Corporate reporting reform and changes to dividend distributions and financial year end dates

The Corporations Amendment (Corporate Reporting Reform) Act 2010 (Cth) (Amendment Act) received Royal Assent on 28 June 2010. The Amendment Act amends the provisions of the Corporations Act 2001 (Cth) (Act) with respect to financial reporting obligations of companies limited by guarantee and parent entities, the mechanisms by which a financial year end date can be changed and the distribution of dividends. These changes, excluding those applicable only to companies limited by guarantee, are described in more detail below.

Changes to financial reporting obligations for parent entities

Public companies, large proprietary companies, registered schemes and disclosing entities are required under the Act to prepare a financial statement for each financial year. In addition, where an entity or company was a parent entity, it was required to prepare financial statements for the consolidated entity. The Amendment Act now provides that where an entity is required by accounting standards to prepare financial statements in relation to a consolidated entity, it will not be required to also prepare financial statements in relation to the entity itself. Instead, the consolidated financial statements must contain supplementary information about the parent entity, including current and total assets and liabilities, profit or loss, and details of contingent liabilities. This amended reporting obligation applies to financial years ending on or after 30 June 2010.

Repeal of the profits test

The Act previously provided that dividends could only be paid out of the profits of the company. However, the Act does not provide any guidance on the definition of the term ‘profits’ and for this reason, amongst others, the Amendment Act repeals the profits test and now provides that dividends must only be paid if:

(a) the company’s assets exceed its liabilities immediately before the dividend is declared and the excess is sufficient for the payment of the dividend;

(b) the payment of the dividend is fair and reasonable to the company’s shareholders as a whole; and

(c) the payment of the dividend does not materially prejudice the company’s ability to pay its creditors.

A note to the Amendment Act provides that an example of circumstances in which payment of a dividend would materially prejudice the company’s ability to pay its creditors, is where the company would become insolvent as a result of the payment.

New ease in changing reporting periods