On 3 December 2013 the Financial Reporting Act and the Financial Reporting (Amendments to Other Enactments) Act became law. These two Acts, combined with new financial reporting frameworks rolled out by the External Reporting Board, create fundamental changes to the financial reporting rules in New Zealand. For most businesses, these changes take effect from 1 April 2014 – so what does this mean for your organisation?
Fit for purpose reporting obligations
The key driver behind the changes to legislation is to make New Zealand’s financial reporting fit for purpose – recognising that one size does not fit all. To this end, the new requirements differ according to:
- the nature of your organisation – whether you are for profit , or public benefit; and
- the scale of your organisation, and whether you have any public accountability
For profit entities that are still required to prepare general purpose financial statements will have a choice between full reporting under NZ equivalents to International Financial Reportings Standards (NZ IFRS), or a new simplified format of the same known as NZ IFRS Reduced Disclosure Regime. (Allbeit existing standards will be retained for one further year – which will enable those that wish to continue as they currently report to do so.)
For public benefit entities – (for example charities, schools and government bodies) – Four “tiers” of financial reporting rules exist.
Click here to see a diagram to help you navigate through the new financial reporting frameworks.
For profit entities
Reduced obligations for small to medium sized companies
Most companies will no longer be required to prepare general purpose financial statements i.e. follow legally mandated accounting standards.
Going forward, New Zealand companies will only be required to prepare general purpose financial statements if they are:
- a FMC reporting entity – a new term that includes most entities previously known as issuers – but also catches other investment management entities. The rules around this are not straightforward – and certainly if you have raised capital from the public or operation on the financial services sector you should seek calarification of your status.
- For locally owned companies: Where revenue exceeds $30m or your assets $60m
- For overseas companies or subsidiaries of overseas companys: Where revenue exceed $10m or your assets $20m
- public entities (e.g. SOE’s)
- have 10 or more shareholders (though can opt out with a 95% majority vote); or
- have fewer than 10 shareholders and have opted to (5% shareholders individually or collectively can require this by requesting in writing)
More than 90% of NZ companies will therefore not be required to prepare general purpose financial statements at all.
However, this doesn’t mean that financial statements don’t have to be prepared. Companies will still be required to prepare financial statements at least to a minimum standard specified by Inland Revenue Department. Using solely the IRD requirements should see a reduction in the amount of disclosure required to be contained within the financial statements – particularly where companies had previously prepared financial statements under the more complex NZ IFRS standards.
Businesses also need consider if there are any contractual or other requirements to prepare financial statements under generally accepted accounting practice – for instance, in their banking arrangements or the terms of any earn-out arrangements. Often such agreements refer to “Generally accepted accounting practice” or will refer to the legacy Financial Reporting Act 1993 -which may no longer be appropriate.
Less financial statements to file and shorter deadlines
Only FMC Reporting Entities, large overseas companies, large subsidiaries of overseas companies, and large New Zealand companies with 25% or more overseas ownership will need to file. (For periods commencing after 1 April 2014.)
Previously, five months and twenty working days was the deadline for all entities that were required to file. This deadline is now four months for FMC Reporting Entities and five months for others still required to file.
Public benefit entities
Mandatory compliance with GAAP for charities
For charities, compliance with the appropriate tier of financial reporting will become mandatory for period commencing after 1 April 2015. There’s been a great divergence in the quality of financial reporting by charities to date – which is hoped to be resolved by mandating compliance. These changes will bring a robustness of charities financial reporting – something of national importance given the scale of the “third” sector within New Zealand. The degree of change from reporting under the new tiers for public sector and not for profit entities will vary considerably – depending on the framework.