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- December 2009
- Proposed reforms to corporate reporting
Proposed reforms to corporate reporting
- By Rob Mackay
- Published 18/12/2009
- December 2009
- Unrated
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:
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:
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 This is seen as an outdated requirement, regulated based on dated common law precedent, and particularly restricting in light of the profit volatility that has been introduced by IFRS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:
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 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.
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.
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.
Article Series
This article is part 1 of a 3 part series. Other articles in this series are shown below:
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Proposed reforms to corporate reporting