New Financial Reporting Requirements for Benefit Fund Friendly Societies

The Australian Securities and Investments Commission (ASIC) and the Australian Prudential Regulation Authority (APRA) today announced requirements for financial reports of benefit fund and friendly societies registered under the Life Insurance Act 1995 (benefit fund societies).

On 1 July 1999, friendly societies became companies under the Corporations Law (the Law) and benefit fund societies became registered life insurance companies under the Life Insurance Act 1995 (the Life Act). The State Friendly Societies Codes (the Codes) ceased to apply on that date.

ASIC and APRA have jointly developed a single set of requirements as to the form and content of financial reports for benefit fund societies under both the Law and the Life Act.

The requirements are included in APRA Prudential Rule No. 47 ("PR 47") which applies for the purposes of financial statements under the Life Act. These same requirements may also be applied for financial reports under the Law pursuant to ASIC Class Order 99/1225 dated 30 August 1999 ("the Class Order").

The Class Order also contains certain requirements for distribution of financial reports to members, half-year reporting by disclosing entities and concise financial reports under the Law. This release does not deal with transitional requirements for disclosing entities as it is understood that no benefit fund friendly societies were disclosing entities at 1 July 1999.

While the form and content requirements have application for financial reports under both the Law and the Life Act, other matters covered in this information release (eg requirements concerning the lodgement of financial reports) are specific to the Law or the Life Act. ASIC has regulatory responsibility for those matters falling under the Law and APRA has regulatory responsibility for matters falling under the Life Act.

Matters covered in this Information Release

This information release outlines:

the new reporting requirements for benefit fund societies for years ending on or after 1 July 1999;
transitional reporting requirements for years ending on or before 30 June 1999;
requirements for the lodgement and distribution of financial reports by friendly societies; and
requirements concerning audit appointments, annual returns and individual relief in relation to financial reporting requirements.

Application of the new requirements

The reporting requirements under PR 47 and the Class Order only apply to benefit fund societies which are registered under the Life Act.

Non-benefit fund friendly societies and health benefit fund only friendly societies are not registered under the Life Act but are subject to the Law. The financial reporting requirements for these entities are discussed in a separate ASIC information release entitled "New Financial Reporting Requirements For Credit Unions, Building Societies, Special Service Providers and Certain Friendly Societies" which was also issued today.

The Class Order applies for financial years ending on or after 1 July 1999 and on or before 30 June 2001.

PR 47 applies for financial years ending on or after 1 July 1999 but, consistent with other Prudential Rules under the Life Act, PR 47 does not state a time at which it ceases to apply.

However, both ASIC and APRA consider the reporting requirements to be of a transitional nature and intend to review their operation over the next two years.

ASIC and APRA will also seek the development of an accounting standard by the Australian Accounting Standards Board dealing with financial reporting by benefit fund friendly societies. Any such standard is likely to replace the requirements of PR 47 and the Class Order concerning recognition and measurement in the financial statements, as well as many of the requirements concerning presentation in the financial statements.

Having regard to matters arising from the review and the status of the development of any accounting standard, ASIC and APRA will work together to determine whether to continue the reporting requirements applied under PR 47 and the Class Order with any appropriate changes.

The new requirements for years ending on or after 1 July 1999

PR 47 and the Class Order replace the provisions of the Prudential Standards issued by the Australian Financial Institutions Commission ("AFIC") insofar as those Prudential Standards dealt with the form and content of financial statements.

The requirements of PR 47 and the Class Order are based on the financial reporting requirements of the Law (including accounting standards) with some specific modifications.

The manner in which the reporting requirements are framed has been changed. The AFIC Prudential Standards did not specify the modifications to the requirements of the Law but specifically identified the requirements of accounting standards made under the Law which were to be applied to benefit fund societies.

What hasn't changed?

Consistent with the AFIC Prudential Standards, PR 47 and the Class Order provide for the following significant modifications to the financial reporting requirements of the Law:

The preparation of separate financial statements for each fund.
Benefit funds to record assets at net market value and take any gains or losses to the profit and loss statement. Management funds must apply the same policy to traded securities. ....3/ -3-
Member liabilities to be determined on an actuarial basis.
Member liabilities to be treated as equity of a benefit fund and allocations of surplus to members as appropriations.
Benefit funds exempt from accounting standards in relation to certain disclosure requirements for the profit and loss statement and balance sheet, as well as those requirements of accounting standards which are inconsistent with market value accounting.
The management fund financial statements must include a note containing summary financial information for each of the benefit funds.
There is a prescribed format for the financial statements of the benefit funds.
Health benefit funds for the purposes of the National Health Act 1953 have different reporting requirements to those applying to other benefit funds.
The auditor must form an opinion and report in respect of each fund.

What has changed?

Significant differences between the requirements under the AFIC Prudential Standards and the requirements under PR 47 and the Class Order are:

Half-year financial reports
Half-year financial reports are only required for benefit fund societies which are disclosing entities rather than all benefit fund societies. These half-year reports may be subject to a review rather than an audit. The half-year reports are only required under the Law, not the Life Act and must only be lodged with ASIC.
The Class Order allows the half-year financial reports to be prepared in accordance with the accounting basis in PR 47. However, only the management fund financial reports need be prepared (including summary financial information on the benefit funds) and AASB 1029 "Half-Year Accounts and Consolidated Accounts" applies.
Entire society financial statements
The AFIC Prudential Standards required the presentation of financial statements for the entire society. These financial statements comprised the management fund financial statements with single line items in non-current assets and liabilities equal to the assets attributable to members of the benefit funds.
Under PR 47 and the Class Order, the management fund financial statements must be presented instead. These must not include the assets, liabilities, revenues or expenses of the benefit funds either line by line or in single line items in non-current assets and liabilities. However, it is necessary to disclose the assets attributable to members of the benefit funds (ie assets less non-member liabilities) in a note to the management fund financial statements.
This supersedes the statement in the ASIC booklet "What's New and What Do I Have To Do? A Guide for Credit Unions, Building Societies and Friendly Societies" released in early June 1999 which indicated that the presentation required by the AFIC Prudential Standards may be maintained.
Directors' report, directors' declaration and auditor's report
A single directors' declaration and a single auditor's report is required for all funds and must be distributed to all members. However, opinions are required to be formed in relation to each fund.
The form and content of the directors' declaration and auditor's report has been changed for consistency with the requirements of the Law and the Life Act. The directors' report must comply with the requirements of sections 299, 300 and 300A of the Law which differ from those of the Codes.
Actuary's statement
A statement by the Appointed Actuary is now required and must be distributed to all members receiving full financial reports.
Market value accounting
More guidance is provided on the application of market value accounting in benefit funds and the related exemptions to accounting standards. For example, guidance is provided on the consolidation of controlled entities.
New accounting standards
New accounting standards made by the Australian Accounting Standards Board under the Law will automatically apply to benefit fund societies from their operative dates.
New accounting standards which apply include AASB 1001 "Accounting Policies" (reissued March 1999 and applying from years ending 31 December 1999), AASB 1004 "Revenue", AASB 1006 "Interests in Joint Ventures" (from years ending 31 December 1999), AASB 1016 "Equity Accounting" (as amended by AASB 1016A), AASB 1021 "Depreciation" (management fund only), AASB 1036 "Borrowing Costs", AASB 1037 "Self-Generating and Regenerating Assets" (from 1 July 2000) and AASB 1039 "Concise Financial Reports". PR 47 makes minor exceptions to the requirements of some of these standards as they apply to benefit funds.
Health benefit funds
The separate financial statements of a health benefit fund must comply fully with the requirements of accounting standards under the Law. This is consistent with the requirements imposed on those registered health benefits organisations which were not friendly societies and were already companies under the Law prior to 1 July 1999.
Definitions of "assets", etc
The definitions of "assets", "liabilities", "revenues" and "expenses" in AASB 1034 apply to benefit funds unless they are inconsistent with other specific requirements of PR 47.
Commitments and contingent liabilities
Benefit fund financial statements must disclose capital commitments, other expenditure commitments and contingent liabilities.
Revenue and expense disclosures
Information on revenue and expenses of the management fund relating to the benefit funds is not required to be disclosed on the face of the profit and loss statement and would normally appear in the notes to the financial statements. The costs associated with deriving fees and other revenue from the benefit funds must be stated.
The detail on income and expenses of the benefit funds previously required to appear on the face of the profit and loss statement may now be transferred to the notes to the financial statements.
Changes in terminology
The "profit and loss account" is now the "profit and loss statement". The terms "profit" and "loss" replace the terms "surplus" and "deficiency" in the benefit fund profit and loss statements. However, the terms "unallocated surplus" and "deficiency" are still used in place of "retained profits" and "accumulated losses" in the benefit fund financial statements, which is consistent with Life Act terminology.
Other changes include the requirement for benefit funds to disclose borrowings from "controlled entities" instead of borrowings from "subsidiaries".
Rounding of amounts
Rounding will be permitted pursuant to ASIC Class Order 98/0100 with rounding permitted to different extents depending upon the size of the assets of a fund. However, where the financial statements for different funds are presented together (eg side-by-side), the financial statements of all such funds may only be rounded to the extent permitted for the fund in respect of which the prescribed amount under the class order is the smallest. The order does not permit the rounding of certain information (eg directors' remuneration) to more than the nearest dollar.

Financial years

The transfer of registration from the State Friendly Societies Codes to the Corporations Law does not create a new financial year. For example, the next financial year of a society with a financial year ended 31 December 1998 is the 12 month period ending 31 December 1999 not the 6 months ending 31 December 1999.

Requirements for years ending on or before 30 June 1999

Those benefit fund societies with years ended 30 June 1999 and those other benefit fund societies which have not completed their reporting obligations for years ended before 30 June 1999 prior to 1 July 1999 will be required to complete those obligations pursuant to transitional financial reporting requirements under the Corporations Regulations and the Life Insurance Regulations.

Under both sets of regulations, the requirements as to the form and content of financial statements are the same as under the Codes, including a requirement to comply with AFIC Prudential Standards. The only change is that the directors' report need not refer to the register of directors being open for inspection because the provisions of the Codes dealing with that register have been repealed.

ASIC Exemption and Modification Order 99/1223 dated 30 August 1999 applies for financial years ended on or before 30 June 1999 and:

Allows the directors' report and auditor's report to continue to refer to provisions of the Friendly Societies Codes rather than those of the Corporations Law. The Corporations Regulations already allow the financial report to refer to the Codes.

Provides relief from applying all but paragraphs 6.3.1 to 6.3.5 (including Attachment C) of the AFIC Prudential Standards dealing with form and content of reports.

These do not include the paragraphs dealing with quarterly and other returns, audit and audit reports on risk management systems.

The Order makes further exclusions from the requirements that:

Directors' reports refer to the register of directors' interests being open for inspection. This recognises that the provisions of the Codes dealing with that register have been repealed.

Accounts be lodged with State Supervisory Authorities.

Half-year accounts be prepared by non-disclosing entities.

AFIC Practice Notes and Interpretations The AFIC Interpretative Notes and Practice Notes dealing with financial reporting will not apply to friendly societies for years ending on or after 1 July 1999.

In some cases, the provisions of these Interpretative Notes and Practice Notes have been included in PR 47 or ASIC class orders. However, existing ASIC Policy Statements and Practice Notes dealing with financial reporting under the Law may apply.

The AFIC Interpretative Notes and Practice Notes continue to provide guidance in the preparation of financial statements of benefit fund societies for years ending on or before 30 June 1999.

Lodgement and distribution of financial reports

Benefit fund societies are required to lodge their financial statements with ASIC under the Law and with APRA under the Life Act.

The following is a summary of the requirements contained in the Law, the Corporations Regulations, the Life Act and the Life Insurance Regulations. Friendly societies should also refer to the actual legislation.

Corporations Law - Years ended on or before 30 June 1999

For financial years ended on or before 30 June 1999, the following requirements under the Law are the same as those under the Codes:

The timing requirements for lodgement of financial reports. However, financial reports should be lodged with ASIC using ASIC Form 388. There will be no need to re-lodge financial reports already lodged with a State Supervisory Authority before 1 July 1999.
Financial reports need not be distributed to members.

However, friendly societies are required to send financial reports to members on request, as well as making them available at the friendly society's office. Members may request financial reports be sent to them at any time until the financial reports for the next year are available.

Under the Codes the only requirements were that copies of the financial reports be available at the offices of a friendly society up to the date of the annual general meeting ("AGM") and that the most recent accounts remain available for inspection without charge at those offices. The notice period for general meetings held before 1 January 2000 will remain 14 days and notice may continue to be given by advertisement in certain newspapers.

Corporations Law - Years ending on or after 1 July 1999

For financial years ending on or after 1 July 1999:

Friendly societies must distribute reports to members before the earlier of four months after year end or 21 days before the AGM.
If a friendly society sends concise reports, individual members may request the full financial reports.
The Class Order relieves benefit fund societies from sending the financial reports for a benefit fund to a member who does not invest in that fund. Members may also request to be sent no reports.
Friendly societies have four months from year end to lodge financial reports with ASIC.

The notice period for general meetings held on or after 1 January 2000 will be 21 days for unlisted friendly societies (28 days if listed) and notice must be sent to each individual member.

Corporations Law - Disclosing entities

Any friendly societies which are disclosing entities will continue to be required to lodge their financial reports within 3 months after year end and distribute them to members by the earlier of four months after year end or 21 days before the AGM. They will also continue to be required to lodge half-year financial reports with ASIC within 75 days after the end of the half-year.

The Life Insurance Act 1995

For financial years ending on or before 31 December 2000, the timing requirements for providing financial reports to APRA under the Life Act and the Life Insurance Regulations are consistent with those applying under the Law for lodgement of financial reports with ASIC.

For financial years ending on or after 31 December 2000, financial statements must be lodged within 3 months of year end with APRA.

Audit appointments from 1 July 1999

The Corporations Regulations allow for the appointment of auditors of friendly societies under the Codes to transfer over under the Law (ie there is no need to reappoint the auditor). However auditors must meet the continuing requirements under the Law (eg they remain Registered Company Auditors, and they are not indebted to the society in excess of the limits set out in s.324 of the Law).

Under the Life Act an individual may only hold an appointment as the auditor of a friendly society if they have been approved by APRA for this purpose. Only individuals (not firms of auditors) may be approved. Transitional arrangements have been put in place such that an auditor appointed under the Friendly Societies Code is taken on 1 July 1999 to be approved by APRA to audit benefit fund societies and to be appointed auditor for the purposes of the Life Act. If a firm of auditors is appointed under the Friendly Societies Code, the effect is that each member of the firm at the transfer date is taken to be approved by APRA.

Corporations Law annual returns All friendly societies will be required to lodge an annual return with ASIC in accordance with Chapter 2N of the Law. The first such return is due by 31 January 2000.

The Corporations Regulations provide an exemption from disclosing information in the annual returns of Entities for the top 20 members in a class of member shares (as defined in the regulations).

The requirements for the lodgement of returns with APRA under the Life Act are not covered in this release.

Copies of Prudential Rules No. 47 are available on APRA's website (www.apra.gov.au). Copies of Class Order 99/1225 and Exemption and Modification Order 99/1223 may be obtained from ASIC's InfoLine (ph. 1300 300 630).

For further information contact:

Doug Niven
Deputy Chief Accountant
Australian Securities and Investments Commission
National Office, Sydney
Tel: (02) 9911 2079

Les Phelps
General Manager
Specialised Institutions Division
Australian PrudentialRegulation Authority
Tel: (02) 9210 3140

ASIC information release 99/025
APRA media release 99:16