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Financial Reporting Bill introduced

by Stephen on September 21st, 2012

Financial Reporting Bill introduced
The Financial Reporting Bill was introduced by the Government at the end of July but is yet to have its first reading. It is designed to give effect to the Government’s announcement (in September 2011) of a new statutory reporting framework. This is part of process of the review of New Zealand’s financial reporting framework, which commenced in 2009 with the aim of examining and confirming the types of entity that should be subject to general purpose financial reporting obligations – and specifying what those obligations are for each type of entity.

Once enacted, the Bill will repeal and replace the Financial Reporting Act 1993 and amend a number of other statutes which contain financial reporting obligations for various types of entity.

One of the primary aims of the policy underpinning the Bill is to reduce the compliance burden on SMEs. Primarily, this is to be achieved by the removal of the existing (mandatory) requirements to prepare general-purpose financial statements and annual reports.

The Bill is essentially a piece of umbrella legislation to which the specific financial reporting obligations (to be continued in the primary legislation) will refer. As a result, the Bill contains:

• Definitions of key concepts and terms (such as GAAP );
• Provisions relating to the functions and powers of the External Reporting Board (XRB); and
• Standard provisions relating to auditor qualifications and access to information.
The main impacts of the Bill
The Bill is aimed at achieving 3 major outcomes:
• First, to reduce compliance costs by removing or reducing reporting obligations where they are unnecessary or excessive. Specifically, the Bill proposes the removal of the requirement for non-large, non-issuer, companies to prepare general-purpose financial reports. Instead, it will up to shareholders to decide whether financial reports will need to be prepared.

• Secondly, it will strengthen the law where the current reporting requirements do not adequately meet users’ needs – with the main change being to empower XRB to issue financial reporting standards for a range of entities, including registered charities. Currently, registered charities are required to attach financial statements to their annual returns but the quality of reporting is regarded is poor because of the absence of clear rules governing their preparation.

• Thirdly, it will make several other changes where the current financial reporting settings are inconsistent with the 3 indicators of financial reporting.
Another purpose of the Bill is to make financial reporting legislation more user-friendly by placing the substantive reporting requirements in Acts where the public might generally expect to find them. For example, the requirements for companies are split between the Financial Reporting Act and the Companies Act 1993.
Modernisation and standardisation
The Bill will modernise and standardise general-purpose financial reporting concepts and language (e.g. by standardising accounting record keeping requirements) across a number of statutes.
Financial reporting for issuers etc.
The Bill does not include specific provisions that relate to financial reporting by issuers and some other financial market participants (apart from transitional provisions). Instead, the intention is that their substantive reporting requirements will eventually be included in the Financial Markets Conduct Bill. However, as a precursor, to change the underlying legislation (and to implement a policy setting that will make a distinction between public issuers and other ‘large’ entities and the SME sector) the Bill contains a number of important definitions that focus on size to identify which entities must comply with GAAP, namely:

Large: Large entities are those with $30 million revenue or $60 million assets (calculated by reference to each of the preceding two financial years); and
Not-for-profits: A specified non-profit entity is an entity with operating payments of $40,000 or more.

In addition, a new category is added (by means of an add-on to the Financial Markets Conduct Bill to be implemented via a Supplementary Order Paper than accompanied the Bill) which is defined as an ‘FMC reporting entity’ with financial reporting obligations that include having their financial statements audited by a qualified auditor and lodging those audited financial statements, including any audit report, directly with the XRB. In addition to issuers, a number of financial market participants (including managers or operators of registered schemes or funds) are captured. There are a number of important carve-outs including (for example) companies that are unlisted issuers of equity securities (only) that have fewer than 50 shareholders or 50 share parcels.

Another example of the flexibility that Bill seeks to provide (particularly to deal with concerns about the need to safeguard SMEs from the costs associated with full-scale compliance) is to enable XRB some FMC reporting entities to be subject to a lower compliance burden. This is achieved by:

• Recognising that certain types of FMC reporting entity are designated as having “a higher level of public accountability” – such as issuers, banks, insurers, etc.
• Enabling the FMA to designate individual FMC reporting entities, or classes thereof, as having a higher level of public accountability; and
• (As a logical counterweight) providing that the FMA can also designate individual FMC reporting entities, or classes thereof, to not have a higher level of public accountability.

There are a number of other notable changes in the Bill for other reporting entities. These include:
Limited partnerships: the Bill removes the requirement on small and medium-sized limited partnerships to prepare general-purpose financial statements;
Partnerships: the Bill introduces requirements for ‘large’ partnerships to prepare general-purpose financial statements. These must be audited by a qualified auditor in accordance with auditing and assurance standards (unless the partnership opts out); and
Charities: the Bill empowers XRB to make financial reporting standards for registered charities and other not-for-profits that have reporting obligations.

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