There have been discussions about the changes to the financial reporting requirements for small and medium-sized companies (SME’s) for some time now. It was announced on 13 March 2014 that these changes will come into effect on 1 April 2014. The changes are meant to save compliance costs significantly for most SME’s in New Zealand, that is, companies with annual revenue of less than $30 million or assets less than $60 million.
Compliance costs increased significantly for companies in 2007 when accounting standards, based on international reporting standards, required them to have detailed and extensive accounting disclosures. This provided a platform for those companies, mostly large, that were looking for offshore funding in the international markets but SME’s operating in the domestic market did not get a comparable benefit.
The new legislation provides relief for SME’s in that only large companies, as defined, are required to comply with the accounting standards.
For accounting periods beginning on or after 1 April 2014, small to medium-sized companies will no longer have a statutory obligation to prepare general-purpose financial statements required under the Financial Reporting Act 1993 , ie financial statements complying with accounting standards. They will however be required to prepare special-purpose financial statements for income tax purposes.
Inland Revenue issued guidelines late last year setting out the minimum information companies will need to provide for the special-purpose financial statements but these proposed minimum reporting requirements appear to be lengthy and unfortunately may negate most of the savings in compliance costs for SME’s.
Some of the Inland Revenue requirements include:
- A balance sheet setting out the assets, liabilities, and net assets of the company as at the end of the income year;
- A profit and loss statement;
- The financial statements must be prepared on the Double-entry and Accrual accounting principles;
- Values used may be tax values, historical costs, or market values as long as they are consistent with the accounting principles above;
- Other information that must be disclosed in the Financial statements:
- a statement of accounting policies;
- Taxable Income Reconciliations;
- Detailed, taxation-based, schedule of the company’s fixed assets and depreciable property;
- Associated person transactions; and
- Additional disclosures for companies with particular types of business;
- Reporting of certain items of income eg dividends and interest grossed up for tax credits.
The New Zealand Institute of Chartered Accountants (NZICA) will also issue guidelines, in conjunction with Inland Revenue, so entities will have the option of choosing between Inland Revenue and NZICA frameworks.
If you want to discuss how the changes affect you please contact my accountants in Manukau.