Explanatory MemorandumCirculated By the Authority of the Minister for Financial Services, Superannuation, Corporate Law and Human Services, the Hon Chris Bowen
Chapter 7 - Lost capital reductions
Context of amendments
7.1 Under section 258F of the Corporations Act, companies are allowed to cancel paid-up capital that is lost or not represented by available assets of the company. The provision is intended to allow companies to write down the value of the company's capital in situations where a company incurs certain types of losses. This is done by writing-off past accumulated losses against the share capital of the company.
7.2 However, concerns have been expressed that companies may be able to use section 258F to overstate the profitability of the company by taking expenses directly to share capital rather than recognising them in the statement of financial performance. Such action would be in breach of Australian accounting standards.
Summary of new law
7.3 It is proposed that section 258F be amended to make it clear that a company can only cancel share capital in circumstances where it is not inconsistent with the requirements in Australian accounting standards. The proposed amendment will still allow companies to write off accumulated losses to share capital but will not allow companies to take expenses directly to share capital.
7.4 The proposed amendment is of a technical nature and is designed to clarify the manner in which section 258F is intended to operate.
Comparison of key features of new law and current law
|New law||Current law|
|Under the new law, a company may not reduce its share capital by cancelling any paid-up capital that is lost or not represented by available assets if the cancellation is inconsistent with the requirements of any accounting standard.||Under the current law, a company may reduce its share capital by cancelling any paid-up capital that is lost or not represented by available assets.|
Detailed explanation of new law
7.5 The Bill provides for section 258F to be recast, with a proposed paragraph 258F(2)(b) providing that a company's ability to reduce its share capital by cancelling any paid-up share capital that is lost or is not represented by available assets will not apply if the cancellation is inconsistent with the requirements of any accounting standard . [Schedule 1, Part 1, items 8, 9 and 10]
Application and transitional provisions
7.6 Proposed subsections 1510B(3) and 1515(3) provide that the proposed amendments to section 258F apply in relation to the cancellations of paid-up share capital that occur on or after the commencement of items 8, 9 and 10 of Schedule 1 . [Schedule 1, Parts 2 and 3, items 52 and 54]