Financial reports have real benefits (Pharmacy Today – May 2012)

With proposed changes underway to the financial reporting requirements of various entities, are you aware of the way your company may be impacted? The financial statements your accountant prepares each year are required under statute, and the disclosures contained within are mandated from a large number of individual financial-reporting standards.

If you have always considered these a costly and irrelevant compliance overhead, someone has been listening. The rules are undergoing a major overhaul in an effort to simplify the process and reduce compliance costs for small-to-medium-sized businesses.

Last year, then Minister of Commerce, Simon Power announced changes to the financial-reporting structure in New Zealand. The important changes included the formation of the External Reporting Board, which is now responsible for changes or additions to financial reporting and assurance standards, as well as implementing more relaxed reporting requirements for small and medium-sized companies.

Under the current reporting framework, all companies are required to prepare General Purpose Financial Reports and there are various conditions that must be met in order to adhere to these standards. The new rules are expected to be introduced in 2013 and companies with annual revenue of less than $30 million and assets less than $60 million will no longer have a statutory requirement to prepare General Purpose Financial Reports. Approximately 98% of New Zealand companies (400,000) are expected to fall under the new reporting rules.

The changes are designed to result in a simple, practicable and consistent financial-reporting framework and balance the benefits to users against the costs of compliance for smaller businesses.

Affected companies will still be required to maintain appropriate accounting records and to compile and prepare financial information and reports for tax purposes and in some other situations, including for major creditors. While still being accrual-accounting based, these Special Purpose Financial Reports will be much less onerous.

The New Zealand Institute of Chartered Accountants is creating a set of high-quality guidelines to be used in preparing Special Purpose Financial Reports for entities that fall under the new rules. Although these guidelines will not be enforceable by statute, compliance will be considered to be best practice. Markhams is not yet aware of the small print of the simplification, so cannot confirm exactly how different these reports will be. However, for all those excited by the prospect of reduced compliance costs and a smaller bill from their accountant, Markhams offers a word of caution.

Financial reports provide information that is useful in decision making both internally for management purposes and externally for investors and creditors. Well-prepared financial statements provide readers with a reliable overview of the company’s financial position, operating results and changes to the business over a period of time.

You can then benchmark performance against other businesses or measure whether you are achieving desired results from new initiatives or changes you have made.

Although business owners and managers have the most knowledge about their businesses, traditional financial statements help to identify key phenomena and explain their financial efforts on the business. Not having appropriate financial reports prepared can result in owners or managers failing to identify areas that are performing poorly or which could be run more efficiently that could be easily detected from a good set of financial reports.

For many companies, the key in taking advantage of the new reporting framework will be finding a balance between eliminating any unnecessary bureaucratic costs and maintaining the appropriate financial information to make high-quality financial management decisions.

This may mean other performance-management tools, such as the “balanced scorecard”, are utilised to ensure owners are getting enough quality information on key performance areas, both financial and non-financial, to effectively run their business.

A balanced scorecard sets objectives that are linked to the organisation’s overall business strategy. Focusing on these key objectives can assist managers to improve the performance of their business.

The changes to the reporting framework should allow the use of such tools to grow as companies will not be obligated to plough as many resources into statutory reporting requirements, but instead specifically target obtaining financial information in areas where they see more value.

Markhams definitely sees the benefit in simplifying the rules. It did not make sense to legislatively burden small entities with turnovers of a few hundred thousand, with the same financial reporting complexity of a multimillion-dollar enterprise.

However, it is up to you as a business owner to decide how important detailed annual financial reporting is in managing your business and to work with your accountant to ensure you receive the right information.

Published in Pharmacy Today by Tarsha Hazleman, May 2012.

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