Submissions called on Financial Reporting Bill

Thursday 29 November 2012

Author: Glenn Joblin

​The Commerce Select Committee has called for submissions on the Financial Reporting Bill. The Bill will repeal and replace the Financial Reporting Act 1993 (the 1993 Act) and amend a number of other statutes which contain financial reporting obligations for various entities.

The release of the Bill is the latest stage in the review of New Zealand's financial reporting framework which commenced in 2009. The Cabinet policy decisions on which the framework for the Bill is based were released last year (click here for further background details).

Submissions close on 18 January 2013.

Key aims of the Bill

The Bill aims to:

  • Reduce compliance costs by removing or reducing reporting obligations where they are considered unnecessary or excessive.

  • Strengthen the law where the current reporting requirements do not adequately meet users' needs.

  • Make financial reporting legislation more user-friendly by placing the substantive reporting requirements in Acts where the public would expect to find them (for example, all the substantive rules relating to the preparation, auditing and distribution of financial statements for companies will form part of the Companies Act).

  • Modernise and standardise general-purpose financial reporting concepts and language (for example by standardising accounting record keeping requirements) across relevant Acts.

  • Amend provisions in various Acts that provide for matters that are now addressed in financial reporting and auditing and assurance standards.

Financial reporting for issuers

Issuers will be largely unaffected by the proposed amendments to the financial reporting regime.

The Bill will amend the proposed Financial Markets Conduct Act (which is still making its way through the parliamentary process) to include substantive financial reporting requirements for issuers and other financial market participants (referred to as FMC reporting entities). These amendments are currently contained in a Supplementary Order Paper (SOP) to the Financial Reporting Bill, as they can not be incorporated as part of the Financial Reporting Bill until after the Financial Markets Conduct Bill is enacted.

Transitional provisions are included in the Financial Reporting Bill to provide for the 1993 Act to continue to apply to issuers until the Financial Markets Conduct Act comes into force.

Changes for small to medium sized companies

One of the main focus areas of the 2009 review was to review the compliance burden under the 1993 Act on small to medium-sized companies. The Bill will reduce the compliance obligations on those companies. In particular, the thresholds for determining if a company qualifies as a "large" company are to be lifted and it will not be mandatory for all other companies to prepare general-purpose financial statements. A company will be considered "large" (in respect of an accounting period) if at least one of the following applies:

  • as at the balance date of each of the two preceding accounting periods, the total assets of the company and its subsidiaries (if any) exceed $60 million; or

  • in each of the two preceding accounting periods, the total revenue of the company and its subsidiaries (if any) exceeds $30 million.

Currently, the criteria for a "large" company are total assets of $10 million, total turnover of $20 million, and 50 or more full time equivalent employees, and a company need only satisfy two of the criteria.

Key changes for companies

Other key changes affecting companies are briefly outlined below.

  • Shareholder opt out and opt in rights: in the case of New Zealand companies which are not FMC reporting entities or large companies under the Bill, it will be left to shareholders to determine if certain reporting requirements apply to the company:

    • Widely held companies - if a New Zealand company (other than an FMC reporting entity or a "large" company) has 10 or more shareholders, the shareholders of the company may opt out of the requirement to prepare general-purpose financial statements, have its financial statements audited or prepare an annual report by means of a resolution passed by a 95% majority of those shareholders entitled to vote and who vote on the question. This opt out right can be disapplied by the constitution of a company.

    • Closely held companies - if a New Zealand company (other than an FMC reporting entity or a "large" company) has fewer than 10 shareholders, it will only be required to prepare general-purpose financial statements, have its financial statements audited or prepare an annual report if shareholders who hold at least 5% of voting shares require the company to comply.

    A decision to opt out or opt in can only be exercised for a single accounting period and therefore will need to be renewed on an annual basis.

  • Timing for preparation of financial statements: financial statements must be prepared within three months after a balance date (rather than five months under the 1993 Act).

  • Group financial statements only: financial statements for a parent company do not need to be prepared if group financial statements are prepared. Instead, it will be left to the External Reporting Board to determine what parent company information, if any, will need to be disclosed in the notes to the consolidated financial statements. Under the 1993 Act, if a company has subsidiaries, financial statements for both the parent company and the group must be prepared.

  • Financial statement requirements for overseas companies: New Zealand registered overseas companies will only be required to prepare financial statements if they are an FMC reporting entity or a "large overseas company". For those overseas companies which are required to prepare financial statements, the requirement to include financial statements for its New Zealand business prepared as if that business were conducted by a New Zealand incorporated company has been carried over from the 1993 Act.

  • Recognition of overseas reporting requirements: the provisions for the recognition of overseas financial reporting requirements have been relaxed by allowing recognition of the overseas requirements if the Registrar is satisfied that the requirements are either substantially the same as or sufficiently equivalent, in relation to the quality of financial reporting they achieve, to the relevant New Zealand requirements.

  • Appointment of auditor: an auditor is only required to be appointed for a company if the financial statements or group financial statements of the company are required to be audited.

  • Audit of financial statements: the requirement to ensure that financial statements are audited will be restricted to FMC reporting entities, "large" companies and other companies with 10 or more shareholders (unless, except in the case of FMC reporting entities, the shareholders opt out of compliance) (refer to the table below). Shareholders of a "large company" may not opt out if the company is required to register financial statements. Companies with fewer than 10 shareholders can be required to comply with this requirement (if shareholders who hold not less than 5% of the voting shares opt in to compliance).

  • Registration of financial statements: the registration requirements for companies will apply to few companies under the Bill – not all overseas companies will be required to register financial statements: that requirement will only apply to "large overseas companies". The policy that New Zealand companies with significant overseas ownership should register their financial statements has been retained, although the new criteria for a "large" company will mean that fewer companies are subject to that obligation (refer to the table below).

  • Balance date: the approval of the Commissioner of Inland Revenue will be required if a company is to adopt a balance date other than 31 March. If, before commencement, a company has a balance date other than 31 March, the balance date of that company will continue to be that date.

  • Annual report: the duty to prepare an annual report will be restricted to FMC reporting entities, "large" companies and other companies with 10 or more shareholders (unless the shareholders opt out of compliance) (refer to the table below). Companies with fewer than 10 shareholders can be required to comply with this requirement (if shareholders who hold not less than 5% of the voting shares opt in to compliance).

    Shareholders who hold at least 95% of the voting rights can agree to exclude certain information from the annual report (the Companies Act currently requires all shareholders to agree).1

  • Accounting records: the Bill retains the requirement for directors to ensure that the company keeps accounting records that correctly record the transactions of the company. It also requires directors to establish and maintain a satisfactory system of control of its accounting records.

  • Solvency test: the solvency test in section 4 of the Companies Act has been amended to recognise that not all companies will prepare general-purpose financial statements. Currently, it requires the directors, when considering the balance sheet solvency test, to have regard to the most recent general-purpose financial statements of the company that comply with the 1993 Act. The amendments proposed by the Bill require the directors to always have regard to the accounting records of the company, and to have regard to the most recent financial statements only if they have been prepared under the Companies Act or another statute.

Overview of proposed financial reporting regime for companies

Set out below is an overview of the key elements of the proposed financial reporting regime for companies (including those companies that are FMC reporting entities) under the Bill and the proposed amendments to the Financial Markets Conduct Bill (FMC Bill).

 ​​​ FMC reporting entity2 (based on proposed amendments to FMC Bill) "Large Company"3 Every other NZ company with 10 or more shareholders holding voting shares Every other NZ company with fewer than 10 shareholders holding voting shares "Large Overseas Company"4
Prepare financial statements (within 3 months after balance date)
Yes, but shareholders may opt out by means of a resolution passed by a 95% majority of those shareholders entitled to vote and who vote on the question (unless the constitution disapplies this opt out right) Only if shareholders who hold at least 5% of voting shares require (by written notice) the company to comply
Prepare group financial statements (within 3 months after balance date) Financial statements for a parent company are not required if the company prepares group financial statements (refer below)
Prepare group financial statements (within 3 months after balance date)
Yes, unless the company is a subsidiary of a company incorporated in New Zealand and group financial statements for that parent company and its subsidiaries are prepared
Obligation to comply with NZ GAAP (if financial statements are required)
Compliance with accounting standards of country of incorporation is permitted if those requirements are substantially the same as NZ GAAP or sufficiently equivalent, in relation to the quality of financial reporting they achieve, to requirements of NZ GAAP
Appoint auditor
Only if the financial statements or group financial statements are required to be audited (refer below)
Financial statements to be audited
Yes, but shareholders may opt out by means of a resolution passed by a 95% majority of those shareholders entitled to vote and who vote on the question (this opt out right does not apply where the company is required to register its financial statements or the constitution disapplies it) Yes, but shareholders may opt out by means of a resolution passed by a 95% majority of those shareholders entitled to vote and who vote on the question (unless the constitution disapplies this opt out right) Only if shareholders who hold at least 5% of the voting shares require (by written notice) the company to comply
Audit requirements Compliance with all applicable NZ auditing and assurance standards Compliance with audit standards in country of incorporation is permitted if the Registrar is satisfied that the standards are substantially the same as NZ applicable auditing and assurance standards and are sufficiently equivalent, in relation to the quality of auditing they achieve, to applicable NZ auditing standards
Register financial statements (within 20 working days after date by which financial statements must be prepared)
Only if:

 • shares carrying 25% or more voting power are held by a company incorporated outside NZ, a subsidiary of a company incorporated outside NZ or a person not ordinarily resident in NZ; or

 • it is a subsidiary of a company incorporated outside NZ and it is required to prepare financial statements or group financial statements
Only if it is a subsidiary of a company incorporated outside NZ and it is required to prepare financial statements or group financial statements
Prepare annual report (within 3 months after balance date)
Yes, but shareholders may opt out by means of a resolution passed by a 95% majority of those shareholders entitled to vote and who vote on the question (unless the constitution disapplies this opt out right) Only if shareholders who hold at least 5% of voting shares require (by written notice) the company to comply No
Exclude certain prescribed content from annual report Yes, if shareholders who together hold at least 95% of the voting shares agree Not applicable

Other notable changes

Although not the focus of this update, there are a number of notable changes introduced by the Bill for other reporting entities. These include:

  • Limited partnerships: the Bill removes the requirement on small and medium-sized limited partnerships to prepare general-purpose financial statements;

  • Partnerships: the Bill introduces requirements for large partnerships to prepare general-purpose financial statements. These must be audited by a qualified auditor in accordance with auditing and assurance standards (unless the partnership opts out); and

  • Charities: the Bill empowers the External Reporting Board to make financial reporting standards for registered charities and other not for profit entities that have reporting obligations.

Timeline and next steps

Submissions close on 18 January 2013. We will be making submissions on the Bill. If you would like further information on the Bill, or to provide your views on any aspects of the Bill, please contact your usual Bell Gully adviser.

The Commerce Select Committee is due to report back on the Bill on 28 May 2013 and the Bill is expected to be passed by mid-2013.

We will keep you updated with further developments.


1 Shareholders cannot agree to exclude all information from a company's annual report. A company's annual report must still include any financial statements or group financial statements for the relevant accounting period and the auditor's report on those financial statements (if an auditor's report is required).

2 The term "FMC reporting entity" in the SOP to the Financial Reporting Bill includes an issuer of a "regulated product" (subject to an exemption for a company with fewer than 50 shareholders or voting parcels of shares if that company only qualifies as a FMC reporting entity for being an issuer of equity securities that are both voting products and regulated products), a licensee under Part 6 (e.g. a manager of a registered scheme), a licensed supervisor, a listed issuer, a recipient of money from a conduit issuer, a registered bank, a licensed issuer, a credit union and a building society.

3 A "Large Company" is a company incorporated in New Zealand with:

  • as at the balance date of each of the two preceding accounting periods, total assets of the company and its subsidiaries greater than $60 million; or

  • in each of the two preceding accounting periods, total revenue of the company and its subsidiaries greater than $30 million.

4 A "Large Overseas Company" is a company incorporated outside New Zealand which carries on business in New Zealand within the meaning of the Companies Act test and which satisfies the criteria for a "Large Company" referred to in note 3 above.​


Disclaimer

This publication is necessarily brief and general in nature. You should seek professional advice before taking any action in relation to the matters dealt with in this publication.

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  • Corporate governance and advisory