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FOOD FOR THOUGHT

What Financial Reporting Standards should your organisation be using?

Posted by Yuline Little on February 18, 2015

Last year more than 700,000 sets of accounts for companies, partnerships, trusts and not-for-profit organisations were prepared in New Zealand. But with the biggest accounting changes in nearly two generations all but executed, the look and shape of more than 470,000 of them are going to be very different. Yuline Little outlines key changes by tackling some important frequently asked questions.

 

Financial Reporting Standards FAQs

 

Read more: The Business Owner's Guide to Better Financial Management

 

Why change the financial reporting requirements?

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How do you determine what financial reporting standards your organisation should adopt?

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What organisation types will be most affected by the changes?

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How do you know if your organisation has 'public accountability' or not?

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What organisations will be still be required to prepare general purpose financial reports?

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For companies not required to prepare general purpose financial reports, are there any minimum requirements that must still be met?

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Are the Inland Revenue's minimum reporting requirements enough for your business?

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Are any organisations exempt from preparing financial statements altogether?

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How will trusts and incorporated societies be affected?

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How will trustee companies be treated? 

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What is your next step?

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Why change the financial reporting requirements?

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Preceding this call for change companies regardless of their size or type, had to prepare general purpose financial reports. This meant that their financial statements had to be prepared in accordance with Generally Accepted Accounting Practice (GAAP). However, globalisation and the growing number of multi-national entities meant that as a country we focused on staying abreast of internationally accepted standards, so far as financial reporting goes. Keeping pace with international standards had the effect of adding more layers of complexity. This made meeting the financial reporting requirements imposed by GAAP more difficult and impractical for the majority of New Zealand's companies i.e. small to medium sized businesses (SMEs). The changes will help to rectify this imbalance, with best estimates picking that at least 76%1&3 of companies will no longer be required to prepare general purpose financial reports.

 

At the other end of the spectrum we have not-for-profit organisations and registered charities that whilst they were previously required to prepare and file financial statements as part of their Annual Returns, there were no minimum standards on the content or quality of those financial statements.  

 

The governance group and other stakeholders, such as members, funders, and donors use the financial statements so they can make informed decisions. It is important that financial statements fairly present the activities, transactions and balances and give the whole story of a charity.

 

There are different reporting criteria for different sizes of charity, with simplified regimes for smaller charities. Larger charities will be required to provide non-financial information, such as their mission or purpose and what they do, in addition to financial information.  

 

These are two general examples, but you can begin to see how the changes are all about introducing some much needed relevancy and breaking away from the 'one size fits all' approach. By their very nature larger more complex organisations should have to follow a far more stringent process than say a simple "ma and pa" business - and this is what the changes aim to address.

 

How do you determine what financial reporting standards your organisation should adopt?

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The first step typically involves determining whether you operate a Public Benefit Entity (PBE). PBEs are organisations whose primary objective is to provide goods or services for community or social benefit and where equity is provided to support that primary objective rather than for a financial return to equity holders. Registered charities, not-for-profit organisations, government agencies and statutory bodies typically fall under this sector.

 

A PBE is either a Public Sector PBE (PS PBE) or a Not-for-Profit PBE (NFP PBE). If your organisation does not fall within the PBE definition, then it will be classified as a For-Profit entity.

 

From there, things get more complex.

 

For both PBEs and For-Profit entities there are size thresholds and the reporting standards for each type of entity (be it a charity, company, partnership etc.) are defined in the relevant governing legislation. For example some of the criteria that companies are evaluated against include: local or offshore ownership, the identity of its stakeholders, and whether it is raising debt or equity from the public.

 

Yes, it is important for you to know what your financial reporting obligations are, but if you don't live and breathe accounting every day then it can be difficult to get your head around the various caveats, tiers, definitions and exclusions. Suffice it to say that Bellingham Wallace will assess the financial reporting obligations of all our clients and ensure they are made aware of their obligations, as well as the wider impact of any changes, if any.

 

What organisation types will be most affected by the changes?

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Small and medium privately held companies and partnerships

Generally speaking only companies that raise debt or equity from the general public, or have an annual revenue in excess of $30m or assets exceeding $60m (i.e. large companies) will need to prepare general purpose financial reports.

 

This means that the majority of small to medium sized businesses will no longer be required to prepare general purpose financial reports. They can, however, choose to do so.

 

Small and medium sized companies won't be completely off the financial reporting hook: they will still need to produce 'special purpose financial reports' which meet a minimum set of requirements specified by Inland Revenue. Click here to find out more about these minimum requirements.

 

Non-large unlimited partnerships will also prepare special purpose financial reports.

 

Overseas owned companies

Overseas owned companies, including New Zealand subsidiaries of multi-national companies and New Zealand branches of overseas companies, have previously had to meet additional requirements, with regards to audit and filing financial statements with the Companies Office. Going forward, their statutory reporting obligations will essentially be the same as their locally owned and operated contemporaries, but subject to lower size thresholds i.e. annual revenue in excess of $10m, or assets exceeding $20m.

 

For most, the new requirements will apply to financial years beginning on or after 1 April 2014. 

 

Registered charities

Registered charities are classified as Public Benefit Entities (PBE). Historically this sector has had few (if any) standards of financial reporting imposed on them, so the impact of the changes on some charities will be significant. Those organisations affected will find the initial steps challenging as they come to grips with the additional complexities and responsibilities required of them. However, the emphasis on public accountability and the use of size thresholds, will mean that the prescribed accounting standards will vary from charity to charity.

 

For example: of New Zealand's 27,0002 registered charities up to 59% of them are very small with operating expenses less than $125k pa. Due to their small size these charities may be able to adopt a simpler cash reporting standard. Conversely larger charities with annual expenses of $15m, for example, will have a stricter and more regimented set of financial reporting standards to meet.

 


Generally speaking these changes will apply to registered charities that have financial years beginning on or after 1 April 2015. However, charities can choose to adopt the new standards early.

 

How do you know if your organisation has 'public accountability' or not?

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The definition of 'Public Accountability' is probably not what you'd expect. When it comes to determining your financial reporting requirements an entity has public accountability if it:

 

  • Has debt or equity instruments that are traded, or plan to be traded, in a public market, or
  • Holds assets in a fiduciary capacity for a broad group of outsiders as one of its primary businesses, or
  • Is legally classified as a FMC Reporting Entity. This includes all issuers, registered banks, deposit takers, registered superannuation schemes and licensed supervisors and non-bank deposit takers.

 

What organisations will still be required to prepare general purpose financial reports?

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Generally speaking, once the changes are fully enacted only the following entities will need to prepare General Purpose Financial Reports in accordance with GAAP: 

 

  • FMC reporting entities
  • Large New Zealand companies, large limited partnerships and large unlimited partnerships
  • Large overseas companies, Large New Zealand branches of overseas companies, large New Zealand companies that are subsidiaries of overseas companies
  • Other entities such as Retirement Villages, Maori entities, Friendly Societies and Credit Unions
  • Public Benefit Entities, which have public accountability or are large, including registered charities and public service organisations.

A Public Benefit Entity (PBE) is one whose primary objective is to provide goods or /services for community or social benefit and where equity is provided to support that primary objective rather than for a financial return to equity holders.

 

If an entity is not a PBE it is deemed to be a 'For Profit' entity.

 

For companies not required to prepare general purpose financial reports, are there any minimum requirements that must still be met?

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Yes. The Inland Revenue requires such companies to prepare 'special purpose financial reports' which meet a minimum set of requirements specified by Inland Revenue.



Under these minimum requirements companies will be required to prepare a balance sheet, profit and loss statement and a statement of accounting policies. The financial reports must also include comparable figures for the previous year, a reconciliation between financial statements and taxable income, and a movement in shareholder's equity reconciliation, all relevant amounts from the financial statements summary (IR10 form) and sufficient notes disclosing all related party transactions. This last point is a bit of a caveat in that it could actually result in additional compliance costs. For now though certain 'associated person' transactions can be deferred to the 2015/16 tax year.

 

Are the Inland Revenue's minimum requirements enough for your organisation?

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It is important to remember that it's not only Inland Revenue that will want to access the information contained within your financial statements. Banks, owners and shareholders all rely on it to make important decisions, so a question worth pondering is whether the minimum will actually be enough?



If your business has loans or overdrafts, then banks will probably require a lot more insight into 'what's going on in your business' - not only so they can keep track of their investment, but also to make future lending decisions. At the end of the day it is important to remember these minimum standards are just that...minimums. You'll still have the option to provide further information and analysis so that you can better understand your business and use the information to make good decisions.

 

Are any organisations exempt from preparing financial statements altogether?

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'Small' companies that have annual revenue and expenses of $30,000 or less and are not part of a group of companies are exempt from preparing financial statements. However they are still required to keep sufficient records to calculate taxes.

 

Non-active companies are not required to prepare financial statements.

 

How will trusts and incorporated societies be affected?

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There is no statutory requirement at this time for trusts or societies to prepare general purpose financial reports. Trustees and officers will need to check the financial reporting requirements in the entity's founding document - ie. the Trust Deed or Constitution. If that document requires financial statements in accordance with GAAP, the entity will need to prepare general purpose financial reports. If permitted, the trustees or officers may be able to modify the founding document so that only special purpose financial reports are required.

 

How will trustee companies be treated? 

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Trustee Companies will be treated in the same way as all companies. It is expected that most trustee companies will meet the small company or non-active company criteria and will therefore be exempt from preparing financial reports.

 

However the directors of trustee companies need to consider the protection provided by preparing financial statements, and the risks taken by not doing so, before deciding whether or not to prepare them. The notes to special purpose financial statements generally disclose potential liability for transactions in the trust, documents signed by the trustee on behalf of the trust, and any rights of indemnification.

 

What is your next step?

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Determining what your financial reporting obligations are is not a process that should be taken lightly. Navigating the various criteria, size thresholds and the various 'opt-out' and 'opt-in' provisions will be confusing to many. Clients of Bellingham Wallace do not need to do anything. We will identify the appropriate financial reporting standards for all our clients and ensure they are made aware of any changes to their financial reporting obligations. 


 
If you are worried or concerned about how the changes to New Zealand's financial reporting standards will impact on your organisation then please contact your Bellingham Wallace advisor or Yuline Little immediately. 

 

Click here to contact our team

 

1 http://taxpolicy.ird.govt.nz/publications/2013-ip-financial-reporting-requirements/chapter-2

2 https://www.charities.govt.nz/im-a-registered-charity/new-reporting-standards/

3 http://www.business.govt.nz/companies/about-us/statistics

 

Topics: Financial Reporting