New Zealand Commerce Minister Simon Power recently announced that small and medium-sized companies (with annual revenue of less than $30 million, and assets less than $60 million) will no longer have to provide financial statements in accordance with generally accepted accounting practice (GAAP) unless their owners require them to.
While there are winners and losers based on the proposals, the overall outcomes have a ring of common sense to them. Essentially they refocus the requirements for financial reporting on to the entities where these are needed most resulting in the cost/benefit equation being better met.
The Minister estimates that compliance costs for companies may reduce by NZ$90 million per year, but the extent of relief will not be clear until the IRD releases its proposals for financial reports required for tax purposes.
Conversely, registered charities which accept donations from the public will be required to report the results of their activities. The reporting requirements have been focused to recognise that for the vast majority of these entities, a form of simple format reporting will be sufficient rather than full GAAP financial statements.
Shortening the deadline for non-listed companies with reporting obligations will also ensure timelier financial reporting, with the deadline dropped from five months to three months. This will mean companies may have to change their year-end reporting processes in order to meet the challenge of the shorter deadline.
The External Reporting Board (XRB), which oversees reporting standards, proposes a multi-standards approach, with for-profit entities following a suite of standards based on International Financial Reporting Standards, and public benefit entities following a suite of standards based on International Public Sector Accounting Standards. This change should address the needs of the differing user groups of financial statements.
However, Deloitte (New Zealand) urges caution on extending the approach too far. It is vital that the XRB ensures modifications in New Zealand are limited to only those that are necessary to ensure ongoing international comparability.
It is anticipated that differing standards between for-profit entities and public benefit entities will add complexity for a small number of mixed groups where reporting obligations exist.
While some decisions are still to be made, in particular for incorporated societies and assurance requirements for registered charities, and there are some inconsistencies and some clarifications needed, these proposals are a good step forward for New Zealand reporting.
|Changes from the 2009 discussion documents
- Large privately owned companies (not overseas owned) will not be required to publicly file their financial statements, as previously confirmed by the Minister
- The filing deadline for non-listed companies has dropped from five months to three months, which is also quicker than the four months proposed in 2009
- The IRD has been tasked to develop minimum standards for the preparation of special purpose financial statements by companies that do not have reporting obligations
- The thresholds for size have increased
- For for-profit entities, earlier proposals considered existing guidance of $10m assets, $20m revenue and 50 employees as the basis for being "large". The threshold proposed is now $30m revenue or $60m assets so more entities may fall out of existing reporting requirements
- For public benefit entities an expenditure threshold of $20m for public sector entities and $10m for not-for-profit entities was initially proposed. The revised proposals have increased this to $30m expenditure to be considered large. The Minister notes that most not-for-profit entities will not be large and will therefore be able to take advantage of reduced disclosure concessions or simple format reporting
- It is proposed that for-profit entities that fall into the second tier of reporting will follow a reduced disclosure regime harmonised with Australia. This will require the same measurement and recognition requirements as NZ IFRS with disclosure exemptions. This differs to current differential reporting in NZ IFRS and IFRS for SMEs which include recognition and measurement exemptions
- Standards based on International Public Sector Accounting Standards (IPSAS) were considered in the 2009 discussion documents. Based on concerns expressed by submitters on the current status of IPSAS the XRB will not use pure IPSAS but will instead modify the standards as appropriate
- Earlier discussion documents asked for feedback on whether a review engagement might be appropriate instead of an audit for public benefit entities This has not been included for public sector entities and the Minister has not yet released proposals on assurance requirements for registered charities
- Incorporated societies and charitable trusts that are not registered charities are not currently included in the proposals. The Minister notes that the Law Commission is currently reviewing the Incorporated Societies Act 1908 so financial reporting issues will be determined once this review is completed.
Deloitte New Zealand has summarised the proposals in the following publications: