Explanatory Statement

Issued by authority of the Minister for Financial Services, Superannuation and Corporate Law

Select Legislative Instrument 2010 No. 184

Corporations Act 2001

Subsection 1364(1) of the Corporations Act 2001 (the Act) provides that the Governor-General may make regulations prescribing matters required or permitted by the Act to be prescribed by regulations, or necessary or convenient to be prescribed by such regulations for carrying out or giving effect to the Act.

Recently, the Act was amended by the Corporations Amendment (Corporate Reporting Reform) Act 2010 (the Amending Act) for the purpose of, among other things, streamlining parent-entity reporting and introducing a three-tiered reporting framework to reduce the regulatory burden on companies limited by guarantee.

Under the Act an entity is 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 2001 (the Principal Regulations) specify supplementary information about the parent entity that is to be included in a note to the consolidated financial statements.

The Regulations amend the Principal Regulations to specify the inclusion of a note is required in the consolidated financial statements containing specified supplementary information about the parent entity is required.

As part of the reforms delivered by the Amending Act to reduce the burden on companies limited by guarantee, subsection 301(3) now provides certain companies with the option of having their annual report subject to a review, rather than an audit. A review, in contrast to an audit, is not designed to obtain the same high level of assurance that financial information is free from material misstatement. The review could be undertaken by either a registered company auditor, or a member of a professional accounting body that holds a prescribed practising certificate. For this purpose, the Regulations prescribe the practising certificates issued by the Institute of Chartered Accountants in Australia, CPA Australia Ltd or the National Institute of Accountants.

Subsection 343 of the Act provides that regulations may modify the operation of Chapter 2M of the Act in relation to all companies, registered schemes or disclosing entities of a specified kind. The Regulations allow a body corporate that is a company limited by guarantee and is currently subject to a tailored financial reporting regime under Part 12.6 of the Regulations to continue to operate under this already streamlined regime.

Under the Corporations Agreement 2002, the Commonwealth must consult with and obtain the approval of the Ministerial Council for Corporations before making amendments to certain provisions of the Corporations Regulations. The Council was consulted and has approved the Regulations and waived the period of public consultation, given the extensive consultation already undertaken.

Details of the Regulations are set out in the Attachment.

The Act specifies no other conditions that need to be satisfied before the power to make the Regulations may be exercised.

An earlier version of the Regulations was exposed for a four week public consultation, along with the Corporate Reporting Reform Bill, ending on 3 February 2010. Over 50 stakeholders made written submissions and roundtable discussions were also held in Sydney and Melbourne. Views were generally supportive of the intent of the Regulations and a number of technical aspects were addressed in the final Regulations. Key stakeholders consulted included the Company Auditors and Liquidators Disciplinary Board, the Australian Securities and Investments Commission, the Auditing and Assurance Standards Board, the Australian Institute of Company Directors, the Australian Accounting Standards Board, Chartered Secretaries Australia, the Group of 100, the Law Council of Australia, the professional accounting bodies and major audit and accounting firms.

The Regulations are a legislative instrument for the purposes of the Legislative Instruments Act 2003.

The Regulations commenced on the commencement of the Corporations Amendment (Corporate Reporting Reform) Act 2010.

ATTACHMENT

Details of the Corporations Amendment Regulations 2010 (No. 6)

Regulation 1 - Name of Regulations

This regulation provides that the name of the Regulations is the Corporations Amendment Regulations 2010 (No. 6).

Regulation 2 - Commencement

This regulation provides that the Regulations commence on the commencement of the Corporations Amendment (Corporate Reporting Reform) Act 2010.

Regulation 3 - Amendment of Corporations Regulations 2001

This regulation provides that Schedule 1 of the Regulations amends the Corporations Regulations 2001 (the Principal Regulations).

Schedule 1

Item [ 1 ] - Before regulation 2M.3.03, in Part 2M.3

Item [1] inserts a new regulation 2M.3.01 into the Principal Regulations.

New subregulation 2M.3.01(1) lists the disclosures required by notes to an entity's consolidated financial statements included in annual financial reports under section 295 of the Act.

Subregulation 2M.3.01(1) specifies that for the purposes of paragraph 295(3)(a) of the Act, the inclusion of a note is required in the consolidated financial statements containing the following supplementary information about the parent entity:

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current assets of the parent entity;

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total assets of the parent entity;

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current liabilities of the parent entity;

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total liabilities of the parent entity;

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shareholders' equity in the parent entity separately showing issued capital and each reserve;

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profit or loss of the parent entity;

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total comprehensive income of the parent company;

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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 of the parent entity;

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details of any contractual commitments by the parent entity for the acquisition of property, plant or equipment; and

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comparative information for the previous period for each of the above items.

Subregulation 2M.3.01(2) specifies that the above information be calculated in accordance with accounting standards in force in the financial year to which the disclosure relates.

Subregulation 2M.3.01(3) specifies, for the purpose of this regulation, that parent entity means a company, registered scheme or disclosing entity that is required by the accounting standards to prepare financial statements in relation to a consolidated entity.

This regime strikes an effective balance between the needs of users of parent entity financial information and the cost of preparing such information. Users of parent entity financial statements continue to retain access to relevant financial information relating to the parent entity through the summary report. While some information on the parent entity would no longer be reported, consultation with stakeholders has indicated that this information is not widely used and adds to the complexity of the financial statements. The costs of preparing and auditing summary financial information would be significantly lower than for separate parent entity financial statements - the extent of these costs savings would depend on the size and complexity of the entity and the relativities around the size of the parent as opposed to the consolidated entity.

Item [ 2 ] - Before regulation 2M.4.01, in Part 2M.4

Item [2] inserts new regulation 2M.4.01A into the Principal Regulations.

Regulation 2M.4.01A specifies practising certificates for paragraph 324BE(1)(b) of the Act. The regulation prescribes the following practising certificates:

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the Certificate of Public Practice issued by the Institute of Chartered Accountants in Australia (ICAA);

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the Public Practice Certificate issued by CPA Australia Ltd or the National Institute of Accountants (NIA).

This regulation allows members of professional accounting bodies who hold such certificates to be taken to be a registered company auditor for the purposes of a review of a financial report of a company limited by guarantee.

A review consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. This reduces the time and costs associated with having the financial statements audited, whilst ensuring that the financial information remains subject to an appropriate degree of assurance. The review would be conducted in accordance with a standard on review engagements developed (and modified as appropriate) by the Auditing and Assurance Standards Board (AUASB).

This measure expands the category of individuals that are permitted to undertake a review, providing greater flexibility and reducing unnecessary burden on companies limited by guarantee and their auditors, particularly during peak periods.

Item [ 3 ] - After regulation 12.6.01

Item [3] inserts a new regulation 12.06.01A into the Principal Regulations.

The new regulation allows a body corporate, that is a company limited by guarantee and is currently subject to a tailored financial reporting regime under Part 12.6 of the Principal Regulations, to continue to operate under this already streamlined regime.

This includes a body corporate that is:

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a transferring financial institution of a state or territory; or

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a company that is permitted to use the expression 'building society', 'credit society' or 'credit union' under section 66 of the Banking Act 1959.

The reforms relating to reporting to members by companies limited by guarantee contained in section 316A do not apply to such entities. These entities continue to report to their members under Part 12.6 of the Principal Regulations.