The Act^[7] requires the Licensee to prepare and lodge a profit and loss statement and balance sheet with ASIC. In addition, Licensees other than limited Licensees,^[8] are required^[9] to lodge an auditor’s report in a prescribed form with ASIC for each financial year. ASIC requires the Licensee’s financial statements to be attached to the form: Australian financial services licensee: profit and loss statement and balance sheet (FS70). The form also requires compliance with the accounting standards to the extent outlined in FS 70. Form FS70 can be found on the ASIC website www.asic.gov.au.

Section 989D(1) of the Act and regulation 7.8.14A of the Regulations require the Licensee to lodge FS70 and the form Auditor’s Report for AFS Licensee (FS71) with ASIC within the following timeframes:

1. if not a body corporate – the day that is two months after the end of that financial year;
2. if a body corporate that is a disclosing entity or a registered scheme – the day that is three months after the end of that financial year; or
3. if a body corporate that is not a disclosing entity or registered scheme – the day that is four months after the end of that financial year.

Many Licensees lodge annual financial reports and the auditor’s report under Chapter 2M of the Act (within three or four months of the financial year) with ASIC. The lodgement requirements under Chapter 2M and Part 7.8 of the Act are separate obligations, so it is necessary for Licensees to lodge financial statements under both provisions. The lodgement requirements under Chapter 2M of the Act apply to companies in general. Only the financial reports lodged under Chapter 2M are on public record. FS70 and FS71 contain information that is not required under Chapter 2M. Even if a Licensee is not required to lodge annual financial reports under Chapter 2M, they are still required to lodge FS70 and FS71 with ASIC under Part 7.8 of the Act.

The Licensee can apply to ASIC for an extension of time to lodge FS70 and FS71 under Section 989D(3) of the Act.

Financial Requirements for APRA Regulated Entities, Market and Clearing Participants

The base level financial requirements (refer paragraph 18) and other financial requirement conditions, as set out in ASIC Pro Forma 209 (PF 209), do not apply, but FS70 and FS71 are still required to be lodged with ASIC, if the Licensee is either:

1. a body regulated by the Australian Prudential Regulation Authority (APRA) as defined in Section 3(2) of the Australian Prudential Regulation Authority Act 1998;
2. a market participant (other than a principal trader, unless the principal trade is a registered market trader) as defined in Key Terms in RG 166 as an entity that is a participant of a financial market on which financial products are traded. Financial markets are operated by:
   1. ASX Limited (ASX market) that is required to comply with, and complies with, the rules of the ASIC Market Integrity Rules (ASX Market) 2010 that impose financial requirements, taking into account any waiver by ASIC;
   2. Cboe Australia Pty Limited (Cboe market) and APX markets that are required to comply with, and comply with, the rules of the ASIC Market Integrity Rules (Cboe Australia Market) 2011 and APX market 2013 that impose financial requirements, taking into account any waiver by ASIC; or
   3. Australian Securities Exchange Limited (ASX 24 market), that restricts its financial services business to participating in the ASX 24 market and incidental business^[10]; and is required to comply with, and complies with, the rules of the ASIC Market Integrity Rules (ASX 24 Market) 2010 that impose financial requirements, taking into account any waiver by ASIC; or
3. a clearing participant as defined in Key Terms in RG 166 as a Participant defined in section 761A of the Act in relation to a clearing and settlement facility (“CS facility”), where that facility is the licensed CS facility operated by:
   1. ASX Clear Pty Limited, and the Licensee is required to comply with, and complies with, the operating rules of ASX Clear Pty Limited that impose financial requirements, taking into account any waiver of those requirements by ASX Clear Pty Limited; or
   2. ASX Clear (Futures) Pty Limited, and the Licensee restricts its financial services business to participating in that CS facility and incidental business; and is required to comply with, and complies with, the operating rules of ASX Clear (Futures) Pty Limited that impose financial requirements, taking into account any waiver of those requirements by ASX Clear (Futures) Pty Limited.

Where a Licensee is a body regulated by APRA, PF 209 condition 27 requires the auditor’s opinion to state whether for the relevant period, the Licensee was a body regulated by APRA at the end of the financial year or for any period of time that ASIC requests. ASIC includes this licence condition confirmation as an Application Statement made under section 1 of FS71. The auditor completes the Application Statement in FS71.

Where a Licensee is a market participant or a clearing participant, PF 209 condition 28 requires the auditor’s opinion to state whether, during any part of the period for which the Licensee relied on being a market participant or clearing participant, the Licensee was a participant in the market conducted by:

1. ASX market;
2. ASX 24 market, and restricted its financial services business to participating in the ASX 24 market and incidental business;
3. Cboe market;
4. FEX market;
5. NSX market;
6. SSX market;
7. Licensed CS facility operated by ASX Clear Pty Limited; or
8. Licenced CS facility operated by ASX Clear (Futures) Pty Limited, and restricted its financial services business to participating in the licensed CS facility and incidental business.

ASIC includes this licence condition confirmation as an Application Statements made under section 1 of FS71. The auditor completes the Application Statements in FS71.

All Licensees that are not exempt from the base level financial requirements are required to comply with these requirements under the Act. The base level financial requirements (summarised in Appendix 3) include:

1. the solvency and positive net assets requirements;
2. the cash needs requirement (appendix 6), unless a tailored cash needs requirement applies (refer paragraph 20 and 21).

In addition, there are financial requirements specified in PF 209 and RG 166 for:

1. trustee companies providing traditional services (net tangible assets requirement, refer to PF 209 condition 19B and RG 166 Appendix 5);
2. issuers of margin lending facilities (net tangible assets requirement, refer to PF 209 condition 19A and RG 166 Appendix 6);
3. foreign exchange dealers (tier one capital requirement, refer to PF 209 condition 20 and RG 166 Appendix 7);
4. holding client money or property (tiered surplus liquid funds requirement, refer to PF 209 condition 21 and RG 166 Section C);
5. transacting with clients as principal (adjusted surplus liquid funds (ASLF) requirement, refer to PF 209 condition 22 and RG 166 Section D); and
6. reporting triggers for Licensees who are not APRA regulated and are not retail over the counter (OTC) derivative issuers (refer to PF 209 conditions 23 26 and RG 166.82).

Financial Requirements for Responsible Entities, Operators of Investor Directed Portfolio Services (IDPS), Custodial or Depository Service Providers, Retail OTC Derivative Issuers, Crowd Source Funding Intermediary and Corporate Director of Retail Collective Investment Vehicles

In addition to the standard solvency and positive net assets requirements specified in paragraph 18, tailored financial and assurance requirements apply to the following types of Licensees:

1. A responsible entity authorised to operate a managed investment scheme and IDPS operators.
2. Custodial or depository service providers.
3. Retail OTC derivative issuers.
4. Crowd-sourced funding intermediary (CSF).
5. Corporate Director of Retail Corporate Collective Investment Vehicles (CCIV).

Tailored financial and assurance requirements that apply to Licensees mentioned in paragraph 20 include:

1. tailored cash needs requirement (refer Appendix 4);
2. tailored net tangible assets (NTA) requirement;
3. tailored liquidity requirement; and
4. tailored assurance requirement (refer Appendix 5).

Refer Appendix 3 for more details and relevant regulatory references.

Reporting Framework

Licensees are required to lodge their annual financial report and Form FS70 with ASIC. From 1 July 2021 ASIC has updated the financial reporting requirements of Licensees in Form FS 70. Licensees reporting under Chapter 2M and Chapter 7 of the Corporations Act 2001 will be required to prepare general purpose financial statements (GPFS). Subject to some transitional arrangements, from years commencing 1 July 2021, special purpose financial statements (SPFS) will no longer be able to be prepared^[11]. Instead, Licensees will prepare either Tier 1 or Tier 2 GPFS depending on whether they meet the definition of public accountability set out in AASB 1053 Application of Tiers of Australian Accounting Standards^[12]. However, ASIC also specifies that certain licensees are required to prepare Tier 1 GPFS^[13].

ASIC has issued Instrument 2017/307 ASIC Corporations (Financial Reporting: Natural Person Licensees) on reporting requirements for Licensees who are natural persons. A natural person is defined as an individual, as opposed to a company, partnership or trustee. Instrument 2017/307 states that where the licensee is a natural person, the licensee may exclude from the profit and loss statement, the revenue and expense that do not relate to any business of the licensee or all the revenue and expenses that do not relate to a financial services business of the licensee.

Alternatively, a natural person licensee can choose not to rely on Instrument 2017/307 and instead include in a profit and loss statement all of their revenues and expenses, whether personal or business. The relief under Instrument 2017/307 is confined to the preparation of the profit and loss statement. ASIC requires a natural person licensee to still prepare a balance sheet that discloses all of their assets and liabilities, including their personal assets and liabilities and the assets and liabilities of any other business.

The FS71 auditor’s report requires:

1. Confirmation as to whether an auditor’s report on the financial report was prepared separately to the FS71, in order to meet the licensee’s obligation to lodge it with ASIC in accordance with section 989B(3) of the Act, and attached to the financial report lodged with the FS70 (see section 2 of FS71).
2. Reasonable assurance on the following matters as stated in Regulation 7.8.13(2) of the Regulations (included within section 2 of FS71):
   1. the effectiveness of internal controls used by the Licensee to comply with:
      • Divisions 2, 3, 4, 4A,^[14] 5 and 6 of Part 7.8 of the Act; and
      • Division 7 of Part 7.8 of the Act other than section 991A; and
   2. whether each account required by sections 981B and 982B of the Act to be maintained by the Licensee has been operated and controlled in accordance with those sections; and
   3. whether all necessary records, information and explanations were received from the Licensee.
3. Reasonable assurance that the Licensee complies with the specific financial requirements under the licence; and a combination of reasonable and limited assurance in relation to the relevant cash needs requirements either as outlined in:
   1. Appendix 4 and 5 if the Licensee is a responsible entity, an operator of IDPS, a custodial, a depository service provider or a retail OTC derivative issuer, that is subject to tailored cash and audit requirements (included within sections 4 and sections 6-8 of FS71); or
   2. Appendix 6 if the Licensee is not a body regulated by APRA or a market or clearing participant or a body subject to tailored cash and audit requirements (refer paragraph 18(b)) (included within sections 4 and 5 of FS71).
4. A report that there are no matters that should have been reported to ASIC in accordance with section 990K of the Act during or since the financial year that have not previously been reported to ASIC, other than the matters detailed in FS71 (section 13 of FS71).

ASIC Pro Forma 209 Australian financial services licence conditions (PF 209), reissued in July 2022, sets out the standard licence conditions which subject to individual circumstances, will usually be applied to licences authorising a person to provide financial services under the AFSL. It is important that the individual AFSL conditions are examined carefully so that the appropriate reporting and auditing obligations are met.

In addition, ASIC Class Orders CO 12/752, CO 13/76 and CO 13/761 set out the financial requirements applicable to specific categories of Licensees. It is important that these tailored requirements are examined carefully so that the appropriate financial and auditing obligations are met.

Exemptions From Lodging Form FS71

The holder of a limited AFSL is not required to lodge FS71 with ASIC. Regulation 7.8.12A and 7.8.13A of the Regulations exempts limited Licensees^[15] from lodging an auditor’s report with ASIC, but requires the lodgement of a compliance certificate with ASIC. Under sections 989B(1) and 989B(2) of the Act, limited Licensees are still required to prepare and lodge with ASIC, a profit and loss statement and balance sheet in the approved form FS70 within the required timeframes. Where the licensee holds a limited AFSL for part of the financial year but holds a full license for the remainder of the year, the FS71 is required to be completed for the part of the year for which the full licence is held.

A foreign Authorised Deposit-taking Institution (“ADI”) which holds the AFSL that has relief under Instrument 2016/186 ASIC Corporations (Foreign Licensees and ADIs), is not required to lodge FS71 with ASIC. It is exempt from the requirements of section 989B of the Act, where equivalent reports prepared for the overseas regulator of the foreign ADI are lodged with ASIC at least once in every calendar year and at intervals of not more than 15 months.

Where the foreign ADI is also regulated by APRA and the AFSL contains condition 27 in PF 209, then it is necessary for the foreign ADI to lodge an audit report (even if the foreign ADI is exempt under Instrument 2016/186), that states whether for the relevant period, on a reasonable assurance basis, the Licensee was a body regulated by APRA at the end of the financial year or for any period of time that ASIC requests. This is because the APRA regulation confirmation requirement is in addition to Section 989B of the Act or Instrument 2016/186. The format of this audit report does not need to be in accordance with FS71. To avoid any processing problems, ASIC requires the audit report to be lodged and accompanied by a letter identifying the Licensee, licence number and financial year, and clearly stating the reasons why FS71 has not been lodged. ASIC requires this letter to include reference to the instrument and to the requirement for a report pursuant to the relevant licence condition.

Instrument 2016/186, issued 24 March 2016 provides that a foreign company AFSL holder can lodge accounts prepared for their home regulator with ASIC to meet their AFSL requirements. As a result the foreign company does not have to comply with regulations made for the purposes of sections 988A, 988B, 988D(a) and 988F of the Act and hence is not required to lodge FS70 or FS71.

RG 166.8 also states that if the Licensee is prudentially regulated overseas, they can apply to ASIC for relief from the financial requirements. ASIC will give this relief on a case by case basis if they are satisfied that the applicant is regulated in a way that is comparable to regulation by APRA for entities of that kind. If applicable, ASIC will consider the extent to which the relevant foreign prudential regulation is consistent with the Basel Committee guidelines for regulating deposit taking institutions.