FocusOn - Companies Limited by Guarantee - Proposed Financial Reporting Changes

On 4 December 2009, the Government announced proposals to cut red tape and improve Australia's corporate reporting framework.

As part of the consultation process, the Minister for Financial Services, Superannuation and Corporate Law has released an exposure draft of the Corporations and Amendments (Corporation Reporting Reform) Bill 2010 which is currently open for comment. The closing date for submissions to Treasury is 3 February 2010.

Companies Limited by Guarantee

A number of the proposed changes will have a significant impact on the financial reporting obligations for companies limited by guarantee. Companies limited by guarantee are a corporate structure that is commonly used for not-for-profit entities. Key measures include:

	Introducing a three tiered differential reporting framework for companies limited by guarantee
	Streamlining reporting obligations for parent entity financial statements
	Allowing companies more flexibility in relation to changes to their reporting period
	Requirement to include a declaration on compliance with International Financial Reporting Standards (IFRS) in the director's declaration

Existing Financial Reporting Framework

The existing reporting framework treats companies limited by guarantee as public companies and therefore these companies are required to prepare audited financial reports in accordance with the Australian Accounting Standards and a directors’ report in accordance with the Corporations Act regardless of their size.

Many of these companies are small not-for-profit entities and therefore the government considered that this obligation may impose an unreasonable cost burden with limited public interest benefit.

Proposed Financial Reporting Framework

Under the proposed new law a three tiered differential reporting framework will be introduced exempting small companies limited by guarantee from reporting and auditing requirements and providing certain other companies limited by guarantee (CLG) with a simplified assurance framework and simplified directors’ report for all companies limited by guarantee.

In addition companies limited by guarantee will no longer be forced to publish their financial reports. They now have the option to write to their members informing them that an annual report has been prepared and how they can obtain a copy.

All companies limited by guarantee will be prohibited from paying dividends. Many organisations have already had this clause incorporated into their Constitution however the payment of dividends will now be prohibited under the Corporations Act.

Differential Reporting Framework

Under the proposed new law a three tiered differential reporting framework would be introduced for companies limited by guarantee.
Tier 1 - Companies that meet the following criteria:

	Annual revenue of less than $250,000
	No deductible gift recipient endorsement

Reporting Obligation: Exempt from the obligation to prepare and lodge audited financial statements

Tier 2 - Companies that meet the following criteria:

	Annual revenue of between $250,000 and $1 million
	Annual revenue less than $250,000 with deductible gift recipient endorsement

Reporting Obligation: Companies will prepare and lodge a financial report which they can elect to have reviewed rather than audited.

Tier 3 - CLG's with greater than $1million revenue would continue to prepare and lodge audited financial statements.

Streamlined Directors Report

In addition, for tiers 2 and 3 the content of the directors report has been simplified and will require the disclosure of:

	short and long-term objectives
	the strategy for achieving the objectives
	the principal activities during the year
	how the entity measures its performance, including any key performance indicators used by the entity
	the total amount the members of the company are liable to contribute if the company is wound up

Parent Entity Financial Statements

When a company limited by guarantee controls or significantly influences a subsidiary, the current law requires the preparation of consolidated financial reporting at parent and group level (otherwise called 4 column reporting).

Under the proposed new law CLG would be able to prepare financial statements in relation to the consolidated entity (or group) with supplementary information about the parent entity included in the notes to the financial statements.

Changing Reporting Periods

Under the current law, the financial year of a CLG is to be 12 months long except in the first financial period which is allowed to be up to 18 months from the date of incorporation.

Under the amended law an entity will be permitted to vary the length of a financial year subsequent to its first financial year provided:

	the financial period is not longer than 18 months
	the previous five financial years have all been 12 months duration
	the change is made in good faith and in the best interests of the entity

IFRS Declaration

The director's declaration in a company's annual report must include a statement of whether, in the director's opinion, the company's financial statements are prepared in compliance with International Financial Reporting Standards.

Published : 10 December 2009