The Government has released its remaining policy decisions on its 2009/2010 review of the statutory framework for financial reporting, and has announced that it intends to introduce a Financial Reporting Amendment Bill to Parliament in the first quarter of 2012, with a view to it being enacted in 2013.
In addition, the External Reporting Board (XRB) has released three discussion documents outlining proposals for a new Accounting Standards Framework.
Two years ago the Ministry of Economic Development (MED) released a discussion document on the Statutory Framework for Financial Reporting with a view to creating a financial reporting framework that is "coherent, complete and consistent" and balancing "the benefits of financial reporting against the compliance costs". The review also promoted New Zealand-Australia financial reporting convergence. The review found that the framework was overly costly and not meeting users' needs or expectations, particularly for small and medium-sized businesses and registered charities.
The discussion document included a controversial proposal that stakeholder interest warranted greater public disclosure of the financial performance of large non-issuers. However, following business concerns on the proposal, Commerce Minister Hon Simon Power made an early announcement in February 2010 that the Government had decided that large non-issuer companies would not be required to file their financial statements with the Registrar of Companies. For further details of that decision see our article Early announcement on financial reporting changes.
The MED's discussion document was released simultaneously with a companion discussion document by the Accounting Standards Review Board (now replaced by the XRB) entitled Proposed Application of Accounting and Assurance Standards under the Proposed New Statutory Framework for Financial Reporting. This document outlined how the board would respond if Parliament were to enact the changes proposed by the MED.
Summary of proposed financial reporting changes
The new legislative framework for financial reporting which has been approved by Cabinet will involve a number of significant changes from the status quo. The changes will reduce the number of companies required to prepare general purpose financial reporting from 460,000 to less than 10,000, and they are expected to cut business compliance costs by $90 million a year. However, the current financial reporting requirements for issuers are to be retained (as modified by the Auditor Regulation Act 2011).
The following table outlines some key changes for non-issuer companies, limited partnerships, partnerships, and credit unions. Changes to the Financial Reporting Act 1993 will also require the XRB to set financial reporting requirements for registered charities, and for other not-for-profit entities that have reporting obligations. Further information about these changes can be found in two Cabinet papers on the MED website.
Click here to view the table.
For reporting entities still subject to GPFR obligations, there are also proposals to:
- Change the deadlines for financial reporting for issuers and companies: Currently, the financial statements of a reporting entity must be completed within five months after the balance date of the entity. Those that have filing requirements must file the audited financial statements within another 20 working days. The Financial Reporting Act is to be amended to reduce the timeline from five months to three months of the balance date (with 20 days to file). This will mean some reporting entities may have to change their year-end reporting processes in order to meet the challenge of the shorter deadline.
- Remove the requirement for parent company financial statements: A company that has one or more subsidiaries is required to prepare consolidated financial statements and parent-only financial statements. The consolidated financial statements are considered essential as they provide information about the overall scale of the company and the resources under its control. However, as part of these reforms the Government is proposing that the parent company reporting obligation be removed. Instead, it will be left to the XRB to determine what parent entity information, if any, will need to be disclosed in the notes to the consolidated financial statements.
XRB now consulting on a multi-standard accounting framework
Following the Government's announcement on changes to the financial reporting framework, the XRB released three documents outlining proposals for New Zealand's standards framework for general purpose financial reporting. The three documents are:
- A Position Paper entitled: Accounting Standards Framework: A Multi Standards Approach;
- A Consultation Paper entitled: Accounting Standards Framework for General Purpose Financial Reporting by For-Profit Entities; and
- A Consultation Paper entitled: Accounting Standards Framework for General Purpose Financial Reporting by Public Benefit Entities.
The consultation papers outline specific proposals for the number of tiers, the criteria for allocating entities to tiers, the accounting standards that will apply to each tier, and the process and timing for adopting the new frameworks in each sector. For for-profit entities, the XRB's proposals include:
- A two tier structure and the removal of the current exemption that allows small and medium companies to use "old GAAP" (as these entities will for the most part no longer be required to comply with XRB standards);
- The application of full NZ IFRS harmonised with Australia for Tier 1 for-profit entities (which will include all issuers, registered banks, deposit takers, registered superannuation schemes and large for-profit public sector entities); and
- The adoption of a Reduced Disclosure Requirements (RDR) version of NZ IFRS harmonised with Australia for Tier 2 for-profit entities. The proposed RDR are based on the premise that for-profit entities in Tier 2 would apply the same recognition and measurement requirements as for Tier 1 but with significantly reduced disclosures. The proposals would result in very few differences between the New Zealand and Australian requirements.
The closing date for submissions on both the consultation papers is 16 December 2011. For further information visit the XRB website: www.xrb.govt.nz.