KPMG: Financial Reporting Overhaul
28th January 2014
Financial Reporting Overhaul
Ann Tod – KPMG Private Enterprise Partner
The new Financial Reporting Act overhauls the statutory reporting obligations of entities in New Zealand and was part of the Government’s Business Growth Agenda to improve capital markets and reduce compliance costs for small and medium sized entities.
• New definition of ‘large’. Different size thresholds will apply to overseas companies (incl. subsidiaries of overseas companies)
• Inland Revenue has issued a consultation paper, setting the minimum financial reporting requirements for corporate SMEs.
• Minimum financial reporting requirements required by the old Financial Reporting Act will now be a requirement of the Tax Administration Act.
• NZ IFRS Differential Reporting (Tier 3) and Old GAAP (Tier 4) will be withdrawn by the XRB for For-profit entities once the Acts are enacted and come into force.
The effective dates of both the Financial Reporting Act 2013 and the Financial Markets Conducts Act 2013 have yet to be set. Certain provisions likely to be effective 1 April 2014 with remaining provisions of the Acts coming in force on 1 April 2017.
Key changes introduced by the
Financial reporting requirements for different entity types are contained in the statutes governing those entities. In particular, financial reporting requirements for issuers are included in the ‘Financial Markets Conducts Act 2013 (FMC). Key changes for different entity types and consequences for these entity types are summarised below:
Preparation and assurance
• The definition of "large" has been amended for overseas companies and subsidiaries of overseas companies ($20 million for assets and/or $10 million in revenue). All other entities apply the original thresholds of $60 million for assets and/or $30 million in revenue. As a result more overseas companies and subsidiaries of overseas companies will be required to prepare and file financial statements due to changes in the threshold definition on the term ‘large’, compared to the proposal under the initial Financial Reporting Bill.
general, a statutory obligation to prepare general-purpose
financial statements will only apply to companies
(a) are ‘FMC reporting entities’;
(b) are ‘large’ entities;
(c) are public entities;
(d) have 10 or more shareholders that have not opted out; or
(e) have fewer than 10 shareholders but have opted in.
• An annual notice of shareholder’s meeting on the proposed resolutions in relation to the application of Opt In/ or Opt Out is required.
• Parent entity financial statements will no longer be required if consolidated group financial statements are prepared.
• Non-active companies will continue to be exempt from the requirement to prepare financial statements.
• Financial statements registration requirement now only applies to ‘FMC reporting entities’, ‘large overseas companies’ or ‘large’ New Zealand companies with 25% or more overseas ownership.
• The timeframe for preparation and filing of financial statements has been reduced to 4 months after the balance date for FMC reporting entities, and reduced to 5 months for all other entities. Under the FRA 93, the reporting timeframe was 5 months plus 20 working days for all entities.
Small to medium sized entities
All active companies that no longer have a statutory obligation to prepare general-purpose financial statements will be required to prepare financial statements at least to a special-purpose level specified by Inland Revenue.
In November 2013 Inland Revenue issued for consultation a paper - Minimum financial reporting requirements for companies. This paper discusses which companies will be required to prepare financial statements and the minimum details required for tax purposes.
I have been a member of The New Zealand Institute of Chartered Accountants (NZICA)SME working group that has provided input to the development of additional guidance to SMEs on financial reporting. The latest proposed NZICA guidance is focused on keeping things simple and consistent with the minimum financial reporting requirements required for tax purposes. As a consequence the cost savings expected by the government will not be significant.
Essentially the minimum financial reporting requirements that were required by the old Financial Reporting Act will now be a requirement of the Tax Administration Act.
Inland Revenue has proposed that these new requirements to commence for income years starting from 1 April 2014 for companies and 1 April 2015 for non-companies. However, the final timing will depend upon the effective dates set by the Financial Reporting Act 2013.
Consequential impacts on
• The XRB will be withdrawing the existing NZ IFRS Differential Reporting and Old GAAP suite of standards, when the legislation is enacted and in force – this is expected to be 1 April 2014.
• For-profit SMEs that are currently applying NZ IFRS Differential Reporting (Tier 3) or Old GAAP (Tier 4) will need to transition into either NZ IFRS (Tier 1) or NZ IFRS RDR (Tier 2) in order to continue to assert compliance with NZ GAAP.
• Small to medium sized PBEs or NFP PBEs, may continue to apply differential reporting under NZ IFRS PBE or Old GAAP, until the relevant legislation that governs the financial reporting of those entities and the applicable suites of standards (NZ PBE standards, Simple Format Accrual, Simple Format Cash), set by the XRB are effective, come into effect.
The financial statements of a specified not-for-profit entity will need to comply with generally accepted accounting practice (as set by the External Reporting Board). This is a new requirement will apply to entities with total operating payments of $125,000 or more.
In all other cases, not-for-profit entities will have a choice to either follow generally accepted accounting practice or a non-GAAP standard in preparing the financial statements. It is expected that the accounting standards will come into force in 2015.
In addition, changes have been announced that require charities with annual expenditure of over $1million or more to be audited, over $500,000 reviewed and less than $500,000, no mandatory requirements.
There is general agreement that public confidence in the charitable sector will improve if financial statements of large and medium sized registered charities are subject to a level of assurance. This needs to be weighed against the assurance service costs hence excluding smaller charities.
There is a reasonable expectation that compliance costs on the whole should fall, particularly for medium-sized business however costs will likely increase for very small businesses and a number of not-for-profit entities.
She currently provides audit services and general accounting advice to a range of small to medium enterprises and branches/subsidiaries of overseas companies. Her current clients include many import/distributors, manufacturers, privately-owned businesses and not-for-profit entities.
Ann is currently a member of the New Zealand Institute of Chartered Accountants’ Admissions and Membership Committee. She is also the Finance Director of the International Netball Federation.
About KPMG New Zealand
KPMG is focused on fuelling New Zealand’s prosperity. We believe by helping New Zealand’s enterprises succeed, the public sector do better and our communities grow, that our country will succeed and prosper.
KPMG is one of New Zealand’s leading professional services firms, specialising in Audit, Tax and Advisory services. We have 825 professionals who work with a wide range of New Zealand enterprises – from privately owned businesses, to publicly listed companies, government organisations, and not-for-profit bodies. We have offices in Auckland, Wellington, Christchurch, Hamilton, Tauranga and Timaru.
Globally, KPMG operates in 155 countries; employing more than 155,000 people in member firms around the world. The independent member firms of the KPMG network are affiliated with KPMG International Cooperative (”KPMG International”), a Swiss entity. Each KPMG firm is a legally distinct and separate entity and describes itself as such.