House of Representatives

Explanatory Memorandum

(Circulated by the authority of the Treasurer, the Hon J. B. Hockey MP)

Chapter 3 - Clarifying the financial year

Outline of chapter

3.1 Item 6 of Schedule 1 to this Bill amends the Corporations Act 2001 (Corporations Act) to clarify the circumstances in which a financial year may be less than 12 months.

3.2 All references in this Chapter are to the Corporations Act unless otherwise specified.

Context of amendments

3.3 There is confusion about the conditions under which directors may determine that a financial year is shorter than 12 months.

3.4 Section 323D sets out how companies, registered schemes and disclosing entities may determine the length of their financial year.

3.5 While an entity's financial year is expected to be approximately 12 months long, entities can determine otherwise in cases where:

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an entity needs to modify its financial year by up to seven days, to accommodate week-based internal reporting frameworks; or

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an entity needs to synchronise its financial year in order to prepare consolidated financial reports.

3.6 Subsection 323D(2A) allows entities to determine that their financial year is less than 12 months if none of the previous five financial years have been less than 12 months, the shorter financial year commences at the end of the previous financial year and the decision is in the best interests of the entity.

3.7 Stakeholders have raised concerns about the interaction between this provision and the operation of subsection 323D(2), which reqmuires that a financial year is 12 months long, unless determined by the directors to be a period that is longer or shorter than 12 months by up to seven days.

3.8 There is confusion surrounding whether taking advantage of the flexibility in section 323D(2) would trigger the five-year period in which an entity is precluded from accessing the benefits offered by section 323D(2A).

3.9 Similarly subsection 323D(3) requires an entity to synchronise its financial year end with its parent entity when it becomes a controlled entity. Again, stakeholders have raised concerns that this provision may trigger the five-year period in which an entity is precluded from accessing the benefits offered by section 323D(2A).

3.10 Entities that amend their financial years by up to seven days should be confident that they may determine when a subsequent financial year may last for less than 12 months. Similarly, entities that have been synchronised should be confident that they may determine that a subsequent financial year may last for less than 12 months - provided that the financial year synchronised meets the requirements of subsections 323D(3) and 323D(4).

Summary of new law

3.11 The Bill seeks to put beyond doubt that directors may determine that a financial year is shorter than 12 months by more than seven days irrespective of whether, during an entity's previous five financial years, the directors have determined that the financial year is shorter than 12 months:

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by up to seven days; or

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to synchronise the financial year to prepare consolidated financial statements.

3.12 The Bill does not change the legal operation of this provision.

Comparison of key features of new law and current law

Detailed explanation of new law

3.13 A Note is inserted at the end of subsection 323D(2A) to clarify that the directors of a company, registered scheme or disclosing entity may determine that a financial year will last for a period of less than 12 months under subsection 323D(2A) irrespective of whether, in any of the previous five financial years:

•

a financial year has been shorter than 12 months by up to seven days (under subsection 323D(2)); or

•

a financial year has been extended or shortened to facilitate the synchronisation of financial years for the purpose of preparing consolidated financial reports (under subsection 323D(4)).

[Schedule 1, item 6, Note at the end of subsection 323D(2A)]

3.14 The Note does not affect the legal operation of section 323D.