New Zealand finally has a new financial reporting regime that will replace the clunky Financial Reporting Act 1993 (FRA 1993). Despite numerous amendments, the FRA 1993 contains a number of arbitrary distinctions and onerous requirements, particularly for small companies. The Financial Reporting Act 2013 (FRA 2013) and the Financial Reporting (Amendments to Other Enactments) Act 2013 are the result of a reform process that began in 2009, and will provide welcome relief for small to medium enterprises.
The new regime will come into force on an as yet unspecified date to be announced by the Government, which is likely to be in early 2014. The new rules will only apply to accounting periods commencing after that date, meaning that the existing FRA 1993 requirements will likely still apply in respect of financial years ending 31 December 2013 or 31 March 2014.
The new regime is a rationalisation of financial reporting duties and has been deliberately split across various acts for ease of access. The FRA 2013 contains certain key financial reporting concepts (eg generally accepted accounting practice) and provides for the External Reporting Board to prepare and issue financial reporting and auditing and assurance standards. Meanwhile, the substantive financial reporting requirements (including the key rules around which entities need to prepare, audit and register financial statements with the Companies Office) have been transferred from the FRA 1993 to entity-specific legislation, including the Companies Act 1993 and the Financial Markets Conduct Act 2013 (FMCA).
The key financial reporting obligations for companies will be as follows (noting that this is a general summary only and you should obtain professional advice as to your specific compliance obligations):
- FMCA reporting entities (formerly known as issuers): Listed companies and other entities regulated by the Financial Markets Authority under the FMCA (including those companies already regulated as “issuers”, such as registered banks and licensed insurers) will be required to prepare, audit and publicly disclose general purpose financial statements within four months of their balance date.
- New Zealand branches: As noted below, large overseas companies carrying on business in New Zealand (applying a threshold of either NZ$20m in assets or NZ$10m in revenue during each of the past two accounting periods) must prepare, audit and publicly file their financial statements with the New Zealand Companies Office. In addition, the overseas company's New Zealand branch (that is, the extent of its New Zealand business operations alone) must also prepare, audit and file financial statements for the branch alone if its operations amount to a “large” branch. A “large” New Zealand branch is one that satisfies the same thresholds, ie it had either NZ$20m in assets or NZ$10m in revenue during each of the past two accounting periods. It is therefore possible that an overseas company carrying on business in New Zealand through a branch may only need to file financial statements for the overseas company itself (but not for the branch) if its branch operations did not meet the “large” threshold.
Preparation and audit of financial statements: The following companies will be required to prepareand audit general purpose financial statements:
- large New Zealand-incorporated companies (companies which together with their subsidiaries (if any) have assets in excess of $60m or revenue in excess of $30m during each of the past two accounting periods). These companies can, subject to certain exceptions, opt out of the audit requirement if the financial statements do not need to be publicly disclosed (see below) and the shareholders opt out by a 95% majority vote
- every New Zealand-incorporated company recognised as a public sector entity under the Public Audit Act 2001
- large overseas companies and “large” New Zealand branches of large overseas companies (as noted above, separate to large overseas companies themselves), in each case applying a threshold of either NZ$20m in assets or NZ$10m in revenue during each of the past two accounting periods
- all other New Zealand-incorporated companies with 10 or more shareholders unless the shareholders are able to and do opt out of this requirement by a 95% majority vote
- all other New Zealand-incorporated companies with 10 or fewer shareholders if the shareholders opt into compliance with this requirement.
Public disclosure of financial statements: The following companies will need to register audited financial statements with the Companies Office for public disclosure within five months of their balance date:
- large overseas companies, including the separate financial statements for the New Zealand branch, if that branch is “large” (in each case applying a threshold of either NZ$20m in assets or NZ$10m in revenue during each of the past two accounting periods)
- large New Zealand-incorporated companies in which 25% or more of the shares are ultimately owned by foreign interests.
- Recognition of overseas reporting standards: The Registrar of Companies will be able to allow a large overseas company (solely for its own financial statements but not for those of its New Zealand branch if separate financial statements for that branch are required) to comply with its home country’s financial reporting requirements and auditing and assurance standards if they are substantially the same or sufficiently equivalent in terms of the quality of financial reporting and auditing and assurance, respectively, as would be achieved under the applicable New Zealand financial reporting and auditing and assurance standards.
- Group financial statements and parent company financial statements: There will no longer be a requirement for companies to prepare stand-alone parent company financial statements if that company prepares group financial statements encompassing its subsidiaries.
- Inactive companies: The exemption under the FRA 1993 for “non-active” companies has been carried across to the FRA 2013 by way of a qualification to the definition of a “large” company. The effect of this exemption is that a company that would otherwise be “large” by virtue of meeting the relevant assets threshold will not need to prepare, audit and register financial statements if that company was “inactive” during the relevant accounting period, that is, it did not derive any income, had no expenses and did not dispose of any assets during that accounting period and has no subsidiaries or all of its subsidiaries are inactive entities.
- Filing timeframes: The standard timeframe to prepare, audit and file financial statements has been reduced from five months and 20 working days after a company's balance under the FRA 1993 to fivemonths after its balance date for all companies except reporting entities under the FMCA (which have four months to do so).
There are also changes to sector-specific legislation including the legislation covering registered charities, retirement villages and building societies. If your organisation currently has financial reporting obligations, the new rules could affect your compliance requirements. Please contact your regular Buddle Findlay adviser for more information.