New financial reporting rules could restrict SMEs from paying dividends

New legislation passed by the Federal Government last month has dramatically altered small business financial reporting methods and will restrict SMEs from paying their annual dividends.

CPA Australia spokesman Paul Drum says the changes do not specifically target small businesses, but they are an oversight which inadvertently raises costs and creates compliance issues for SMEs unprepared for the new procedures.

The legislation introduced a three-tiered test a company must pass before it can pay a dividend, replacing a previous law that stated companies could only pay dividends through profits.

This previous rule was harshly criticised, because companies said their payments would be restricted if they were forced by accounting standards to make write-downs that affected their bottom lines.

The new problem is that small businesses need to adhere to new accounting standards, and pass a test which states their assets must be greater than their liabilities. SMEs are facing additional costs to ensure their collection of assets and liabilities is prepared correctly under these new accounting standards.

Drum says there are two major problems. The first is that businesses aren’t prepared for these methods because they’ve never had to adhere to them before. The second is that many businesses will have to change their constitutions.

“Small businesses have never had to lodge accounts that are audited under normal accounting standard rules, instead you passed a solvency test. Now they are being forced to pass an assets test under new accounting standards. They aren’t prepared for that.”

“The second problem is that, can companies change their constitutions in time to pay a dividend? Many constitutions state dividends can only be paid through profits, so they have to be changed.”

Drum says if a board cannot honestly say that it is in a positive net asset position, then it cannot pay the dividend.

“Otherwise, it puts the board of directors at risk. A lot of businesses can’t pay their dividends because of this. So we are looking for a different test for small businesses to reduce compliance burdens.”

It also creates issues where a company may have posted a profit, but records a net asset liability, while companies with large levels of debt are also affected. Proprietary companies, which have previously not been forced to lodge accounts or comply with these accounting standards, will also be hit.

Both CPA Australia and the Institute of Chartered Accountants have been discussing the issue with Treasury officials. The Australian Institute of Company Directors has written to financial services minister Chris Bowen seeking an amendment.

However, Drum says he is optimistic about a resolution.

“There have been some issues that are still unresolved. CPA Australia identified the issue that this rule would have implications for small businesses, but of course with legislation you start with a broad rule and then find the exceptions.”

“On the one hand this is a boom for accountants, but on the other it’s a compliance cost for small businesses with little benefit.”