Consolidated financial reporting
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This research paper analytically looks at the impact of the Corporations Amendment (Corporate Reporting Reform) Act 2010 that was passed on 29 June 2010. This Act introduces the use of consolidated financial statements. It is clear that consolidated financial statements do not clearly provide useful insight into the general health and progress of a set of associated entities (typically large corporations). In the context and the legal environment of the contemporary corporation, makes traditional consolidated accounting framework to be highly contestable. The current events in Australia in trying to streamline financial reporting indicate that the group is contrivance over the individual legal status of the associated entities. When it comes to the preparation and disclosure of accounting and financial information, this can be confusing and even deluding, especially where corporations are undergoing a financial distress. However, consolidated financial statements successfully disclose information on the financial outcomes of corporate associations. The paper looks at some of the major changes in the Corporations Amendment (Corporate Reporting Reform) Act 2010 and the way they address they are affected by globalisation, and the amplified network complexity of the modern corporation, shifting power to a smaller number of individuals as opposed to the parent company.
The Corporations Amendment (Corporate Reporting Reform) Act 2010 was passed on 29 June 2010 and with an aim of introducing radical changes on the existing Corporations Act 2001 (the Act) with regards to the parent entity disclosures and financial reporting practices. The Act became law on periods ending 30 June 2010 or after. These changes, as required by the accounting standards, must prepare consolidated financial statements. Specifically, the new law amends section 295(2) of the previous Act (Corporations Act 2001) that require the parent entity to prepare and disclose separate financial results as well as current and preceding financial statements. On the contrary, the new Corporations Regulations requires parent entity to prepare and disclose supplementary information through the use of notes in the financial statements. This information is practically less extensive as compared to the previous regulations.
A summary of the changes
The Corporations Amendment (Reporting Reform) Bill 2010 was passed and became law on 28 June 2010. The Act has a number of specifications with respect to the disclosure and reporting requirements of entities that prepare general purpose financial statements (GPFS). The first stage changes have already been implemented with the release, on 5 July 2010, of two new accounting standards: AASB 1053 Application of Tiers of Australian Accounting Standards; and AASB 2010-2 Amendments to Australian Accounting Standards arising from Reduced Disclosure Requirements (Deloitte 3).
These changes can be summarized as follows:
Parent entity information-There is no need for presenting parent entity columns in the consolidated financial statements, instead the information is disclosed by way of note in annual financial statements. This implies that no parent entity information is required in half-year consolidated financial statements.
The IFRS declaration-An IFRS declaration must be included in the director’s statement, but this applies only to IFRS compliant firms.
Declaration of dividends- the new law requires entities to take great care when declaring dividends, new requirements for payment of dividends apply from the time of Royal assent (28 June 2010). A solvency test has been introduced to replace the existing profits test. Payment of dividends is permitted when; assets sufficiently exceed liabilities, when the payment is fair and reasonable and when there is absence of any material prejudices regarding the entity’s ability to pay creditors.
Early adoption of RDR-Some entities (for-profit entities that are not publicly accountable and some of the not for-profit entities as well as government entities. This depends on the reporting requirements placed on each entity. Firms limited by guarantee-A three tiered differential reporting framework has been newly introduced, these include changes relating to audit requirements.
Easier to change year ends-Under section 323D (2A); it is now much easier for companies to change their year ends as long as they meet certain criteria. The period in which such change can take place is referred to as the “subsequent financial year”. This year is allowed to last for a period less than 12 months as agreed upon by the directors and as long as all of the following conditions are met:
The subsequent financial year must start at the end of the previous financial year,
In the previous 5 financial years, all financial periods must not be less than 12 months, and
The change to the subsequent financial year is done in good faith and with the best interests of the entity at heart.
All entities that prepare GPFS are now included in the financial reporting entities category as either Tier 1 or Tier 2. This depends on whether these entities are government entities or are “publicly accountable”. The application of the tiered system is set out by the AASB 1053 (AASB 5).
The recognition and measurement basis of accounting is same for all entities, irrespective of whether they are in Tier 1 or 2.
“Public accountability” (defined at Appendix A to AASB 1053) means “accountability to those existing and potential resource providers and others external to the entity who make economic decisions but are not in a position to demand reports tailored to meet their particular information needs” (Deloitte 10). Such entities include profit making entities in the private sector that hold debt or equity instruments that are publicly traded or entities with fiduciary assets (including banks and credit unions among other financial institutions),
Entities in classified as Tier 1 and have public accountability will continue to prepare GPFS as required by the Australian Accounting Standards (AAS) and in accordance with IFRS. Therefore, Tier 1 financial reporting and disclosure requirements have not changed a bit. Tier 1 entities are profit-making in the private sector that report under the Corporations Act 2001 and government departments,
Tier 2 entities that have no public accountability are now required to prepare their GPFS in line with the Australian Accounting Standards with the reduced disclosure requirements (AAS-RDR). Such entities are not required to be IFRS compliant. Examples of these entities are non-profit making entities or profit making entities in the private sector that are not publicly accountable.
According to these changes, the AAS-RDR sets-out the minimum disclosure requirements in the financial reports of Tier 2 entities. Weighing against Tier 1 entities, the disclosure requirements are simply reduced in the section of notes to the financial statements, depending on the type of entity. It is critical to take note that:
Tier 2 entities can still chose to apply Tier 1 reporting requirements as the requirements of AAS-RDR are the bare minimum requirements for GPFS,
Tier 2 entities can also elect to include additional disclosures on top of the Tier 2 minimum requirements,
Key regulators such as the ASIC may specifically require Tier 2 entities to apply Tier 1 disclosure conditions,
Ideally, the AASB 2010-2 is an amending standard that is meant to effectively reduced disclosure requirements of Tier 2 in a number of pre-existing Accounting Standards that are affected by the AAS-RDR.
Objectives of group financial statements
The main objective of presenting group financial statements is to give information on the overall economic activities of the group. According to the Companies Act and FRS 2 when accounting for Subsidiary Undertakings, information is required to be presented in a manner that the group is viewed as a single economic business entity and to show how the group controls its economic resources and other obligations. Simply, this is greatly achieved by summing up the financial statements of the subsidiaries of the group; this is done by making a number of adjustments. In actual sense, an individual economic entity is not able to make a profit out of itself; profits emanate from intra group trading and for purposes of consolidation, other intra group transactions are done away with.
On 24 June 2010, the commonwealth government delivered on its promises in reforming the practice of financial reporting and to reduce bureaucracies in preparation and disclosure of financial results. For the reporting entities, they are now only required to prepare consolidated financial statements for years ending on or after 30 June 2010. Unluckily, the new regulations still require entities to disclose additional financial information for the parent entity. This puts a tall order on the preparers and auditors of group financial statements especially when it comes to areas that are difficult to measure such as impairment of inter-entity loans and parent company investments in its subsidiaries, as wells the fair value of inter-entity loans that are valued below market interest rates. Therefore, the savings in terms of time and cost expected from these changes may not be as enormous as many would have expected them to be. In principle s295 (2) does not require firms to present alternative financial statements. On the other hand, ASIC have expressed the need for allowing firms to include financial statements of the parent entity at their own discretion. The new changes have introduced flexibility, as the interest of the group are considered but fail to consider the corresponding possibility of increased liability. The new rules tend to treat the group as a single entity for purposes of management, but as distinct entities at the slightest detection of any threat of liability or loss (Clarke 629). At a more detailed analysis, there are strong calls to address issues of accountability related to convoluted corporate structures and the associated regulatory frameworks.
It is seem rather indisputable that the purpose of accounting is to capture the “financial substance” of an entity’s transactions. Evidently, this would mean that the expected outcome is that general-purpose financial statements should be prepared in line with their function as set-out in Australia’s Statement of Accounting Concepts SAC 2.
Accountability and usefulness of financial statements
A considerable body of literature is existent on the issue of accountability and performance, especially after the global financial meltdown. Something that is clear on the relevant literature on accountability is the multiplicity of views and the relationships that exist between these views and the practice of consolidated financial reporting (Simms, 1999). A number of researchers in the accounting profession have argued that the multiplicity of the views and the unclear relationship with consolidated financial reporting is partly results from the poor conceptualisation of the concept of accountability and the existence of puny theoretical framework of the literature on consolidated financial reporting (Clarke 266). Accounting regulators have successfully linked the concepts of control and accountability and they perceive control as the most suitable criterion for establishing the components of the entire entity for the purposes of presenting useful financial information to the stakeholders. Apparently, there appears to be lacking models related to accountability and those of consolidated financial reporting that can be used as superior or that are universally accepted generally by researchers.
The analysis indicates that there is an overall belief that the overall entity’s consolidated financial reports are useful because they are reliable and comparable to those of other reporting entities. In addition, consolidated financial statements are understandable. The superiority of their understandability can be regarded as a very important attribute when it comes to effective reporting. Furthermore, the discussion above implies that the benefits of preparing consolidated financial reports are more than the costs. It can be argued that, in terms of cost-effectiveness for purposes of decision-making, consolidated information is much more beneficial than unconsolidated information.
Clarke, E, and G. Dean, “Creative Accounting, Compliance and Commonsense”, Australian Journal of Corporate Law, 1997: 36-86.
Simms, M. “Accountability in Australian Government: Towards the Year 2000”, Australian Journal of Public Administration, 1999:58, 1, p.33.
Clarke, Frank, Dean Graeme and Houghton Erne, “Revitalizing group Accounting: Improving accountability” Australian accounting review, 2002: 12, 3.
Clarke, Frank, Dean, Graeme. and Oliver, K. “Groupthink-group therapy: consolidation accounting,” Corporate Collapse: Accounting, Regulatory and Ethical Failure, 2nd ed., Cambridge University Press, Cambridge. 2003: 266-282
“AASB” Recent Changes to AASB Standards and Corporations Act 2001. 2010.,Web. 28 Apr. 2011 http://www.auasb.gov.au/admin/file/content102/c3/Jul10_Agenda_Item_14%28c%29_AUASB_Board_Meeting_Summary_Paper.pdf