Savings for SMEs a pipe dream?

25 November 2013

Savings for SMEs a pipe dream?

Matthew Bellingham, Chairman of the New Zealand Institute of Chartered Accountants (NZICA) Public Practice Advisory Group, first touched on the government’s proposal to reduce the financial reporting requirements for companies, back in September 2011. Since then we have been through an extensive consultation period with all submissions currently under review. Two years on what exactly has been proposed and is there a catch?

Essentially the government will be rewriting the Financial Reporting Act 1993 so that most companies will no longer be required to prepare general-purpose financial statements (GPFS). In other words, financial statements will have less requirements to meet so in theory they should be easier to prepare. The only exceptions are likely to be large companies, which have turnover in excess of $30 million or $60 million in assets, or companies that are issuers. Companies won’t be completely off the hook and their financial statements will still need to meet a minimum set of requirements. There is a working group set up by N to come up with some reporting guidelines, but the minimum standards will be set by the country's largest user of financial statements - the IRD.

Initially there was a lot of media hype around the fact that these changes would save New Zealand businesses $90 million a year. While this seems like a pretty big chunk of revenue, based on roughly 450,000 companies (the government’s figures) this only equated to the about $200 per company, which is a bit of an anti-climax, but at least it is better than nothing I guess. In late November the IRD issued their discussion document outlining the proposed minimum standards, and after my initial review I now suspect that the government were very optimistic with their anticipated savings in compliance costs! Why?

Under the proposed minimum requirements companies will be required to prepare a balance sheet, profit and loss statement, statement of accounting policies, tax reconciliation – all good so far. But they will also be required to disclose all related party transactions, and this is the caveat which could actually result in additional compliance costs.

It is also important to remember that it’s not only the IRD that wants the information contained within your financial statements. Banks, owners and shareholders all rely on it to make important decisions, so the other question worth pondering is whether the minimum is always going to be enough? If your businesses has loans or overdrafts, then banks will probably require a lot more insight into ‘what’s going on in your business’ - not only so they can keep track of their investment, but also make future lending decisions. At the end of the day I think it is important to remember these minimum standards are just that, minimums, and there will still be the option to provide further information and analysis so that you can better understand your business and use the information to make good decisions.

The government is looking at introducing these changes as soon as 1 April 2014. While I appreciate the government’s attempt to try and reduce the burden of compliance on the engine room of the New Zealand economy, I think that there has been a lost opportunity. It would have been nice to move micro businesses to much simpler standards, perhaps even a simple cash accounting model for those with revenues lower than $250,000.

Matthew Bellingham is Chairman of the New Zealand Institute of Chartered Accountants’ Public Practice Advisory Group and co-founder of Bellingham Wallace, a contemporary firm focused on adding more to the business of accounting through fresh thinking and expansive strategies that are unrestricted by tradition or outdated principles.

ENDS

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