Financial Reporting Act passed

22 November 2013

Financial Reporting Act passed

Introduction

The Financial Reporting Act was passed on 20 November.

The announcement from the Commerce Minister’s office highlighted the removal of the requirement for SMEs to produce complex financial statements. This, he said, would remove some expensive compliance obligations for many companies with revenue between $2m and $30m a year and enable them to focus their time and energy on growing their businesses, innovating and creating jobs.

The Act will also improve the quality of financial reporting by charities and allow XRB to issue accounting standards for registered charities.

Changes to financial reporting

The principal changes that will result from the Financial Reporting Act include:

• Changes for SMEs: Most SMEs will no longer be required to prepare general-purpose financial statements. Instead, SMEs will only be required to prepare general-purpose financial statements if they are:

o an ‘FMC reporting entity’;
o “large”;
o a public entity;
o have 10 or more shareholders (and have not opted out); or
o have fewer than 10 shareholders (and have opted in).

All companies, other than those which are ‘non-active’ that do not have an 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 .

• Financial reporting requirements split according to entity: The financial reporting requirements of an entity will be contained in the statute which governs the relevant type of entities. The headline distinctions are those between:

o entities which are a ‘FMC reporting entity’ – whose financial reporting obligations will be contained in the Financial Markets Conduct Act 2013; and
o companies which are not a ‘FMC reporting entity’ – whose financial reporting obligations will be contained in the Companies Act 1993.

• Large New Zealand companies: As previously noted, the definition of a ‘large’ New Zealand company has been amended. As a result, a New Zealand company (other than a subsidiary of an overseas company) will be considered ‘large’ if at least one of the following applies:

o as at the balance date of each of the two preceding accounting periods, the asset threshold is $60m (for total assets of the company and its subsidiaries); or
o in each of the two preceding accounting periods, the revenue threshold is $30m (total revenue of the company and its subsidiaries).

(Note that for the New Zealand subsidiary of an overseas company to be classified as ‘large’, the above thresholds are reduced to $20m and $10m respectively.)

• Overseas companies: An overseas company will only be required to prepare financial statements if it is a ‘FMC reporting entity’ or a ‘large overseas company’. For an overseas company, the same thresholds apply as to New Zealand subsidiary of an overseas company to determine if it is large (i.e. the $20m asset threshold or $10m revenue threshold).

• Registration: The registration requirement will only apply to ‘FMC reporting entities’, ‘large overseas companies’ and ‘large’ New Zealand companies with 25% or more overseas ownership – with the result that fewer companies will be required to register their financial statements.

• Timelines: The timelines for preparing and lodging financial statements has been reduced from 5 months + 20 working days after the balance date to 4 months.

• No parent company financial statements: An FMC reporting entity that is a parent will only be required to prepare group financial statements (rather than both parent financial statements and group financial statements, as is currently the case) .

Transitional measures

The transitional measures for implementing the Financial Reporting Act – making it clear that in the majority of cases, the existing regime will continue to apply to entities whose accounting periods began prior to the relevant provisions of the new regime coming into effect.

Implementation Timeline/s

In the case of FMC reporting entities, the FMA has indicated that the new financial reporting requirements will apply to FMC reporting entities from 1 April 2014 – under Phase 1 for implementation of the Financial Markets Conduct Act. The FMA has also indicated that it will be providing further guidance and its policies on exemptions under the new regime.

For SMEs and companies that are not FMC reporting entities, the IRD consultation paper on the new minimum financial reporting requirements for companies indicates that they have a 1 April 2014 implementation date in their sites too.

At a glance, these dates seem ambitious – but it often seems to be the way with significant new legislative regime such as that heralded by the Financial Markets Conduct Act that there is a rush of detail at the end of what has otherwise been an orderly and measured process.

Further information

If you would like more information about any of the matters discussed in this note, please contact me.