The future is finally here! On 3 December 2013 the Financial Reporting Bill and the Financial Reporting (Amendments to Other Enactments) Bill received the Royal Assent of the Governor General. Unlike many things in politics the Bills had unanimous cross party support. This is recognition for the good work that has gone in to getting to this stage.
So what does this mean to NZ businesses?
The passing of these two Bills represents enactment of the overhaul of our financial reporting environment in New Zealand. In relation to potential change matters that we have been updating clients and contacts about over the past few years it also means that we are now able to finally provide advice with certainty as to what is changing and for whom.
Why two Acts?
During the course of the process, the originally intended Bill was split into two Acts: The Financial Reporting Act (2013) and the Financial Reporting (Amendments to Other Enactments) Act. The latter contains all the consequential amendments, the former is the primary legislation. Our current umbrella financial reporting legislation, the existing Financial Reporting Act 1993, will be repealed and replaced by this new legislation.
The key changes
The key changes to be introduced by the two new Acts are:
• Where requirements are found –
The Financial Reporting Act still specifies what are considered approved accounting standards in New Zealand. However financial reporting requirements of different types of entities are now split between different statutes. i.e. The financial reporting requirements for specific entities will be contained in the statutes which govern those entities. For example, the financial reporting obligations for “FMC reporting entities” will be included in the Financial Markets Conduct Act 2013. For companies which are not “FMC reporting entities”, the financial reporting obligations will be included in the Companies Act 1993.
• Reduced compliance 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. In future, New Zealand companies will only be required to prepare general purpose financial statements if they are:
- an “FMC reporting entity”
- “large”, (see below)
- public entities
- have 10 or more shareholders and have not opted out of compliance (requires 95% marjority vote); or
- have fewer than 10 shareholders and have opted into the requirement to prepare financial statements (5% shareholders individually or collectively can require this by requesting in writing)
• Amended definition of “large” for New Zealand companies –
A New Zealand company (other than a subsidiary of an overseas company) will be considered “large” (in respect of an accounting period) if at least one of the following applies:
- as at the balance date of each of the two preceding accounting periods, the total assets of the company and its subsidiaries (if any) exceed $60 million; or
- in each of the two preceding accounting periods, the total revenue of the company and its subsidiaries (if any) exceeds $30 million
For New Zealand incorporated subsidiaries of overseas companies to be classified as “large”, the above thresholds are reduced to $20 million for the asset threshold and $10 million for the revenue threshold.
• Financial statement requirements for overseas companies – Overseas companies will only be required to prepare financial statements if they are an “FMC reporting entity” or a “large overseas company”. In determining whether an overseas company is “large”, the same thresholds apply as to New Zealand incorporated subsidiaries of overseas companies (i.e. the lower $20 million assets / $10 million revenue thresholds apply).
• Filing requirements –
Fewer companies will be required to register financial statements, with the registration requirement only applying to “FMC reporting entities”, “large overseas companies” and “large” New Zealand companies with 25% or more overseas ownership (including subsidiaries).
• Timing for preparation and filing of financial statements –
The imeframe for preparing and filing financial statements has been reduced. Previously five months and twenty working days for all entities, this is now split as follows:
“FMC Reporting Entities”: four months
Large overseas companies, large subsidiaries of overseas companies, and companies with more than 25% ownership: five months.
• Group financial statements only –
Financial statements for a parent company do not need to be prepared if group financial statements are prepared. The External Reporting Board will determine any parent company reporting obligations.
Timing and transitional provisions
The effective dates for the two Acts are to be set by an Order in Council, but we expect that the effective date will apply for financial reporting periods commencing after 1 April 2014. The Financial Reporting Act 1993 will continue to apply to accounting periods that begin prior to the relevant sections of the new Acts commencing.
The IRD has also indicated that their new minimum financial reporting requirements for companies would apply for accounting periods commencing after 1 April 2014.
What will the IRD require?
These law changes mean more than 90% of New Zealand companies will longer have to prepare general purpose financial statements.
However, Cabinet has agreed that all active companies that do not have an obligation to prepare general purpose financial statements will still be required to prepare financial statements at least to a level specified by Inland Revenue. The IRD remains the biggest user of financial statements in New Zealand and released an Officials’ Issues Paper in November 2013 advising they will set the minimum standards for company special purpose financial statements.
The minimum requirements for special purpose financial statements proposed by the IRD are as follows:
- They should be based on double entry cost-based accrual accounting.
- They should include a balance sheet and profit and loss, and specified supporting notes and/or schedules should also be available.
- Where reasonably possible, tax values can be used for the determination of income and expenditure, and the preparation of the balance sheet.
- A statement of accounting policies and changes should be part of the financial statements.
- They should include, if necessary, financial statements to taxable income reconciliation.
- Certain related-party transactions should be scheduled (but only for periods commencing 1 April 2015 and later).
The IRD anticipates that compliance costs for small and medium sized companies will decrease, although they note that companies can always opt up to a higher level of reporting if they wish to even when not required to report at that level by law.
As noted earlier, the removal of legislative requirements is only expected to apply from 1 April 2014 onwards.
However the IRD notes that they have also started considering extending these requirements to non-corporate business taxpayers such as sole traders and partnerships. Formal consultation on this is expected during 2014, with a likely commencement date of special purpose financial reporting for periods beginning 1 April 2015.
IRD officials are also participating in the New Zealand Institute of Chartered Accountants’ SME Working Group which is developing an accounting framework for special-purpose financial statements for small and medium enterprises (SMEs).
It is too early to know exactly how this will integrate with IRD requirements, but it seems that compliance with that framework will mean IRD’s minimum requirements are likely to be exceeded.