There has been huge change in financial reporting legislation in New Zealand in recent years. A direct result is different financial reporting and assurance requirements for different types of entities going forward. Hence it is useful to consider the new landscape in terms of how many entities have to do what in future.
The past, the present, and how we got here
In the past in terms of financial reporting, New Zealand has largely adopted a one-size fits all approach. Not all entities had a statutory requirement to apply financial reporting standards, but many, if not most, did anyway. And this was done with sound logic; if we adopt what are considered the generally accepted accounting practices then (hopefully) our financial statements will be understood by all, and by extension; be useful for readers of the financial statements for their understanding and decision making.
As in most first world countries, generally accepted accounting practices are established by following financial reporting standards. These are approved by Governments usually via legislation after being set by bodies that may either have been under the control of the Government, or by professional bodies but with some form of government oversight and approval. New Zealand has moved to the former category in the past 5 years.
Financial reporting has got more complex over the years. This reflects the increasing complexity of business and organisations, as well as the impacts of entities being structured and trading multi-nationally. This globalisation of how we do business in the world has seen countries moving towards a more global approach to setting financial reporting standards. The International Federation of Accountants (IFAC) is the major financial reporting standard setter for the world, albeit that the US, as the world’s largest economy, has liked to have their own rules. However even this is changing, perhaps with recognition of the US’s decreasing international dominance as the largest economy. Recent times have seen the release of a new financial reporting standard on revenue recognition that has been jointly developed by IFAC and the US standard setters. An almost revolutionary display of cooperation in financial reporting standard setting!
The impacts of this move to international financial reporting standards, and globalisation, has not surprisingly resulted in more complex accounting standards over time. The practical impact of this in New Zealand, a country where most entities have tried to follow the financial reporting standards even though many have not been required to, has meant that this has got harder and less practical.
Recognition of this situation led to a comprehensive rethink of who should be required to follow what standards in New Zealand. While this process has taken about 10 years, we are now in a position where we have a new Government financial reporting and assurance standard setter (the External Reporting Board – XRB) who is responsible for setting the financial reporting framework and strategy, and new legislation now in force that clarifies what type of entities have to follow what type of financial reporting standards.
Much has been written about our new financial reporting framework and there is much detail involved. But in essence we have arrived at a rather sensible place that is largely “horses for courses” based on entity type and stakeholder need. That is, if you are a large and complex organisation then you should follow financial reporting standards suitable for that. If you are small and simple, your financial reporting standards should very much take this into account and cost vs. benefit should be a significant consideration. Wrapped around this philosophy are a few other considerations such as where/who do you get your money from, and who are your stakeholders and what is their access to information.
The big shift
The “first principles” assessment of who should have to do what in terms of financial reporting in New Zealand has resulted in a significant shift. Previously we have had a heavy hand environment where legislation imposed financial reporting requirements on all companies, no matter what size and type. In contrast, most charities and not-for-profit entities had very little, if any, financial reporting specified in law. That situation has now significantly changed.
Companies – From all to a few
Previously all approximately 400,000 New Zealand companies had to by law follow financial reporting standards. Now the majority will no longer have to unless they are:
- Publically accountable = essentially that they are raising debt or equity from the general public (Tier 1 reporters)
- Large = assets over $60m or revenue over $30m
- An overseas company or overseas owned, with assets over $20m or revenue over $10m
- A company with 10 or more shareholders who don’t opt out by 95% majority vote
Those in 2 – 4 above fall into Tier 2. While it is hard to get accurate numbers of this new reporting environment, best estimates are:
- 1,500 to 1,800 FMC reporting entities (those Tier 1 entities raising debt or equity from the public or similar)
- 2,000 to 3,000 of the other companies that fall into classifications 2 – 4 above
This means a vastly smaller number of companies in New Zealand have to by law follow financial reporting standards. Given the nature of these companies the financial reporting standards are the international standards.
The remaining 395,000 companies can either choose to adopt the Tier 2 accounting standards or they can just adopt what is required by the Inland Revenue Department. A sensible approach when the primary parties interested in the average company in New Zealand are the owners, the bank and the tax department…and all three of those can generally get the information they need.
Public Benefit Entities (PBE)
The opposite has occurred in the PBE sector with many more now required to follow financial reporting standards.
- Public Sector entities – there are approximately 3,800 of these and all are required by law to follow financial reporting standards.
- Registered charities – all 27,000 are now required to follow financial reporting standards of an appropriate type for their size.
As can be seen from these numbers, there are now a lot more PBE entities than companies requiring to follow financial reporting standards in New Zealand. However for the vast majority of these they will be following New Zealand developed financial reporting standards that are appropriate for their size and type, rather than international financial reporting standards.
This makes sense. Government owned or controlled entities should be accountable to a high standard therefore it makes sense for public sector entities to continue to be required by law to adopt appropriate financial reporting standards. Likewise, registered charities are in effect receiving a subsidy from all taxpayers in New Zealand by not being required to pay income tax. They also often seek money from the general public and hence there should logically be an appropriate level of financial reporting accountability.
Another future consideration is the suggestion that the approximately 23,000+ incorporated societies be legislated to follow financial reporting standards in future when the Incorporated Societies Act 1908 is revised in the not too distant future. This seems sensible that they would be required by law to follow a similar set of standards as registered charities that are appropriate to their size and type.
Registered Charities Data
Of our 27,000+ registered charities:
- only about 1,000 entities will be required by their size to follow standards that are based on international standards;
- approximately 6,750 will be able to adopt locally developed simple format accrual based financial reporting; and
- the remaining 19,000+ will be able to adopt a locally developed simple format cash reporting standard.
The above reflects the fact that we have a large number of very small charities in New Zealand. In fact approximately 3,000 of our registered charities are so small that they have an annual operating expenditure of less than $1,000.
What does all this mean?
- Recognition that some New Zealand entities do or may operate on the world stage and accordingly should follow internationally recognised financial reporting standards;
- Recognition that New Zealand should be a contributor to, and an influencer of international financial reporting standards, rather than trying to write these;
- Recognition that for many New Zealand entities their small size and type mean that they should only have simple reporting requirements;
- A New Zealand financial reporting and assurance standard setter (the XRB) that now has a much bigger PBE audience than it does a company audience in terms of who it is developing standards for. Hence a change in focus;
- A greater variation of financial reporting standards in New Zealand in future, but hopefully due to the “horses for courses” approach the variety is more than offset by the better fit, and hence better information for their stakeholders;
- Finally some enforced consistency in PBE financial reporting in New Zealand – hopefully allowing stakeholders a better understanding of their operations and how they compare.