House of Representatives

Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon Peter Costello, MP)

13. Chapter 2M: Financial reports and audit

13.1 The changes to the Corporations Law contained in Chapter 2M and the related consequential amendments in Schedule 2 of the Bill will replace existing Parts 3.6, 4.4 and 4.5 and Divisions 2 and 3 of Part 3.7 of the Law.

13.2 The Bill brings together into a single chapter provisions dealing with financial statements and audit requirements which are currently dispersed throughout the Law and the Corporations Regulations.

13.3 The new provisions require certain companies, managed investment schemes and disclosing entities to prepare financial reports and have them audited. For these entities, the financial report and auditors report, as well as the directors report to members, will, in most cases, have to be sent to members and lodged with the ASC.

Accounting standards and the Law

13.4 The Law currently contains specific rules dealing with accounting methodology. The inclusion of these rules in the Law burdens it with material more appropriately dealt with in accounting standards.

13.5 The Bill will therefore reduce the overlap between the Law and the standards by removing detailed accounting rules from the Law and leaving them to be dealt with in accounting standards. A number of consequential amendments in the Bill reflect the removal of technical accounting rules from the Law.

13.6 Under the approach taken in the Bill, specific procedures for the preparation and lodgment of consolidated financial statements are not set out in the Law. Instead, the Bill merely refers, within the context of the rules dealing with financial statements, to the obligation to prepare consolidated financial statements as required by the accounting standards (Bill ss 296 and 304). Consistent with this approach, Chapter 2M adopts the definitions of control and economic entity used in Accounting Standard AASB 1024: Consolidated Accounts.

Application of Chapter 2M to managed investment schemes

13.7 The Managed Investments Bill 1997 sets out a regulatory regime for registered managed investment schemes. Chapter 2M complements the Managed Investments Bill and imposes financial record keeping and reporting obligations on registered managed investment schemes. For the most part, these schemes are treated similarly to public companies throughout the Chapter.

13.8 The new rules replace the accounting requirements for prescribed interest schemes. These are presently set out in Division 11 of Part 3.6, Division 5 of Part 7.12 and in the special rules applying to property trusts contained in paragraphs 7.12.15(5)(o) and (p) of the Corporations Regulations.

13.9 The Bill recognises that managed investment schemes are not separate legal entities and adopts special rules to apply Chapter 2M to these schemes (Bill s 285(3)). In particular, the responsible entity of a scheme is responsible for the obligations in respect of the scheme and the directors and officers of the responsible entity are treated as the directors and officers of the scheme (Bill s 285(3)(a) and (b)).

Financial records

13.10 The Bill requires bodies to keep written financial records (Bill s 286). The reference to the term written does not preclude bodies keeping their records in electronic form, as the definition of writing in section 9 of the Law extends to computerised records.

13.11 The Bill inserts into section 9 a definition of financial records (Bill Schedule 2 Items 244 and 266). The documents referred to in this definition are those documents necessary to correctly record and explain the transactions and financial position and performance of the company, scheme or entity and enable true and fair financial statements to be prepared and audited as required by subsection 286(1) of the Bill. These documents include invoices, receipts, orders for the payment of money, bills of exchange, cheques, promissory notes, documents of prime entry, working papers and other documents necessary to explain the methods by which financial statements are made up and adjustments are made in preparing financial statements. The change in description from accounting records to financial records follows from the changed references to the names of accounting documents required by the Law to financial statements and financial report.

13.12 The Bill does not retain the current requirement that sufficient records be kept to allow them to be reviewed (current s 289(1)(b)(ii)). If sufficient records are kept to enable an audit to be conducted, a review of the documents will also be possible (Bill s 286(1)(b)).

13.13 The obligation to keep financial records for 7 years after the transactions covered by the records are completed has been retained (Bill s 286(2)).

13.14 Financial records may be kept in any language as long as an English translation of the records is available for inspection within a reasonable time (Bill s 287). Similarly, records may be kept in electronic form, provided they are convertible into hard copy and made available for inspection within a reasonable time (Bill s 288). Records kept in a language other than English or in electronic form need only be made available under these provisions to a person who is entitled to inspect them (Bill s 287).

13.15 The Bill retains the current distinction in the Law between records kept in Australia and records kept overseas (Bill s 289). Companies keeping records outside Australia must currently keep sufficient records in Australia to allow true and fair accounts to be prepared and must notify the ASC of the location of the duplicate records in Australia, if they are kept at a place other than the companys registered office (current s 289).

13.16 The Bill extends this notification requirement for companies, registered schemes or disclosing entities which keep their records overseas. Financial records may be kept at a place determined by the company, responsible entity of a registered scheme or disclosing entity (Bill s 289(1)). If records are kept overseas, the ASC needs to be notified of the location of the duplicate set kept in Australia, even if they are kept at the registered office (Bill s 289(2)). This requirement is designed to ensure that the ASC is notified if a company, scheme or entity keeps its financial records overseas. The ASC will retain its power to require the production of financial records kept outside Australia (Bill s 289(3)).

13.17 Director access provisions and signposts to the provisions that give members, auditors, controllers and the ASC access to financial records are contained in sections 290 and 291 of the Bill. The Bill allows a court to authorise a person to inspect financial records on behalf of a director (Bill s 290(2)). Where this authorisation is given, the court can make a further order limiting the use of information obtained during the inspection.

Obligation to prepare annual reports

13.18 Disclosing entities, public companies, large proprietary companies and registered collective investment schemes will be required to prepare annual financial reports and directors reports (Bill s 292). The obligation continues to apply to all disclosing entities incorporated or formed in an Australian jurisdiction, whether or not they are companies or registered schemes (Bill s 285(2)).

13.19 The Bill reenacts the distinction between small and large proprietary companies introduced by the First Corporate Law Simplification Act 1995 . As at present, small proprietary companies will not have to prepare and lodge annual financial reports or directors reports, unless directed to do so by at least 5% of members or the ASC or, in some cases, if they are controlled by a foreign company (Bill ss 292(2), 293 and 294).

13.20 A foreign controlled small proprietary company must prepare an individual financial report and obtain an auditors report, as well as preparing a directors report, if:

(a)

it was controlled by a foreign company for all or part of the year (according to the test for control set out in AASB 1O24: Consolidated Accounts ); and

(b)

during the period when it was controlled, it was not consolidated in financial statements for that year lodged with the ASC by a registered foreign company or by an Australian company, registered scheme or disclosing entity (Bill s 292(2)(b)).

13.21 The Bill proceeds on the basis that financial reporting by small proprietary companies which are foreign controlled should, as far as possible, equate with the reporting requirements of small proprietary companies which are controlled by Australian companies. Accordingly, a small proprietary company will be required to prepare a financial report if the controlling registered foreign company does not prepare and lodge financial statements with the ASC which consolidate the affairs of the small proprietary company for the period in which it was controlled.

13.22 An Australian company which controls a small proprietary company is required to consolidate the small proprietary company in its consolidated financial report if it comes within the scope of AASB 1024: Consolidated Accounts . While it would not be appropriate for the Corporations Law to generally require a registered foreign company to prepare consolidated financial statements, that company may consolidate the small proprietary company in financial statements prepared under the law of its jurisdiction of incorporation. If consolidated accounts of this kind are lodged with the ASC in accordance with the requirements in current section 349, the remainder of Chapter 2M will not apply to the small proprietary company.

13.23 In some cases, a small proprietary company which is ultimately foreign controlled will be directly controlled by an Australian company, registered scheme or disclosing entity. If the interposed company, scheme or entity lodges financial statements and reports which consolidate the small proprietary company, the remainder of Chapter 2M will also not apply to the small proprietary company.

13.24 Under proposed paragraph 292(2)(b), circumstances will arise where parity of treatment between foreign controlled small proprietary companies and other small proprietary companies will not occur. The Bill allows for the ASC to issue specific exemption orders (Bill s 340) and also class exemption orders (Bill s 341). The criteria for these exemptions are set out in Bill s 342 and relate to whether compliance with 2M.2 and 2M.3 would make the financial report or other reports misleading, be inappropriate in the circumstances or would impose unreasonable burdens.

Content of the annual financial report

13.25 The Bill specifies the contents of the annual financial report (Bill s 295). To avoid differences between the accounting terminology in the Corporations Law and that used by preparers and users of accounts, the Law will refer to financial statements, rather than accounts and the financial statements, notes and directors declaration will be collectively labelled the financial report. The documents comprising the financial statements will be the profit and loss statement, balance sheet and statement of cash flows and, if required by the accounting standards, consolidations of these documents. This change ensures that the Bill is consistent with the common usage of these terms and their use in AASB instruments.

13.26 The current requirement to prepare a statement of cash flows contained in AASB 1026: Statement of Cash Flows only applies to reporting entities. A statement of cash flows will be useful for monitoring the cash inflow and outflow during the year, and has therefore been added to the basic documents required by the Corporations Law for financial reporting to members. It is envisaged that companies without a cash flow would comply with this requirement by including a statement that it had no cash receipts or payments. The obligation to prepare a cash flow statement will also extend to registered foreign companies (Bill Schedule 2 Items 296, 298, 299, 301 and 302). The ASCs capacity to provide relief from accounting obligations is retained (Bill Part 2M.6).

13.27 As part of the annual financial report, the Bill requires directors to make a declaration about several matters, including the companys solvency (Bill s 295(4)). This obligation also applies to the directors of the responsible entity for a collective investment scheme. Because a scheme is not a separate legal entity, the responsible entity incurs debts on behalf of the scheme. The directors declaration of solvency required by paragraph 295(4)(c) of the Bill therefore relates to the debts of the scheme (Bill s 285(3)(c)).

13.28 Directors are currently required to sign off on the directors statements and directors report for an accounting period (current ss 303 and 310). The Law currently prevents the statement and report from being made more than 42 days before the deadline for an accounting period. The requirement ensures that members receive up-to-date information about the directors view of the position of the company. These rules cause some inconvenience to companies which would otherwise sign off on the statement and report before 3 months after the end of the financial year, and they have therefore been modified by ASC CO96/277 and 96/278. The Bill removes the complex 42 day rule and requires the directors declaration and directors report to be prepared and signed off in time to comply with the obligation to report to members and be lodged with the ASC (Bill ss 295(5), 301, 316 and 320). Under the Bill, companies, schemes or entities are therefore able to sign off on the declaration and report before 3 months after the end of the financial year, should they wish to do so and members are provided with the directors declaration and report within a similar time frame as under the existing Law.

13.29 The Bill also removes the 42 day sign off requirement for half-year financial reports and replaces it with a rule equivalent to that for annual financial reports (Bill s 303(5)). There is no requirement for directors to sign off on the half-year directors report.

13.30 A financial report will be required to comply with accounting standards and any further requirements in the Corporations Regulations (Bill s 296). This requirement does not repeat the existing reference in section 298 to applicable accounting standards because each standard describes the companies and entities to which it applies.

13.31 The Bill requires that the financial statements and notes for a financial year give a true and fair view of the financial position and performance of the company, registered scheme or disclosing entity (Bill s 297). This ensures that the financial statements and notes give a true and fair view of the companys whole operations including profit and loss and cash flows, and not just matters relating to the balance sheet. This approach is consistent with the AASBs Statement of Accounting Concepts SAC2: Objectives of General Purpose Financial Reporting , which requires that information that is relevant to the assessment of performance, financial position and financing and investing be included in general purpose financial reports.

13.32 The obligation for the financial statements and notes to present a true and fair view will not affect the primary obligation to comply with the accounting standards. If compliance with the accounting standards would not produce financial statements which give a true and fair view, additional information necessary to give the true and fair view must be included in the notes to the financial statements. An equivalent rule will apply to the financial statements and notes for half-year financial reporting (Bill s 305).

Directors reporting responsibilities

13.33 The Bill requires directors to prepare an annual directors report containing the existing general disclosure obligations to report to members (Bill ss 298 and 299). The exemption of dormant entities from the directors statement requirements no longer operates.

Specific disclosures

13.34 The Bill also contains specific disclosure requirements for the annual directors report (Bill s 300). A number of these disclosures restate requirements currently contained in Division 6 of Part 3.6 of the Law. The others have either been revised and simplified, or repealed where the disclosure is unnecessary.

13.35 The Law currently requires a directors report to include information about each option that a company or body corporate has granted (current s 308). The Law and the accounting standards require the disclosure of directors executive officers remuneration. However, it is unclear the extent to which these provisions require the disclosure of options granted as part of directors and executive officers remuneration. The Bill clarifies the position and requires the disclosure of all options granted as part of remuneration over unissued shares or interests in relation to the directors and the 5 most highly remunerated officers of an entity (Bill s 300(1)(d)). This approach takes into account the widespread use of employee share schemes, the operation of existing ASC class orders and the need to provide information to shareholders about the most significant employees of an entity.

13.36 Some specific disclosure requirements (for example, the basis on which the option may be exercised in current paragraphs 308 (3)(c) and 216C(1)(f)) have been removed to take into account the disclosure requirements in relation to the enhanced register of options introduced by the First Corporate Law Simplification Act 1995 .

13.37 Additional disclosures that were required in directors reports for certain public companies have now been rationalised (current s 307). Disclosures of directors shares or interests in contracts or proposed contracts with related parties have been omitted from the Law as these are adequately covered in Accounting Standard AASB 1017: Related Party Disclosures.

13.38 Directors of listed companies will be obliged by the Bill to disclose details of directors interests (Bill s 300(11)). These interests must also be notified to the relevant securities exchange under current paragraph 235(1)(a). In light of the Managed Investments Bill, a parallel provision extending to the directors of responsible entities for listed schemes has also been inserted (Bill s 300(12)). These provisions ensure that the annual directors report contains information of directors interests as at the date of the report, enabling members to gauge the extent of the directors interests in the enterprise.

13.39 The annual directors report for a registered managed investment scheme is required to include a number of basic details specific to these schemes (Bill s 300(13)). The report must state the amount of fees paid to the responsible entity out of scheme property during the year and the value of the schemes assets at the end of the year. This requirement provides members of the scheme with meaningful information regarding the level of management fees.

13.40 Members may not relieve companies, schemes or entities from their obligation to provide the specific details required by section 300 of the Bill. The information to be provided under this section may be relevant to persons other than company members, in particular, company creditors. However, wholly-owned subsidiaries which have the benefit of the ASC class order exempting them from preparing financial reports and directors reports would continue to be exempted from the specific reporting requirements contained in Bill section 300 (Bill s 1434).

13.41 The specific information required by Bill section 300 does not have to be included in the directors report if it is included in the financial statements for the financial year (Bill s 300(2)).

13.42 The financial report for a financial year must be audited (Bill s 301).

Half-year reporting for disclosing entities

13.43 The Bill sets out half-year reporting responsibilities in Division 2 of Part 2M.3 (Bill ss 302-306 and 319). These are based on a number of the requirements in the annual financial reporting provisions.

13.44 The half-year reporting requirements for disclosing entities, which were introduced by the Corporate Law Reform Act 1994 and have been in operation since September 1994, are unchanged in substance from the current Law.

13.45 The true and fair view requirement in the context of half-year financial reporting must take into account the more limited scope of half-year financial reporting in comparison with full-year financial reporting.

Audit and audit report

13.46 Division 3 of Part 2M.3 brings together the statutory duties of the auditor when conducting an audit of financial statements (Bill ss 307-313). The Bill sets out the matters about which the auditor is required to form an opinion when conducting an audit (Bill s 307).

13.47 The choice of a full audit or a review of half-year financial statements, also introduced by the Corporate Law Reform Act 1994 , is preserved. The Bill sets out the information which an auditor is required to report to members in an audit or review of financial statements (Bill ss 308 and 309).

13.48 When conducting an audit, the auditor must report on whether the financial report is in accordance with the Law, including compliance with the accounting standards and the true and fair view. If the auditor is of the opinion that the financial report does not meet these requirements, the report must say why (Bill ss 308(1) and 309(1)). The auditor is also required to give details of defects or irregularities in the financial report and of deficiencies, failures or shortcomings in respect of a number of specified matters on which the auditor is required to form an opinion when carrying out the audit (Bill ss 308(3) and 309(3)).

13.49 In reviewing the half-year financial report, the auditor must report to members on whether they became aware of any matter in the course of the review which makes them believe the report does not comply with the half-year reporting requirements (Bill ss 309(4) and (5)).

13.50 The auditors current rights of access to books and ability to request assistance from any officer for the purpose of the audit or review are preserved (Bill s 310). The Bill will require that a request for assistance be reasonable.

13.51 The position of auditors has been strengthened by converting the current negative obligation on company officers not to obstruct the auditor without lawful excuse (current s 333) into a positive obligation to assist the auditor in the conduct of an audit or review (Bill s 312).

13.52 Under the current Law, an auditor must report to the ASC if the auditor is satisfied that there has been a contravention of the Law (current s 332(10)). The words is satisfied in section 332 were considered by the House of Representatives Standing Committee on Legal and Constitutional Affairs in its November 1991 report, Corporate Practices and the Rights of Shareholders . The Committee concluded that those words were undesirable as they require too high a degree of satisfaction before an auditor must report a contravention of the Law. To alleviate this concern, and in accordance with the recommendations of the Committee, the Bill requires an auditor to report to the ASC if they have reasonable grounds to suspect that a contravention of the Law has occurred (Bill s 311(a)). This reduces the level of satisfaction required before an auditor must report and introduces an objective element into the test.

13.53 The Law currently requires an auditor to notify the AASB if they are not satisfied that the companys accounts comply with the accounting standards (current s 332A). Under the Bill, suspected contraventions of the Law must be reported directly to the ASC if the auditor believes they cannot be adequately dealt with by commenting in the audit report or by bringing the matter to the attention of the directors (Bill s 311). The Bill requires financial reports to comply with the accounting standards and therefore a failure to comply with the standards is a contravention of the Law (Bill s 296). The requirement for the auditor to report to the ASC in these circumstances, rather than the AASB, is consistent with the role of the ASC as the enforcement agency in relation to breaches of the Corporations Law.

13.54 The qualified privilege of auditors and other persons is retained (current section 1289).

Annual financial reporting to members

13.55 The Bill specifies the requirements for annual financial reporting to members and establishes the timing requirements for reporting (Bill s 314).

13.56 Public companies, and disclosing entities which are not companies or collective investment schemes, must report to members by the earlier of 4 months after the end of the financial year or 21 days before the AGM (Bill s 315(1)). Large proprietary companies must report to members within 4 months after the end of the financial year (Bill s 315(4)).

13.57 Public companies are currently required to send financial statements and reports to members at least 14 days before the AGM, which must be held within 5 months after the end of the financial year (current ss 245 and 315). As a result, these companies have a maximum of 4 and a half months to report to members.

13.58 The new rule will require public companies to report to members within 4 months after the end of the financial year. This shorter time frame is in line with that introduced for large proprietary companies in the First Corporate Law Simplification Act 1995 . It also provides adequate opportunity for members to examine the financial report before the companys AGM, which, under the Bill, must be held within 5 months after the end of the financial year (Bill s 250N). The 21 day period specified in paragraph 315(1)(a) of the Bill operates where a company holds its AGM earlier than is required by section 250N.

13.59 Currently, the financial statements of prescribed interest schemes must be sent to interest holders within 90 days after the end of the financial year (current s 1069(1)(f) and r 7.12.14A). This position has been retained, in effect, for collective investment schemes under the Bill (Bill s 315(3)).

13.60 Public company directors will remain under an obligation to lay the financial report, directors report and auditors report before the AGM (Bill s 317). If a companys first AGM is held before the completion of the companys first financial year, the financial report is to be presented at the AGM for the following year. The first AGM will still have to be held as required under section 250N of the Bill.

13.61 Collective investment schemes will not be required to hold an AGM.

13.62 As at present, borrowing corporations will be required to give a copy of the annual financial report, directors report and auditors report to the trustee for debenture holders by the section 315 deadline (Bill Schedule 2 Item 336).

13.63 Individual debenture holders are entitled to ask for a copy of the last reports sent to members or the full financial report and the directors report and auditors report for the last financial year. These reports will be sent as soon as practicable after the request and will be free of charge (Bill s 318).

Concise financial reports for members

13.64 Currently, the Law does not provide for concise financial reporting. The Bill will allow companies, registered schemes or disclosing entities can choose to send a concise financial report to members instead of the full annual financial report (Bill s 314(1)).

13.65 A concise financial report is intended to provide members with information relevant to evaluating the performance and prospects of the business, without giving them fully detailed accounting disclosures. The concise report should be easier to read than the full financial statements and will provide a useful summary of the company, registered scheme or disclosing entitys financial position.

13.66 A concise financial report will comprise:

(a)

concise financial statements drawn up in accordance with accounting standards made for the purposes of concise financial reporting

(b)

the annual directors report

(c)

an auditors statement:

(i)

that the full financial statements or consolidated financial statements have been audited, and

(ii)

whether, in the auditors opinion, the concise financial report complies with the accounting standards made for the purposes of concise financial reporting

(d)

a copy of any qualification or emphasis of matter in the auditors report on the financial report

(e)

a statement informing members that the full financial statements and reports will be sent to them free of charge, on request (Bill s 314(2)).

13.67 The full annual directors report will be included in a concise financial report, in view of its importance in communicating significant information to members.

13.68 The concise financial report will contain a copy of any qualification in and of any statements contained in the emphasis of matter section of the full financial report. Members receiving the concise financial report will therefore be informed of any deficiencies in the full report or of any matter which, while not affecting the audit opinion, is important to draw attention to or emphasise, as it is considered relevant to the users of the audit report.

13.69 Members will be able to request that the company, registered scheme or disclosing entity not send any annual reporting material to them if they do not want to receive it (Bill s 316). The provision also enables members to require that the full financial report and directors and auditors reports be sent to them. This facility allows members to obtain copies of the full reports if the company, registered scheme or disclosing entity has elected to send only a concise financial report to members.

Lodging financial statements and reports with the ASC

13.70 Financial statements and reports prepared under Chapter 2M must be lodged with the ASC within the specified time period.

13.71 Disclosing entities and registered schemes must lodge their annual financial report within 3 months after the end of the financial year. Non-disclosing entities have 4 months to do so (Bill s 319(3)). The 4 month period reflects the timing requirement for reporting to members, under subsection 315(1) of the Bill and ensures that financial information on the ASCs database is more up to date.

13.72 These rules reflect the current Law, except in relation to public companies. Public companies which are not disclosing entities are currently required to lodge their financial statements with their annual return (current ss 245, 316 and 335 and regulation 3.8.02). The annual return is required to be lodged within 6 months after the end of the financial year (current ss 245 and 335). The Bill breaks this nexus and sets out a separate lodgment regime for the financial report.

13.73 The Bill contains a transitional provision for public companies which are not disclosing entities at the end of the last financial year to which the current Law applies. These companies are required to lodge the documents specified in subsection 1432(2) of the Bill either within 1 month after the day on which the companys next AGM is held or within 1 month of the last day on which the company should have held its next AGM (Bill s 1432).

13.74 Unless the ASC requires it under section 321 of the Bill the following reports do not have to be lodged with the ASC:

(a)

the financial report, directors report or auditors report of a small proprietary company prepared on shareholder direction (Bill s 293)

(b)

the financial report, directors report or auditors report of a small proprietary company prepared on direction by the ASC (Bill s 294)

(c)

the financial report, directors report or auditors report of a large proprietary company that is covered by subsection 319(4) of the Bill (Bill s 319). This subsection requires that certain conditions be met so that a large proprietary company can take advantage of this exemption. If the company was a large proprietary company at the end of the financial year that ended after 9 December 1995, but falls below that threshold in subsequent financial years, it may still take advantage of the exemption provided in subsection 319(4) of the Bill if it has continued to have its financial statements and reports audited before the deadline in each financial year from the financial year ending during 1993.

13.75 As the obligation to keep financial records lasts for 7 years, the ASC is only able to direct a company to lodge reports up to 6 years after the end of the financial year or half-year (Bill ss 321(2)(c) and (d)).

13.76 If financial reports or directors reports are amended after lodgment with the ASC, they must be re-lodged within 14 days of amendment (Bill s 322). If the amendment is material, the company, registered scheme or disclosing entity must notify members of the amendment and of their right to obtain a copy of the amended report as soon as practicable (Bill s 322(2)). This will ensure that members are fully informed of the financial position of the company, registered scheme or disclosing entity.

13.77 By setting out 2 separate timing requirements for reporting to members and lodging financial reports with the ASC, the Bill remove the need for the existing complex concept of financial deadline (Bill ss 315 and 319). This change has necessitated the repeal of the definition of deadline contained in section 9 (Bill Schedule 2 Item 261).

13.78 However, the existing concept of deadline has a residual use in paragraph 319(4)(d) of the Bill, which deals with the exemption of some large proprietary companies from the obligation to lodge financial information with the ASC. This is because the existing exemption is carried forward into Chapter 2M. In order for these companies to benefit from the exemption, they must comply with certain requirements by the deadline, as that term is currently defined in section 283D of the Law.

Consolidated financial statements

13.79 The Bill deals with the rights and obligations of company directors, officers and auditors in the preparation and audit of consolidated financial statements (Bill ss 323C). When requested by the company, registered scheme or disclosing entity, a director or officer of a controlled entity must provide all the information necessary for the preparation of consolidated financial statements and the notes to those statements (Bill s 323).

13.80 An auditor who audits or reviews a financial report that includes consolidated financial statements has a right of access, at all reasonable times, to the books of controlled entities and can require officers of controlled entities to give all necessary information, explanations or assistance for the purposes of the audit or review. The controlling entity whose financial report is being audited must meet the expenses of providing the information, explanations or assistance to the auditor (Bill s 323A). Officers or auditors of controlled entities must allow the auditor of the controlling entity access to the books of the entity and give that auditor any information, explanations or assistance required under section 323A of the Bill (Bill s 323B).

13.81 Where control over an entity has changed during the financial year, the rights and obligations set out in sections 323-323B of the Bill still apply to the preparation and audit or review of the controlling company, registered scheme or disclosing entitys financial report (Bill s 323C). This requirement was inserted into the Bill to ensure that a change of control does not prevent an auditor from obtaining information or assistance necessary to conduct their audit or review.

Financial years and half-years

13.82 Chapter 2M and associated amendments made by the Bill apply to financial years and half-years ending after these rules commenced. Parts 3.6, 3.7, 4.4 and 4.5 of the current Law continue to apply where a financial year or half-year ended on or before the commencement (Bill s 1431).

13.83 The first financial year of a company, incorporated body or registered scheme can be a period of up to 18 months. An ASC exemption will be needed to vary the 12 month period for subsequent financial years to make it more than 7 days shorter or longer (Bill s 323D). Seven days grace allows a necessary degree of flexibility to retailers and similar businesses - in particular, those who use calendar years to calculate their balancing date. In addition, they are able to vary a financial year to deal with fluctuations in trading conditions which may arise, making it more convenient to close off the accounts within a week of the financial year.

13.84 Similar rules apply to the half-years of disclosing entities (Bill s 323D(5)).

13.85 The Bill removes the ASC exemption power in current subsections 290(4) to 290(14) relating to synchronisation and combines it with the general ASC exemption power (Bill ss 340 and 341).

13.86 The Bill makes financial years and half years predictable. To assist in achieving this objective, it is envisaged that ASC relief will only be provided in exceptional circumstances where, for example, commercial reasons require that variations be made to a financial year or half-year. This would include changes to take account of seasonal fluctuations which may affect a business.

13.87 A company, registered scheme or disclosing entity that has to prepare consolidated financial statements must do whatever is necessary to ensure that the financial years of the consolidated entities are synchronised with its own financial years. It must achieve this synchronisation by the end of the 12 months after the situation that calls for consolidation arises. In order to achieve this a controlled entity (but not the controlling entity) is able to shorten its financial year or extend it to be up to 18 months long to achieve synchronisation with the controlling entity (Bill ss 323D(3) and (4)).

Auditor

13.88 The provisions contained in Division 1 of Part 3.7 have been moved into Part 2M.4 of the Bill. These provisions deal with the appointment, supervision and disciplining of auditors in relation to their functions under the Corporations Law.

Accounting standards

13.89 The Bill describes the operation and application of accounting standards (Bill s 334).

13.90 The distinction adopted in the Bill between the Law and the accounting standards provides greater flexibility for making detailed accounting rules. By allowing the accounting standards to set out the rules for consolidating financial statements, the Law does not prevent accounting standards from incorporating equity accounting principles, which were arguably incompatible with previous legislative provisions (Bill s 335). The Bill permits the accounting standards to require the inclusion in financial statements of comparative amounts for earlier periods (Bill s 336).

13.91 The Bill preserves the current Laws position on the interpretation of accounting standards (Bill s 337). This provision attributes the same meaning to terms in the accounting standards as they have in Chapter 2M of the Bill or Part 1.2 of the Law and allows accounting standards to use these terms without the need to repeat the definitions.

13.92 The Bill deals with the validity and text of accounting standards by preserving the contents of current sections 286A and 286B (Bill ss 338 and 339). It continues to be possible to read down particular parts of an accounting standard which may be inconsistent with the Law, so that the parts of the standard which are not inconsistent will still be valid (Bill s 338).

13.93 The Bill provides that the text of an accounting standard, when published by the AASB or ASC, is the correct text of the standard (Bill s 339). Unless there is evidence to the contrary, a standard published by the AASB or ASC will continue to be proof in proceedings that the specified standard was in force at a particular time and that the text set out in the document is the text of the specified standard.

13.94 Accounting standards in force immediately before commencement of Bill Schedule 2 continue to apply and have effect with any necessary modifications as if they were standards made for the purposes of Chapter 2M (Bill s 1433).

Exemptions and modifications

13.95 The ASCs exemption power is located in Part 2M.6 of the Bill and replaces existing section 313.

13.96 A distinction is made in the Bill between the ASCs power to make specific exemption orders (Bill s 340) and its power to make class orders (Bill s 341). The Bill sets out the criteria which the ASC must take into account in making an order under section 340 or 341 (Bill s 342). The ASC must consider whether complying with the requirements of Parts 2M.2 and 2M.3 would make the financial report or other report misleading, be inappropriate in the circumstances or impose unreasonable burdens. The Bill specifies further criteria to assist in determining whether complying with the audit requirements impose unreasonable burdens (Bill ss 342(2) and (3)). These criteria reflect amendments made to current section 313 by the First Corporate Law Simplification Act 1995 relating to the audit of large proprietary companies.

13.97 The Bill provides for the continued operation of existing ASC exemption orders. Where an order under current sections 290, 291, 311 or 312 was in force immediately before the new rules commence, it will continue to have effect after commencement with any necessary modifications as if it were an order made under section 340 of the Bill (Bill s 1434).

13.98 The regulations may modify the operation of the Chapter (Bill s 343). This, for example, enables the financial reporting and audit provisions to be modified in their application to particular bodies or classes of bodies where appropriate.

Sanctions for non-compliance

13.99 As under the Bill, the civil penalty regime in Part 9.4B of the Law applies to breaches of the financial record keeping and the financial reporting requirements (Bill s 344). Under the current Law, the civil penalty regime applies only to financial statement and reporting obligations and does not extend to record keeping obligations (current ss 318 and 591).

13.100 However, sections 312 and 323B of the Bill are offences, rather than subject to the civil penalty regime. These provisions, which deal with the obligations to assist in the preparation of financial statements and auditors reports, are dealt with by means of penalties imposed under Schedule 3 to the Corporations Law.

13.101 Directors are liable to civil penalties if they fail to take all reasonable steps to comply with, or to secure compliance with Parts 2M.2 or 2M.3 (Bill s 344).

Special rules and exemptions

13.102 The Bill removes the special accounting rules and exemptions currently applying to investment companies, property trusts and other prescribed interest schemes, banks and life insurance bodies. These rules were developed piecemeal and make it difficult for users to draw comparisons between the financial status of different types of entities.

13.103 Part 4.4 currently contains detailed requirements for companies that have been declared by the ASC to be investment companies. No company has been declared an investment company since 1986 and these provisions are repealed by the Bill (Bill Schedule 1 Item 8).

13.104 In relation to banks and life insurance corporations, current Part 4.5 will be repealed (Bill Schedule 1 Item 8). An accounting standard will be developed to replace it and govern the preparation of financial statements by these bodies. This adopts the recommendation of a Working Party established by the then Commonwealth Attorney-General and Treasurer in 1992 to examine Part 4.5. If necessary, it is envisaged that the Regulation made under Bill s 343 will give a temporary exemption to these bodies, pending the adoption of the new standards.