Disclosure rules 'too detailed'

Brian Cadzow says financial reporting rules are too stringent. Photo / Doug Sherring

The level of financial disclosure companies are required to make is being reviewed as smaller firms get bogged down by excessively detailed standards.

New Zealand and Scotland's accountancy industry bodies have launched a joint project to limit the amount of disclosure required under the International Financial Reporting Standards (IFRS).

The two groups banded together after the International Accounting Standards Board (IASB) identified the need for a review.

The former president of the New Zealand Institute of Chartered Accountants, Tony Frankham, said he suspected concerns were expressed by the two countries and "no doubt the people that make the noise get the job".

He said the new financial reports required under IFRS were so complex and full of detail they were losing relevancy for the same people they were intended for, such as shareholders.

"Many people don't read them because they don't understand what they mean."

New Zealand had its own accounting standards but, in the past three years, had followed international advice to sign up to IFRS. The aim was to make large corporates comparable around the world, but the fact was most businesses in New Zealand weren't that big, Frankham said.

He is co-chairing a group that will make recommendations to the IASB on how the reports can be more readable and relevant.

"Does the benefit from adopting these stringent strategies outweigh the cost, compliance and benefit that comes from it?"

Group chairwoman Isobel Sharp, who is a partner at Deloitte and a former president of the Scottish body, said the issue of excessive disclosure had vexed those involved in financial reporting for years. "This project is a real opportunity to recommend practical improvements to IFRS financial statements.

"We will be suggesting specific deletions and changes on a standard-by-standard basis."

The goal was to help the international accounting board make sure that financial reports were more concise but still transparent and understandable to investors and other users of financial information.

Frankham said the international board had issued an IFRS standard for small businesses but New Zealand was still considering whether to adopt it.

Deloitte partner Denise Hodgkins said that was because of timing. New Zealand already had a regime that allowed for some reporting exemptions so it was "not critical for New Zealand to adopt it as a matter of urgency".

The Government is also currently reviewing the financial reporting legislation and the local Accounting Standards Review Board is looking at tiers of reporting such as a first tier of publicly listed companies and a second tier of large, private companies.

"The decision hasn't been made yet as to which set of standards will be adopted for this second tier," Hodgkins said.

Equally, the decision on which way to go over small companies wouldn't be made until the Government completed its review.

"It's likely many smaller entities will not need to prepare financial statements at all."

New Zealand could also go for a reduced disclosure regime recently adopted by Australia "in the interests of transtasman harmonisation".

Standards a burden on small companies

Auckland-based cinema-management software company Vista Entertainment Solutions employs 60 people locally and 90 overseas.

Finance director Brian Cadzow believes the cost of complying with the stringent International Financial Reporting Standards (IFRS) definitely outweighs the benefits.

Moving to IFRS has placed an increased burden on the company's end-of-year report, he says.

"A lot of effort is required. You have to go back two or three years to get a new starting position.

"For a report in 2010, you have to show a comparative report for 2009, which requires you to restate your 2008 position as well."

Vista reached the threshold required for the standards in 2009. It is based on an asset test, a turnover test and employee numbers.

The initial changeover took three months. The company had to spend $10,000 and $20,000 employing accountants to get to a point where it could start.

The result is reports are twice as long and don't necessarily add value for shareholders, Cadzow says.

The notes accompanying the accounts and the extent of the disclosures are particularly complicated.

"It's a one-size-fits-all approach. There's not many people in companies that would be able to do it accurately themselves."

As New Zealand is a country made up of "smallish" businesses, the threshold should be higher so smaller firms don't have to meet it, he says.

"We're suggesting different options based on the nature of the firm."