Opinion & Analysis
OPINION: The passing of the Financial Reporting Act 2013 might seem like an early Christmas present, but astute business owners should be aware that other requirements will remain to ensure that the preparation of quality financial reports is still essential.
Coming 20 years after its predecessor, the act clarifies the financial reporting obligations for companies. It comes into effect for reporting periods starting on or after April 1, 2014. Generally, the range of companies that will be required to comply with generally accepted accounting principles (GAAP) will be reduced. GAAP means complying with applicable financial reporting standards that have been approved by the External Reporting Board.
Now, you might think that tax is a dry subject but reading financial reporting standards is even worse. There are scores of standards covering topics ranging from the basic framework for financial reporting through to detailed topics like accounting for inventories, consolidations and "Hedges of a Net Investment in a Foreign Operation".
Under the new act, the requirement to comply with GAAP will generally be limited to companies that are publicly accountable or issuers, or are large. A company will be large if it has, in the two prior accounting periods, either:
Total assets of more than $60 million; or
Total revenue exceeding $30m.
The vast majority of companies will fall outside those parameters but that does not mean that they are now off the hook.
The Government has given a mandate to Inland Revenue to specify the minimum reporting requirements for companies that fall outside the scope of the Financial Reporting Act.
To that end, the policy division of Inland Revenue has released an officials' paper setting out its thoughts on what the minimum reporting requirements should be. The interest is understandable because financial reports provide the basis for preparing an income tax return.
In short, the proposals aren't too different from the rules that currently apply to smaller, "exempt" companies. The suggested minimum requirements include:
Double entry, cost-based accrual accounting;
Inclusion of a balance sheet, profit and loss statement, with supporting notes and schedules;
A statement of accounting policies and changes thereto;
A reconciliation of accounting income to taxable income;
Disclosure of certain related-party transactions.
A further issue considered is the level of detail required. This is currently dictated by the IR10 "Accounts Information" form that is part of a business tax return. It sets out certain key-point information that has to be sent to Inland Revenue in lieu of sending in a copy of the financial statements themselves.
Although the current focus is on the reporting requirements for companies, the policy officials are also considering whether other business entities, such as sole traders, partnerships and trusts, should also come within the scope of their proposals.
In terms of reducing compliance costs, there is also a suggestion that "micro-businesses" (suggested as being those with a turnover of less than the GST registration threshold of $60,000 per annum) have no financial reporting obligations.
Aside from Inland Revenue's requirements, small and medium businesses should not be forgetting other users who may demand that robust financial statements be prepared.
Lenders will have their requirements, as they will be concerned to know whether a business is meeting its obligations under the terms of a loan. Directors and trustees need financial information to assist in ensuring that they are meeting their duties.
Most importantly, entrepreneurs need good financial information to make decisions about their businesses.
While the tools available for preparing that information, such as Xero and MYOB, are making some of the compliance easier, the interpretation and use of the information generated should remain the principal focus.