| |expend resources | |
| |preparing a review| |
| |of operations and | |
| |financial | |
| |condition. | |
|Government/regulat| | |
|ors | | |
Option B: Consistent requirements
| |Benefits |Costs |
|Investors and |The information | |
|other users of |which listed | |
|annual reports |managed investment| |
| |schemes would be | |
| |required to | |
| |disclose would | |
| |allow investors | |
| |and other users of| |
| |financial reports | |
| |to make better | |
| |decisions. In | |
| |particular, this | |
| |should mean fewer | |
| |losses as a result| |
| |of poor | |
| |information and | |
| |more efficient | |
| |allocation of | |
| |capital. [+2] | |
|Listed managed | |There would be |
|investment schemes| |some compliance |
| | |costs for listed |
| | |managed investment|
| | |schemes associated|
| | |with preparing the|
| | |additional |
| | |disclosures. |
| | |However, these |
| | |costs are expected|
| | |to be minimal. |
| | |Much of the |
| | |information |
| | |required under |
| | |section 299A is |
| | |similar to the |
| | |information |
| | |already required |
| | |under section 299.|
| | |Additionally, the |
| | |disclosures |
| | |required by |
| | |section 299 rarely|
| | |constitute more |
| | |than a few pages; |
| | |even BHP only |
| | |devoted 1000 words|
| | |to these |
| | |disclosures in its|
| | |2008 Annual |
| | |Report. Further, |
| | |these disclosures |
| | |do not need to be |
| | |audited. The |
| | |issues which must |
| | |be reported on are|
| | |also those which |
| | |the responsible |
| | |entity of a |
| | |managed investment|
| | |scheme (or any |
| | |entity) should be |
| | |aware of in any |
| | |case. [-1] |
|Sub-rating |+2 |-1 |
|Overall rating |+1 |
Consultation
212. Consultation was undertaken as part of the CAMAC review and was
taken into account by CAMAC in forming its recommendation. Groups
who made submissions to the CAMAC inquiry included major businesses
and business associations, accounting firms and shareholder
representative.
213. Submissions which dealt with the issue of who should report
generally focused on size and/or ownership. One submission which
did deal with reporting obligations for companies other than
corporations commented that any entity with a significant impact on
society should be required to report.
Conclusion and recommended option
214. Option B is the preferred option. It is difficult to quantify the
costs and benefits of requiring companies to disclose a review of
operations and financial condition. However, the costs appear
likely to be minimal for the reasons outlined above. The
disclosure of this information is also generally viewed as
beneficial for listed companies and was considered by the HIH Royal
Commission to be important in helping users understand the issues
underlying the figures reported in a company's financial
statements.
215. As the benefits of providing this information are generally
considered to outweigh the costs when this information is provided
by listed companies, it seems likely that the benefits will also
outweigh the costs when this information is prepared by listed
managed investment schemes.
Other minor and technical amendments
Declaration of IFRS Compliance
Problem
216. Some feedback from foreign jurisdictions has suggested there is a lack
of awareness that the financial statements of Australian companies are
compliant with IFRS. In particular, as accounting standards in
Australia are commonly referred to as 'Australian-equivalent
International Financial Reporting Standards (AIFRS)', there is a
perception that they are not identical to IFRS.
217. Lack of international recognition of Australia's IFRS adoption
prevents Australia from realising the full benefits of IFRS in
relation to the facilitation of foreign investment.
218. Auditing Standards also require an auditor to make a declaration of
IFRS compliance in the audit report, but there is no corresponding
requirement in the directors' declaration and this may create some
confusion.
Conclusion
219. A statement of IFRS compliance should be required in the directors'
declaration. This will provide benefits to companies by creating
consistency between the auditor's report and directors' declaration
and will help ensure international recognition of Australia's adoption
of IFRS. This amendment would not generate any additional costs as an
analogues statement is already required in the notes to a company's
financial statement. It would merely ensure that IFRS compliance is
stated more prominently.
Lost capital reductions
Problem
220. Under section 258F of the Corporations Act, companies are allowed to
cancel paid-up capital that is lost or not represented by available
assets of the company. The provision is intended to allow companies
to write down the value of the company's capital in situations where a
company incurs certain types of losses. This is done by writing-off
past accumulated losses against the share capital of the company.
221. Concerns have been expressed that companies may be able to use section
258F to overstate the profitability of the company by taking expenses
directly to share capital rather than recognising them in the
statement of financial performance. Such action would be in breach of
Australian accounting standards.
Conclusion
222. Section 258F should be amended to make it clear that a company can
only cancel share capital in circumstances where it is not
inconsistent with the requirements in Australian accounting standards.
The proposed amendment will still allow companies to write off
accumulated losses to share capital but will not allow companies to
take expenses directly to share capital.
223. The proposed amendment is of a technical nature and is designed to
clarify the manner in which section 258F is intended to operate.
There is no evidence that there is, or has been, widespread misuse of
the section and, as a consequence, the proposed amendment will have
minimal, if any, impact on companies that are required to prepare
financial statements.
IMPROVEMENTS TO THE FINANCIAL REPORTING COUNCIL'S FUNCTIONS AND FUNDING
ARRANGEMENTS
Problem
224. Prior to the enactment of the Governance Review Implementation
(AASB and AUASB) Act 2008 (the GRI Act), the Australian Accounting
Standards Board (AASB) and the Australian Accounting Standards
Board (AUASB) were statutory bodies governed by the Commonwealth
Authorities and Companies Act 1997 (CAC Act). The GRI Act has
transferred the AASB and the AUASB from the CAC Act to the
Financial Management and Accountability Act 1997 (FMA Act)
framework.
225. As a consequence of the enactment of the GRI Act, the specific
accounting and auditing standards functions given to the FRC under
s.225(2)(i) and (j) and s 225A(2)(i) and (j) of the Australian
Securities and Investments Commission Act 2001 (ASIC Act) are now
obsolete and unnecessary. These provisions require the FRC to:
: seek contributions towards the costs of the Australian
accounting standard and auditing standard setting processes;
and
: monitor the level of funding, and the funding arrangements,
for those processes.
Conclusion and recommended option
226. Paragraphs 225(2)(i) and (j) and 225(2A)(2)(i) and(j) of the ASIC
Act should be repealed as they are no longer necessary or
appropriate having regard to the fact that the AASB and the AUASB
are now FMA agencies for purpose of the FMA Act.
Improvements to the Companies Auditors and Liquidators Disciplinary Board's
(CALDB) processes including immunities and appointments
Problem
The Corporate Law Economic Reform Program (Audit Reform and
Corporate Disclosure) Act 2004 (CLERP 9) amended CALDB's structure.
As a result of the CLERP 9 changes, CALDB's membership was
increased from three to 14 members, all of whom are appointed by
the Minister on a part-time basis. Membership consists of:
: a Chairperson and a Deputy Chairperson, each of whom must be
enrolled as a barrister and/or a solicitor or a legal
practitioner in Australia;
: three members selected from a panel of seven nominated by the
Board of the ICAA;
: three members selected from a panel of seven nominated by the
Board of CPAA; and
: six business members. Business members need not be nominated
by any particular body. The Minister must be satisfied that a
business representative has knowledge or qualifications in a
business or law-related discipline.
There are problems with this approach. There are three
professional accounting bodies in Australia, the ICAA, CPAA and the
National Institute of Accountants (NIA). Additionally, there is
also a recognised professional body representing insolvency
practitioners, the Insolvency Practitioners Association of
Australia (IPAA). Under the current framework, the NIA and other
professional and interested parties are unable to nominate members
for CALDB.
Under s 221 of the ASIC Act, immunity consistent with that of a
Justice of the High Court is conferred on Panel Members of the
CALDB when exercising powers in relation to a hearing. Witness and
legal and other representatives receive immunity equivalent to that
which they would receive if appearing before the High Court.
However, s 1294A of the Corporations Act also allows the
Chairperson to conduct pre-conference hearings. This was
introduced to streamline the hearing process. Immunity under s 211
is not available for pre-conference hearings conducted by the
Chairperson.
Conclusion and recommended option
227. The requirement for the two professional accounting bodies to
directly nominate members to the CALDB should be replaced with a
new approach whereby accounting members would be drawn from
nominations received from all relevant professional bodies and
other interested parties, with the Minister retaining
responsibility for selecting the most appropriate accounting member
once the list is compiled. This is similar to the current
arrangements for the appointment of business members to CALDB.
228. The immunity under s 221 of the ASIC Act should be extended to
include pre-conference hearings conducted under s 1294A of the
Corporations Act.
Implementation
229. The preferred options identified above will be progressed through
the Corporations Act Amendment (Corporate Reporting Reform) Bill
2010.
230. Several of the issues identified above are long standing issues,
which are the result of extensive previous review processes. These
issues include reporting by companies limited by guarantee, parent-
entity financial reports, and the requirement to pay dividends from
profit.
231. In August 2008, several of the preferred options identified above
were included as part of a targeted consultation process with key
stakeholders. Feedback from the targeted consultation process
suggests that there is broad support for the proposed reforms among
stakeholders, and that the measures would be well received by the
wider corporate community.
232. In addition, an exposure draft of the amendments was subject to a
two month public consultation period ending in February 2010.
Index
Schedule 1: Amendments relating to the Corporations Act 2001
|Bill reference |Paragraph |
| |number |
|Parts 1 and 4, items 5, 55, 58 and 59 |3.13 |
|Part 1, items 4 and 30, paragraphs 45B(d) |1.19, 1.24 |
|and 301(3)(a) | |
|Part 1, item 6, section 254SA |1.44 |
|Part 1, item 7, section 254T |3.4 |
|Part 1, items 8, 9 and 10 |7.5 |
|Part 1, item 14, section 285A |1.15, 1.35 |
|Part 1, item 16, subsection 294B(6) |1.18 |
|Part 1, item 16, sections 294A and 294B |1.16 |
|Part 1, item 16, subsection 294B(2) |1.17 |
|Part 1, items 17 and 31 |2.9 |
|Part 1, Item 18 |6.5 |
|Part 1, items 24 and 27 |5.5 |
|Part 1, items 25 and 26 |5.6 |
|Part 1, item 28 |5.7 |
|Part 1, item 29, subsection 300B(3) |1.37 |
|Part 1, item 29, subsections 300B(1) and (2)|1.36 |
|Part 1, item 30, subsection 301(3) |1.27 |
|Part 1, item 40, section 316A |1.40 |
|Part 1, item 40, subsection 316A(3) |1.41 |
|Part 1, item 40, subsection 316A(5) |1.42 |
|Part 1, items 43 and 44 |4.5 |
|Part 1, item 45, section 324BE |1.31 |
|Parts 2 and 3, items 52 and 54 |2.13, 4.7, 7.6|
|Part 4, item 56 |3.17 |
Schedule 2: Australian Securities and Investments Commission Act 2001
|Bill reference |Paragraph |
| |number |
|Part 1, items 1 and 2 |9.12 |
|Part 1, items 3 and 4, paragraphs 203(1)(c) |9.13 |
|and (d), subsection 203(1A) | |
|Part 1, item 5, subsection 203(1B) |9.14 |
|Part 1, item 5, subparagraph 203(1B)(b)(ii) |9.15 |
|Part 1, item 6, subsection 210A(5) |9.16 |
|Part 1, item 7, subsection 221(1A) |9.18 |
|Part 1, item 8, subsection 221(2A) |9.19 |
|Part 1, items 9 to 12 |8.4 |
|Part 2, item 13 |9.20 |
|Part 2, item 13, section 289 |9.21 |
|Part 2, item 13, section 290 |9.22 |
|Part 2, item 13, section 291 |9.23 |
Do not remove section break.
-----------------------
[1]
[2] Based on sample data provided by ASIC on 3 November 2006.
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