New Zealand’s financial reporting framework is about to undergo a radical makeover. The changes are significant for some organisations. It is therefore important your organisation is fully aware of what is changing and the implications.
Hopefully you are all remaining abreast of progress regarding the fundamental changes in financial reporting legislation and the standards framework in NZ. To make this easier for our clients we have boiled down all the changes into a brief explanatory document and diagram.
Download the diagram below (prints to A3).
What is changing?
Who has to follow General Purpose Financial Reporting (GPFR)?
The Government has announced its proposed reforms to the statutory reporting framework and specified which entities will be required by legislation to prepare annual financial statements under GPFR. Under this reform the following types of entities will be required by legislation to prepare GPFR:
- Publicly accountable entities
- Large entities
- For-profit: annual revenue > $30m, or assets > $60m
- For-profit (public sector): annual expenses > $30m
- Not-for-profit: annual expenses > $30m
- Entities with 10 or more shareholders
Different accounting standards for different entities.
The External Reporting Board (XRB), the Government’s accounting and audit standard setter, has released the proposed accounting standards that will apply to the different types of entities that are required to prepare annual financial statements under GPFR.
Rather than just having a single set of accounting standards applicable to all; the proposed accounting standards framework adopts a two sector (For-profit or Public Benefit Entities) four tier structure with differing accounting standards applying to each tier.
When will these changes happen?
The changes now have to be confirmed via the relevant legislation being enacted. In addition, some of the proposed accounting standards are new and still need to be developed. The changes will therefore occur progressively over the next 3 years. The timing will differ depending on the type of entity:
- For-profit entities: From 1 November 2012 with early adoption permitted
- For-profit entities: Transitional tiers (3 and 4) will be removed once the proposed legislative changes come into force
- Public sector PBEs: For periods beginning on or after 1 July 2014
- Not-for-profit PBEs: For periods beginning on or after 1 April 2015
Who will be affected?
Small and medium sized private companies
From July 2013 the majority of small and medium-sized private companies, that are not raising money from the public, will no longer have to prepare general purpose financial reports. This means they do not need to follow all the accounting standards unless they choose to. Instead they will only be required to prepare special purpose financial reports to comply with their tax obligations.
The implications: A reduction in mandatory compliance and the associated cost. The owner now has a choice to adopt the financial reporting framework that will best meet their needs.
Large privately held companies
Those that are not raising debt or equity from the public (issuers) will have a statutory requirement to prepare annual financial statements in accordance with International Financial Reporting Standards and have these audited unless they opt out via a 95% majority vote. They will not have to file these for public viewing. ‘Large’ is proposed to be defined as annual revenue greater than $30m or total assets over $60m.
The implication: Possible changes to accounting policies where different reporting exemptions have previously been adopted e.g. deferred tax.
Overseas Owned Companies
Overseas owned companies or overseas companies operating in New Zealand have previously had to follow a different set of financial reporting requirements to many of their locally owned contemporaries. This difference has been removed along with audit requirements for these companies. Instead their statutory reporting requirements will essentially be the same as New Zealand owned and operated companies.
The implication: Removal of some New Zealand statutory compliance.
Not-for-profit (NFP) entities
Large publically accountable NFP entities along with registered charities will be required to prepare annual financial statements in accordance with new PBE accounting standards. These standards will differ depending upon the size of the NFP entity. Some of these NFP entities will also have a statutory requirement to be audited or be subject to a lesser level of assurance.
The implications: Many more NFP entities will have a statutory requirement to prepare GPFR financial statements. This increased compliance is designed to improve the accountability, consistency and quality of financial reporting in the sector. It is also proposed that in future many larger NFP entities will also have a statutory audit or assurance requirement.
Any queries you may have regarding this please contact your Hayes Knight adviser.