Financial Reporting Act 2013

At the end of 2013, the Financial Reporting Act 2013 (FRA 2013) received Royal
Assent. The Act would replace the old Financial Reporting Act 1993. The new FRA 2013
indicates a new page of financial reporting environment in New Zealand, which will take
effect on 1 April, 2014. In this essay, we will focus on the key changes of FRA 2013
relating to companies and its impacts on different stakeholders.
Before we start to analyse the new Act, we shall briefly introduce the structure of the
financial reporting environment. From 2014, New Zealand will have specific standards
for two sectors which are both IFRS for profit-oriented entities and IPSAS for non-forprofit entities. Here in this essay, we will focus on the for profit-oriented entities sector.
New Zealand has adopted a two-tier system in relation to for-profit entities. Tier 1
includes publicly accountable and large for-profit public sector entities, which must apply
NZ IFRS accounting standards; Tier 2 includes small to median entities, which must
apply NZ IFRS Reduced Disclosure Regime.
In FRA 2013, the crucial definitions remain the same as in FRA 1993 except the
large entities definitions. The new definition of large entity are: 1) for New Zealand
domestic entities, total assets of the entity and its subsidiaries exceed $60 million or
revenue of the entity and its subsidiaries exceeds $30 million in two consecutive
accounting periods; 2) for overseas company or a subsidiary of an overseas company, the
total assets and its subsidiaries exceed $20 million or revenue of the entity and its
subsidiaries exceeds $10 million (PWC, 2013).
Stinchcombe has explained in December 2013 on Hayes Knight News that only the
listed below entities has a statutory obligation to prepare general-purpose financial
statements:
(a) are FMC reporting entities (issuers);

(b) are large entities;

(c) are public entities;
(d) have 10 or more shareholders that have not opted out; or
(e) have fewer than 10 shareholders but have opted in.
Stinchcombe also stated entities that are neither issuers nor large will no longer be
required to prepare general purpose financial reports (GPFR), which includes nearly 90%
New Zealand companies. According to Professor Laswad (2014), these changes are
expected to set 450,000 companies free of statutory obligation to prepare GPFR and only
left 10,000 companies required to submit GPFR. Because the large company threshold is
increased, the total costs of preparing the GPFR expected to cut by $90 million a year.
The main impacts of large entity definition changes are positive. Firstly,
companiesexpenses on financial reporting will be significantly reduced, also it saves
human resources and time on communicating on these reports as mentioned above.
Secondly, its another way to encourage SME to pay more energy to other areas such as
innovation, energy reducing, green industry, instead of preparing the reports.
For small to median entities, if they not meet the criteria for preparing GPRF, they
may be required to prepare special purpose financial reports (SPFR) by Inland Revenue
or by management or financiers. Entities that prepare SPFR can use NZICA accounting
framework, which meets the requirements of many end users (NZICA, 2014). As KPMG
narrated in January of 2014, the old FRA that use to require the minimum financial
reporting will be replaced by the Tax Administration Act, while the Tier 3 for Differential
Reporting and Tier 4 for Old GAAP of NZ IFRS will be substituted by XRB in relation to
for-profit entities.
In addition, the new Act plays a flexible role by applying the opt-in and opt-out
policy. Because of the new definitions of large entities, there are some previously large
entities that become small to median entities (SME), for instance, under the new large

entities definition, some entities with $30 to $50 million total assets used to be large
entities, within the new Financial Reporting Act will be classified into SME, which
means they will not be required to prepare financial statements in line with NZ GAAP
(NZICA, 2013). Those companies stakeholders such as investors or debtors may still
need more specific financial reports to make their financial decisions, thus they can apply
the opt-in policy. SME that have less than 10 shareholders do not require an audit, but
shareholders may decide to opt-in if at least 5% requires, which means if only one
shareholder feels necessary for auditing, then his or her requirement should be satisfied.
Whereas, there are some companies that have more than 10 shareholders, then they can
apply the opt-out policy if 95% of them agree (PWC, 2013).
There is another change of the new Act is about deadlines. Under the new Act, two
different statutes will be applied on the basisi of the types of entities. One of them is
Financial Markets Conduct Act 2013, which will conduct to FMC preparing entities,
and the other is Companies Act 1993, which will apply to companies are not FMC
reporting entities. For the first type of entities, the FMC Act 2013 requires a single
deadline of four months instead of five months and twenty days from balance date for
preparation, audit and filing. For the second type of entities, the amended Companies Act
1993 gives 5 months for preparation, audit and filing from balance date (PWC, 2013).
In general, this change reduces the FMC preparing entities deadline for one month.
From a shareholders view, it is really a piece of good news for the information they will
receive is not that much out-of-date as before, which will help them make more
reasonable financial decisions. From the FMC preparing entities view, the reduced one
month of preparing time is also significant. They will have to finish the same work in a
shorter time meaning harder and more challenging work. Managers of these entities will
need to guide employers to balance the time and reports accuracy.

About the registration/ filing, now only FMC reporting entities, large overseas
companies or large New Zealand companies with 25% or more overseas ownership
will be required (KPMG, 2014).
As we know, the new Acts enactment balances public accountability, economic
impact, and the separation of ownership from management. Releasing major companies
from GPFR requirement especially the NZ IFRS burden is a reasonable and pragmatic
step. However, we know every coin has two sides. As Grant Thornton (2011) points out,
there is no automatic rule book to determine the basis for financial reports preparation
anymore, and that is one of the consequences of going to SPFR. That can affect
stakeholders comparability, particularly when it relates to revenue and expenses
recognition. As we know SPFR requires less statement and in some situations it does not
require auditing, meaning the information disclosed to stakeholders is less. Compared to
usually higher level of statements requirements, stakeholders will acquire limited
information unless they choose to opt-in.
Grant Thornton (2011) has also mentioned another aspect about the cost saving of the
new Act. Well, the new Act will simplify the financial statements of SME, but does the
simplification really save such significant costs of financial statements preparation as
much as we expected? In Grant Thorntons experience, most of the financial statements
preparation cost is incurred in determining the amounts to go into financial statements
rather than in a disclosure process. In my point of view, Grant Thorntons standpoint is
authentic and solid. Preparing the statements or adapting the format of statements is just a
minor part of the whole process of accounting. On the contrary, recognizing the right
amount going into each accounting subject is more important. Usually we understand
even if all the accountants are true and fair and follow applicable accounting standards
they might still get different levels of profit. That is because the income, revenues and
expenses measurement models adopted are different.

In general, the Financial Reporting Act 2013 and the amendments of related other
Acts indicates a progress of New Zealands external financial environment. Simplify the
SME and some overseas companies financial reporting statements are really an
improvement. In recent years, the economic environment is much better than in 2008
when the global financial crisis happened. A simpler financial reports requirement can to
some extent release related work of SME. The main impacts of new Act along with the
saving to companies are positive unless the costs saving of financial statements
preparation is not much as expected.