19 December 2007

Mr Geoff Miller
General Manager
Corporations & Financial Services Division
The Treasury
Langton Crescent
CANBERRA ACT 2650

Dear Geoff

Review of Parent Entity Financial Statements

I refer to your letter of 13 September 2007 requesting further information about the costs associated with complying with the requirement to present parent entity financial statements.

The Group of 100 considers that a review of the present requirements relating to parent entity financial statements is an essential component of initiatives to reduce the burden of regulation on business, a reduction in business costs, the removal of unnecessary and extensive disclosures and the provision of relevant and useful parent entity information in summary form.

The presentation of full parent entity financial statements in the annual report in conjunction with the consolidated financial statements overloads the annual report with unnecessary detail and is potentially confusing to unsophisticated users including shareholders. We are informed that sophisticated users including financial analysts focus primarily on the consolidated financial reports and are interested in few of the parent entity disclosures. The adoption of IFRSs has accentuated the need for reform in this area. IFRSs are primarily drafted from the perspective of users of consolidated financial statements and parent entity financial statements are not directly addressed.

The Group of 100 believes that replacing full parent entity financial statements would:

• help make financial statements more user-friendly and reduce the volume of disclosures; and
• reduce compliance costs because the preparation and presentation of full parent entity disclosures is time consuming and complex whereas the information relevant to users would be presented in summary parent entity information.

These issues are highlighted by the requirement to prepare parent entity disclosures in compliance with AASB 7 ‘Financial Instruments: Disclosures’ which applies to annual reporting periods beginning on or after 1 January 2007. Under the Corporations Act 2001 mandated disclosures for parent entity and consolidated financial statements will include those relating to exposure to risk and the processes for monitoring and controlling risk. AASB 7 also requires extensive disclosures and sensitivity analysis of major types of risk exposures. Compliance with this particular standard will result in significant additional costs, including costs of audit, in respect of parent entity disclosures as risk management of company groups is normally undertaken on a consolidated basis.

The removal of the requirement to present full parent entity financial statements would result in significant cost savings in the external audit. This would occur because of the different nature of the audit work required in respect of providing summary parent information instead of the requirement to express an opinion of the full parent entity financial statements. We have been advised that the incremental audit costs for holding company (parent) financial statements, in respect of ASX 150 companies, are $20,000 – 25,000. It is anticipated that compliance with AASB 7 is likely to result in an increase in these costs.

Tony Reeves
National President