Major financial reporting reforms passed

Late last week Parliament passed the Financial Reporting Bill – part of the government’s Business Growth Agenda to improve capital markets and reduce compliance costs. The Bill changes the financial reporting obligations of most New Zealand companies, and overall presents a more principled approach to the issue, basing the rules on three things: public accountability, economic significance, and the separation of owners and management.

A few key changes to be aware of are:

Reduced compliance for "SMEs”: Most New Zealand companies will no longer be required to prepare general purpose financial statements. Instead, a company will only be required to prepare general purpose financial statements if it’s an entity governed by the new Financial Markets Conduct (FMC) regime (for example a public issuer), "large”, a public entity, has 10 or more shareholders and hasn't opted out of the regime, or has fewer than 10 shareholders and has opted into it.

A company incorporated in New Zealand will be considered to be large if it has assets of $60 million or revenue of $30 million. If the company is a subsidiary of an overseas company, however, the threshold will be $20 million of assets or revenue of $30 million.

Importantly, all companies, other than those which are non-active that don’t have an obligation to prepare general purpose financial statements, will still be required to prepare financial information at least to a minimum level to be set by Inland Revenue, on which consultation is currently being conducted. The extent of these requirements will determine how much the compliance burden will really be reduced.

Overseas companies: An overseas company carrying on business in New Zealand will only be required to prepare financial statements if it’s an FMC reporting entity or large. Overseas companies carrying on business in New Zealand will be considered to be large if they have $20 million of assets or revenue of $10 million.

Timing: To ensure more timely reporting, the deadline for FMC reporting entities to prepare and register their financial statements will be reduced to four months post-balance date (note that listed entities already need to have their financial statements prepared within three months of their balance date to comply with the NZX Listing Rules). The deadline for other entities captured by the new regime will be five months.

Registration: Fewer companies will be required to register their financial statements. The only companies that will need to register are FMC reporting entities, large overseas companies and large New Zealand companies with 25% or more overseas ownership.

The new requirements are likely to apply from 1 April 2014. Before then, it’s important for companies to determine what their obligations are going to be, including being able to comply with the requirements being set by Inland Revenue. It’ll be equally important to think about the extent to which any reporting ought to be done over and above the new legal minimum for the benefit of the company’s stakeholders. And, looking at it from the other angle, stakeholders ought to think about the extent to which they can or should be demanding additional information over and above the new legal minimum.

This article was first published in the Your Law column in the Sunday Star Times on 1 December 2013.

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