The Financial Reporting Framework

In Australia, determining whether a business must prepare Financial Reports requires consideration of two overlapping frameworks: the legal framework and the accounting framework. While these often align for large organisations, they can be misaligned for growing private companies—creating a ‘grey area’ of compliance.

Here, we explain both frameworks and the implications for different business structures, from listed companies to small trusts.

The Legal Framework: When Are You Legally Required to Prepare Financial Reports?

The Corporations Act 2001 (Cth) governs financial reporting obligations for companies. Specifically:

• Section 292 requires certain companies (usually large proprietary or public companies) to prepare Financial Reports.

• Part 2M.3 Division 1 outlines the contents and standards required.

• Division 3 requires audit of these reports for some entities.

Entities such as trusts or partnerships are not typically required by law to prepare Financial Reports unless:

• It's written into a trust deed, partnership agreement, or constitution.

• A financier or external party imposes the requirement, e.g. in a loan agreement.

ASX-Listed Entities

These companies are subject to ASX Listing Rules and must publish Annual Reports that comply with the Act and Accounting Standards. These are generally audited and made publicly available.

The Accounting Framework: What Makes a 'Reporting Entity'?

Under the accounting framework, compliance obligations are determined by whether the entity qualifies as a reporting entity, regardless of its legal structure.

Statement of Accounting Concepts (SAC) 1

This standard outlines the reporting entity concept—defined by whether there are users dependent on general purpose financial statements. Examples of such users include:

• Shareholders not involved in day-to-day management

• Employees

• Creditors and lenders

• Government agencies

Criteria for Reporting Entity Status

A business is likely a reporting entity if it meets one or more of the following:

• Separation of ownership and control (e.g. public companies)

• Economic or political significance

• Size in terms of revenue, assets, employees, or public funding

Critically, legal structure is irrelevant—a large trust or partnership may still be a reporting entity.

Large vs Small Proprietary Companies: The Legal 'Grey Area'

What Is a Small Pty Ltd?

Under Section 45A of the Corporations Act, a Pty Ltd company is considered small if it meets at least 2 of these 3 tests:

1. Gross consolidated revenue < $25 million

2. Gross consolidated assets < $12.5 million

3. Fewer than 50 full-time equivalent employees

Small proprietary companies are generally exempt from preparing Financial Reports, unless directed by ASIC or shareholders.

The Medium-Sized Business Trap

Some businesses—particularly family-owned Pty Ltd companies—fall into a ‘grey area’:

• They may be considered large under the Corporations Act and required to prepare and audit Financial Reports.

• But they may not qualify as reporting entities under accounting standards because they lack external users who depend on their reports.

In these cases, compliance with general purpose financial report standards may be required, even if it seems disproportionate to the business's operations.

Practical Implications for Small and Medium Businesses

For small businesses, including many trusts and partnerships:

• Financial reporting may only be required for tax or BAS purposes, or

• Imposed by banks or internal agreements (e.g. shareholders or partnership deeds).

For growing businesses, the shift to becoming a large Pty Ltd or being deemed a reporting entity can bring significant new reporting and audit obligations. This transition often comes without clear warning—particularly where organic growth pushes them across the statutory thresholds.

Our Recommendation

If your business is:

• Experiencing rapid growth

• Expanding ownership beyond family

• Seeking external financing

• Operating through multiple entities

…you should proactively assess your financial reporting obligations under both the legal and accounting frameworks. What wasn’t required last year may become compulsory this year.

At Dolman Bateman, we specialise in helping businesses navigate complex financial reporting and compliance requirements. Don’t wait for the ATO or ASIC to knock, get in touch today for a compliance review and forward plan.

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Disclaimer:

The information provided in this article is general in nature and does not constitute personal financial, legal or tax advice. While every effort has been made to ensure the accuracy of this content at the time of publication, tax laws and regulations may change, and individual circumstances vary. Dolman Bateman accepts no responsibility or liability for any loss or damage incurred as a result of acting on or relying upon any of the information contained herein. You should seek professional advice tailored to your specific situation before making any financial or tax decision.