Commonwealth Numbered Regulations - Explanatory Statements

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CORPORATIONS AMENDMENT REGULATIONS 2004 (NO. 7) 2004 NO. 208

Subsection 1364(1) of the Corporations Act 2001 (the Act) provides that the Governor-General may make regulations prescribing matters required or permitted by the Act to be prescribed by regulations or necessary or convenient to be prescribed by such regulations for carrying out or giving effect to the Act.

The Corporate Law Economic Reform Program (Audit Reform and Corporate Disclosure) Act 2004 (the Amending Act) makes significant amendments to the Act.

The purpose of the proposed Regulations is to amend the Corporations Regulations 2001 (the Principal Regulations) as necessary to facilitate the effective operation of amendments to the Act made by the Amending Act. The Principal Regulations would be amended in respect of the following subject matters:

•       additional disclosure requirements in annual directors' reports;

•       practical experience and educational requirements for registration as a registered company auditor;

•       registration of authorised audit companies and conditions of such registration;

•       auditing standards;

•       conditions on the registration of company auditors; and

•       authentication of the appointment of proxies at meetings of members of companies.

Details of the Regulations are set out in the Attachment. The Regulations commence on the date of their notification in the Gazette.

Details of the Corporations Amendment Regulations 2004 (No. 7)

Regulation 1 provides that the name of the Regulations is the Corporations Amendment Regulations 2004 (No. 7).

Regulation 2 provides that the Regulations commence on the date of their notification in the Gazette.

Regulation 3 provides that Schedule 1 of the Regulations amend the Corporations Regulations 2001 (the Principal Regulations).

SCHEDULE 1

Item 1

Regulation 2G.2.01 - Authentication of appointment of proxy (Act s 250A(1))

Item 1 inserts new Chapter, Part and Division headings into the Principal Regulations. The Principal Regulations did not previously contain Regulations pursuant to Chapter 2G of the Corporations Act 2001 (the Act).

Regulation 2G.2.01 provides a method of electronic authentication of proxy appointments, requiring identification of the member of the company making the appointment and an indication of the member’s approval of the information communicated. More specifically, where the proxy appointment is by email or Internet-based voting, the authentication must include identification information, such as the member’s name, address and birth date, and a form of security protection, such as a confidential identification number.

Item 2

Regulation 2M.3.03 Prescribed details (Act s 300A)

Division 1 of Part 2M.3 of the Regulations deals with the contents of the annual directors’ report of a listed company.

Section 300A of the Act provides for certain elements of the remuneration of directors and specified executives to be disclosed in the annual directors’ report of a listed company. The disclosures are to be made in a section of the annual directors’ report referred to as the remuneration report.

The purpose of these Regulations is to prescribe the details to be included in the remuneration report.

The Regulations require that information about remuneration in respect of the year for which the report is prepared be separate from information regarding remuneration in respect of earlier periods or which is more qualitative in nature (see subregulation 2M.3.03(3)).

Details of remuneration to be included in the remuneration report relate to:

• details prescribed by Accounting Standards; and

• other disclosures.

Details prescribed by Accounting Standards.

Subregulation 2M.3.03(1) specifies the information relating to remuneration during the financial year that must be disclosed pursuant to paragraph 300A(1)(c) of the Act. The information to be disclosed under these Regulations draws on the requirements of Accounting Standard AASB 1046 Director and Executive Disclosures by Disclosing Entities. The Australian Accounting Standards Board (AASB) issued AASB 1046 in January 2004.

In order to ensure greater consistency between the disclosures made in the remuneration report and the financial statements, these Regulations specify the disclosures required by AASB 1046 that must also be made in the remuneration report.

Disclosure is required of items of remuneration that relate to the period covered by the annual directors’ report and include all amounts accrued or paid in respect of that period.

The level of disclosure required in the remuneration report is the same as that required by the relevant paragraphs of AASB 1046. In summary, paragraph 2M.3.03(1)(d) of the Regulations, by cross referencing paragraph 7.1 of AASB 1046, will require disclosure in the remuneration report of:

• Primary benefits, which include:

– cash salaries, fees and commissions;

– cash profit sharing and other bonuses; and

– non-monetary benefits.

• Post employment benefits:

– pension and superannuation benefits;

– Post employment benefits required to be approved by members under the Corporations Act 2001.

– other post-employment benefits.

• Equity compensation:

– the value of shares and units;

– the value of options and rights;

– alterations to the terms of options or rights during the reporting period; and

– the value of other equity compensation.

• Other compensation:

– termination benefits;

– prescribed benefits; and

– all other benefits.

Measurement of elements of remuneration must be made in accordance with AASB 1046.

The Regulations require any payments made as part of the consideration for a person becoming a director or executive to be separately identified.

Primary Benefits

This category of benefits includes salary, fees, commissions, profit sharing and bonuses and generally will comprise the most significant amount of remuneration for most individuals.

Bonuses, other than equity compensation, earned by an individual in the reporting period includes all forms of profit sharing, incentive schemes, performance pay plans and share-based payment compensation other than equity compensation.

A long-term incentive plan means any plan or arrangement providing benefits, other than equity compensation, as an incentive for performance to occur over a period longer than one reporting period.

Non-monetary benefits include items where an individual has received the benefit during the reporting period, such as discounts on goods (in excess of that available to trade customers, shareholders or other employees), medical care or subsidised housing.

Post-Employment Benefits

Post-employment benefits include retirement benefits and other post-employment benefits (such as post-employment life insurance and post-employment medical care). Disclosure is required of all benefits arising in the reporting period that are paid, payable or to be provided in respect of post-employment benefits for the specified persons.

AASB 1046 (and therefore these Regulations) distinguishes between retirement benefits payable in the normal course of events and termination benefits arising when an individual’s employment is terminated before the normal retirement date.

Equity Compensation

Equity compensation includes benefits in such forms as:

• ordinary shares, units, options and other equity instruments of the entity provided at less than the fair value at which those instruments would have been issued to a third party or on the market; and

• rights to equity instruments that may, at the discretion of the entity, be settled by either cash payments or the issue of its equity instruments.

The values of equity instruments, including options and rights, are estimated in accordance with the Accounting Standards. The amount shown as remuneration is the value after deducting any amount payable to the entity for those equity instruments. Amounts initially paid or payable do not include an amount that may be paid in the future for the issue of another equity instrument, such as an ordinary share issued on exercise of an option or right.

Other Employee Benefits

It is expected there will be a variety of benefits provided to individuals that are not easily classified into the categories identified above. For example, a company may pay insurance premiums to protect a director against various legal costs that may arise. Chapter 2D.2 of the Act specifies restrictions on indemnities, insurance and termination payments by a company in relation to its officers, identifying which payments are prohibited and which do or do not need members’ approval. Prescribed benefits are those that require approval by members. Chapter 2E of the Act, Related Party Transactions, Part 2E.1, Division 2, specifies several exceptions to the requirement for member approval, including reasonable remuneration and small amounts (less than $2,000) given to a director or their spouse.

Loans

In accordance with AASB 1046, the difference between actual interest payable on a loan to a director or executive and the commercial rate of interest, had the loan been agreed on an arm’s length basis is included in remuneration as a non-monetary primary benefit.

Other disclosures

In addition to the disclosures made with reference to AASB 1046, the Regulations require disclosure of certain other information.

• Paragraph 2M.3.03(2)(d) requires disclosure of payments made prior to the person holding office as part of the consideration for the person agreeing to hold office.

– The effect of this requirement is that where a person receives an inducement to hold office, the value of this payment is included in the remuneration disclosures during the first year in which the person holds office.

• Paragraph 2M.3.03(2)(c) provides that details of changes to the terms of previously agreed performance based remuneration must be disclosed.

Subregulation 2M.3.03(3) specifies how information is to be presented in the remuneration report.

Subregulation 2M.3.03(4) provides that a reference to ‘accounting standard’ in the Regulation is a reference to AASB 1046 Director and Executive Disclosures by Disclosing Entities issued by the Australian Accounting Standards Board, as in force at the commencement of the Regulation.

Item 3

Technical amendment

This item makes a technical amendment by inserting a heading ‘Division 2 Registration’ before regulation 9.2.01.

Item 4

Registered company auditors

This item replaces existing Regulations 9.2.01 (prescribed bodies), 9.2.02 (prescribed universities), 9.2.03 (prescribed institutions) and 9.2.04 (practical experience in auditing).

Regulation 9.2.01 - Practical experience in auditing (Act s 1280(2))

Paragraph 1280(2)(b) of the Act provides that, before registering a person as a company auditor, the Australian Securities and Investments Commission (ASIC) must be satisfied that the applicant has either:

(a) satisfied all the components of an auditing competency standard approved by ASIC (subparagraph 1280(2)(b)(i)); or

(b) had such practical experience in auditing as is prescribed (subparagraph 1280(2)(b)(ii)).

This regulation sets out the practical experience that is prescribed for the purposes of subparagraph 1280(2)(b)(ii). The regulation provides that the applicant will have to have had at least 3,000 hours work in auditing, including at least 750 hours spent supervising the audits of companies, during the 5 years immediately before the date of the application. The expression ‘work in auditing’ retains its current meaning, that is, work under the direction of a registered company auditor which includes appraising the operations of companies and forming opinions on the matters specified in sections 307 (Audit), 308 (Auditor’s report on annual financial report) and 309 (Auditor’s report on half year financial report) of the Act.

The number of hours work in auditing referred to in the proposed regulation has been chosen to ensure that the practical experience is gained over a minimum of two, and up to five, financial reporting periods.

Regulation 9.2.02 - Prescribed universities and institutions (Act ss 1280(2A) and 1282(2)

Paragraph 1280(2A)(a) of the Act provides that, before registering a person as a company auditor, ASIC must be satisfied that the applicant holds a degree, diploma or certificate from a prescribed university or another prescribed institution in Australia. Subparagraph 1282(2)(a)(ii) contains an equivalent requirement in respect of a person seeking registration as a liquidator.

This regulation prescribes the universities and other institutions from which a degree, diploma or certificate will have to be held. Part 1 of the table in the regulation lists the prescribed universities while Part 2 of the table lists the prescribed institutions.

All of the universities and other institutions currently prescribed in existing Regulations 9.2.02 and 9.2.03 are included in regulation, with appropriate amendments to reflect changes of name and changes in the status of the body. In addition, a number of universities that have either been established since the last revision of those Regulations or now offer courses satisfying the requirements of paragraph 1280(2A)(b) are also prescribed.

Regulation 9.2.03 - Prescribed courses (Act s 1280(2A))

Paragraph 1280(2A)(c) of the Act provides that, before registering a person as a company auditor, ASIC must be satisfied that the applicant has satisfactorily completed a course in auditing prescribed by the regulations for the purposes of that paragraph.

This regulation will prescribe courses in auditing offered by, or conducted on behalf of, CPA Australia, The Institute of Chartered Accountants in Australia and the National Institute of Accountants.

Regulation 9.2.04 - Prescribed bodies (Act s 1282(2))

Subsection 1282(2) of the Act, which deals with the educational and practical experience requirements for registration as a liquidator, provides, in part, that an applicant satisfies the educational requirements if they are a member of The Institute of Chartered Accountants in Australia, the Australian Society of Certified Practising Accountants (now known as CPA Australia) or any other prescribed body.

Regulation 9.2.04, which is based on existing regulation 9.2.01, prescribes a total of seven overseas accounting bodies in Canada, Ireland, New Zealand, the United Kingdom and the United States of America for the purposes of subparagraph 1282(2)(a)(i).

Item 5

This item inserts a new Division 2A after Division 9.2 of the Principal Regulations.

Division 2A: Conditions on registration

Regulation 9.2.08 - Kinds of conditions (Act s 1289A)

Section 1289A of the Act allows ASIC to impose conditions on the registration of an auditor. Subsection 1289A(1) provides that ASIC may only impose conditions of a kind specified in the regulations.

The Regulation allows ASIC to impose conditions concerning:

(a) the minimum amount and nature of continuing professional education that will have to be undertaken;

(b) the periodic review of the audit and audit-related work of an auditor as part of a quality assurance or review program;

(c) the need to have a current policy of professional indemnity insurance for claims against a registered company auditor in relation to audits conducted under the Act; and

(d) the establishment and maintenance of a system for resolving complaints made against a registered company auditor by audit clients in relation to audits conducted under the Act.

Item 6

This item inserts a new Part 9.2A after Part 9.2 of the Principal Regulations.

Part 9.2A Authorised audit companies

Division 1 Registration

Regulation 9.2A.01 Application for registration as authorised audit company (Act s 1299A)

The regulation prescribes the information to be included in the application for registration as an authorised audit company under s.1299A of the Act.

Regulation 9.2A.03 Annual statements by authorised audit company (Act s 1299G)

The regulation prescribes the information to be set out in the annual statement which an authorised audit company is required to lodge with ASIC under s.1299G of the Act.

Item 7

This item inserts a new Part 10.5 after Part 10.2 of the Principal Regulations.

Part 10.5: Transitional provisions relating to the Corporate Law Economic Reform Program (Audit Reform and Corporate Disclosure) Act 2004

Regulation 10.5.01 - Adoption of auditing standards made by accounting profession before commencement

Under the new arrangements for setting Australian auditing standards, the Auditing and Assurance Standards Board (AUASB) of the Australian Accounting Research Foundation (AARF) (a joint venture of The Institute of Chartered Accountants in Australia and CPA Australia) has been reconstituted as a statutory body and given the power to make auditing standards under section 336 of the Act.

To facilitate the transition from the existing body of professional auditing standards to the body of new and revised standards to be made by the AUASB, subsection 1455(1) of the Act provides that the regulations may provide that a standard specified in the regulations is to have effect, for the purposes of the Act, as if it had been made by the AUASB under section 336 on the date specified in the regulations. Subsection 1455(2) further provides that only standards made or issued by AARF before 1 July 2004 on behalf of The Institute of Chartered Accountants in Australia and CPA Australia are eligible for inclusion the regulations.

The regulation lists all the auditing standards that have effect for the purposes of the Act as if they had been made by the AUASB under section 336. Paragraph 10.5.01(1)(a) provides that the standards listed in the regulations are taken to have been made by the AUASB on 1 July 2004.

Part 1 of the table will list the 37 auditing standards that are now in force and are applicable to Corporations Act audits. Paragraph 10.5.01(1)(b) provides that these standards apply in respect of financial reporting periods ending on or after 1 July 2004.

Part 2 of the table lists the four new or amended auditing standards made in February 2004. In keeping with the application paragraphs contained in these standards, paragraph 10.5.01(1)(c) provides that these standards apply in respect of financial reporting periods beginning on or after 15 December 2004.

Item 8 Schedule 1, items 147 and 153; and

Item 9 Schedule 2, forms 903A and 907

Schedule 1 of the Principal Regulations contains a list of the forms in Schedule 2 of the Principal Regulations. Items 147 and 153 in Schedule 1 contain the references to forms 903A (Application for registration as an auditor) and 907 (Triennial statement of an auditor) respectively in Schedule 2.

Item 9 removes forms 903A and 907 from Schedule 2 while item 8 makes a consequential amendment to the list of forms in Schedule 1.

A revised form for the application for registration as an auditor and a new form for the annual statement of an auditor will be approved by ASIC in accordance with section 350 of the Act.