Tax alert

Article

Have your statutory financial reporting obligations changed?

Tax Alert - April 2018

By Alex Mitchell and Belinda Spreeuwenberg

Changes contained in the Financial Reporting Act 2013 eliminated the requirement for many small-to-medium enterprises (SMEs) to prepare New Zealand general-purpose financial statements. From 1 April 2014 many SMEs have instead prepared financial statements in accordance with Inland Revenue minimum financial reporting requirements, or the CAANZ Special Purpose Financial Reporting Framework.

If your business currently prepares financial statements that are compliant with Inland Revenue’s minimum requirements or the CAANZ Special Purpose Financial Reporting Framework, you are required on an annual basis to determine whether you must instead prepare general-purpose financial statements.

General-purpose financial statements are financial statements that are prepared in accordance with the standards issued by the External Reporting Board. There are two tiers under which these financial statements can be prepared; the Tier 1 Accounting Requirements (NZ IFRS) or Tier 2 Accounting Requirements with reduced disclosures (NZ IFRS RDR).

Generally, your statutory financial reporting obligations will change, and general purpose financial statements required, if you become ‘large’. A New Zealand private company will be ‘large’ if the following threshold is met:

  • Total assets are more than $60 million at balance date in each of the two preceding accounting periods; or
  • Total revenue is more than $30 million in each of the two preceding accounting periods.

For an overseas company or a subsidiary of an overseas company, there is a lower threshold for what constitutes ‘large’. For these entities, general purpose financial statements will be required where:

  • Total assets are more than $20 million at balance date in each of the two preceding accounting periods; or
  • Total revenue is more than $10 million in each of the two preceding accounting periods.

Note that the above thresholds should be calculated to include the entity and its subsidiaries (if any).

Importantly, the thresholds for ‘large’ are based on total revenue and total assets calculated in accordance with NZ IFRS RDR. These may therefore not be the amounts currently reported under the Inland Revenue minimum financial reporting requirements or the CAANZ Special Purpose Financial Reporting Framework. If there are material differences it is important to understand what these are in order to have comfort that you are compliant with your financial reporting obligations.

It is not just changes in your business revenues/assets that could impact the assessment of whether you are ‘large’. There are several accounting standards that have been issued that may impact the recognition of revenue and assets. For example, NZ IFRS 16 Leases is effective from accounting periods beginning on or after 1 January 2019 for for-profit entities, and requires lessees to recognise a “right to use” asset and lease obligation in the statement of financial position. This could have a significant impact on your businesses total assets if you are a lessee currently reporting an operating lease.

So what does this mean for you? Simply, if your business currently prepares financial statements in accordance with the Inland Revenue minimum requirements or the CAANZ Special Purpose Financial Reporting Framework, but one of the ‘large’ thresholds has now been met for two consecutive years, on the face of it your reporting obligations will have changed. Our team of accounting advisors can guide you through what that means in practice.

 

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