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On 14 September 2011 the Minister of Commerce, Simon Power, announced proposed reforms to New Zealand’s financial reporting requirements for annual financial statements. The Government sees a theoretical annual saving of up to $90 million in compliance costs from the proposed changes.

The key driver of these changes is to ensure that the reporting requirements are appropriate for entities at all levels. This will see the financial reporting requirements for profit-orientated organisations separated from those in the not-for-profit and public sectors.

Central to the proposals is the concept of providing different levels of requirements to different tiers of reporting entities - and to end compulsory general purpose financial reporting for small and medium closely held companies.

The proposals in summary:

• Issuers continue to report under New Zealand equivalents to International Financial Reporting Standards (NZ IFRS)
• Large entities without public accountability will have to report under a new reduced-disclosure regime known as RDR
• Small and medium non-issuer entities are no longer required to prepare general purpose financial information. Instead, they must prepare special purpose financial reports primarily for tax purposes
• A large entity is now defined as either earning revenue in excess of $60 million per annum or having total assets in excess of $30 million.

That's well and good, but we envisage that the IRD, your bank and other interested parties (such as shareholders) will still want to know that your accounts at least remotely resemble the actual picture.

Reduced Disclosure Regime

RDR aims to give entities that aren't publically accountable a scalable reporting framework that is less onerous than full NZ IFRS.

However, there are differences between the proposed RDR disclosures and those currently available under differential reporting. These may be seen to increase the level of disclosure for some entities - such as the requirement to provide a statement of cash flows.

Unlike the current differential reporting requirements, RDR contains no measurement differences from full NZ IFRS. For example, deferred tax accounting will become compulsory for entities reporting under RDR.

Small and medium entities

Most New Zealand for-profit entities will fall into this category¹ and the proposal is to remove the requirement to prepare general purpose financial information.

However, some form of reporting will still be required. The Government believes the users of financial statements in the SME market - owner/managers, the IRD and financiers - will be able to determine the extent of reporting they will require.

Accordingly, the Government is proposing that Special Purpose Financial Statements be required under an amendment to the Tax Administration Act. NZICA and the IRD will develop a reporting format and the measurement basis will essentially be tax rules. The form and level of detail required in these reports has yet to be determined.

For medium-sized companies now reporting under differential reporting requirements, this is likely to reduce the quantity of information disclosed. But for small companies, the reduction may not be that great.

Hayes Knight will give clients further information once the required statement format becomes clearer. We will also be actively involved in the shaping of the new reporting formats to make them as practical and useful as possible for our clients.

Audit and filing requirements

Under the proposals, only issuers and large overseas incorporated and owned companies will be required to file audited financial statements with the Companies Office.

Large, privately held New Zealand-owned companies won't need to file their financial statements, though they will probably be required to be audited.

When is all this happening?

The effective date for the proposed changes is financial periods beginning on or after 1 July 2013. For a typical March balance date, the first effective year end would be 31 March 2015.

How will this affect the charitable sector?

Read how these changes will impact the charitable sector and not-for-profits.

Final thoughts

While we await the final legislation and detail of what will be required of SMEs, we see this as a great opportunity to reduce the burden of compliance on the engine room of the New Zealand economy. It means accountants; managers and owners can focus more on business.

¹  Except for issuers and companies with more than 10 shareholders. These will be able to opt out of general purpose financial reporting requirements subject to 95% shareholder approval.

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