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Australian regulator consults on 'combined financial statements'

  • ASIC (Australian Securities and Investments Commission) (dk gray) Image

15 Oct 2013

The Australian Securities and Investments Commission (ASIC) has issued a consultation paper in which it seeks views on financial reporting by 'stapled' entities. The Consultation Paper discusses various issues in relation to the preparation of financial reports by stapled entities in light of the issue of AASB 10 'Consolidated Financial Statements' (equivalent to IFRS 10), and includes proposals for a legislative instrument to allow Australian stapled entities to present combined financial statements.

A stapled entity is an entity of which under the terms on which it is traded require it to be transferred together with a security of one or more other entities. Such stapled securities are generally traded at one aggregate price and behave in some respects as if they are a single entity. Prior to the application of AASB 10, financial statements of stapled groups were commonly presented either as combined or consolidated financial statements.

The consultation paper, CP 217 Presentation of financial statements by stapled entities, responds to constituent concerns around the application of AASB 10/IFRS 10 to stapled security arrangements in the Australian context. The paper outlines a number of reasons why it may not be possible for one stapled entity to consolidate other stapled entities, including:

  • none of the stapled entities have an ownership or other financial interest in any of the other stapled entities
  • none of the stapled entities have 'power' over the other stapled entities, particularly where a third party manages all of the entities
  • it is considered that there are no variable returns between the stapled entities
  • the prohibition on consolidation where a stapled entity meets the definition of an 'investment entity'
  • where the stapled entities are a trustee/manager and a managed investment scheme, it may be unclear as to why control would exist merely because the two entities are stapled when it would not otherwise exist.

In ASIC's view, combined financial statements are necessary to give a 'true and fair view' of the individual stapled entities in a stapled group by providing an overall view of the entire arrangement, particularly where there are financial or operating interrelationships between the entities. Under Australia's Corporations Act 2001, ASIC has the power to issue a 'Class Order' that effectively changes the operation of the law for a particular class of entity, and is proposing to do so in this case. ASIC considers this is necessary as combined financial statements are not required by accounting standards, nor permitted under the existing operation of the Act, and accordingly the proposed Class Order would have the effect of removing any legal impediment under the Act from an entity presenting combined financial statements in the financial report of a stapled entity.

Although the proposed Class Order would allow stapled groups to prepare combined financial statements, it would not relieve entities in a stapled group from presenting financial statements required by accounting standards, and accordingly any combined financial statements would be in addition to those statements. This is on the basis of maintaining Australia's compliance, as explained in the paper:

It is important that financial reports of Australian entities are regarded as fully IFRS compliant by international investors. IFRS compliance enables investors to identify that financial reports are prepared in accordance with high quality standards, comparable with other international entities using IFRS, and are prepared on a basis that is understood in global markets. This will assist to facilitate capital flows and investment in Australian entities.

The proposals would also continue past practice of permitting all stapled entities in a stapled group to present their financial statements together in a single financial report. ASIC considers this approach is more meaningful to investors, particularly where stapled entities operate together.

In terms of the international context, the paper notes the following:

Stapled group arrangements also exist in Canada (Canada has also adopted the IFRS). A control relationship is not considered to exist in stapled groups in Canada and so consolidated financial statements are not presented. The Ontario Securities Commission has granted relief to allow stapled entities to present combined financial statements.

The Consultation Paper is open for comment until 30 November 2013 and ASIC expects to finalise a Class order by the end of December 2013. Click for ASIC press release (link to ASIC website).

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