The Reporting and Assurance Team regularly publishes commonly asked questions and answers as part of its weekly newsletter ANT. Other legislation could include those issued by a variety of state regulators that are responsible for entities such as associations, co-operatives and strata title arrangements.
My client has asked me to audit a grant acquittal with a reporting date that is different to the financial statement audit reporting date. To what extent can I rely on the work I performed for the financial statement audit in auditing the grant acquittal?
If there is an overlap in the reporting periods (for example the financial report date is 30 June and the grant acquittal date is 30 September), you may be able to use some of the evidence for the overlapping period, however additional work will be necessary to achieve the planned approach for the audit of the grant acquittal.
When deciding on the additional work to be performed, paragraph 84 of Guidance Statement GS 022 Grant Acquittals and Multi-Scope Engagements
says that the auditor ordinarily considers:
- Whether the objectives and procedures already performed are appropriate for the additional work;
- Any significant changes that have occurred in the subject matter since the previous work was completed;
- The need to update the auditor’s risk assessment for the additional period, including any potential cut-off issues;
- The possibility and practicality of testing internal control in order to reduce substantive procedures for the extended period;
- Choosing the most appropriate substantive procedures – substantive analytical procedures vs tests of detail; and
- Other core considerations such as materiality levels and the availability of evidence.
When you want to use work from another engagement, you have to determine that the work performed and the evaluation of that work is sufficient and appropriate to meet the objectives of the current engagement. Otherwise there is a risk that you will not obtain sufficient appropriate audit evidence. Paragraphs 86 and 87 discuss the documentation considerations of using work from a previous engagement. While GS 022 was issued by the AUASB for use in Australia, this guidance may also be useful for auditors in New Zealand conducting similar engagements.
My client has asked me to audit a grant acquittal and the regulator requires certain procedures to be performed. Can I accept the engagement?
Guidance Statement GS 022 Grant Acquittals and Multi-Scope Engagements provides guidance on dealing with grant acquittal and similar engagements where the regulator prescribes some procedures or the scope of the engagement. Where there are prescribed procedures, paragraph 73 states that the auditor:
a) Preserves their independence and professional judgement in determining the extent timing and scope of audit procedures by determining whether the prescribed scope and/or procedures:
- Will enable the auditor to obtain sufficient appropriate audit evidence to meet the auditor’s objectives;
- Will need to be incorporated into procedures determined by the auditor as necessary to meet the auditor’s objectives; or
- Are additional to the procedures determined to be necessary to meet the auditor’s objectives.
b) Determines their reporting responsibilities, if any in regard to the prescribed scope and/or procedures; and
c) Assesses whether they are confident they will be able to discharge their responsibilities regarding the prescribed scope and/or procedures.
If the auditor is unable to meet the prescribed scope and/or procedures, paragraph 74 states that the auditor should not accept the engagement unless required to do so by law or regulation. While GS 022 was issued by the AUASB for use in Australia, this guidance may also be useful for auditors in New Zealand conducting similar engagements.
My client has asked me to audit a grant acquittal and the regulator has prescribed the report format. Can I sign the report?
Guidance Statement GS 022 Grant Acquittals and Multi-Scope Engagements
provides guidance on prescribed reports. Where the regulator has prescribed a report format, the auditor should compare the prescribed report to the reporting requirements of the relevant AUASB standards.
Paragraph 21 of ASA/ISA (NZ) 210 Agreeing the Terms of Audit Engagements
requires that where the prescribed report is significantly different to the requirements of the auditing standards, the auditor shall evaluate whether users might misunderstand the assurance obtained from the audit and, if so, whether additional explanation in the auditor’s report can mitigate possible misunderstanding. If any possible misunderstanding cannot be mitigated that the engagement should not accept the engagement unless requirement by law or regulation to do so. Paragraph 43 of ASA/ISA (NZ) 700 Forming an Opinion and Reporting on Financial Statements
sets out the minimum elements that the report should contain.
Paragraph 67 of GS 022 sets out a number of alternatives the auditor can consider in this situation, including issuing an alternative report that complies with the requirements of the standards. Where an alternative report is not acceptable and the auditor cannot decline the engagement, paragraph 69 sets out other alternatives the auditor may consider, which may include seeking legal advice. Appendix 7 to GS 022 provides further considerations relating to prescribed reports. While GS 022 was issued by the AUASB for use in Australia, this guidance may also be useful for auditors in New Zealand conducting similar engagements.
Auditing trans tasman - ethical obligations
The New Zealand Institute of Chartered Accountants (NZICA) has a statutory obligation to always have a Code of Ethics which governs the professional conduct of members of Chartered Accountants Australia and New Zealand that reside in New Zealand. The New Zealand Auditing and Assurance Standards Board (NZAuASB) mandate covers auditing and assurance standards, including professional and ethical standards, which govern the professional conduct of assurance practitioners. Therefore both NZICA and NZAuASB maintain a Code of Ethics; however the requirements are aligned to ensure that assurance practitioners are not subject to differing obligations. The NZAuASB standard is PES-1: Code of Ethics for Assurance Practitioners.
Members of Chartered Accountants Australia and New Zealand that reside in Australia must comply with APES 110: Code of Ethics for Professional Accountants when practising in Australia and to the extent to which they are not prevented from doing so by local laws or regulations when practising outside Australia. They must also comply with ethical requirements in other standards issued by the Accounting Professional and Ethical Standards Board (APESB) and the Auditing and Assurance Standards Board (AUASB) in Australia.
I have a client who is charity registered with the ACNC. Does their 30 June 2014 financial report need to be audited?
The requirement to prepare a financial report and have it audited or reviewed is determined by the size of the entity. There are three tiers of registered entities as follows:
- Small – annual revenue less than $250,000
- Medium – annual revenue of $250,000 or more but less than $1,000,000
- Large – annual revenue is more than $1,000,000.
Medium and large entities must prepare a financial report for reporting periods beginning on or after 1 July 2013 unless they are a basic religious charity. Medium entities may have their financial report audited or reviewed. Large entities must have the financial report audited.
More information about the audit and review requirements for medium and large entities can be found on the ACNC’s website. Members may also find our Enhancing Not-for-profit annual and financial reporting guide and our Guide for charities reporting under the ACNC Act 2012 useful in understanding the reporting and audit obligations.
Correction to last week’s Q&A
In ANT 34, there was an error in the Q&A on preparing Tier 2 financial statements. The sentence “It does provide any relief from the recognition and measurement requirements for these entities.” should read “It does not provide any relief from the recognition and measurement requirements for these entities.” The corrected text of the full Q&A is available here.
I am auditing the 30 June 2014 financial report of a charity registered with the ACNC. Do I have to include an independence declaration in my auditor’s report?
No. While section 60-40 of the Australian Charities and Not-for-profits Commission Act 2012 (Cth) (the ACNC Act) requires that you provide the charity with a signed written independence declaration that states that to the best of your knowledge and belief that:
- There have been no contraventions of any applicable code of professional conduct in respect of the audit, or
- The only contraventions of any applicable code of professional conduct in respect of the audit are those detailed in the declaration.
The ACNC’s current interpretation of the requirements of the ACNC Act is that you are not required to include this declaration within the auditor’s report. More information on the ACNC’s audit requirements can be found on their website.
I recently read a set of what appeared to be special purpose financial statements prepared by a professional accountant. However it was not clear from the accounting policy note or elsewhere in the report that these were in fact ‘special purpose financial statements’. Isn’t making a statement about the accounts being special purpose a requirement of APES 205?
Yes it is. APES 205 Conformity with accounting standards sets the standards for members involved in the preparation, presentation audit, review or compilation of financial information, regardless of whether those statements purport to be special purpose or general purpose. Specific responsibilities exist in paragraph 6.1 that require members producing special purpose reports to take all reasonable steps to ensure that the report that is produced clearly identifies:
- That the financial report a special purpose financial report
- The purpose for which the special purpose report was produced and
- The significant accounting policies that have been used in its production.
Members involved in the any aspect of the production of financial statements are reminded that compliance with APES 205 is a mandatory requirement of their Institute membership.
Members are also reminded that if the special purpose financial statements are being lodged in satisfaction of reporting requirements under Chapter 2M of the Corporations Act, then stating that they are special purpose is also a requirement of paragraph 9 of AASB 1054 Additional Australian Disclosures which applies to these entities. It became operative for financial reporting periods ending on or after 1 July 2011. The same paragraph also applies to special purpose reports being lodged with the Australian Charities and Not-for-profits Commission (ACNC) in satisfaction of its reporting requirements (see ACNC reporting FAQ on this topic).
I have been asked to perform the audit of a solicitor’s trust account. What auditing standards apply to this engagement?
The purpose of the audit of a solicitor’s trust account is to determine whether the law practice or individual solicitor has maintained the trust account in accordance with the requirements set by the Law Society to which they belong. Therefore it is a compliance engagement which must be performed in accordance with ASAE 3000 Assurance Engagements Other than Audits or Reviews of Historical Financial Information and ASAE 3100 Compliance Engagements. The Law Society will set the requirements for the qualifications of people able to perform the engagements as well as the requirements for maintaining the trust account, so you must familiarise yourself with the relevant Law Society requirements before accepting or performing the engagement.
I am an Australian-resident member and I would like to carry out statutory assurance engagements in New Zealand. What is the application process?
Australian auditors seeking to be recognised as a qualified auditor in New Zealand must provide a letter that demonstrates that the applicant:
(a) is a registered company auditor in Australia (provide ASIC RCA number)
(b) is a member of Chartered Accountants Australia and New Zealand (provide membership number)
(c) is not, and has never been, the subject of disciplinary proceedings in Australia or action that might lead to disciplinary proceedings. If this is not the case, describe the details and time of the actions or proceedings
(d) is not subject to any special conditions in carrying on as an auditor in Australia, as a result of criminal, civil or disciplinary proceedings in Australia. If this is not the case, describe the conditions and proceedings
The letter must be accompanied by a copy of your membership certificate and a copy of your firm’s Certificate of Currency for Professional Indemnity Insurance. Here is a template letter which covers the above matters.\
Applications must be lodged with the New Zealand companies office via their online form.
Your letter can be uploaded under any of the evidence boxes down the bottom, along with copy of the membership certificate and a copy of the firm’s Certificate of Currency for Professional Indemnity Insurance. The documents only need to be uploaded once. The letter will be reviewed regardless of which “box” it is assigned to.
Is it necessary for a tier two or tier three Victorian incorporated association to prepare General Purpose Financial Statements?
Not always. The financial reporting provisions for these types of associations for financial reporting periods ending on or after 30 June 2013, are set out in the Associations Incorporation Reform Act 2012 (Vic) apply. The relevant sections are section 95 for tier 2 entities, which are those with total revenue between $250,000 and $1 million and Section 98 for Tier 3 entities, which are those with total revenue in excess of $1 million. Both require, in sections 95(2) (a) and 98(2) (a) respectively, that the financial statements must be prepared in accordance with Australian Accounting Standards (AAS).
When applying the AAS, associations should have regard to their application/scope paragraphs. In order to fully appreciate the requirements within the application/scope paragraphs of the AAS, an understanding of the “reporting entity” concept set out in Statement of Accounting Concept 1 Definition of the Reporting Entity (SAC 1) issued by the Australian Accounting Standards Board is necessary. SAC 1 defines reporting entities as those in respect of which it is reasonable to expect the existence of users dependent on general purpose financial reports for information. General purpose financial reports are intended to meet the information needs common to users who are unable to command the preparation of reports tailored specifically to meet their information needs.
An association that meets this definition will be required to prepare General Purpose Financial Statements, while an entity that is not a reporting entity as defined in SAC 1 will have the option to either prepare General Purpose Financial Statements or Special Purpose Financial Statements.
It should also be noted that associations that are required to, or choose to prepare General Purpose Financial Statements have the option to apply the Reduced Disclosure Requirements (RDR) version of the Australian Accounting Standards, instead of the full version.
It is the responsibility of the committee of the association to carefully consider all relevant criteria and characteristics applicable to the association in determining whether it is a reporting entity or non-reporting entity. Consumer Affairs Victoria provides information on the above and other financial reporting matters on its website.
Will the Australian Charities and Not-for-profits Commission (ACNC) accept an association’s audit report signed by an auditor who is not a registered company auditor (RCA) even though the ACNC Act requires RCAs?
Yes. In respect of the 2014 reporting period the Commissioner has decided to accept these reports using her discretion under Schedule 1, Part 4, Item 10(1) (2) & (3) of the ACNC (Consequential and Transitional Act) Act 2012. Refer to the ACNC website for details. The audit requirements are different under the various State/Territory Acts governing incorporated associations and the ACNC will accept the state/territory report audited by a non-RCA. It should be noted this rule is transitional and only in place for the 2014 financial year unless extended.
The regulator has asked for access to my audit working papers. What should I do?
The relevant guidance is in paragraphs 44-48 of AUASB Guidance Statement 011 Third Party Access to Audit Working Papers (GS 11)
Paragraph 44 of GS 11 requires an auditor to give access to audit working papers when legally requested (e.g. due to a subpoena, search warrant, court order or court proceedings) or when required by a regulator such as ASIC, APRA and the ATO, under relevant legislative provisions.
When the regulator seeks access under relevant legislation, the auditor’s statutory obligations to that regulator, will under normal circumstances, override common law or professional responsibilities to respect the confidentiality of the client. A formal written request from the regulator, specifying what is required and its authority for the request should normally be expected and the level of access granted by the external auditor will need to be in accordance with the requirements of the relevant legislation.
The procedures an auditor would follow when asked for access by a regulator, subject to legal advice and internal firm requirements, are:
(a) inform the client, or former client that a request for audit working papers concerning the audit client’s engagement has been made and the purpose for which access is required, except where such disclosure is prohibited by law;
(b) consult their legal counsel;
(c) where appropriate, and in consultation with the client, inform the regulator seeking access to their audit working papers that certain audit working papers may not be accessed, because they are the subject of client legal professional privilege; and
(d) maintain a written record of action taken to comply with the regulator’s request, as well as a list of the audit working papers provided pursuant to such request; and
(e) ensure the regulator provides a written receipt for all audit working papers accessed.
Where can I find the latest version of the ASX’s Corporate Governance Principles and any associated guidance regarding compliance with these principles?
The ASX Corporate Governance Principles and Recommendations are available on the ASX website. They contain 8 principles and 30 recommendations for their implementation that seek to help listed companies promoting best practice in corporate governance matters. Guidance on the required content of the disclosures that comply with the principles and also on the ASX’s applicable monitoring and enforcement processes can be found in ASX Listing Rules Guidance Note 9 Disclosure of Corporate Governance Practices released in early 2012.
Listed companies are required to report compliance with these principles under Listing rule 4.10.3. This requires that they include in their annual report a statement about the extent to which the entity has followed the recommendations of the ASX Corporate Governance Council (‘Council’) during the financial reporting period and, if it has not done so, explain why this is the case. The Corporate Governance Principles and Recommendations were first introduced by the Council, which comprises an independent group of organisations including the Institute of Chartered Accountants Australia, in 2003 and were subsequently revised in 2007 and 2010.
As a result of the reissue of Guidance Note 9 in 2012, the ASX discontinued the compilation and publication of the regular annual review reports it had been preparing since 2004 on these principles. These reports were a major means of educating listed entities about ASX's expectations regarding their corporate governance disclosures.
The ASX now uses the monthly compliance reports to provide results of its reviews into corporate governance and other compliance issues. The monthly reports regularly cover such matters as new listings and delistings, statistics on announcements, trading halts, suspensions and other related issues, and statistics on the number of market participants. They also report any rule changes in that month, updates to guidance notes and other significant activities of the compliance branch. The findings of the 2011 analysis of the corporate governance disclosures in the annual reports of listed entities are contained in the May 2012 compliance monthly activity report on page 2. This indicates that the review resulted in the despatch of letters to 18 listed entities which were considered by ASX not to have complied at all with their disclosure obligations in relation to the diversity recommendations and the follow-up of a further 30 entities whose disclosures were considered to be incomplete.
Members interested in delving into the history and development of the disclosures can still access the old annual review reports on the corporate governance disclosures which cover the period from 2004 -2010 on the ASX website.
Has the Tax legislation, referred to in the Institute’s Essential Guidance for the June 2012 reporting season publication, been enacted yet?
The Tax Laws Amendment (2012 Measures No. 2) Act 2012 received royal assent on 29 June 2012 . Therefore the financial consequences of its amendments, which modify the consolidation tax cost setting and rights to future income rules with retrospective application do need to be recognised by 30 June 2012 reporters. The Act also makes amendments to ensure that the tax treatment of financial arrangements that are part of the assets and liabilities in a consolidation/joining event is consistent with the Taxation Of Financial Arrangements ( TOFA) tax timing rules.
The third piece of taxation reform regarding transfer pricing referred to under the “Legislation with retrospective application” heading of Section 4 of the Essential guidance publication has been passed by the House of Representatives and is to go before the Senate shortly. Therefore this legislation does not meet the criteria for substantive enactment in accordance with the requirements of paragraph 6 of Interpretation 1039 Substantive Enactment of Major Tax Bills in Australia at 30 june and therefore the financial consequences of its provisions do not require adjustment at 30 June 2012.
My client is an incorporated association that changed its status to that of a company limited by guarantee 6 weeks before the end of its financial year. Is the association required to draw up a set of accounts to show the closure of the association and lodge them with anyone?
Provided that the entity was registered with ASIC as a company before the end of its financial year and had its registration as an “Inc” cancelled before the end of the year, the entity can simply prepare financial statements as a company for the year (the continuation of its incorporated status) and submit them to the Australian Securities and Investments Commission (ASIC).
This is because of the operation of s 601BM of the Corporations Act which is applicable for a body corporate that is not a company or corporation solely when they register as a certain type of company (limited by guarantee being one of them). It states that:
‘(1) Registration under this part does not:
(a) create a new legal entity; or
(b) affect the body’s existing property, rights or obligations…’
The application of this paragraph is on the basis that the original entity is a body corporate. A body corporate is defined in s 9 of the Corporations Act. If any uncertainty exists, legal advice should be sought.
My ASX listed company is changing its year end from June to December and so is preparing a full financial report for 1 July 2011 to 31 Dec 2011 to effect this change. Are accounting standards which apply to annual reporting periods beginning 1 July 2011 applicable to this financial report?
The application date of an AASB standard, as set out in the application paragraph at the beginning, is generally worded in terms of “annual reporting periods beginning on or after“ a specified date. Where this specified date is 1 July 2011, this usually means a 12 month period that ends on 30 June 2012 (for June year ends) or on 31 December 2012 ( for December year ends).
Where the reporting period is other than the 12 month norm, as occurs in this case due to a change in year end, it is necessary to look to the definitions of the terms “annual reporting period” and “financial year” in order to determine whether the shorter reporting period does constitute an “annual reporting period“ for the purposes of applying a new accounting standard.
‘Annual reporting period’ is defined in paragraph 6 of AASB 1054 Australian Additional Disclosures as ‘the financial year or similar period to which annual financial statements relate.’ The accounting standards do not define a ‘financial year’ however this term is defined in section 323D of the Corporations Act 2001. This section states that a company’s first financial year is a period that concludes not longer than 18 months after it is incorporated. Subsequent financial years are usually of 12 months duration but may be less than that subject to the provisions of section 323D (2A). This section states that:
A subsequent financial year may last for a period of less than 12 months determined by the directors if:
- The subsequent financial year starts at the end of the previous financial year; and
- There has not been a period during the previous 5 financial years in which there was a financial year of less than 12 months in reliance on this subsection; and
- The change to the subsequent financial year is made in good faith in the best interests of the company, registered scheme or disclosing entity.
This means that if the directors of the company set the company’s next financial reporting period as running from 1 July 2011 to 31 Dec 2011 and provided the criteria in section 323D(2A) are satisfied, this new period is the “subsequent financial year” of the entity. This also means it becomes the entity’s next annual reporting period (fitting within the “or similar period” section of the definition in paragraph 6 of AASB 1054). Since this period commenced on or after 1 July 2011 accounting standards with an application date worded with this date would apply to the entity’s new 31 December 2011 year end.
I’m the director of a company that isn’t listed and we’re considering establishing an audit committee. What guidance is available to assist us?
The ASX Corporate Governance Principles issued by the ASX Corporate Governance Council contain recommendations in Principle 4 that set out the basics of establishing a best practice audit committee.
These include structuring the audit committee so that it:
- Consists only of non-executive directors
- Consists of a majority of independent directors
- Is chaired by a an independent chair, who is not the chair of the board
- Has at least three members.
The commentary on the principles also discusses the need for the committee members to have sufficient technical expertise to discharge their mandate. As the prime purpose of an audit committee is to focus on issues relevant to the integrity of the company’s financial reporting, this includes them being financially literate. Ideally, at least one member of the committee should be an experienced finance professional.
The principles also recommend that the audit committee has a formal charter that sets out roles and responsibilities, composition, structure and membership and the processes for inviting non-members to meetings. The Board of Directors need to ensure the audit committee has the appropriate powers and resources to carry out this charter, including the rights to have access to management, to seek additional information and explanations and to have access to internal and external auditors without management present.
The audit committee should communicate regularly to the board on all the matters within its charter.
Further guidance is also available in Audit Committees – A Guide to Good Practice which is prepared jointly by the Auditing and Assurance Standards Board, the Australian Institute of Company Directors and the Australian Institute of Internal Auditors.
The Institute has additional resources for audit committees. These include papers on:
I’m reviewing the employee entitlement provisions of my client and want to be sure they have correctly reflected the changes to employment laws introduced by the federal government earlier this year. Where can I find some assistance?
The Federal Government introduced legislative changes that would have affected most employees between July 2009 and January 2010. Those changes include:
- The introduction of the Fair Work Act and its associated National Employment Standards
- Award modernisation aimed at simplifying the current state and federal award systems
- Changes to enterprise-based and individual workplace agreement arrangements.
You can access more information about the Fair Work Act for employees and employers from the Fair Work Ombudsman website. The Institute's Knowledge Centre can also assist with finding relevant legislation.
Updated December 2010
My client is an association that changed its status to that of a company limited by guarantee 6 weeks before the end of its financial year. Is the association required to draw up a set of accounts to show the closure of the association and lodge them with anyone? Or can it prepare 30 June accounts as per usual and lodge them with ASIC, including some narrative disclosure about the change in Constitution? We are aware that the year-end accounts will be more substantial this year as they have to comply with all the Corporations Act requirements applicable to their new status.
Provided that the entity was registered with ASIC as a company before the end of its financial year and had its registration as an “Inc” cancelled before the end of the year, all that is necessary is that the entity prepares financial statements as a company for the year (the continuation of its incorporated status) and submit them to the Australian Securities and Investments Commission (ASIC).
Updated December 2010
A registered charity under the Australian Charities and Not for profits Commissions (ACNC) Act 2012 with revenue over $250,000 will be required to file their financial statements for the 2013/14 financial year with the ACNC and have these statements placed on a public register. Does that mean that the charity is automatically a reporting entity and that it therefore needs to file general purpose financial statements to satisfy its reporting requirements?
No, the registered charity could still be determined to be a non-reporting entity in which case special purpose financial reports would satisfy these reporting requirements.
Guidance on the application of the reporting entity concept is contained in SAC 1 Definition of the reporting entity. The key determinant of a ‘reporting entity’, as set out in paragraph 19, is the existence or not of users who are dependent on general purpose financial reports in order to satisfy their information needs. Significant factors in this decision, as explained in paragraphs 19-22, are the degree of separation of ownership and control, the influence the entity has on third parties, and its financial characteristics. Factors along these lines specific to registered charities would be the impact they have on the wider community and the significance of their government grants or public donations.
Determining the applicability of the reporting entity concept is initially the responsibility of management since they are responsible for the preparation and presentation of the financial statements on which the auditor gives their opinion. They must also specifically disclose the fact that they have prepared a special purpose report in the notes to their financial statements in accordance with paragraph 9 of AASB 1054 Australian Additional Disclosures.
Given the significance of this decision, the Institute recommends that charities record management’s ’reporting/ non reporting entity’ decision in the minutes, with appropriate rationale. This resolution will then support the representation, required by the auditors under ASA 580 Written Representations that management have fulfilled their responsibility for the preparation of the financial report in accordance with the applicable financial reporting framework. The decision needs to be revisited on an annual basis as envisaged by paragraph 28 of SAC 1 to ensure the circumstances on which it is based have not changed.
For more information on the required content of the 2014 Annual Information statement, which will be the first one for which financial information is required, visit the ACNC’s reporting webpage and also its reporting FAQs.
Do the accounts of a trustee company need to disclose the assets and liabilities of a trust?
There is usually no need for a trustee company to disclose the assets and liabilities of a trust on the face of its balance sheet providing that the trustees do not anticipate any shortfall in the ability of the trust’s assets to meet its obligations. This is because the trust’s liabilities and the offsetting “trustee’s right of indemnity” will not usually meet the definitions of “assets” and “liabilities” contained in the Framework for the Preparation and Presentation of Financial Statements. It is not usually probable that the corporate trustee will be “obliged to make a future sacrifice of economic benefits” so recognition of the liabilities is inappropriate. Further, recognition of the assets is also inappropriate as the trustees do not “control a resource where future economic benefits are expected to flow to the entity from the “right of indemnity”.
This approach was issued as policy by ASIC in 1999 as INFO 2450 titled Corporate trustee financial statements and trust liabilities. However, this document has now been superseded because the accounting standards to which it refers are no longer relevant. Despite this, we still consider the principles and definitions which underlie its conclusions to be unchanged.
While balance sheet recognition is not required, the existence of the trustee relationship should still be disclosed in accordance with the provisions of paragraph 86 of AASB 137 Provisions, Contingent Liabilities and Contingent Assets. This paragraph requires the disclosure of the description and nature of contingent liabilities.
I have heard that the new ‘Fair Work’ legislation (the Labour government’s successor to the Liberals’ WorkChoices legislation) requires some organisations to prepare general purpose financial reports. Can you please tell me more?
Employee organisations that can negotiate on behalf of workers (e.g. trade unions) have to be registered under the Fair Work Act. A list of these organisations is on the Fair Work Australia website. Organisations registered under the Fair Work (Registered Organisations) Act 2009 must then comply with s 253 of the Act, which says:
“As soon as practicable after the end of each financial year, a reporting unit must cause a general purpose financial report to be prepared, in accordance with the Australian Accounting Standards, from the financial records kept under subsection 252(1) in relation to the financial year.”
Under s 257, the financial report has to be audited.
This means that these entities - many of which are associations rather than companies (meaning that they are not always required to produce audited general purpose accounts) - will now be required to do so in order to comply with their reporting obligations under this legislation. We also understand that some of organisations that have lodged the special purpose reports they normally prepare for reporting purposes have received letters from the regulator requiring these to be replaced with general purpose reports, indicating that the requirements of the legislation are being enforced.
For more information, the Act can be downloaded from the Fair Work Australia website. The explanatory memorandum and parliamentary speeches are available online.
Updated December 2010
Do I need to be a registered company auditor with a practicing certificate to be able to perform a grant audit under Commercialisation Australia?
You don't need to be a registered company auditor but you do need a practicing certificate to be able to perform the audit.
Section 3.3 of Commercialisation Australia's Guide to Managing your grant discusses the audit requirements and states:
“For the purposes of this Guide, an independent auditor is a member of the Institute of Chartered Accountants, a member of CPA Australia or a Public Practice Certified Member of the National Institute of Accountants, not being an employee, shareholder, director or other officeholder, related entity or associate of the participant. Further, the independent auditor must not be any person having had an involvement in the preparation of the application or any other report required in this Guide.”
Given that a fee would be charged to perform the audit, the Institute’s Regulation 4/702 relating to the Certificate of Public Practice requires you to hold a Certificate of Public Practice (CPP). Refer to our CPP factsheet for further information.
Also, a reminder that you have a duty to comply with Auditing Standards under APES 210 Conformity with Auditing and Assurance Standards
and you must also be technically competent to do the work under Section 130 of the Code of Ethics
Where can I find more information about the recent changes to the NSW incorporated associations legislation?
There is a fact sheet on the NSW Government Fair Trading website summarising the changes. NSW incorporated associations will need to comply with amended legislation from 1 July 2010, with the proclamation of the Associations Incorporation Act 2009, and publication of the Associations Incorporation Regulation 2010.
This Act separates the financial reporting requirements of NSW incorporated associations into two tiers:
- ‘Tier 1’ associations, with gross annual receipts of more than $250,000, or current assets exceeding $500,000, will be required to provide an audited financial statement each year, unless they have been granted an exemption by Fair Trading. The audit must be carried out by a registered company auditor, or a person approved by the Director-General
- ‘Tier 2’ associations are still only required to lodge a summary of their financial affairs and this is not required to be audited.
Most of the other changes to the legislation are designed to modernise the law and reduce red tape, and cover:
- Changes to association constitutions, although an association’s constitution will automatically comply with the new requirements
- More flexibility for meetings and resolutions
- More choices for official address of the association
- Common seal will no longer be required
- More flexibility for annual general meetings
- Supporting stability and accountability
- Statutory duties of committee members and obligations of office bearers
- Australian residency
- Penalty notice system.
You can find more details of the changes on the Department of Fair Trading’s website.
Unfortunately, associations involved in fundraising under the Charitable Fundraising Act 1991 still require an audit under s 24 of that Act.
Updated December 2010
Does the federal government’s recent announcement about the new carbon pricing mechanism have any impact on existing reporting and audit obligations under the NGERS legislation?
[as reported in ANT32/2011]
No. The Federal government’s “clean energy future” proposals announced on 10 July have no immediate effect on corporations already reporting under the National Greenhouse and Energy Reporting scheme (NGERS) legislation that has been in operation since 2007. Entities currently captured by its requirements must still report their emissions data by 31 October this year. Readers should also note that the corporate thresholds have lowered again for the 2010-2011 reporting year and entities that have triggered a threshold for the first time during the 2010-2011 reporting period must register by 31 August 2011. As a guide, businesses emitting more than 25 000 tonnes of carbon dioxide equivalent, or consuming more than 25 000 megawatts of electricity or 2.5 million litres of fuel in a year, can expect to be required to report. More details on the requirements of the NGER Act can be found on the Department of Climate Change website.
Specific details as to how the new clean energy future plan will impact on the NGER legislation in the future are still being finalised but there will be no change to the current application of the NGER Act until new legislation has been drafted and passed into law through Parliament. For more detail on the government’s plans, visit its clean energy future website.
I have heard that auditors of SMSF need to be registered with ASIC from 1 July 2013. What does that mean for me as a Chartered Accountant?
That is correct, as part of the new SMSF auditor registration regime SMSF auditors must be registered with ASIC in order to sign off on SMSF audit reports after 1 July 2013. This means that you must apply to be registered if you wish to still be able to sign SMSF audit reports. ASIC is encouraging auditors to apply before 30 April 2013 as applications received after that date may not be able to be processed by 1 July 2013.
For detailed information on the regime, including the transitional arrangements, minimum education, experience and competency assessed requirements, members are encouraged to visit the Institute’s SMSF auditor webpage.
There is also access from this page to ASIC’s Regulatory Guide 243 Registration of self-managed superannuation fund auditors (RG 243) and its Class Order Competency standards for auditors of self-managed superannuation funds (CO 12/1768).
I have heard that there are changes to the ASX listing rules affecting the composition of remuneration committees becoming operative shortly. Can you update me please?
The changes you refer to affect the remuneration committees of the top 300 entities listed on the Australian stock exchange (S&P/ASX 300 Index entities). The amended listing rules (PDF) were released in August 2010 and come into effect on 1 July 2011. They are a response to ASX and investor concerns that remuneration committees comprising executive directors cannot adequately ensure that independent advice is being given to boards of directors on the sensitive issue of executive remuneration.
The new rules require that, as a condition of inclusion in the S&P/ASX300 Index, the entity must have a remuneration committee comprised solely of non executive directors. A remuneration committee is defined as 'a committee formed by an entity to advise that entity on matters pertaining to the remuneration of its key management personnel'.
Such a committee must be in existence at the beginning of the financial year that the entity is included in the index. If it loses its index status when the index is reviewed semi annually, it must continue to comply with this rule for the whole of that financial year. Where an entity is part of a corporate group, that has one or more related bodies corporate in the +S&P/ASX300 Index, the board of that entity may utilise a remuneration committee of a related body corporate in the +S&P/ASX300 Index in order to satisfy the requirements of the listing rules.
The changes were exposed in April 2010 (PDF) combined with proposed rule changes concerning the adoption, content and disclosure of company trading policies. In response to feedback received on its consultation, the ASX has chosen not to extend the remuneration committee proposals to the top 500 entities and also extended the implementation date to 1 July 2011.
Are there any financial reporting considerations as a result of the Federal Government’s recent announcement of the new carbon pricing scheme?
As most readers are probably aware, the federal government announced the proposed implementation of a new carbon pricing scheme on 10 July 2011. The plan involves imposing a fixed price on carbon emissions for the first 3 years, commencing on 1 July 2012 followed by a flexible emissions trading scheme on 1 July 2015. While the biggest impacts will be felt on the 500 entities whose carbon emissions render them immediately liable to the new cost, other entities will be affected as their costs through the supply chain may rise. The first bills for the new plan were tabled in Parliament last week.
Set out below are the major financial reporting considerations members should be aware of in both the short and longer term.
Considerations for period end prior to any commencement date of the scheme
At this stage the short term financial reporting implications associated with the scheme for period ends prior to the commencement date of the scheme are limited and centre around:
- Asset impairment: the federal government’s announcement will give affected entities more certainty about the future impact of a carbon pricing scheme on the value of their assets. This may require the alteration of asset impairment testing models as at the relevant period end. The Government’s announcement would qualify as an adjustable post balance date event if the issue of a carbon pricing scheme had been considered in the models used to test impairment at your relevant period end. However, if the directors had determined at the period end that there was not sufficient certainty to factor a carbon pricing scheme into the impairment testing model the government’s announcement would be a non-adjusting event.
However, these effects may be limited given that the legislation has not yet passed through parliament, substantial government assistance packages are available in some industries and cost increases to customers may also be possible.
- Directors report disclosures: companies that are going to be substantially impacted should consider the need to disclose details in the "likely developments" section of their directors report based on their assessment of the likelihood the current carbon pricing scheme legislation will be enacted.
Longer term implications
Longer term the proposed carbon pricing scheme legislation is likely to generate additional recognition, measurement and disclosure issues as entities work within the new proposals. This will make it important to ensure that over the coming year the entity’s systems and processes are up to the task of coping with the new developments as they occur.
A project to develop comprehensive guidance on accounting for the rights and obligations inherent in an emissions trading schemes was being undertaken by the IASB however this has currently been suspended to allow the board to pursue its convergence agenda with FASB. With the FASB project nearing completion, the emissions project may be reactivated with future timing depending on the outcome of the agenda consultation process currently being undertaken by the IASB.
The Institute’s reporting and assurance team has collated onto our carbon resources webpage links to a range of resources that can assist members understand the plans and assess the impact on businesses with which they are involved.
I am aware that this year has seen changes to reduce the regulatory burden on companies limited by guarantee and to associations in some states. Have there been similar changes affecting co-operatives?
No. As yet, there has been no change in financial reporting for co-operatives. The reporting requirements for these entities are contained in individual state based legislation relevant to cooperatives and changes in these pieces of legislation have not kept pace with the reductions in reporting obligations being introduced into the Corporations Act, as referred to above, which provide relief for smaller entities. Existing requirements regarding the production and audit of financial statements remain in place.
However the need for change has been recognised and the NSW Department of Fair Trading is managing the development and introduction of new national cooperatives legislation, which amongst other reforms is intended to reduce the reporting burden on small cooperatives to align them with the requirements imposed on small proprietary companies under the Corporations Act.
More details on this legislation can be found on the Fair Trading NSW website.
Updated December 2010
I’ve heard that there have been some changes to the reporting requirements of Incorporated Associations in Victoria. What are they and when do they apply?
The changes to the Victorian Incorporated Association Act will introduce three tiers of association for financial reporting and auditing purposes based on revenue thresholds. The changes were to be introduced on 1 December 2011 but are now expected to become effective from 1 July 2012.
The reporting and audit requirements for each of the 3 tiers are:
Tier 1: associations with revenue less than $250,000 in the previous financial year. They must provide a signed annual statement to Consumer Affairs Victoria. Their accounts do not have to be audited or reviewed unless requested by members or the Registrar
Tier 2: associations that are not in Tier 1 or 3. They must have at least a review of their financial statements by an independent accountant. This review may be undertaken by a public practice certificate holder of the Institute, CPA Australia or NIA (now called IPA), or any other person approved by the Registrar. An audit may be requested by members or the Registrar
Tier 3: associations with revenue of more than $1,000,000 in the previous year. They must have an audit of their financial statements performed by a registered company auditor or a public practice certificate holder of the Institute, CPA Australia or NIA (now called IPA), or any other person approved by the Registrar.
Revenue is defined as total income from all activities before expenses, but excluding any income received as capital. The explanatory memorandum to the Associations Incorporation Amendment Act 2010, which introduced the changes, provides two examples of capital items that would be excluded from revenue (as defined in the Act) in determining which threshold applies. These are capital grants and bequests.
Associations wishing to avail themselves of the new requirements will need to check their constitution or rules of operation to ensure they do not have reporting or audit requirements that would override the new legislation. If such requirement do exist, the constitution will need to be amended and the changes approved by members before the association can take advantage of the new reporting requirements.
Other changes introduced by the 2010 Amending Act include enhanced governance arrangements, the limitations on trading repealed and improved grievance and dispute resolution procedures. These changes were given royal assent last year (see item 8 in ANT 40/2010 (PDF)) and represent stage 2 of the Victorian Government’s reforms in this area. The stage 1 amendments, dealing with the way in which incorporated associations managed their affairs were contained in the Associations Incorporation Amendment Act 2009. Its revisions are either already in force or become law on 1 July 2012 with the 2010 changes.
More details can be obtained from the legislation and the Consumer’s Affairs Victoria website. The Institute’s not-for-profit publication Enhancing not for profit annual and financial reporting also includes details of the new requirements.