Corporations Amendment Act: Implications - Example

Corporations Amendment (Corporate Reporting Reform) Act: Implications Introduction The state today in the modern era performs a number of functions, due to the reason that most of the aspects of the country need to be regulated by the state. The state usually regulates the functioning of the nation state through policy formulation and execution. These policies can easily be divided into two categories: domestic policy formulation and foreign policy formulation. The changes that occur in the policies of nation state are a reflection of the various changes that are taking place in a society. It has been realised that the role of the various elements of society, including the various communities that co exist in the country are a significant factor that affect the various policy developments and changes that are taking place in the nation state. Thus the process of change and amendment of laws is significant to ensure that the democratic fibre of society is maintained. The maintenance of the domestic laws for the governing of the society is important. Thus, it is important to comprehend the changes that occur in the governmental policies and the laws of the country. In the following paper an attempt has been made to have a detailed discussion on the impact that the changes made by the amendment act of the year of 2010 has made in the corporate culture of the country. The Corporation Amendment (Corporate Reporting Reform) Act of 2010 impacted the disclosures in consolidating financial reports, where the focus was laid on making the system more efficient and effective. The paper will look into the background of the act, along with its implications and also discuss it in the light of the reviews that scholars have made in the aftermath of its implementation. Background and Purpose The bill that was adopted amends the Corporate Act that had been adopted by the commonwealth in the year of 2010. The main objectives and purpose of the bill includes the reduction of the regulatory burden that is borne by a company, so that the smaller companies can function more efficiently, where they only have to provide an annual report to the members who ask for it (Austilli.edu). It also helps in the overall reduction of burden through allowing of disclosure of summary of the patent entity of parent entity and consolidated entity together, and also allows the companies to replace the profits test with the solvency based one, leading to the modification of the payment scheme of dividends from only profits to other sources (Proposed subsection 323D(2A) of the Corporations Act, section 299A of the Corporations Act at pp. 10–12). Also it allows a company to cancel its share capital; and can extend its financial year if it so needs. The amendment also makes changes for the second and third tier of the small companies group, where the focus is on ensuring that the red tapism can be reduced. So it focuses on them preparing a simpler director report, instead of a detailed one as specified under the corporate law, revising the method of distribution of reports and finally prohibits paying its members a dividend (Proposed section 254SA of the Corporations Act). Implication of Corporate Reporting Reform Act The main implication of the reporting reform was that it helped reduce the regulatory obligations of the small corporations, especially the ones which were not based on profits. This was achieved through the implantation of a three tier reform off the reporting act that controlled the corporates in the country. The mall companies were exempted from reporting and for the other corporates a simplified version of auditing and reporting was developed where simpler disclosures of the directors’ reports were allowed for. The Act also allowed for greater streamlining Of the parent entity reporting; Lowing for greater flexibility in the payment of dividends, which was me conducive through the replacement of the profit test with the solvency test in corporate houses; allowing companies to more easily change their year-end date to minimize the burden on companies and their auditors during peak reporting periods. The regulatory framework that regulated the reporting of the directors’ information, including the non financial framework was refined and made easier; and The Statement of Compliance with the International Financial Reporting Standards was also refined, making the director’s declaration more streamlined. Implications on a Financial Front When one reviews the role of the financial implications of the changes that has been created in the market and the economy of the country due to the amendment, it has to be realised that none of the financial implications have been mentioned in the bill itself. These implications can be understood from reading the amendments and analysing its impact on the working of the companies in the economy (57). The RIS, that is the Regulation Impact Statement, has noted that in the introduction of the act in the economy, the costs that will be borne will be minimal in comparison to the overall benefits that the act will have on the working and the performance of the companies and in translation on the functioning of the economy as a whole. Also there will an immediate cost cutting in the preparation of the summary of the audit reports of the company, while the overall saving capacity of the company will increase leading to better financial resources at their disposal for growth and investment (Dore, R, 2009). Also the benefits of replacing the profits test will be high, and it will outweigh the costs that will have to be borne to put in place the new system of functioning. Finally, the costs of requiring all listed entities to disclose a review of operations and financial condition are difficult to quantify but appear to be ‘minimal’—mainly because there are only approximately 200 listed managed investment schemes which will need to comply with the revised requirement. Other Practical Implications The Corporations Amendment (Corporate Reporting Reform) Act 2010 received royal assent on 28 June 2010, effecting the government’s red tape reforms to corporate reporting. This long-awaited Act results from extensive consultation and advocacy by the accounting profession over many years. Its significant reforms include introducing a three-tiered differential reporting framework for companies limited by guarantee, removing the requirement to prepare parent-entity accounts and replacing the profits test with a solvency-type test for payment of dividends (Donaldson M,, 2010). Other changes address procedural issues, making it easier to change year ends, improving disclosure of non-financial information in the directors' report; refining the statement of compliance with International Financial Reporting Standards contained in the directors' declaration, and clarifying the circumstances in which a company can cancel its share capital (Guthrie, J, 1990). In the following section of the paper the practical implications of the amendment will be discussed, where its impact on the working of the companies and the economy of the commonwealth as a whole will be established. Deep into new three test limbs Under the new system that the amendment established, a company may not pay dividends unless three criteria are met by the company: The assets that have been declared by the company have to exceed the liabilities that the company has, before dividends are established. There is equal distribution of the dividends to all the stakeholders of the company; and The payment of the dividends must not hamper the companies’ abilities to be able to make its payments to its creditors. Many scholars are of the belief that the changes that have been bought about to the law are highly effective, but it has to be realised that this has a direct effect on the working of the company as a whole which has to be established. It has been carried out in the section below (Donaldson M, 2010). Implications of Balance Sheet Solvency Test There was observed that in the year of 2009 a number of companies were unable to pay their dividends as they could not pass the profit test where the balance in the accounting could not be met, due to the non cash expenditures, although the company had access to the cash to pay the dividends to its stakeholders (Hopwood, A. G, 1972). Thus, this led to a greater amount of volatility to the profits of a company, as it could not show itself profitable, even if it wanted to, leading to the stakeholders losing out on their share of the gains of the company. The new act accounts for this. Today, the balance sheet test allows for the distribution of the dividends in case the company can balance its liabilities, and its profits, and excess cash is available. Although the second and third tier companies are required to analyze the solvency factor in order to ensure that the distribution of the dividends takes place (Ferguson, J., Collison, D. J., Power, D. M., & Stevenson, L. A, 2006). Since the government has not provided any details on the basis of which the value assets and liabilities estimation will be carried out, it is to be presumed that it has to be assumed on the basis of the statutory accounts of the company. Although this system has been applied in other countries also, it has never been purely on the basis of the value of the assets and liabilities of the company. (J. Rickford et al, 2004) On Fair Value Accounting There are also criteria that need to be met before the dividends are paid. For example, if the balance sheet test has to be met in accordance to the standards set by the A-IFRS then it is important that the balance sheet is prepared in keeping with the fair values in the balance sheet. One can be prevented from paying the dividends if say, the company has intangible assets that have been valued at the time of recording in the balance sheet and they have not been fair valued, then the balance sheet will reflect a negative n the asset value of the company, leading to lack of payment of dividends to the stakeholders (Collison D, Power D, et al, 2011). Also it has been observed that if a company has profits, but has a deficiency in the net assets of the company, then it cannot pay the dividends. Constraints of Time Another area that has to be focused upon is the fact that a company will have to spend significant amount of time and effort in ensuring that its balance sheet is up to date, and that all the liabilities and the assets of the company have been accounted for and balanced in the balance sheet before the payment of dividends every year. These will not be in keeping with the standards of the accounting system, and the timings will have to be considered and accounted for. Prejudice: Material When distributing the dividends, it is important that the company takes into account the fact that its ability to pat its creditors should not be affected by its payment of the dividends. This has been extended to all dividend payments instead of being restricted to the dividends that come under Chapter 2J of the Corporation Act. Thus, the directors will have to ensure that the company is not materially prejudiced against its creditors before the distribution of its dividends among its stakeholders. (Cho Y-Y, 2004) Income Tax Considerations It has been observed that in order to ensure that the companies are able to evolve and adjust themselves to the needs and the demands of the new system, there have been certain changes that have been made to the income tax section also of the corporate law in the commonwealth. (Cornwell, P. 2004) It has been seen that for the purpose of the income tax the distributions are to be counted in the taxable income, so that ax can be levied as it would be on the profits. Argument by and Contradictions on Clark, Dean and Oliver Many scholars have been highly critical on the changes that have been bough about the policy of the corporate management in the commonwealth where they believe that in the hopes of making the system more efficient and economic; the government has effectively destroyed any sense of responsibility that was being carried out by the corporate houses in the market. They have been highly critical of the amendments that have been bough about to the Corporate Act of 2001, where the accounting system has been bared of any responsibility. They believe that through the imposition of standards, the auditors are being given a chance to ensure that they can walk away from the decisions that they may take, on the basis of the facts that the standards allow them to do so. This will according to them lead to the misinterpretation and since there will be lack of comparability in the system. They are critical of the amendments and believe that it does not address the issues involved and fails to focus on the issues related to accounting and its methodology. (Clark and Dean, 1993) The authors clearly state in the criticism of the changes that have been bought about that - “Accounting standards have failed to match the admirable claims of the leaders of the profession – namely, that compliance with them would reduce the diversity of accounting practices and thereby provide data relevant to the making of informed financial assessments, defying financial common sense, complying with certain practices endorsed by the accounting profession itself, producing the standard nonsensical, fictional financial outcomes, are not regarded by either the regulators or (so it seems) the accounting profession to be a willful indulgence in creative accounting." (Clark, Dean and Oliver, 2003) Conclusion In conclusion, it can be summarized that the amendment that has been made to the corporate law in the commonwealth is one that needed to be bough about to ensure greater amount of flexibility and efficiency in the system. It has bought about changes in the working and the functioning of the companies, where the accounting system has become more evolved. The standard on which the dividend distribution takes place in the small companies has been changed. It has bought about changes in the working of the accounting departments in the companies and also impacted their overall functioning. Yet, there are certain problems that have not been accounted for such as the lack of responsibility among the auditors, on the decisions that they take, and it also reduces the corporate transparency and undermines the overall business ethics maintenance in these companies. The bill promised a reformation of the corporation reporting in the nation, by helping ensure that the red tapism and regulatory burden is reduced. Yet the system is still highly taxing on the SMEs. Thus, it is important that it is evolved where better standards are set, and the accounting process as a whole is focused upon to bring about an economic and efficient method of functioning in these companies. References Corporations Amendment (Financial Market Supervision) Act 2010 (being Act No. 26 of 2010) is available electronically at http://www.austlii.edu.au/au/legis/cth/num_act/camsa2010530/, viewed 03 May 2011. Proposed subsection 323D(2A) of the Corporations Act (which is to be inserted by item 44 of Schedule 1 to the Bill). Section 299A does not apply to individuals, partnerships or trusts. See http://www.austlii.edu.au/cgi-bin/sinodisp/au/legis/cth/consol_act/ca2001172/s299.html (viewed 1 June 2010). Proposed paragraphs 45B(1)(d) and 301(3)(a) of the Corporations Act (which are to be inserted by items 4 and 30 of Schedule 1 to the Bill). Proposed subsection 45B(1) of the Corporations Act (which is to be inserted by item 4 of Schedule 1 to the Bill). These companies will continue to be subject to the financial reporting regime in Part 12.6 of the Corporations Regulations 2001. Proposed section 254SA of the Corporations Act (to be inserted by item 6 of Schedule 1 to the Bill). Ibid., p. 58. J. Rickford et al., "Reforming Capital: Report of the Interdisciplinary Group on Capital Maintenance', European Business Law Review, Vol. 15, 2004 Cho, Y-Y and Kishore, V, "The 'material prejudice' test and the financial assistance", (2004) 78 ALJ 194 Cornwell, P. "Material Prejudice and financial assistance: the financier's viewpoint", (2004) 78 ALJ 746 Clarke, F., and G. Dean, 1993, “Accounting and the Law: The Separate Legal Entity Principle and Consolidation Accounting”, Australian Business Law Review 21(4): 246-69. Clarke, F., G. Dean and K. Oliver, 1997, 2003, Corporate Collapse: Regulatory, Ethical and Accounting Failure, Cambridge University Press. Donaldson M, Corporation Amendment (Corporation Reformation Act) Bill 2010, Law and bills digest sections, 2010, 9-12 Collison D, Power D, et al. “The impact of introductory accounting courses on student perceptions about the purpose of accounting information and the objectives of business: A comparison of UK and Japan” Accounting Forum, (2011), 35, 47-60 Dore, R, “Financialization of the global economy”. Industrial and Corporate Change, 17(6), 1097–1112 (2009) Ferguson, J., Collison, D. J., Power, D. M., & Stevenson, L. A. “Accounting textbooks: Exploring the production of a cultural and political artifact”. Accounting Education: An International Journal, 15(3), 1–18, (2006) Guthrie, J. 1990, “The Adoption of Corporate Forms for Government Undertakings: Critical Issues and Implications”, The Public Sector: Contemporary Readings in Accounting and Auditing, Guthrie, J., Parker, L. & Shand, D. (Eds.) Harcourt, Brace, Jovanovich, Sydney, pp.209-21 Hopwood, A. G., An Empirical Study of the Role of Accounting Data in Performance Evaluation. Empirical Research in Accounting: Selected Studies ( 1972) pp. 156-18 Read More