Treasury has recently released the Corporations Amendment (Corporate Reporting Reform) Bill 2010.  The purpose of the proposed reforms is to reduce red-tape, improve accountability and transparency of disclosures and refine the reporting framework. The key initiatives included in the proposed reforms include:

• reporting exemptions and simplification for public companies limited by guarantee
• reducing the reporting requirements of parent entity financial statements
• amending the requirements for paying dividends
• easing of restrictions on changing reporting periods
• extending the disclosure requirements of listed registered schemes.

Differential reporting framework for public companies limited by guarantee

In recognition of the fact that the majority of public companies limited by guarantee operate in the not-for-profit sector, the proposals are intended to reduce the burden and associated costs of financial reporting by way of exemptions for smaller entities and streamlining aspects of reporting for others, at the same time continuing to service the information needs of users.

It is proposed that this will be achieved by introducing a three tier differential reporting framework as follows:

First tier

• companies not having deductible gift recipient status and annual revenue of less than $250,000

Obligations

• company will be exempt from all financial reporting requirements

Second tier

• companies with annual revenue of less than $250,000 that are a deductible gift recipient; and
• companies with annual revenue of greater than $250,000 but less than $1 million, irrespective of whether the company is a deductible gift recipient

Obligations

• company must prepare a financial report and a streamlined directors’ report (rather than a full directors’ report)
• can elect to have the financial report reviewed rather than audited

Third tier

• companies with annual revenue of $1 million or more, irrespective of whether the company is a deductible gift recipient.

Obligations

• company must prepare a financial report and a streamlined directors’ report (rather than a full directors’ report)
• financial report must be audited

Second tier financial report reviews

Public companies limited by guarantee falling into the second tier would have the option of having their financial report subject to a review rather than an audit.  This is intended to reduce the time and costs associated with an audit whilst still providing a level of assurance considered appropriate.

It is intended to extend the list of persons capable of conducting a review (from solely registered company auditors) to include members of a professional accounting body (ICAA, CPA, or NIA) that hold a prescribed practising certificate.   

Directors report requirements

In recognition that users are more interested in the ability of such companies to achieve their objectives rather than other traditional directors report disclosures that are required by a public company, second and third tier companies would instead prepare a streamlined directors report including the following information:

• description of short and long term objectives
• strategy for achieving objectives
• principal activities during year
• how activities contributed to achieve objectives
• how performance is measured including any KPI’s used
• names of directors with their qualifications, experience and special responsibilities
• board meetings held and attended
• liability of each class of membership and total amount members liable to contribute upon a wind up of the company.

Distribution of annual reports

To assist in reducing the resources required in reporting to members, companies in the second and third tiers would be required to write to members informing them that an annual report is available and how it may be obtained.  Members would be able to make a standing election on how they wish to receive the annual report.
 
Payment of Dividends

Despite the corporate structure of companies limited by guarantee not being suitable for conducting profit oriented activities, current corporations law does not prohibit the payment of dividends for such entities.  The proposed amendments will rectify this by prohibiting the payment of dividends.

Parent-entity financial statements

Where accounting standards require consolidated financial statements to be prepared, the proposed amendments to the Act will alleviate the need to prepare separate financial statements for the parent entity.

Instead, it is proposed that regulations will be incorporated into the Act that will require the inclusion of a note in the consolidated financial statements containing the following information about the parent:

• current and total assets
• current and total liabilities
• shareholders’ equity, showing separately issued capital and reserves
• profit or loss
• details of any guarantees entered into by the parent entity in relation to the debts of its subsidiaries
• details of any contingent liabilities
• details of its capital commitments.
  

It is proposed that the amendments related to parent entity reporting will be in place for full and half years ending on or after 30 June 2010.


Requirement for paying dividends

The current Corporations Act legislation requires that dividends can only be paid out of company profits (s.254T). This is seen as an outdated requirement, regulated based on dated common law precedent, and particularly restricting in light of the profit volatility that has been introduced by IFRS standards.

It is proposed to replace the profit test by the following prerequisites in order to pay dividends:

• company’s assets must exceed its liabilities and the excess is sufficient for payment of the dividend (i.e. a balance sheet solvency test)
• 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 (i.e. must continue to have regard to the s.588G requirements to prevent insolvent trading).

Changing reporting periods

The current Act generally prevents an entity from changing its financial year unless it is for the purposes of synchronising the financial years of an entity and its controlled entities. Specific order relief from ASIC under s.340 is also possible where the entity is able to demonstrate unreasonable burden.

The amendments propose to allow a company the flexibility to amend a financial year of an entity (subsequent to the first year) to last for a period other than 12 months provided:

• it does not extend greater than 18 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
• the change to the subsequent financial year is made in good faith and in the best interests of the entity.

It is proposed that these amendments will commence for financial years commencing on or after 1 July 2010.

Review of operations and financial condition for all listed entities

In an endeavour to improve the decision making by investors and oversight by regulators in relation to listed managed investment schemes, amendment to section 299A has been proposed to extend the requirement to disclose a ‘review of operations and financial conditions’ from solely listed public company to include listed registered schemes.

IFRS Declaration

In response to concerns from foreign jurisdictions that there is a lack of awareness that the financial statements of Australian companies are compliant with IFRS, an amendment to the Corporations Act has been proposed to require the directors’ declaration in a company’s annual report to include a statement of whether, in the directors opinion, the company’s financial statements, and the notes to the financial statement, are prepared in compliance with IFRS as made by the IASB.