Further changes to the Financial Reporting Bill

7 November 2013

 Introduction

The Financial Reporting Bill is presently working its way through the legislative process.  When enacted, the Bill will replace the Financial Reporting Act 1993 (the 1993 Act) and amend a number of other statutes that contain financial reporting obligations for various entities.

A further Supplementary Order Paper was introduced on 31 October, containing a number of further changes to the Bill.  These changes are largely intended to dovetail with the Financial Markets Conduct Act 2013 (FMC Act) which was recently passed and is designed to come into force in two phases (1 April 2014 and 1 December 2014).

Large overseas companies

The definition of ‘large’ in relation to overseas companies has been amended by:

 ·         Reducing the asset threshold from $60 million to $20 million; and

·         Reducing the revenue threshold from $30 million to $10 million.

The effect of this change is that more overseas companies will be ‘large’ and will, accordingly, have financial reporting preparation, audit, and filing obligations under the Companies Act 1993.

For consistency, the test for whether the New Zealand business of an overseas company is ‘large’ has been amended (new section 204 of the Companies Act 1993).  The effect of this change is that more New Zealand businesses of overseas companies will be large under new section 204 (which requires financial statements of such large New Zealand businesses to be prepared).

Other noteworthy changes

Other changes of note arising out of the SOP include:

·         A clarification that, if one enactment requires an entity to prepare financial statements in accordance with generally accepted accounting practice (GAAP) but another enactment allows those statements to be prepared in accordance with a non-GAAP standard – the statements must comply with GAAP:

·         An amendment to the definition of inactive entity – to clarify that either such an entity must have no subsidiaries or all of its subsidiaries must be inactive.

·         Further changes to the opt-out provisions, which enable:

o   the shareholders of a company with 10 or more shareholders (other than a ‘large’ company, or a public entity) to opt out of the requirement to prepare company or group financial statements, the audit requirements, or the obligation to prepare an annual report; or

o   the shareholders of a ‘large’ company (other than a public entity or company that is required to register financial statements) to opt out of the audit requirements.

that includes a requirement that the notice of a shareholders’ meeting to consider an opt-out resolution to include the text of any proposed resolution.

Changes arising out of the FMC Act

The main change made following the enactment of the FMC Act is to replace Part 7 of the FMC Act (which relates to financial reporting).  The new Part 7:

·         applies to entities defined as ‘FMC reporting entities’ (these include issuers of debt securities, equity securities, and derivatives, managers of registered schemes, licence holders under Part 6 of the FMCA (other than an independent trustee of a restricted scheme), licensed market operators (other than overseas operators), licensed supervisors, listed issuers, registered banks, and licensed insurers;

·         includes building societies and credit unions as FMC reporting entities.  Many building societies and credit unions are issuers under the Financial Reporting Act 1993.  The amendments will require all building societies and credit unions to comply with financial reporting obligations as FMC reporting entities; and

·         requires FMC reporting entities to keep proper accounting records, to prepare financial statements or group financial statements, to have these financial statements audited, and to lodge these financial statements with the Registrar of Financial Service Providers.

The main changes that will flow from the new Part 7 include:

 ·         Timeline for preparing financial statements:  The timeline by which FMC reporting entities must prepare (and lodge) audited financial statements has been reduced to 4 months after balance date (from the current 5 months + 20 working days).

·         Enforcement and liability:  The financial reporting requirements will be subject to the enforcement and liability regime in the FMC Act.  A contravention may give rise to a civil remedy under subpart 3 of Part 8 of the FMC Act, including a pecuniary penalty.  In addition, both the FMC reporting entity and its directors may be liable for an offence for knowingly failing to comply with financial reporting standards.  This offence has a maximum penalty of imprisonment for a term not exceeding 5 years and a fine not exceeding $500,000 (in the case of an individual) or $2.5 million (in the case of a body corporate).  Currently, the offences in the Financial Reporting Act are strict liability offences with a maximum fine of $100,000.

·         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).[1]  

Transitional measures

The SOP includes changes to the transitional measures for the new financial reporting requirements for FMC reporting entities.  These include:

·         A clarification that the new regime applies to persons who were issuers immediately before commencement and persons who make offers of securities under the Securities Act 1978 (whether under the transitional provisions of the FMC Act or otherwise).

·         Providing that the obligation on an entity under the Financial Reporting 1993 Act ceases to apply if it has financial reporting obligations under the FMC Act, it ceases to be an issuer, or its accounting period commences after a prescribed date.

·         Clarifying that, for an entity whose accounting period started before commencement of the Bill – and the entity becomes an FMC reporting entity during that period, in which case, the financial reporting requirements of the former law apply to the period (rather than those of Part 7 of the FMC Act).  However, this does not apply if, for example, the entity made a regulated offer under the FMC Act.

·         Adding a new provision for an FMC reporting entity that is an issuer or a trustee of a ‘scheme’ (for certain superannuation schemes, unit trust and offers of participatory securities) that is not yet registered under the FMC Act and requires the financial statements of that scheme to be prepared under Part 7 of the FMC Act.

Next steps

It is anticipated that the Bill will complete the final stages of its legislative journey so that it will be in force at the same time as the relevant provisions of the FMC Act – on 1 April 2014.

Further information

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