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Reducing the financial reporting burden for SMEs

By reducing the financial reporting burden on small to medium-sized businesses, owners can get back to running their business, saving time and costs.

Thresholds for proprietary company reporting have not kept pace with economic growth

‘Large’ proprietary companies are required to prepare and lodge a financial, a director’s and an auditor’s report with the Australian Securities and Investments Commission (ASIC) each financial year.

Small proprietary companies are generally not required to prepare these reports, but are required to keep adequate financial records.

The current definition

Currently, a company is a ‘large’ proprietary company if it meets at least two of three thresholds at the end of a financial year:

  • $25 million or more in consolidated revenue;
  • $12.5 million or more in consolidated gross assets; or
  • 50 or more employees.

The current thresholds have not been reviewed since 2007 and, as a result, are set at too low a level to appropriately capture the level at which a company becomes economically significant.

This means that financial reporting obligations, and their associated costs, are unnecessarily being imposed on a proportion of the proprietary companies that are currently preparing, auditing and lodging annual reports.

The new definition

To ensure that financial reporting requirements are targeted at economically significant companies and keep pace with economic growth, the Government is proposing to double the thresholds for determining a large proprietary company to:

  • $50 million or more in consolidated revenue;
  • $25 million or more in consolidated gross assets; or
  • 100 or more employees.

Increasing the thresholds will make sure financial reporting obligations and associated costs are not imposed on smaller businesses

Cost savings to business

Doubling the thresholds will result in around 2,200 proprietary companies no longer being classified as ‘large’ and no longer being required to comply with financial reporting and audit obligations.

This is estimated to reduce the regulatory cost on these businesses by $81.3 million per annum. The average cost for a large proprietary company of preparing and auditing financial reports is approximately $36,950 p.a.

Impact on transparency and accountability to shareholders and other stakeholders

Users of the financial reports of these 2,200 companies, such as shareholders, creditors, customers and members of the public, will be impacted as the financial reports will no longer be publicly available via ASIC (for a fee). Should a member of the public approach a small proprietary company for their internal financial reports, there is no obligation on the company to provide it.

However, these 2,200 companies are likely to have fewer ‘users’ of their public financial reports (for example, they may be tightly held companies with a small number of investors, who may already have access to financial information about the company). The benefit that users would lose from the formally lodged financial reports no longer being publicly available is unlikely to be significant.

These 2,200 proprietary companies:

  • Will still be required by law to keep written financial records and a failure to do so is an offence.
  • May be required to prepare or audit financial reports if directed by ASIC or by 5 per cent or more of their shareholders.
  • Must comply with all other corporate obligations that usually apply to proprietary companies (for example, notifying ASIC of changes to a company’s share capital and of its top 20 shareholders).

What is the rationale for doubling the thresholds?

  • The assets and revenue thresholds were last increased (by 150 per cent) in 2007, from the original 1995 levels to the current thresholds.
  • Doubling thresholds will not have a material impact on the reporting population, but will ensure the thresholds keep pace with economic growth.

The Government invites feedback on whether the proposed doubling is the appropriate increase for each of the thresholds.

How does this proposal work with other developments in the financial reporting framework?

  • In March 2018, the International Accounting Standards Board (IASB) released a revised Conceptual Framework. The Australian Accounting Standards Board (AASB) is consulting on its approach to applying the IASB’s Conceptual Framework, which will effect ‘special purpose’ financial statements for companies complying with the Australian Accounting Standards and lodging reports with ASIC.
    • If special purpose financial statements are no longer an available option, this means all large proprietary companies will be required to lodge ‘general purpose’ financial statements with ASIC.
    • This will enhance accountability, transparency and comparability of these companies, but will also increase compliance costs. Increasing the large proprietary company thresholds, to remove reporting requirements for some smaller companies, will help mitigate this increasing compliance burden.</li.
  • The thresholds for financial reporting by registered charities are also under review.