Preparing for June financial reporting – models and guides
Key actions: It is crucial entities consider key messages in finalising preparations for June financial reporting to ensure the financial statements tell the story of the past financial year or half-year. Key resources include the Tier 1 model financial statements, disclosure checklists and Australian financial reporting guide.
The June 2021 financial reporting season sees the ‘new normal’ emerge as a predominant theme, with new challenges and opportunities. ASIC continues to focus on the disclosures made in the financial report and entities can continue to expect regulatory scrutiny to be rigorous.
Examples of improving transparency include:
- Ensuring changes in circumstances since prior reporting periods are considered, adequately reflected and clearly explained in the financial report and operating and financial review
- Clear disclosure about key judgements and the sources of estimation uncertainty arising in the financial statements, details of the assumptions made and sensitivity and scenario analyses
- Explaining how impairment assessments have been undertaken, including disclosure about key assumptions and methods used when testing impairment
- The impacts of any government support received are clearly understandable and comprehensively disclosed, including accounting policies and amounts received or repaid
- The impacts of climate change and other emerging risks, including the entity’s governance process, its strategy, how the entity manages the associated risks, and key metrics and targets.
We have also released updated versions of the following resources to assist:
- Tier 1 model financial statements – This document analyses key matters to focus on for 30 June, including what’s new for the current reporting season, a summary of new and revised pronouncements and reporting deadlines. It also contains full IFRS compliant financial statements, with appendices for Australian-specific disclosures for both for-profit and not-for-profit entities
- Australian financial reporting guide – An updated edition of our ‘one-stop shop’ for everything related to financial reporting in Australia. Updates include a clearer navigation of the reporting mandate, expanded coverage of the revised reporting regime commencing 1 July 2021, and various updates for new and revised pronouncements and guidance
- Tier 1 disclosure checklists – There are two checklists available for Tier 1 financial statements. The full-year compliance checklist summarises the recognition, measurement, presentation and disclosure requirements set out in accounting standards and other Australian-specific requirements (such as the remuneration report), and the interim reporting compliance checklist sets out the requirements in half-year and other interim financial reports.
Simplified Disclosures – get ready
Call to action: With increasing awareness and interest in this major change in Australian financial reporting, impacted entities need to act now and consider the need to include comparative information from the current period in their first Simplified Disclosures financial statements next year.
Recap
Many for-profit entities will be unable to prepare special purpose financial statements for reporting periods beginning on or after 1 July 2021. A new ‘Tier 2’ regime, ‘Simplified Disclosures’, will be in place from the same date, replacing Reduced Disclosure Requirements (RDR). Read more about the changes in our Clarity publication Removal of special purpose financial statements.
Why do I need to care now?
Entities that are required to move from special purpose financial statements to Simplified Disclosures will be required to provide comparative information, with no relief being available. For June year ends, comparative information needs to be available for 30 June 2021.
This means that impacted entities need to plan for the transition as part of their upcoming full year reporting, understand what is required, collate the necessary information and arrange for the audit of that information.
In some cases, early adoption does provide transitional comparative disclosure relief, and may be attractive. More information can be found in our Clarity publication Simplified Disclosures – Transition options and opportunities.
What resources are available?
In addition to the Clarity publications mentioned above, the following tailored resources provide support to the transition journey for impacted entities:
- NEW Simplified Disclosures presentation and disclosure checklist - A tailorable checklist of all relevant Simplified Disclosures, cross referenced to our Tier 2 Simplified Disclosures model financial statements
- Tier 2 Simplified Disclosures model financial statements– Our Tier 2 model financial statements illustrate the disclosures required for a for-profit private sector entity under AASB 1060, including the transitional disclosures required when moving from unconsolidated special purpose financial statements to consolidated financial statements.
Pitfalls with dividends – things to watch out for
Action steps?
It is important entities considering paying a dividend ensure they consider all appropriate accounting, legal and tax aspects before declaring a distribution.
Background
For entities incorporated under the Corporations Act 2001, the declaration of dividends is subject to the ‘net assets test’ in s.245T. In order to pay a dividend, an entity must have sufficient net assets, the declaration of a dividend must be fair and reasonable to the company’s shareholders, and the payment of a dividend must not materially prejudice the company’s ability to pay its creditors.
The net assets test was introduced a number of years ago and replaced a ‘profits test’ that only permitted the payment of dividends from profits. There is a significant amount of case law around the operation of the profits test, but the net assets test has not been scrutinised by the Courts to any comparable degree.
Under Australian tax law, a dividend can only be franked if it is paid out of profits. Accordingly, the profits test remains relevant for these purposes, and some argue the profits test remains relevant in relation to the declaration of dividends under the Corporations Act 2001.
Why does it matter?
With the widespread impacts of COVID-19 over the past year and more, many entities may have experienced new conditions, and profitability patterns may have altered. Some companies may have incurred their first accounting loss for some time, or may need to fund dividends from different sources within the group than in the past.
Because of the uncertainty around the interpretation of the legal and tax requirements for dividends, particular care is needed where an entity seeking to pay a dividend:
- Has negative net assets and/or negative retained earnings (even if the group as a whole does not)
- Wishes to pay a dividend exceeding the available profits and retained earnings of the entity itself (even if the dividend is less than the consolidated position)
- Needs to rely on the payment of dividends from subsidiaries, particularly where a chain of entities exists (as there may be ‘dividend traps’ whereby an entity in the chain is prohibited from paying a dividend due to its own circumstances)
- Seeks to frank the dividend for taxation purposes when profits are not available, or the dividend is being paid in a different period to when the profits were originally earned.
The payment of a dividend when not permitted can expose the directors to consequences under the Corporations Act 2001, and the incorrect franking of a dividend for tax purposes can have significant tax repercussions.
Whilst the accounting is fairly straightforward, it is nevertheless important for directors to carefully consider the legal and tax implications of dividends before they are declared. Entities should obtain appropriate advice where there is uncertainty.
There may also be indirect accounting implications that need to be considered, e.g. if a dividend is being funded by paying dividends up from subsidiaries, this may result in current or deferred income tax impacts that must be recognised.
