Corporations Act and financial reporting reforms to ease compliance burden

In June 2010 the Government approved the Corporate Reporting Reform Act which aims to cut red-tape and improve Australia’s corporate reporting framework.  The financial statement relief applies to 30 June 2010 financial statements.

The key reforms include:

• Establishing a three tiered differential reporting regime for companies limited by guarantee under the Corporations Act 2001:
• Revenues <$250K and no deductible gift status – no Corporations Act accounts/audit requirements
• Revenue <$1M – streamlined directors report and annual report to shareholders, option of an audit review by any practicing certificate holder rather than an RCA audit
• Revenues >$1M – streamlined directors’ report and annual report to shareholders
• Allowing companies to disclose summary parent-entity financial information rather than full parent-entity statements
• Replacing the ‘profits’ test for paying dividends with a more flexible solvency type test
• Providing greater flexibility for companies to change their year-end date
• Expanding the range of entities that are required to comply with section 299A of the Corporations Act
• Refining the statement of IFRS compliance in the directors’ declaration
• Clarifying the circumstances in which a company can cancel its share capital

The Corporate Reporting Reform Act contains a new streamlined directors’ report (S300 B) for those limited by guarantee companies that are required to prepare financial statements as from 30 June 2010. This replaces the general corporate directors’ report (S299 and S300). Small limited by guarantee companies (revenues of less than $250,000 and do not have deductible gift recipient status) of course are exempted from the requirement to prepare a financial report.

The intention of the changed legislation was to exclude the large number of provisions that are not relevant for typical not-for-profit limited by guarantee companies. These include disclosures relating to the payment of dividends and options issued to directors as remuneration. Given that not-for-profit companies are generally purpose or objective driven, the Government argued that 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.

Section 300 B of the Corporations Act sets out the requirements for the annual directors’ report of companies limited by guarantee which are as follows:

S 300 B: Annual directors’ report—companies limited by guarantee

• The directors’ report for a financial year for a company limited by guarantee must contain a description of the short and long term objectives of the entity reported on:
• setting out the entity’s strategy for achieving those objectives
• stating the entity’s principal activities during the year
• stating how those activities assisted in achieving the entity’s objectives
• stating how the entity measures its performance, including any key performance indicators used by the entity
• The entity reported on is: 
• the company (if consolidated financial statements are not required); or 
• the consolidated entity (if consolidated financial statements are required) 
• The directors’ report for a financial year for a company limited by guarantee must also include 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
• the total amount that members of the company are liable to contribute if the company is wound up

In June 2010 the AASB issued new standards (AASB 1053 Application of Tiers of Australian Accounting Standards and AASB 2010-2 Amendments to Australian Accounting Standards arising from Reduced Disclosure Requirements) on a reduced disclosure regime for non-publicly accountable for-profit private sector entities and certain entities in the not-for profit private sector and public sector.  These were available for early adoption for 30 June 2010 financial statements.

The new standards introduce a second tier of reporting requirements into the Australian financial reporting framework. This substantially reduced the burden of financial reporting for certain entities in both the private and public sectors in preparing their general purpose financial statements.  The new standards introduce a regime which requires disclosures that are substantially reduced when compared with those required under the full IFRSs as adopted in Australia.

With the introduction of the reduced disclosure regime, the Australian Accounting Standards now consist of two tiers of reporting requirements that apply to general purpose financial statements:

• Tier 1: Full IFRS as adopted in Australia
• Tier 2: The reduced disclosure regime

The AASB acknowledges that whilst Tier 2 requirements would be available to all not-for-profit private sector entities and most public sector entities, regulators might exercise a power to require the application of Tier 1 requirements by the entities they regulate.  Accordingly it will be interesting to monitor reporting trends in the coming year and any response from regulators.

Further information
For further information on any of these financial reporting reforms please contact your local Grant Thornton advisor or Keith Reilly. National Head of Professional Standards at keith.reilly@au.gt.com.

To download a PDF copy of the October 2010 edition of our Not-For-Profit Industry Insider, click here.