Parliament passed the Corporations Legislation Amendment (Simpler Regulatory System) Bill 2007 on 21 June 2007, with the Bill now subject to Royal Assent. This Bill introduces amendments to the Corporations Act 2001 in the following areas:
A copy of the legislation will be available shortly from the ComLaw website. Click here to access to the ComLaw website
In this Accounting alert, we discuss the following amendments that impact financial reporting:
Royal Assent is normally given between seven and ten days after the Bill is passed by Parliament.
Update: Royal Assent of the Bill was received on 28 June 2007 and accordingly, the revised threshold tests for large/small proprietary companies and the changes around the distribution of annual reports will be available for financial years ending on 30 June 2007.
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Threshold test for large/small proprietary companies
The new threshold levels apply to proprietary companies with a financial year ending on or after the date of Royal Assent (28 June 2007). Such companies will be able to take advantage of the new threshold levels for that financial year.
The threshold for proprietary companies has not been amended since the threshold was first introduced into law in 1995, resulting in a perception that entities of no/low economic significance were subject to Corporations Act 2001 reporting obligations. To address this concern, Parliament has amended the thresholds as follows, and has also made provisions such that further threshold amendments can now be effected through the Corporations Regulations:
A proprietary company is a large proprietary company if it satisfies at least two of the following conditions:
| Current law | New law |
|---|
| Consolidated gross operating revenue is $10 million or more | Consolidated revenue is $25 million or more |
| Consolidated gross assets is $5 million or more | Consolidated gross assets is $12.5 million or more |
| Number of employees is 50 or more | Number of employees is 50 or more |
All other proprietary companies are small proprietary companies. Small proprietary companies are not required to prepare financial reports for Corporations Act 2001 reporting purposes except where a shareholder or ASIC direction is given, or where the company is controlled by a foreign parent.
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Revenue vs. other income
The Bill continues to use ‘revenue’ as a threshold test. Companies preparing financial reports in accordance with the A-IFRS Framework will be familiar with the distinction between revenue and other income. ‘Income’ encompasses both revenue and gains, with revenue defined as the ‘gross inflow of economic benefits during the period arising in the course of the ordinary activities of an entity when those inflows results in increases in equity, other than increases relating to contributions from equity participants’. As it is only revenue that is considered in evaluating whether a company is a large/small proprietary company, it is important for companies to appropriately distinguish their income sources between revenue and other income, and to ensure that revenue is identified consistently from period to period.
Examples of income that would not commonly be considered to be ‘revenue’ include:
- gains on disposal of property, plant and equipment
- gains arising on foreign currency transactions
- government grant income
- gains arising from increases in the fair value of investment property
- reversal of gains from equity on disposal of investments classified as available-for-sale financial assets.
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'Grandfathered’ large proprietary companies
Although initially proposed in the Treasury’s proposal paper (November 2006), the final Bill passed makes no amendment to the ‘grandfathering provisions’ available to large proprietary companies through the operation of s.314 of the former Corporations Law. That is, ‘grandfathered’ large proprietary companies will continue to not be required to lodge their financial reports with the Australian Securities and Investments Commission (ASIC).
A 'grandfathered' large proprietary company is one that meets all of the following conditions: - was an exempt proprietary company on 30 June 1994
- continues to meet the definition of 'exempt proprietary company' (as in force at 30 June 1994) at all time since 30 June 1994
- was a large proprietary company at the end of the first financial year after 9 December 1995
- has financial statements for the financial year ending during 1993 and each later financial year that have been audited before the deadline
- within four months after the end of the first financial year after 9 December 1995, had lodged with the ASIC a notice that the company has applied for the lodgement relief granted by s.319(4) of the Corporations Law.
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Electronic distribution of annual reports
Companies, registered schemes and disclosing entities are required to report to members for a financial year by providing them with a copy of the full annual report or the concise report. The Corporations Act 2001 currently permits members the choice of receiving their annual reports as a hard copy, or as an electronic copy. The Bill amends the Corporations Act 2001 to allow entities to report to members in all of the following manners:
- sending a hard copy of the annual report (full or concise) to each member who has so elected to receive the annual report in this form
- sending an electronic copy of the annual report (full or concise) to each member who has so elected to receive the annual report in this form (where this option is offered by the entity)
- making a copy of the annual report (full or concise) readily accessible on a web site. Access to that web site must not be restricted
- directly notifying, in writing, all members who have not elected to receive a copy of the annual report that the annual report is accessible on the web site, and specifying the direct address on the web site where the annual report may be accessed. The explanatory memorandum to the Bill notes that notification via a company announcement on the Australian Stock Exchange is not sufficient to meet this requirement. ‘In writing’ may be via a letter sent to the member or via an email or fax, if the member has previously elected to receive communications in that form. The notification may also be included together with other correspondence sent to members – e.g. notice of the annual general meeting.
The amendments to the Corporations Act 2001 amend the default option of distributing annual report to distribution via the internet. In order to take advantage of this amendment for financial years ending on or after the date of Royal Assent, the entity must at least once directly notify members, in writing, that they are entitled to a copy of the annual report (full or concise) and of the forms of receiving reports now available.
This notification:
- must be made after commencement of the legislation
- does not have to be made to members who have previously notified the entity that they do not wish to receive a copy of the annual report
- must be made to members who have previously indicated their preference to receive a copy of the report, irrespective of any past notification that may have been given by the company or the members. Such members may once again elect to continue receiving hard or electronic copies of the annual report (full or concise), or may no longer make this election, thereby allowing the entity to make the annual report available to them via direction to a website. These elections are standing elections for each later financial year until the member changes the election.
The Corporations Act 2001 deadlines for reporting to members are unchanged and are as follows:
| Type of entity | Disclosing entity | Public company | Large proprietary company | Foreign controlled small proprietary company | Registered scheme |
| Deadline for reporting to members | Earlier of 21 days before the AGM or four months after the year end | Earlier of 21 days before the AGM or four months after the year end | Within four months after the year end | Within four months after the year end | Within three months after the year end |
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s.300A remuneration report
While the changes to s.300A of the Corporations Act 2001 do not immediately affect entities (and may not be early adopted), entities may find it useful to assess the amendments now. We discuss the amendments under the following headings:
Extension of the requirements of s.300A to all disclosing entities which are companies
s.300A currently only applies to listed companies while the extensive remuneration disclosures specified in AASB 124 Related Party Disclosures apply to all disclosing entities. In order to better align the scope of the s.300A disclosure requirements with that of the Accounting Standard, the Bill amends the application of s.300A to any disclosing entity that is a company.
Accordingly, all non-listed companies that are subject to the extensive remuneration disclosures in AASB 124 will now also be required to present a s.300A remuneration report (incorporating the changes discussed below) as part of their directors’ report from the first financial year beginning on or after the date of Royal Assent. Such companies may include co-operatives which are disclosing entities due to having previously raised funds pursuant to a prospectus. The amended s.300A does not capture registered schemes which are disclosing entities.
Amendments to current s.300A requirements for listed companies
For listed companies already presenting a remuneration report, the amendments introduced by the Bill include:
| What's changed | What's not changed |
|---|
| Details of the remuneration of key management personnel of the company (where consolidated financial statements are required, the key management personnel of the consolidated entity) will be required | Details of the remuneration of the top five company executives and the top five group executives are still required. These named persons may or may not also be key management personnel of the company (consolidated entity) |
| Executives may seek to guarantee a certain level of remuneration by entering into contracts to limit their exposure to loss of their incentive remuneration. In the future, disclosure will be required of the board policy in relation to key management personnel and the top five company and group executives hedging their incentive remuneration’s exposure to risk, and how that policy is enforced | |
| Removal of the requirement to disclose the aggregate of options (in relation to remuneration) granted, exercised or lapsed during the current financial year | Disclosure of the value of options (in relation to remuneration) lapsed during the year is still required, however, the amendments clarify that the value should be determined as though the failed vesting condition had, in fact, been met |
Auditor’s opinion on compliance with s.300A disclosures
In future periods, where the director’s report for the financial report includes a remuneration report, the auditor will also be required to provide an opinion to members on the remuneration report’s compliance with s.300A. Currently, the auditor is only required to express an opinion on the remuneration report’s compliance with AASB 124, and only when the information otherwise required to be disclosed in the financial report by AASB 124 has been transferred into the remuneration report.
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