Introduction
What Is an "Exempt Company"?
5. The ECR is contained in the FRA and prescribes the financial reporting obligations for most SME companies. Under the FRA all companies are either "reporting entities" or "exempt companies".1 Exempt companies are exempted from the full financial reporting requirements that apply to reporting entities. In particular, exempt companies must prepare financial reports in accordance with regulations, whereas reporting entities must prepare financial reports in accordance with Generally Accepted Accounting Practice.
6. An "exempt company"2 is generally a company, other than an "overseas company"3 or an "issuer",4 that:
- has no more than $450,000 in assets;
- has no more than $1,000,000 per annum in turnover; and
- does not form part of a group of companies.
Characteristics of SME Companies in New Zealand
7. SMEs make an important contribution to the New Zealand economy in terms of job creation, innovation (that is the development and diffusion of new technologies) and maintaining the efficiency of markets.5 There are approximately 260,000 enterprises in New Zealand and as many as 220,000 of these will be micro businesses employing five or fewer staff.6
8. A significant proportion of the 220,000 micro businesses referred to above will be structured as companies7 and fall within the FRA definition of an "exempt company". It is reasonable to assume that most companies in New Zealand will be exempt companies, and can loosely be described as "SME companies".
Distinctive Characteristics of SME Companies
9. Although there is little empirical literature on the qualitative profile of New Zealand's SME companies, international research suggests8 that SME companies have a number of distinctive characteristics compared to larger companies. For example the majority of SME companies will:
- be managed by their owners and are therefore unlikely to have the degree of public accountability to shareholders that is characteristic in larger companies. This means that their financial reports will only be of interest to a small group of users;
- have limited internal resources and can least afford outside expertise or achieve economies of scale;
- have a high proportion of trade debt in their asset structure;
- be more reliant on short-term loans and overdrafts;
- be less reliant on shareholders' interests to finance their assets;
- have higher gearing ratios; and
- have trade and other creditors constituting a higher proportion of their total liabilities.
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