Explanatory MemorandumCirculated By the Authority of the Minister for Financial Services, Superannuation, Corporate Law and Human Services, the Hon Chris Bowen
Chapter 4 - Changing reporting periods
Context of amendments
4.1 In Australia, close to 33,000 companies, registered schemes and disclosing entities (entities) have financial reporting obligations as outlined in Chapter 2M of the Corporations Act.
4.2 Under section 323D of the Act, a financial year is 12 months long (plus or minus seven days). The balance date can normally only be changed by up to seven days each year to accommodate entities with week-based internal reporting. The restrictions on changing financial years were introduced by the Company Law Review Act 1988, which came into effect on 1 July 1998.
4.3 The existing arrangements in Australia make it difficult for entities to change their year-end date for reasons other than those contained in the Corporations Act - generally, to synchronise the financial years of an entity and its controlled entities to facilitate the preparation of consolidated financial statements. In this regard, the Australian requirements are more stringent than the requirements of comparable jurisdictions.
Summary of new law
4.4 It is proposed that section 323D be amended to allow a financial year of an entity subsequent to the first year to last for a period other than 12 months provided that the period is not longer than 12 months, there has not been a period during the last five financial years in which there was a financial year of other than 12 months, and the change to the subsequent financial year is made in good faith in the best interests of the entity.
Comparison of key features of new law and current law
|New law||Current law|
|The amended law will retain the existing requirements.||Under the current law, the financial year of an entity is to be 12 months long (plus or minus seven days).
An entity that is required to prepare consolidated financial statements is to ensure that the financial years of its consolidated entities are synchronised with its own financial year.
|Under the amended law, an entity will be permitted to vary the length of a financial year subsequent to its first financial year provided that: the financial year is not longer than 12 months, the previous five financial years have all been of 12 months duration, and the change in the length of the subsequent financial year is made in good faith in the best interests of the entity.||There is no equivalent provision in the current law.|
Detailed explanation of new law
4.5 The Bill provides for the insertion of a proposed subsection 323D(2A) which provides a more flexible regime for changing an entity's financial year. Subsection 323D(2) will also be amended to provide a cross-reference to proposed subsection 323D(2A) . [Schedule 1, Part 1, items 43 and 44]
4.6 Proposed subsection 323D(2A) provides that a subsequent financial year of an entity may last for a period other than 12 months provided the following requirements are satisfied:
- the financial year commences at the end of the previous financial year and it not longer than 12 months;
- during the previous five financial years each financial year has been of 12 months duration; and
- the change in length of the subsequent financial year is made in good faith in the best interests of the entity.
Application and transitional provisions
4.7 Proposed subsections 1510B(9) and 1515(9) provide that the proposed amendments to section 323D apply where the previous financial year of the entity ends on or after 30 June 2010 (that is, the amendments apply to subsequent financial years commencing on or after 1 July 2010) . [Schedule 1, Parts 2 and 3, items 52 and 54]