New bill sets out to streamline law on financial reporting

Craig Foss.

In the first of a series, Stephen Gillam outlines the impact of legislation that will amend more than 80 acts.

If National, Labour and the Greens all agree on a bill, you know it's going to be a big one.

And the chances are that if you own a company, or have shares in one, the Financial Reporting Bill will affect you in some way.

The bill passed its second reading this month, and while there is no date set for the third reading, it will almost certainly become law soon, replacing the Financial Reporting Act 1993.

Its author, Commerce Minister Craig Foss, says the 169-page bill is designed to update and simplify current legislation and amend more than 80 acts and clean up inconsistencies.

Bell Gully partner Glenn Joblin says the bill will bring the current act up-to-date with legislation that has been passed since 1993.

"What they've tried to do is put the financial reporting obligations under individual statutes," he says.

For example, companies will be covered by the Companies Act 1993 and charities will still refer to the Charities Act 2005, but Joblin says that while there will still be cross-referencing, relevant legislation should be easier to find. Financial statements still have to be prepared under generally accepted accounting practices and the fair and true principle in the same way as the 1993 act dictates, even though the reference to them is removed in the new bill.

SMEs expected to benefit from lower compliance costs

Legal experts say small and medium enterprises (SMEs) stand to benefit most from changes to New Zealand's financial reporting system which promise to lower compliance costs.

The Financial Reporting Bill, drafted by Commerce Minister Craig Foss, is almost certain to pass its third reading in Parliament as it has wide cross-party support. The bill aims to ease the burden of compliance costs for companies in New Zealand, by removing the legal obligation for SMEs to prepare financial statements, and redefining what a large company is so there will effectively be fewer of them.

New Zealand Institute of Chartered Accountants spokesman John Hodge says preparing a financial statement can take a significant amount of time and money, and this bill is expected to ease the compliance burden of SMEs.

"It can be a significant cost so there's a lot of information that goes behind it, a lot of preparation so there is a substantive reduction is costs from an SME's perspective."

However, he says there will still be reasons for SMEs to prepare financial statements.

"While there's the removal of a legal requirement to prepare statements, there'll be other mechanisms to prepare financial statements," he says.

Banks, directors and prospective buyers will still have reasons to request financial statements, and they will still be used for filing tax returns.

The bill will also change the definition of a "large" company. Current legislation makes a company "large" if two of the following apply:

* The total assets value of that company and its subsidiaries exceeds $10 million.

* The total turnover of that company and its subsidiaries exceeds $20 million.

* The company has 50 or more full-time equivalent employees.
The new definition will make it "large" if one of the following applies:

* The total assets value of that company and its subsidiaries exceeds $60 million over the previous two accounting periods.

* The total revenue of the entity and its subsidiaries exceeds $30 million over the previous two accounting periods.

Coming up

How shareholders and charities will be affected.