Explanatory Memorandum
Circulated By the Authority of the Minister for Financial Services, Superannuation, Corporate Law and Human Services, the Hon Chris BowenChapter 2 - Parent-entity financial statements
Context of amendments
2.1 Under the Corporations Act, each public company, large proprietary company, registered scheme and disclosing entity (subsequently referred to as 'entity') is required to prepare a financial statement in relation to the entity reported on for each financial year. In addition, where an entity is a parent entity it is required to prepare financial statements in relation to the consolidated entity if the preparation of such statements is required by the accounting standards. The Act also contains equivalent requirements in respect of the half-year financial statements of a disclosing entity.
2.2 This results in parent entities having to include a minimum of four columns in their financial statements (that is, figures for the current financial year and the preceding financial year for both the parent entity and the consolidated entity).
2.3 The issue of the usefulness of separate parent entity financial statements has been debated in Australia for a number of years. In 2003, the Australian Accounting Standards Board (AASB) commissioned a research project on the relevance of parent entity financial reports and issued a discussion paper titled The Relevance of Parent Entity Financial Reports. The AASB believes that there is a need for revision in respect of parent entity reporting.
2.4 An industry group, the Group of 100 (comprising the Chief Financial Officers of Australia's largest entities) has also noted, in a submission to Treasury, that the replacement of full parent entity financial statements with summary information would reduce the burden of regulation on business, reduce business costs and remove unnecessary disclosures from an entity's annual report.
Summary of new law
2.5 It is proposed that subsections 295(2) and 303(2) of the Corporations Act be repealed and replaced by new provisions that provide that, where the accounting standards require an entity to prepare financial statements in relation to a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.
2.6 It is also proposed that regulations will be made for the purposes of paragraph 295(3)(a) of the Corporations Act requiring the inclusion of a note in the consolidated financial statements containing the following supplementary information about the parent entity:
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- current and total assets;
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- current and total liabilities;
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- shareholders' equity, showing separately issued capital and each reserve;
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- profit or loss;
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- total comprehensive income;
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- details of any guarantees entered into by the parent entity in relation to the debts of its subsidiaries;
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- details of any contingent liabilities; and
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- details of any contractual commitments for the acquisition of property, plant or equipment.
2.7 The proposed regulations will also provide that the supplementary information is to be calculated in accordance with accounting standards in force in the financial year to which the disclosure relates.
Comparison of key features of new law and current law
| New law | Current law |
| Under the new law, an entity would be required to prepare financial statements either: in relation to itself (if the accounting standards did not require the preparation of consolidated financial statements); or in relation to the consolidated entity (if the preparation of such statements is required by the accounting standards).
Where the entity is required to prepare financial statements in relation to the consolidated entity, the Corporations Regulations will specify supplementary information about the parent entity that is to be included in a note to the consolidated financial statements. |
Under the current law, an entity is required to prepare a financial statement in relation to itself. In addition, where an entity is a parent entity it is required to prepare financial statements in relation to the consolidated entity if the preparation of such statements is required by the accounting standards. |
Detailed explanation of new law
2.8 Subsection 295(2) will be replaced by a new provision that provides that the financial statements of the entity for the year are either the financial statements in relation to the entity or, where the accounting standards require the preparation of financial statements in relation to the consolidated entity, the financial statements in relation to the consolidated entity.
2.9 An equivalent amendment will be made to subsection 303(2) in respect of the half-year financial statements of a disclosing entity . [Schedule 1, Part 1, items 17 and 31]
2.10 In addition, regulations made for the purposes of paragraphs 295(3)(a) and 303(3)(a) will specify supplementary information about the parent entity to be included in the notes to the financial statements for the consolidated entity prepared under proposed paragraphs 295(2)(b) and 303(2)(b).
Application and transitional provisions
2.11 Proposed subsections 1510B(5) and 1515(5) provide that the proposed amendment to subsection 295(2) will apply to a financial report of an entity for financial years of the entity ending on or after 30 June 2010.
2.12 Similarly, proposed subsections 1510B(8) and 1515(8) provide that the proposed amendment to subsection 303(2) will apply to a financial report of a disclosing entity for half-years of the disclosing entity ending on or after 30 June 2010.
2.13 Proposed subsections 1510B and 1515 (4) and (7) are savings provisions that provide that the substitution of subsections 295(2) and 303(2) respectively do not affect the operation of the accounting standards made for the purposes of those subsections . [Schedule 1, Parts 2 and 3, items 52 and 54]