Reduction in Regulatory Burden Facing Australian Companies

The package of reforms contained in the Corporations Amendment (Corporate Reporting Reform) Act 2010 and accompanying Regulations, will deliver much needed relief from red tape for Australian companies and implement a number of other important refinements to Australia's corporate regulatory framework.  This Act received Royal Assent on 28 June 2010.  The Corporations Amendment Regulations 2010 (No 6) were enacted on 29 June 2010 which impacts the disclosure in consolidated financial reports.

The key measures to reduce red tape contained in the Act include:

• significantly reducing the regulatory burden on companies limited by guarantee, which typically have a not-for-profit purpose, by introducing a three tiered differential reporting framework;
• streamlining parent-entity reporting;
• providing greater flexibility for companies to pay dividends, by replacing the profits test with a solvency type test; and
• allowing companies to more easily change their year-end date to minimise the burden on companies and their auditors during peak reporting periods.

The reforms will also implement refinements to the regulatory framework including:

• improving disclosure of non-financial information in the directors' report;
• refining the statement of compliance with International Financial Reporting Standards (IFRSs) contained in the directors declaration; and
• clarifying the circumstances in which a company can cancel its share capital.

The main provisions of the Act will come into effect for the financial year ending 30 June 2010.

An outline of the key measures and their effetive date are included below:

Companies Limited By Guarantee

A three tiered differential reporting framework has been 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.  The process for companies to distribute the annual report to their members will also be streamlined.  The following table summarises the relevant requirements, based on specified criteria, that apply for financial periods ending on or after 28 June 2010:

*Please note that under sections 294A a294B of the Corporations Act 2001, members holding at least 5% of the votes, or ASIC, may request that a small company limited by guarantee prepare an audited/reviewed financial report.

^Under the streamlined reporting to members a member may, by notice in writing, elect to receive a hard copy or an electronic copy of the company financial report. This is a standing election for each subsequent financial year until the member notifies otherwise.

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.

Parent Entity Financial Statement

Subsections 295(2) and 303(2) of the Corporations Act 2001 have been 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.

Regulations have been made for the purpose of paragraphs 295(3)(a) and 303(3)(a) of the Corporations Act 2001 requiring the inclusion of a note in the consolidated financial statements containing the following supplementary information (including comparative data based on the standards applicable at the time to which the disclosure relates) about the parent entity:

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

Comparative information in respect of the previous period shall also be presented for each of the above.

The above amendments will apply to a financial report of a disclosing entity for financial years or half years of the disclosing entity ending on or after 28 June 2010.

Requirements For Paying Dividends

The profits test has been repealed and replaced with a more flexible requirement that allows a company to pay dividends if:

• the company's assets exceed its liabilities 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.)

The existing directors' duty to prevent insolvent trading in section 588G of the Corporations Act 2001 will continue to apply.

Please Note:

The Law will require all companies prior to declaration and payment of a dividend to determine solvency based on a net asset test which is required to be calculated in accordance with accounting standards in force at that time.  Small proprietary companies generally do not lodge accounts and therefore are not required to apply all accounting standards currently.  Additional costs are therefore likely to be involved in ascertaining a net asset position for these types of companies.

Changing Year-End Date

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 2001 - 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.

Effective for financial years ending on or after 28 June 2010, section 323D of the Corporations Act 2001 has been amended, making it easier the change an entity's year-end date.  The amendment allows a financial year of an entity, subsequent to the first year, to last for a period other than 12 months provided that the following conditions are met:

• 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 in reliance on this subsection; and
• the change to the subsequent financial year is made in good faith in the best interests of the entity.

A consequential change of income tax year is not automatically proposed.

Disclosure Of Review Of Operations And Financial Condition

The requirement to disclose a review of operations and financial condition in the director's report (as contained in s299A of the Corporations Act 2001) has been extended to all listed entities.  That is, both listed and registered schemes and listed companies.  Currently these conditions only apply to listed public companies.

This change applies to financial years ending on or after 28 June 2010.

IFRS Declaration

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 IFRSs 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 (AIFRSs)', there is a perception that they are not identical to IFRSs.

As a result, the directors' declaration in a company's annual report must now include a statement of whether, in the directors opinion, the company's financial statements and the notes to its financial statement are prepared in compliance with IFRSs as made by the IASB.

This change applies to financial years ending on or after 28 June 2010.

Cancellation Of Share Capital

Under the new law, a company may not reduce its share capital by cancelling any paid-up capital that is lost or not represented by available assets if the cancellation is inconsistent with the requirements of any accounting standard.  Under the current law, a company may reduce its share capital by cancelling any paid-up capital that is lost or not represented by available assets.