Introduction
1. The Financial Reporting Act was enacted in 1993 as part of a wider package of company law reform. The Act places an obligation on certain entities to prepare financial statements1 and provide those statements to the Registrar of Companies.2 It further establishes a body, the Accounting Standards Review Board ("ASRB"),3 which is charged with prescribing the requirements for financial reporting by those entities,4 and giving these requirements the force of law.5
2. The Ministry of Economic Development, in consultation with various stakeholders, has determined that the requirements of the Act should be reviewed. There are several reasons for this, particularly the global trend towards international accounting standards6 and perceived deficiencies in several aspects of the regime.
3. Following this review, it is intended that New Zealand's financial reporting regime will be sufficiently flexible to take into account international standards and developments, while not compromising the positive aspects of New Zealand's current reporting landscape. The review will also address issues of general significance, and in particular is aimed at minimising compliance costs.
Scope of the Review
4. The review will consider all aspects of the Financial Reporting Act and financial reporting in New Zealand. However, the review is split into two parts. This is primarily due to the current proposal for some form of enhanced trans-Tasman co-operation, which may take the form of a joint institution.
5. This issue was discussed by Senator the Hon Helen Coonan, the Australian Minister for Revenue and Assistant Treasurer, and Hon Lianne Dalziel, then the New Zealand Minister of Commerce, at the 20th Anniversary Closer Economics Relations meeting in Sydney in August 2003. They issued a joint press release7 that highlighted Australia and New Zealand's joint commitment, reinforced by global trends, to reducing business costs through the development of an efficient and effective process for trans-Tasman standardisation of accounting standards.
6. This was confirmed by Hon Peter Costello, Australian Treasurer and Hon Dr Michael Cullen, New Zealand Minister of Finance at recent talks, where they jointly announced the establishment of an accounting standards advisory group, which will look at ways of reducing costs and improving efficiency through a single set of standards.8
7. As many of the substantive issues, in particular institutional issues, cannot be discussed properly without also taking into account the trans-Tasman dimension, the Ministry of Economic Development decided that these substantive issues should be held over until any proposals for co-ordination are better advanced. It is therefore proposed to release a second discussion document on the substantive issues (probably concurrently with a trans-Tasman co-ordination document).
8. In considering the issues raised in this discussion document, submitters are therefore asked to consider this possibility, as well as a general desire for trans-Tasman co-ordination.
Part I - The Financial Reporting Structure
9. Part I primarily considers the financial reporting structure in New Zealand - that is, answering the issue of "who is required to report?" This includes a discussion of the ASRB proposal for a financial reporting structure, auditing and filing requirements, entity neutrality and sector neutrality.
Financial Reporting Structure
10. New Zealand has a statutory two-tier system for financial reporting, with a further non-statutory intermediate tier implemented by ICANZ and approved by the ASRB. This framework is intended to encourage timely disclosure of reliable information, while ensuring that users' information needs are met with minimum cost to the provider. The top tier consists of "reporting entities," which must prepare full financial statements in accordance with all applicable financial reporting standards, and includes entities such as public issuers, larger companies, government departments, Crown entities and local authorities. Some of these entities are also required to have their financial statements audited and to file them with the Registrar of Companies. The bottom tier of "exempt companies" (small companies that fall below certain asset and income thresholds) must still prepare financial statements, but the requirements are outdated. The intermediate tier requires reports from certain entities (mainly medium-sized or closely held companies) that are less onerous than the full requirements. However, this intermediate tier operates by virtue of exemptions granted within the standards approved by the ASRB, rather than directly through the Financial Reporting Act.
11. Although it is generally accepted that it is not desirable to subject smaller entities to the full requirements of financial reporting, the appropriateness of this particular system needs to be considered. The ASRB has proposed a new fully-statutory three-tier regime that aims to more appropriately impose reporting requirements proportionate to the potential economic impact of the entity.
Audit and Filing
12. Closely related to reporting requirements are obligations to have reports audited and filed. This review addresses the costs and benefits of doing so, as well as examining possible alternatives to minimise costs.
Entity Neutrality
13. New Zealand does not have a uniform financial reporting regime that encompasses all forms of entity. The Financial Reporting Act imposes reporting requirements on companies, issuers and a variety of public entities, including State Owned Enterprises, Crown entities, local authorities and government departments. However, there are some gaps in reporting requirements, particularly for entities such as partnerships, charities, trusts and so on. The discussion document therefore explores the possibility of achieving greater consistency of reporting requirements across the range of forms of entity.
Sector Neutrality
14. Current New Zealand standards are "sector neutral," that is, the same standards apply to all sectors regardless of whether there is a profit motive or not. They therefore apply to "public benefit entities," entities whose primary objective is not to provide financial returns on equity, but rather perform some sort of social benefit, and whose capital has been provided in order to facilitate that objective. This primarily incorporates the public sector, including most organs of government, but also charities and other similar organisations.
15. Sector neutrality has several benefits, including producing generally superior reports and increasing the comparability and familiarity of reports across sectors, thereby promoting transparency. However, current international standards are designed only for profit-seeking corporates. There is, therefore, concern in New Zealand that reporting standards remain relevant for the public and not-for-profit sectors.
Part II - Other Issues
16. Part II will consider all other issues, and is intended to be released in mid-2004. It will specifically include the following major issues:
Application of International Financial Reporting Standards
17. The Financial Reporting Act is predicated on the assumption that New Zealand is a "standards setter," creating its own financial reporting standards, rather than a "standards taker," accepting standards created elsewhere. However, following the introduction of international standards,9 it is questionable whether this is an appropriate model. In this context, issues such as the allowable scope for derogations and modifications to international standards will also be considered, as well as any threshold test for adoption or otherwise.
Institutional Arrangements
18. Part II will also consider the functions of the institutional bodies associated with financial reporting standards. This will take into account any outcomes from the trans-Tasman advisory group, as well as consider the appropriate functions, powers and operational arrangements of current institutional bodies. A particular issue in this regard is considering the inclusiveness of process. Other countries, including Australia and the United Kingdom, have arrangements whereby a wider selection of stakeholders other than accountants, including representatives from a cross-section of the market and other interests, have a meaningful role in financial reporting institutions. This may need to be considered in New Zealand.
Enforcement
19. The Financial Reporting Act states that New Zealand accounting standards have the force of law and sets out criminal penalties for failure to comply. Two broad enforcement issues need to be considered.
20. The first is whether the existing criminal penalty provisions effectively deter misreporting. There are some civil offence provisions in other areas of business law, such as securities and competition law. It would be useful to explore whether this approach, and any other forms of remedy, might be appropriate for the Financial Reporting Act regime. The second is whether it may be appropriate to consider the appropriate enforcement roles (if any) for institutions. Effective enforcement and deterrence mechanisms, along with high quality reporting standards and good standards of corporate governance practice, are the key elements necessary for any financial reporting infrastructure to be effective in achieving the objective of delivering high quality financial reporting.
Auditing Standards
21. Auditors play a crucial role in ensuring that financial statements can be relied upon by users. However, auditing standards are a high-profile issue in light of recent events in Australia, the United States and Europe, in particular, where the actions of auditors have been questioned. At present, ICANZ is responsible for both regulating auditors and setting audit standards. Given current international trends and the critical role that auditors have in the enforcement process, it is desirable to consider whether some degree of independent oversight might be required.
Overseas Companies
22. The Financial Reporting Act and sections of the Companies Act 1993 create a special reporting regime for overseas-incorporated and overseas-owned companies. This includes requirements that overseas companies file separate audited financial statements for both their New Zealand business and their global business and must prepare full financial statements if their home country obligations are not "substantially the same" as those under the Financial Reporting Act. In response to the Ministerial Panel on Business Compliance Costs' findings10 on the overseas companies regime, it is appropriate to consider the compliance costs imposed and whether they are justified in all circumstances.
Other Issues
23. At this stage, it is also intended to consider several other issues that will ensure the Act operates in an effective manner. This may include issues related to technical neutrality and methods of filing, in particular, the use of XBRL,11 as well as the time for filing and the potential for "concise" financial reports.12
Process and Timeframe for the Review
24. Submissions will close on 30 April 2004, and the Ministry of Economic Development expects to make recommendations to the Minister of Commerce by 31 July 2004. Announcements can be expected to be made around August 2004. Legislation is expected to be enacted by the end of 2005. Until that point, the current requirements for financial reporting as set out in the Financial Reporting Act and associated standards remain in force.
25. Part II of the review is expected to commence in the near future. However, exact timing for Part II is not yet available, as this is dependent on the trans-Tasman accounting advisory group. At time of publication, the advisory group was yet to meet.
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