Most organisations are being impacted by the coronavirus (COVID-19) pandemic, either directly or indirectly, and the increased economic uncertainty and risk may have significant financial reporting implications.
Many regulators including the Australian Securities and Investments Commission (ASIC), Australian Prudential Regulation Authority (APRA), Australian Stock Exchange (ASX) and Australian Charities and Not-for-profits Commission (ACNC) are providing guidance and relief during this unprecedented period. Your reporting obligations might have changed. Whilst it is recommended that you consult with your lawyers on legal matters, some common questions are outlined below.
Common financial reporting questions
- How can your organisation protect their ability to pay franked dividends in the current environment?
- Must a public company with a year-end that falls between 31 December 2019 and 7 July 2021 inclusive, or between 24 December 2021 and 7 January 2022 inclusive, hold an AGM within 5 months after the end of the financial year?
- Given the social distancing rules, what are the different ways to hold the AGM?
- How does the current level of uncertainty impact an entity's continuous disclosure obligations under ASX Listing rule 3.1?
- What is the reporting deadlines relief provided by ASIC?
How can your organisation protect their ability to pay franked dividends in the current environment?
An Australian resident organisation can consider establishing a separate profits reserve and transfer the net total balance of retained earnings (accumulated profits) that exist at the beginning of its annual reporting period into this reserve to preserve their ability to pay franked dividends in the future.
Where an Australian resident organisation wishes to pay franked dividends to its shareholders, it must meet the three Corporations Act 2001 requirements and have “profits” out of which these dividends can be paid as defined by the Australian taxation regulations.
As a result of the financial and economic stresses arising from COVID-19 related events, organisations that have historically been profitable may be experiencing a significant downturn in financial performance resulting in an expectation of losses in the current and future annual reporting periods. If these losses are offset against opening retained earnings (accumulated profits) that existed at the start of its annual reporting period, this will reduce and possibly eliminate the pool of “profits” available to pay franked dividends against.
The pool of prior period profits can be preserved by the organisation under the Australian tax regulations if they are appropriated to a specific profits reserve.
There are other potential techniques that the organisation might use to pay franked dividends, particularly in instances where the organisation has no profits available to pay franked dividends e.g. paying dividends out of an unrealised capital profits.
Before proceeding with a resolution to declare/determine franked dividends and applying various treatments involving prior year retained earnings and reserves, the organisation should always obtain the appropriate tax and legal advice.
KPMG Example Public Company Limited (PDF 4.2MB) Consolidated statement of changes in equity, provides an example disclosure on the use of a profits reserve.
Must a public company with a year-end that falls between 31 December 2019 and 7 July 2021 inclusive, or between 24 December 2021 and 7 January 2022 inclusive, hold an AGM within 5 months after the end of the financial year?
No. ASIC has provided a two-month extension on the period in which a public company with an annual balance date that falls between 31 December 2019 to 7 July 2021 inclusive must hold their annual general meeting (AGM).
ASIC further extended relief for all public companies (other than listed public companies) with a financial year ending on a date that is between 24 December 2021 and 7 January 2022 a one-month extension to the deadline to hold its AGM. ASIC is also supporting the holding of AGMs using appropriate technology.
Given the social distancing rules, what are the different ways to hold the AGM?
Some organisations may wish to hold their AGM using technology instead of traditional physical meetings given COVID-19 restrictions. This could take the form of online meetings (virtual) or physical and online meetings (hybrid).
ASIC considers that hybrid AGMs are permitted under the Corporations Act 2001, but organisations need to check whether their constitution restricts meetings being held in this way. ASIC does not have the power to modify the Corporations Act to facilitate hybrid AGMs where they are not permitted under an organisation’s constitution.
There was some doubt as to whether the Corporations Act permits virtual AGMs and the validity of resolutions passed at a virtual AGM. The Treasurer issued two determinations which together temporarily amended the Corporations Act from 6 May 2020 through to 21 March 2021 which facilitated meetings, including AGMs, being held using one or more technologies (virtual technology) that give all persons entitled to attend a reasonable opportunity to participate without being physically present in the same place.
The Government proposed to extend these measures, however, the relevant Bill (Treasury Laws Amendment (2021 Measures No. 1) Bill 2021) was delayed. ASIC therefore adopted a ‘no action’ position relating to the convening and holding of meetings using virtual technology for meetings held between 21 March 2021 and the earlier of:
- 31 October 2021
- the date that any measures are passed by the Parliament relating to the use of virtual technology in meetings of companies or managed investment schemes.
In early August 2021 the Government passed the Treasury Laws Amendment (2021 Measures No. 1) Bill renewing the measures contained in the determinations. The relief provided by the Bill will remain in force until 31 March 2022. ASIC's 'no action' position is no longer required from 14 August 2021 due to the passing of the Bill.
In March 2022 ASIC issued ASIC Corporations (Virtual-only Meetings) Instrument 2022/129 (AI 2022/129) which will commence on 1 April 2022. AI 2022/129 allows the following entities to hold virtual-only meetings of their members:
- listed companies together with listed and unlisted registered schemes – from the expiry date of the Measures Bill (31 March 2022) to 31 May 2022
- unlisted public companies – from the expiry date of the Measures Bill (31 March 2022) to 30 June 2022.
The relief in AI 2022/129 is conditional on the directors of a company, or responsible entity of a registered scheme, passing a resolution that it would be unreasonable for the company or registered scheme to hold a meeting of its members, wholly or partially, at one or more physical venues due to the impact of the COVID-19 pandemic.
The Corporations Amendment (Meetings and Documents) Bill 2022 (the 2022 Bill) effectively makes the above relief measures to use technology to satisfy their obligations relating to meetings and document execution a permanent part of the Corporations Act.
While the 2022 Bill also enabled companies and registered schemes to hold their AGMs using virtual technology only, this is limited to entities who have amended their constitution to expressly require or permit virtual meetings.
How does the current level of uncertainty impact an entity’s continuous disclosure obligations under ASX Listing rule 3.1?
Subject to certain exceptions, ASX Listing rule 3.1 requires listed entities to notify the ASX immediately of any information concerning it which a reasonable person would expect to materially affect its share price.
Consistent with this rule, organisations should consider any specific events or transactions they are undertaking in response to the COVID-19 outbreak that may require disclosure under the ASX Listing rules.
On 25 May 2020, the Government temporarily amended the Corporations Act 2001 so that companies and officers will only be liable if there has been “knowledge, recklessness or negligence” with respect to updates on price sensitive information to the market. The changes were in effect until 23 March 2021. In early August 2021 the Government passed the Treasury Laws Amendment (2021 Measures No. 1) Bill making these temporary reforms permanent. The changes are effective from 14 August 2021.
What is the reporting deadlines relief provided by ASIC?
The following table sets out the current state of play as at 6 December 2021:
|Entities reporting to ASIC||Balance dates between 23 June 2021 and 7 July 2021
||Balance dates between 8 July 2021 and 23 December 2021||Balance dates between 24 December 2021 and 7 January 2022||Balance dates after 7 January 2022
|Listed entities1||1 month extension (i.e. 3 months to 4 months)
||No extension relief available||No extension relief available||Not currently intending to extend
|Unlisted disclosing entities and unlisted registered schemes||1 month extension (i.e. 3 months to 4 months)
||No extension relief available||1 month extension (i.e. 3 months to 4 months)||Not currently intending to extend|
|Other unlisted entities||1 month extension (i.e. 4 months to 5 months)
||No extension relief available||1 month extension (i.e. 4 months to 5 months)||Not currently intending to extend|
- Where ASX has granted relief it has set out some additional conditions, to ASIC relief, that must be satisfied.
ASIC continues to monitor market conditions and COVID-19 and their impact on financial reporting obligations. ASIC is not intending to extend the class relief for financial reports to entities with financial years that end between 8 January 2021 and 22 June 2021, despite its ‘no action’ position for AGMs up to financial years ending 7 July 2021.
Entities anticipating issues in meeting their financial reporting deadlines can apply for individual relief with ASIC. If applying for relief ASIC recommends applying at least 14 days before the financial reporting deadline.
ASIC allowed listed entities to take one additional month to report for full year and half-year financial reports for 21 February 2020 to 7 January 2021 balance dates. In April 2021, ASIC announced an extension of the one additional month to report for financial reporting dates between 23 June 2021 and 7 July 2021. ASIC advised the extension would assist with any pressures on auditor resources taking into account challenges presented by COVID-19 conditions. The relief does not apply to financial years ending from 8 January 2021 to 22 June 2021 – as ASIC considers that the resource constraint noted above was not as strong during this period. Listed entities were required to inform the market when they rely on the extended period for lodgement.
The ASX granted an equivalent class waiver to listed entities for full year and half-year financial reports for matching balance dates to enable them to take advantage of the deadline extension for lodging full year and half-year financial reports provided by ASIC. Under the waiver if the audited or reviewed half-year accounts or the full year accounts are ready, prior to the extended deadline, they must be given to the ASX.
ASIC extended the deadline for unlisted entities to lodge financial reports under Chapters 2M and 7 of the Corporations Act 2001 by one month for years from 31 December 2019 to 7 January 2021. In April 2021, ASIC announced an extension of the one additional month to report for financial reporting dates between 23 June 2021 and 7 July 2021. ASIC advised the extension would assist with any pressures on auditor resources taking into account challenges presented by COVID-19 conditions. The relief does not apply to financial years ending from 8 January 2021 to 22 June 2021 – as ASIC considers that the resource constraint noted above is not as strong during this period.
In November 2021, ASIC announced an extension of the one additional month to report for reporting dates between 24 December 2021 and 7 January 2022.
The extended deadlines do not apply if the reporting deadline has already passed at the time the relief is registered.