By Hayes Knight – 2 November 2011

Some big changes have been recently proposed regarding annual financial reporting in New Zealand – probably the most significant we’ve seen in a generation. This shake-up will impact schools in the future, so it is therefore important to know what these changes are and what they mean for your school.

So what is changing and why?

On 14 September 2011 the Minister of Commerce, Simon Power announced proposed reforms to New Zealand’s financial reporting requirements for annual financial statements. This is good news for many parts of the New Zealand economy, especially small to medium sized businesses (SMEs). The government anticipates savings of up to $90 million a year in compliance costs from the proposed changes.

A number of years ago New Zealand chose to adopt a global set of financial reporting standards – developing our own standards proved to be too challenging and costly. This decision made good sense as we operate in a global environment and have to be seen as globally relevant. Unfortunately the International Financial Reporting Standards (IFRS) that we adopted didn’t work as well for some entities as they did for others. This was especially the case for entities that were not profit seeking entities. They were also far too complicated for many small entities.

That said, a key driver of the recently proposed changes is to ensure that the financial reporting requirements specified in legislation 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. Again good sense – horses for courses.

Central to the proposals is the concept of imposing different levels of requirements to different tiers of reporting entities i.e. the complexity of financial reporting would depend upon which tier you were in. Tiers would be determined by the size and complexity of an entity.

While a reduction in the requirements imposed on for-profit entities is good news, in the public sector there is still a reasonably high level of financial reporting proposed. The logic here is pretty sound – entities that receive public monies should have a high degree of public accountability. Schools also have to be consolidated into the overall Crown financial statements each year and hence have to be reporting at an appropriate level to enable this.

Application of size criterion to schools

Some commentators have suggested that all schools should be in the same tier regardless of size. The suggested tiers that could impact schools are:

Tier 2: Annual expenditure between $2m and $30m

Tier 3: Annual expenditure below $2m

Data provided by the Ministry of Education indicates that of the approximately 2,500 state and integrated schools, around 1,870 would fall into Tier 3 and around 630 would fall into Tier 2. No schools would fall into Tier 1 – the most complex reporting level. If all schools were required to report as Tier 2, a large number of schools would be required to report at a higher level than their expenditure thresholds would dictate as logically appropriate. This could only be justified if the cost of the additional disclosures was outweighed by the additional benefits. Based on this the standards board charged with recommending these changes to the government has proposed that the tier size thresholds apply to schools in the same manner as for other PBEs.

What will change?

When preparing their annual financial statements, schools will have to apply a new set of accounting standards using International Public Sector Accounting Standards (IPSAS) as a base. The precise detail of these new standards is yet to be determined. It is likely that there may be changes such as tier 2 entities having to also prepare a cash flow statement as part of their annual financial statements.

Schools and other stakeholders, such as the Office of the Auditor General, Ministry of Education, etc, will have the opportunity to comment on and have input into the proposals as they are developed over the next few years – all part of the democratic process.

When are changes proposed to take effect?

Before any changes occur several legislative changes need to happen first, as well as some detailed work undertaken to create the applicable accounting standards. The good news for those of you who have managed to read this far (and jolly well done to you too!) is that the earliest date suggested for adopting these changes is the financial year beginning 1 July 2013, although a later date may be established.

What’s next?

Rest assured that the team at Hayes Knight will keep you updated as the changes unfold and their subsequent implications. We’ll be doing our bit to lobby and help ensure that the final agreed mandatory financial reporting standards are fit for purpose – hopefully the costs are not out of line with the benefits. We will also be keeping our clients appraised of developments.

Should you have any queries on this feel free to contact us.