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In September the QBCC released a discussion paper with proposals to strengthen the MFR and improve regulation. Changes to legislation may follow which would be implemented in a phased approach.

Areas of Reform

The discussion paper addressed 5 key areas for potential reform. Options up for discussion are provided.

  1. Introducing risk-based, targeted annual reporting requirements

Businesses with higher turnover will have to report more information to QBCC on an annual basis. Options considered include a step back to the pre-2014 reporting regime and all licensees reporting NTA and current ratio data annually to QBCC.

       2. Fostering improved accountancy practices that meet the objectives of the Minimum Financial Requirements

The QBCC consider that a licensee’s accountant providing an MFR Report may lack independence and be reluctant to raise issues with their client. The proposals considered include establishing a panel of accountants to review suspect MFR Reports, changing the basis under which accountants may be excluded from conducting reviews and making it more difficult to change MFR information already submitted.

  1. Ensuring forms of assurance can provide financial security

QBCC’s experience with building collapses involving companies reliant on deeds of covenant and assurance indicated that the covenantor was not always able to cover the licensee’s debts. The QBCC propose that the covenantor’s statement of financial position be revised to include further information identifying assets and liabilities and how these have been treated. They would also require the covenantor to certify the statement as true and correct.

  1. Ensuring funds from related entity loans can be readily accessed

QBCC note that in practice, when a licensee enters insolvency these types of loans are often not

repaid. They have three proposals in this area, the first is to exclude all related loan assets from NTA, the second is for the licensee to obtain a formal security over the loan which would provide the licensee some recourse to the related entity’s assets if the related entity fails to meet their obligations to pay the loan. Their third proposal is to provide more clarity on how related entity loans are assessed.

  1. Clarifying definitions and requirements for the calculation of assets

QBCC indicate that the current criteria for how assets are treated under the MFR policy may not be stringent enough. Their proposals include the exclusion of trade debtors over a certain age unless verified as recoverable, only allowing registered vehicles to be included as an asset, the requirement for a report from a registered valuer if assets are recorded at a value, real estate assets on the market for more than a year to be classified as non-current assets and certain monies held in project bank accounts to count towards NTA and revenue.

We will be following these developments closely.

ASIC Fees to Increase for Australian Financial Services (AFS) Licensees

Legislation was passed in June 2018 which resulted in ASIC’s fees reflecting the cost associated with the work undertaken by them. While around 90% of ASIC’s regulatory activities will be now be recovered in the form of industry funding levies, the remaining 10% will be recovered via fees for service.

We have noted when assisting AFSLs with their FS70 lodgement that no lodgement fees were payable because of this new regime. As all lodgements are now completed online this is logical given that the marginal cost to ASIC would be minimal.

Process for Payment of Levies

Each year, regulated entities will be required to provide ASIC with metrics for the previous financial year through the ASIC Regulatory Portal. ASIC will use this data to calculate each entity's share of the 2017–18 regulatory costs. They will issue industry funding invoices (the funding levies) for the 2017–18 financial year in January 2019.

Will costs Increase?

In terms of fees for service for AFSLs, the indication is that some regulatory fees will increase. For example, registering a company as an AFSL used to incur a fee of $1,643. The new fees range from $2,233 for an application online for low complexity products in the wholesale space, up to $7,537 for high complexity products with retail clients. Paper lodgements are more expensive again.

ASIC should be releasing information on annual levies this month. In March 2018 they released “indicative levies” which included the following for AFSLs.

 

Sector

No in Industry

Levy Basis

Indicative levy

Retail clients/relevant products

2953

No of advisers

$1,500

Retail clients/non-relevant products

660

No of days authorised

$719

General advice only

983

Flat levy

$2,058

Personal advice/wholesale only

1466

Flat levy

$596

More clarity on these levies should be published by ASIC shortly.

For more information please contact one of the team from SAAS Audit.

Franchisor Marketing Funds


Under the Franchising Code of Conduct, where a franchisor operates a marketing fund, they must, in addition to including details of the fund in the Franchise Agreement:

  • include the details of the marketing fund in the disclosure document;
  • prepare and maintain financial statements concerning the marketing fund;
  • keep all funds received towards the marketing fund in a separate bank account;
  • make their own contributions towards the marketing fund; and
  • use the marketing fund exclusively for marketing.

Financial Statements

We will focus our attention on the financial reporting requirements.

Section 15 of the Code requires that within 4 months after the end of the last financial year, financial statements are prepared detailing the fund’s receipts and expenses. The financial statements must include sufficient detail of these receipts and expenses so as to give meaningful information about sources of income and items of expenditure, particularly with respect to advertising and marketing expenditure.

Within 30 days of preparing the financial statements, a copy must be given to franchisees.

Audit Requirements

The Code requires financial statements of a marketing fund to be audited by a registered company auditor within 4 months after the end of the financial year to which it relates. A copy of the audit report must be given to franchisees within 30 days of its preparation. Effectively, for a June yearend the deadline for providing the audit report to franchisees is November.

Audit fees are paid by the marketing fund. The audit can be avoided if, within three months of the year end, 75% of the franchisor’s franchisees in Australia, who contribute to the fund, have voted to agree that the fund should not be audited.

Summary of Deadlines for a June 2018 Year End Marketing Fund

Action Deadline
Avoid audit by 75% vote that the fund not be audited 30/9/18
Prepare 30 June 2018 year-end financial statements 31/10/18
If required, have financial statements audited 31/10/18
Provide financial statements to franchisees 30 days from preparation
Provide audit report to franchisees 30 days from report date

 
SAAS Audit would be happy to assist with marketing fund audit requirements. Please get in contact for more information. 

Franchising Code of Conduct Disclosure Documents  

A franchisor in Australia must maintain a disclosure document in a prescribed form to provide information to existing or prospective franchisees. Franchisors will in most cases seek advice from a lawyer specialising in this area to assist them with the preparation of this document.

We have only addressed the “Financial Details” requirement below as this is where some input may be required from an auditor. The exact content of the Disclosure Document is set out in the Code.

Requirement to Update

The Code requires disclosure documents to be updated within four months of the franchisors year-end. An update is not required if the franchisor either did not sign any new agreements in the year or only entered into one agreement AND does not intend to enter into any new agreements in the coming year. Overruling this, there is a provision in the code that if a franchisee requests an update, the documents must be updated so that it reflects the position of the franchisor as at the end of the last financial year.

Financial Details Requirements

Financial information required to be disclosed can be found in Item 21 of the Disclosure Document requirements of the Code.

Solvency Statement

Item 21-1 requires a statement of solvency, signed by a director, stating that the director has reasonable grounds to believe the Franchisor entity will be able to pay its debts as and when they fall due.

The solvency statement should reflect the franchisors position at the end of the last financial year or if they did not exist then, at the date the statement is signed.

Financial Reports

Item 21-2 requires financial reports for the past two financial years in accordance with sections 295 to 297 of the Corporations Act 2001 (meaning they are prepared in accordance with accounting standards and present a true and fair view). Item 21-3 indicates that consolidated financial reports should be provided if they are required to be prepared under the Corporations Act 2001 and they are requested by a franchisee.

Avoiding the Need to Provide Financial Reports to Franchisees

Item 21-4 provides an option for franchisors who are hesitant to provide financial reports to franchisees. If the solvency statement referred to above is audited by a registered company auditor within 4 months after the end of the financial year to which the statement relates and a copy of the auditor’s report is provided with the solvency statement, then there is no requirement to provide financial reports.
To be clear, the auditor is not auditing the financial reports, they are auditing the solvency statement. The auditor will obtain evidence to support the director’s own opinion on the franchisors solvency.

Franchisors Not Operating for More Than Two Financial Years

Item 21-5 states that if the franchisor has not existed for 2 or more financial years, then instead of providing the financial reports mentioned in item 21.2 or 21.3, a statutory declaration of solvency can be provided together with an independent audit report on the entity’s solvency as at the date of the declaration.

Other Ongoing Disclosure Obligations of Franchisors

The Code requires a franchisor to tell a franchisee or prospective franchisee about certain materially relevant facts in writing, within a reasonable time (but not more than 14 days) after becoming aware of it. A relevant link to the Code section is here. Franchisors should consult with their lawyer when making such disclosures.

Final Advice

As registered company auditors, SAAS Audit can assist with the audit of a solvency statement if required. As a first step, we recommend that franchisors, in consultation with their lawyers, consider if an update to their Disclosure Documents is required. It is only if an update is required that updated financial details will be needed.

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