Accounting Legislation Change

The accounting world in New Zealand has been going through the most significant changes in the past 20 years. Much of this has been the result of the comprehensive legislative reform that is now in effect. We highlight some changes that may be important to you or your clients.


What's been changing and why?


The key driver of these changes is to ensure that the reporting requirements are appropriate for entities at all levels. This has seen the financial reporting requirements for profit orientated organisations separated from those in the not-for-profit and public sectors.


Broadly, the changes impact the following:


  • Which entities are required to prepare financial statements financial statements under generally accepted accounting practice (“GAAP”)
  • What form of GAAP is mandatory and permissible for each type of entity
  • Which entities require an audit
  • Who may audit financial statements of entities required by law to be audited.

One of the challenges in ensuring compliance is the breadth of legislation that has been introduced or amended.   The following are some of the critical pieces of updated legislation:


  • Financial Reporting Act 2013 introduced (and Financial Reporting Act 1993 repealed)
  • Companies Act 1993 amended
  • Charities Act 2005 amended
  • Financial Markets Conduct Act 2013 introduced (and Securities Act 1978 being phased out). This is part of broader reform for the entities within its scope – and importantly the financial reporting requirements for FMC Reporting Entities (similar, but not the same as “issuers” previously) are now caught by this legislation.

Some of the broadest impacts likely to impact a wide range of your clients are on companies and charities – on which this article focusses.


Which entities have to report under GAAP in New Zealand?


Fewer companies


The default position that applied to periods commencing prior to 1 April 2014 was that all companies in New Zealand had to prepare financial statements in accordance with GAAP.


The changes now in place under amendments to the Companies Act 1993 mean that only companies that are large, or have more than 10 shareholders, are required by default to comply with GAAP. In this context, large refers to those companies that have more than $30m total revenue or $60m total assets; or more than $10m total revenue and $20m total assets if an overseas company or subsidiary of an overseas company. The test is applied by reference to (and must be met in each of) the two preceding accounting periods.


The requirement for companies with more than 10 shareholders can also be avoided by a 95% majority vote – but this must be completed within the first six months of the accounting period or by the time of the AGM – which ever is earlier.


Likewise small companies with less than 10 shareholders, but that have minority shareholders representing no less 5% of the voting shares can require this by providing written notice.


An impact of this is that many legal agreements that previously assumed GAAP compliant financial statements would exist as a default may now be requiring something more onerous than is required by legislation.


There are also significant changes to the requirements for the filing of overseas companies’ financial statements, which are now also generally limited to large overseas companies, large branches of overseas companies, and large subsidiaries of overseas companies.


More charities


For registered charities, the situation is somewhat reversed.   Previously charities were not required by their own legislation to prepare financial statements in accordance with GAAP. Whilst many have, many others have not which has led to a broad spectrum of quality of financial reporting being presented by charities.


Charities will now (for periods commencing after 1 April 2015) be required to prepare financial statements in accordance with the requirements of the Financial Reporting Act 2013, which effectively requires GAAP standards to be applied to all charities with annual operating payments in excess of $125,000.


Registered charities that are below this threshold are required to apply approved Non-GAAP standards issued (known as Tier 4 standards). Of course an entity is always able to voluntarily adopt up to a higher level if they wish to.


What is GAAP in New Zealand now?


In New Zealand GAAP is now defined as the accounting standards set by the accounting standard setter; the XRB (External Reporting Board).


To understand the history, we used to have one set of accounting standards in New Zealand. Then along came the much more complex International Financial Reporting Standards (IFRS) which we adopted with very slight modifications as NZ IFRS. The old accounting standards weren’t removed at that stage the new NZ IFRS standards were seen by some as too large and complex for many entities. Then we had two GAAPs.


However the difficulties of trying to use these two GAAPs to cover all entities in New Zealand encompassing the for-profit sector, public sector, and not-for-profit sector resulted in a call for more appropriate standards. This led to a two sector, multi-tier accounting standards framework being introduced in New Zealand.


The two sectors categorise entities as either public benefit entities (with slight variations for public sector and not-for-profit) or for-profit entities. The different tiers recognise different size and complexity of entities and hence essentially allow entities to use accounting standards appropriate to their size and complexity.


While some argue it is more complex as it is more accounting standards, it allows a more “horses for courses” approach.


So when legislation for different types of entities now refers to GAAP you need to refer to the XRB’s pronouncements, specifically a document called XRB A1, to determine which accounting standards apply.   The XRB’s website is www.xrb.govt.nz 


Goodbye to old GAAP


Much of this has been in play in the for-profit space for the last year or so, but for many private entities the impact has been subdued due to fact that older GAAPs have continued to be able to be used for periods commencing 1 April 2014.   However the XRB issued a Revocation Notice revoking the Tier 3 and 4 for-profit accounting standards effective from 1 April 2015. This means NZ IFRS Differential Reporting and New Zealand’s Old GAAP (otherwise known as Financial Reporting Standards and applicable Statements of Standard Accounting Practice) are no longer considered an acceptable GAAP for reporting periods beginning on or after 1 April 2015.


This leaves companies that no longer have a requirement to prepare GAAP compliant financial statements with an important decision to make.   And for companies with more than 10 shareholders this decision is now pressing, as it must be voted on by the time of the AGM or before 6 months after the start of the financial period.


Regardless of their type, entities that have not previously adopted NZ IFRS (and even those that have previously applied NZ IFRS but applied differential reporting measurement concessions) will have some new challenges to face if they produce financial statements under GAAP in the 2016 year.


For-profit entities in particular will now have to move to a more complex set of rules – NZ IFRS Reduced Disclosure Regime – and the conversion process requires restatement and consideration of a range of issues that may not previously have been considered.


Which entities need auditing?


For companies, which all previously required an audit unless unanimous shareholder approval was obtained, they now are only legally required to have an audit if they are:


  • Large (but can opt out unless overseas owned)
  • Have more than 10 shareholders (but can opt out)
  • Have fewer than 10 shareholders, but those with not less than 5% of the voting shares have requested an audit.

For registered charities, a statutory audit requirement is introduced for those with annual expenditure in excess of $1 million.   For those with annual expenditure between $500,000 and $1million either an audit or a review engagement is required.


All FMC reporting entities and those entities that are still considered issuers will require an audit.


Who can be the auditor?


Auditors now come in different flavours in New Zealand and different qualifications are required to audit different types of entities. This is relevant in case you are involved with an entity required by law to be audited. You will need to ensure that the auditor selected is now appropriately qualified to perform the audit.


Licensed auditors – To be the auditor of a FMC Reporting entity or issuer the auditor must be a licensed auditor with the FMA or other delegated licencing body, and working for an appropriately registered audit firm.


Qualified auditors – This is a new requirement effective from 1 July 2015 which applies to entities which require an audit by law but are not FMC Conduct auditors. For example auditors of registered charities must in future be qualified auditors. The licencing body is the accountant’s professional body.


Auditor-General Appointed Auditors – Most Public Entities are required by law to be audited by the Auditor-General. However as the Auditor-General does not herself run a large organisation she approves certain auditors with appropriate skills and experience to be appointed auditors on her behalf.


Summary


Doing what has been done in the past as regards financial reporting is certainly not a guarantee of getting it right in the current high change environment.   It is incumbent on all involved with advising or running companies and other entities required by law to provide financial reports to be aware of the changed financial reporting requirements.


Other important changes for companies


The 1st of May 2015 saw other important changes to the Companies Act 1993 come into force. From this date all companies incorporated will need to:


  • Provide the date and place of birth for all directors – this information will not be publically available.
  • Have at least one director who is resident in New Zealand or resident in Australia and is also a director of an Australian incorporated company.       Existing companies have 180 days to comply with this requirement.
  • Provide details of any ultimate holding company if applicable.

We suspect this last point could prove interesting for some New Zealand companies that have a complex chain of ownership entities. The aim of the changes is to assist with preventing the misuse of New Zealand companies.


 

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Authors

Jason Stinchcombe
Audit & Technical Partner