For-profit entities – are you using the right version of the applicable accounting standards?

The Financial Reporting (Amendments to Other Enactments) Act 2013 came into effect on 1 April 2014. The Act outlines the substantive changes to the financial reporting requirements of entities operating in New Zealand and includes consequential amendments to other legislation such as the Companies Act 1993 and the Financial Markets Conduct Act 2013.

Generally Accepted Accounting Practice (GAAP) for many for-profit small and medium entities (SMEs).

Under the new financial reporting framework, only the following entities are required to prepare GAAP compliant financial statements:

  • FMC reporting entities (as defined in section 451 of the Financial Markets Conduct Act 2013)
  • Large New Zealand companies with income more than $30 million or assets more than $60 million for the two preceding accounting periods
  • Large overseas companies or New Zealand subsidiaries or business units of overseas companies with income more than $10 million or assets more than $20 million for the two preceding accounting periods
  • Companies with ten or more shareholders who do not opt-out for the financial reporting requirement
  • Companies with less than ten shareholders when 5 percent or more opt-in for the financial reporting requirement

While this means most of the SMEs in New Zealand have no legal requirement to comply with GAAP when preparing their financial statements, they will still need to produce special purpose financial reports for users such as governance bodies, the Inland Revenue Department (IRD) or the Bank.

What is a special purpose financial report?

A special purpose financial report is not a general purpose financial report. It is prepared for a special purpose and that purpose should be clearly stated.  There is no single definition of special purpose reporting and it varies according to the purpose.

The most common special purpose financial report is prepared for tax compliance purposes. So in our opinion, as a minimum, the special purpose financial reports should be prepared in compliance with the tax reporting requirements established by IRD.

IRD published Tax Administration (Financial Statements) Order 2014 in March 2014 by Order in Council.

The Order, which came into force 1 April 2014, sets the minimum financial reporting requirements for SMEs. However, a small company is exempt from the minimum requirements when:

  1. the company is non-active; or
  2. the company is not part of a group of companies; and
  3. the company has not derived income in excess of $30,000, and has not incurred expenditure in excess of $30,000 during the income year.

The minimum requirements for the preparation of financial statements under the Act are as follows:

  • Balance sheet
  • Profit and loss statement
  • Principles with which statements must comply – accrual accounting and double-entry method
  • The use of valuation principles – tax values, historical value and market value
  • Statement of accounting policies, including:
    • the policies and assumptions that have been used in the preparation of the financial statements; and
    • descriptions of any material changes in the accounting policies; and
    • if financial statements are prepared on a GST inclusive or exclusive basis.
  • A number of other matters are required to be disclosed, as follows:
    • reconciliation – between financial statement and taxable income; and taxation-based schedule of fixed assets and depreciable property;
    • forestry company – cost of timber and a reconciliation of movements in the cost of timber during the income year;
    • livestock – valuation methods, valuations and calculation for tax purposes;
    • any amounts shown in the prescribed IRD forms;
    • sufficient notes to support any exceptional item on any form prescribed by the IRD.

Please note that interest and dividend income must be shown as a gross amount. Dividends must be grossed up to the extent imputation credits are utilisable.

  • Associated person transactions – disclosure requirements for transactions with any associated person within the meaning of subpart YB of Part Y of the Income Tax Act 2007 if the associated person is not a company or the associated person is a company that is not a resident in New Zealand.

Alternatively, SMEs that are required to prepare special purpose reports may follow the CAANZ optional special purpose financial reporting package, which provides a more sophisticated reporting than the Inland Revenue Tax reporting requirements.

Summer 2014

Serious about your success?