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New reporting requirements likely to precipitate a major exodus of AFSL licensees
28 April 2021 | Minutes to read: 4

New reporting requirements likely to precipitate a major exodus of AFSL licensees

By Nicholas Benbow

A lot has been made about the impact of the change in Australian company reporting requirements. This is due to the abolition of the self-assessment of whether an entity is a reporting entity or non-reporting entity and its impact in adopting special purpose or general purpose financial statement reporting, particularly for large proprietary companies reporting to ASIC, foreign-controlled subsidiaries and unlisted public companies. However, I believe the most far-reaching impact will be on AFSL licensees, which, have been inadvertently caught in the crossfire of the change. In Australia at present there are 6,248 AFSL licensees.

Before we explore what may impact these licensees, here’s a little recap on the reporting obligations of AFSL licensees and why they need to prepare financial statements.

As things stand

The vast majority of AFSL licensees are non-reporting entities – that is, they are small proprietary companies that are not required to lodge financial reports under Chapter 2M of the Corporations Act. Therefore, Chapter 7 of the Corporations Act (s.989B) has a separate requirement for such licensees to annually prepare and submit an audited profit and loss statement and balance sheet which is true and fair.

The problem is what is meant by true and fair and whether ASIC views such an obligation as a financial report that would see the obligation under s.989B caught (in turn) under Chapter 2M. I think that as specific reporting requirements are established under s.989B there never was an intention for AFSL licensees to prepare a financial report per se, however the reference to a true and fair view implies that those AFSL licensees apply the recognition and measurement requirements of Australian Accounting Standards but not their disclosure requirements.

A problem of interpretation

Unfortunately, the current ASIC forms 70 and 71 which licensees and their auditors must complete in order to fulfil their obligations under s.989B somewhat obfuscate this. FS70 requires AFSL licensees to lodge accounts, and FS71 requires the AFSL licensee auditor to lodge an audit report in-accordance with the Corporations Act (not separately specifying s.989B) and then it requires the auditor to certify that a) if the licensee is a reporting entity, that the financial report complies with Australian Accounting Standards; and b) if not a reporting entity, in accordance with the recognition and measurement requirements of the  Australian Accounting Standards and disclosure requirements of Australian Accounting Standards that apply to non-reporting entities.

It is clear that ASIC, by specifying that the requirements under s.989B are a financial report, has grouped together AFSL licensee reporting obligations to those set out under Chapter 2M – and perhaps now they have justification – through the eradication of the ability of companies to self-assess whether or not they are reporting entities ASIC may justify that all AFSL corporations are reporting entities and therefore captured under Chapter 2M. If that is the case, perhaps the requirements in s.989B should be retired from the Corporations Act as they will no longer have any relevance if an AFSL licensee is now caught under Chapter 2M. What is critical however is that ASIC needs to provide further guidance on this – clearly for annual reports commencing 1 July 2021 onwards the Form 71, with its reference to reporting entities, will be out of date.

So what are the implications for AFSL licensee reporting?

As things stand, the reporting requirements for small (Tier 2) AFSL licensees are expected to significantly ramp up from the old requirements under s.989B. Although these entities will be entitled to adopt the simplified disclosures under AASB 1060, they will face a raft of new accounting and disclosure requirements, including:

  • A directors’ report
  • A cashflow statement and cashflow reconciliation note
  • A statement of changes in equity (although there is an option to avoid this under certain circumstances)
  • Notes to material balance sheet and profit loss accounts
  • Current and deferred income tax accounting and disclosures, including a prima-facie tax reconciliation note
  • Significant accounting policies and critical accounting estimates and judgments
  • Lease accounting and disclosures
  • Key management personnel compensation and related party transactions
  • Auditor’s remuneration
  • Disclosures concerning revenue contracts with customers

All-in-all, the simplified disclosures represent a quantum leap in disclosure requirements for AFSL licensees – disclosure requirements are now not far removed from those required of an ASX-listed company. Most licensees should expect significant increases in both their annual financial reporting and audit costs. There are a number of “zombie” AFSLs currently in circulation – this change is likely to precipitate these AFSL licences being retired due to the costs arising from the above changes.


s.989B was brought in to provide clarity to ASIC about the trading operations and financial solvency of AFSL licensees and their ability to meet the financial conditions set out in their licence. The new ramped-up disclosures mean that licensees have now quite formidable reporting obligations compared to what previously existed under s.989B. The change is likely to result in the retirement of many “zombie” AFSL entities with small or no levels of trade and a ramp-up of “super AFSL licensees” that manage compliance on a wholesale basis with extensive Corporate Authorised Representative (CAR) arrangements making the costs of such compliance feasible. This may be an outcome (with compliance effectively farmed out to these “super AFSL licensees”) that ASIC may actually be pushing for.

Unless ASIC reclarifies its approach under Forms 70 and 71, expect significant action in the industry as AFSL licensees come to terms with these new requirements, with a significant retirement of AFSL licences from the industry and an upscaling in CAR arrangements. Expect also the formulation of a new job role – the CAR-broker as this takes hold in the industry.

New reporting requirements likely to precipitate a major exodus of AFSL licensees

Nicholas Benbow

Nicholas is a Director in our Audit and Assurance division. He specialises in accounting for complex business transactions, including acquisitions, divestments and restructures, particularly in situations where a business is primed to realise its growth potential. Nicholas works closely with companies through the IPO process, assisting with Audit and strategic advice.

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