Changing the face of financial reporting
On 14 September 2011, the Minister of Commerce announced proposed changes to the statutory financial reporting framework, concerning which entities are required to prepare general purpose financial reports (GPFR). The key change is to replace the current statutory requirement for most small and medium-sized companies to prepare GPFR with a requirement to prepare special purpose financial reports (SPFR) for tax purposes, using minimum standards established by Inland Revenue. This change is expected to significantly reduce compliance costs for around 98% of companies.
Concurrently with the Government announcement, the External Reporting Board (XRB) issued a Position Paper and two Consultation Papers on the accounting standards to be used by those entities that would have a statutory requirement to prepare GPFR under the Government’s proposed statutory framework, such as issuers of debt and equity securities, large companies and partnerships, public sector entities and registered charities.
The XRB Position Paper explains the rationale for the XRB’s decision earlier this year to adopt a multi-standards approach, with different sets of standards to be used by public benefit entities (PBEs) and for-profit entities. PBEs are entities whose primary objective is to provide goods or services for community or social benefit, rather than for a financial return to equity holders. Examples of PBEs include many entities in the public sector (e.g. government departments, hospitals and schools), along with charities and other not-for-profit entities in the private sector. However, public sector entities that are profit-oriented (e.g. state-owned enterprises) will use the accounting standards applying to for-profit entities.
The purpose of the two XRB Consultation Papers is to seek feedback on how the XRB’s decision to adopt a multi-standards framework should be implemented. The XRB is inviting comments by 16 December 2011.
A summary of the key changes proposed in the Government announcement and the XRB Consultation Papers is set out below.
Summary of key changes
- Companies that are not issuers and are not large (annual revenue below $30 million and assets below $60 million) would no longer need to prepare GPFR in accordance with accounting standards. Instead, these entities would prepare special purpose financial reports (SPFR) for tax purposes, using minimum standards established by Inland Revenue. The starting date for the change would be as soon as possible after the legislation has been enacted (expected to be in 2013) and minimum standards have been set by Inland Revenue.
- The statutory requirement for issuers and large companies to prepare GPFR would be extended to large partnerships. The definition of “large” would be annual revenue over $30 million or total assets over $60 million.
- For-profit entities required to prepare GPFR would continue to use NZ equivalents to International Financial Reporting Standards (NZ IFRS). There will be two tiers of requirements – full NZ IFRS for Tier 1 entities (e.g. issuers, registered banks and super schemes) and reduced disclosure requirements (RDR) for Tier 2 entities (e.g. most large companies that are not issuers). The RDR would replace the existing differential reporting framework and is expected to be available for voluntary adoption from 1 July 2012 and mandatory adoption from 1 July 2013.
- There will be a separate set of accounting standards for large and medium-sized PBEs. The PBE standards will be based on International Public Sector Accounting Standards and would include 2 tiers of requirements - large PBEs (expenses over $30 million) and PBEs that levy coercive revenue (e.g. rates or taxes) would comply with the PBE standards in full. Medium-sized PBEs (expenses between $2 million and $30 million) would have reduced disclosure requirements.
- Small PBEs (annual expenses less than $2 million) would use a simplified financial reporting framework. This simplified framework would use accrual accounting, except for very small not-for-profit entities (expenses under $40,000) that could prepare accounts on a cash basis.
- The proposed target date for public sector PBEs to adopt the new PBE standards is 1 July 2013 (i.e. June 2014 year-ends). The proposed target date for charities and other not-for-profits is 1 July 2014 (i.e. June 2015 year-ends).
We will provide further details of the proposed changes announced by the Government and the XRB shortly. In addition, we will hold workshops in October 2011 for Ernst & Young clients to hear more about the proposed changes and the implications for your organisation. Further details to follow.
Click here (pdf, 3.2mb) for a more detailed summary.
For more information please contact a member of Ernst & Young’s Financial Accounting Advisory Services Team:
Kimberley Crook – Partner, Auckland: +64 9 300 7094
David Pacey – Executive Director, Auckland +64 274 899 049
Andrew Moorby – Executive Director, Christchurch: +64 274 899 949
Ravi Kumar – Senior Manager, Auckland +64 212 214 717
Jude Doliente – Manager, Auckland +64 212 417 481
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