Financial Reporting Thresholds to increase from 1 July 2019; but what does it mean for you?
On 5 April 2019, Treasurer Josh Frydenberg approved the proposed amendments to the Corporations Regulations 2001 that will increase the financial reporting thresholds that categorise a proprietary company as “large”. The changes will be effective from 1 July 2019 and are outlined in detail below. The government and some commentators claim that the threshold increase will provide relief to many proprietary companies from “red tape”, with the compliance burden estimated at saving those entities concerned approximately $300M over three years. However, when seeking consultation from the public, a number of submissions, including the combined submission of the Australian Finance Industry Association, the Australian Institute of Credit Management and the Australian Restructuring, Insolvency & Turnaround Association (“the Associations”), considered the impact of the reduced availability of financial statements for those companies as counterproductive. In this article we will identify the changes and consider some of the arguments proffered by the Associations and others.
What is changing?
From 1 July 2019, the Corporations Amendment (Proprietary Company Thresholds) Regulations 2019 (Cth) will increase the “large” proprietary company thresholds referred to in the act as follows:
New (post 1/7/19)
Consolidated revenue for the financial year of the company and entities it controls*
Value of consolidated gross assets at the end of the financial year of the company and the entities it controls*
Employees of the company and entities it controls^
*Control is determined based on the accounting standards
^Full time equivalent employees
Why? – from the government
The threshold increases will:
- Appropriately represent the level at which a company becomes economically significant;
- Reduce the regulatory cost on approximately 2,200 businesses by approximately $81 million p.a.; and
- Reflect economic growth since the thresholds were last reviewed in 2007.
What does it mean – practically?
Put simply: an estimated 2,200 less businesses financial statements (audited) will be publically available from 1 July 2019.
Historically, the regulatory requirement for the preparation of accurate financial statements available to stakeholders was a trade-off for the benefit of limited liability to shareholders by incorporation. Reporting thresholds have been implemented to limit the financial burden on smaller companies lowering the barrier to entry for small and medium enterprise. In the United Kingdom, rather than a threshold per se, there is a “carve out” from the requirements for ALL companies filing their accounts at Companies House (ASIC equivalent). A distinction, perhaps lost in the announcement by Treasury, that the preparation of financial statements are an essential element to undertaking a business.
The impacts of the increased thresholds will be less financial data readily available for review of a company’s financial performance, by credit professionals seeking to maintain or increase levels of credit accommodation to the business, unless an approach is made to the company directly for the financial reports. Credit professionals, will need to consider relevant adjustments to their internal credit approval systems to factor in the reduction of publically available financial information.
A review of some submissions …
In submissions to Treasury by the Associations the following specific reasons were identified in support of their strong recommendation against the increases:
- Reducing transparency of these businesses;
Inability to easily access relevant information is one of the barriers to small business access to credit.
- Reduced access to credit;
Automated due diligence will be impacted due to a lack of available public information.
- Absence of information leads to a negative bias;
Audited financial reports provide a reliable source of information.
- The population of entities impacted is much greater than the 2,200 stated in the joint media release;
Equifax estimates the number of entities effected to be 3,500; Illion 4,600.
- Less oversight of business and accounting practices;
The audit process provides a strong motivation to comply with accounting standards.
- Increasing incidence of insolvency and insolvent trading;
An audit process can identify early warning signs that may stimulate corrective actions earlier.
- Contrary to other jurisdictions;
The United Kingdom exemption limits, reviewed in 2018, are below the current thresholds.
- Contrary to the open banking and mandatory credit reporting initiatives;
Objectives aimed at increasing data to fuel credit assessments.
- Current thresholds are an appropriate definition of an economically significant entity;
- $300 million cost savings unlikely to be realised; and
Greater costs associated with a reduced access to credit.
- Restrictions of Fintech innovation.
An impediment to information will stifle development of further automation from Fintech innovators.
In an interview with the Australian Financial Review, Nick Pilavidis CEO of the Australian Institute of Credit Management, warned against reducing the information available to trading partners and financiers, as it may make it harder for businesses to access credit.
In submissions from Illion, a statistical analysis supported the Associations submissions, citing:
- 3% of companies effected by the increase entered some form of insolvency procedure during the prior 6 years. As such a real insolvency risk exists;
- $1 billion of liabilities for these companies was trade credit outside of terms;
- Total liabilities for these companies was circa $273 billion, which makes them economically significant; and
- In the preceding 12 months, 35,000 credit enquires were made in respect of these companies.
In addition the Institute of Public Accountants, also expressed concerns about the value of the relief to these companies, stating:
“For clarity, financial statements will still need to be prepared for management, shareholders, financiers, and for taxation purposes. Accordingly, the costs savings from financial reporting are likely to be marginal, with the majority of savings coming from the dispensing of the audit requirement …”
And then following with:
“…this is likely to increase business risks as an audit is more than a mere compliance exercise of opining on compliance with accounting standards. Directors may not fully appreciate their increased risk exposures.”
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