June 2010 financial reporting changes

There are a number of changes to financial reporting which have been recently announced. These may have a significant impact on your business, so read on for further details.

Corporate Reporting Reform Act

1  No more parent company financial statements

Save some money by not producing parent company financial statements and save the planet by using less paper courtesy of the Commonwealth Government! Grant Thornton’s Technical Alerts 2010-16 and 2010-07 which are available on our website provide further detail of the Government’s removal of the need for Australian subsidiaries to produce parent company financial statements. However this relief does not apply to Australian financial services licensees. Grant Thornton has raised the issue of their exclusion with Treasury and hope that the situation will soon be rectified. ASIC’s Class Order allows those who wish to continue to prepare parent company financial statements for this and future years to do so.

2  Relief for limited by guarantee companies

Small, limited by guarantee companies that do not have deductible gift recipient status and whose annual revenues are less than $250,000 have been exempted from the requirement to prepare Corporations Act financial statements. Limited by guarantee companies whose annual revenues are less than $1 million, now have the choice of an audit or an audit review, which may provide cost savings of up to 50% compared to a full audit. For all limited by guarantee companies, the requirement to produce a streamlined directors’ report now applies. However, whilst there has been a reduction in the potential directors’ report disclosures required, the streamlining also requires additional information about the company’s objectives, strategy and performance measurement. Refer to Technical Alerts 2010-16, 2010-07 and 2010-46 for full details.

3  Changed dividend payment rules

Companies that post losses for the year, however are in a net asset position, can now continue to pay dividends. This is a result of the repealing of the existing ‘profits’ test for paying dividends which has been replaced with a three-pronged solvency test (also referred to as the net asset test:s.254T) which requires:

a   The company’s assets to exceed its liabilities immediately before the dividend is declared and the excess to be sufficient for the payment of the dividend
b   The payment of a dividend to be fair and reasonable to the company’s shareholders as a whole; and 
c   That the dividend does not materially prejudice the company’s ability to pay its creditors (i.e. the entity must continue to have regard to the s.588G requirement to prevent insolvent trading)

The above test is required to be applied at the time the dividends are declared and paid. Therefore the assets and liabilities need to be calculated in accordance with the accounting standards in force at the time they are applied by the company. This became effective for any dividends declared on or after 28 June 2010.

There are various questions that management must ask themselves as a result of these changes, including:

a   Are the provisions surrounding dividends within the company’s constitution consistent?
b   Can we determine the entity’s net asset position at any point in time during the year?
c   Our entity is not required to prepare and/or lodge financial reports under the Corporations Act. How does this affect us?
d   Will changes in accounting policies and/or standards between declaration and payment date have any effect?

These are expanded on further in our Technical Alert 2010-37.

Reduced disclosures for some non-listed companies (the RDR)
Whist the Australian Accounting Standards Board (AASB) has yet to recognise the global move to simplified accounting for the non-listed market (IFRS for SMEs), some relief is available for some entities for 30 June financial statements. The AASB’s Reduced Disclosure Regime (RDR) accounting standard has used the International Accounting Standards Board’s IFRS for SMEs accounting standard disclosures as a base for reducing the full IFRS disclosures.

However, it is not all good news as the disclosures have been added to because the AASB feels it is necessary to retain the full and complex IFRS recognition and measurement requirements. Hence, additional disclosures are in the AASBs view warranted. The political scene is more promising, not withstanding a minority government, with the Coalition and the Greens supporting government agencies such as the AASB in reducing compliance costs.

On the positive side, non-publicly accountable reporting entities will be able to reduce their 2010 disclosures by a claimed 50% if the RDR is adopted. The AASB has made it easier to work out just what disclosures have been eliminated by now issuing compiled RDR material on a Standard-by-Standard basis.

However, non-reporting entities will generally be better off if they continue to use the AASB’s minimum disclosures (AASB 101 Presentation of Financial Statements, AASB 107 Statement of Cash Flows and AASB 108 Accounting Policies, Changes in Accounting Estimates and Errors) which are only around 25% of the RDR disclosures. Further details are contained in Technical Alerts 2010-24 and 2010-15.

New and amended standards issued but not yet effective disclosures for June 2010 financial statements
Technical Alert 2010-08 has recently been updated to detail the new and amended accounting standards that may not have yet been applied by those preparing Corporations Act financial statements. These amendments require disclosure for both reporting and non-reporting entities. Both the RDR accounting standard and IFRS for SMEs do not require such disclosure for no-publicly accountable entities. This Technical Alert has been updated to reflect August releases by the IASB and AASB. Further details are contained in Technical Alert 2010-45.

For more information on the 30 June financial statements, contact your usual Grant Thornton advisor or the author of this article.

Author, Keith Reilly, August 2010

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