Proposed Changes in Financial Reporting Obligations For SMEs

Currently all companies are required to prepare annual financial reports which can be both expensive and time consuming. For the majority of Small and Medium Enterprises (“SMEs”) the cost involved in preparing such reports often outweigh any benefit obtained from the information gathered as that information is often known to the directors and shareholders (who are often one and the same).

 A number of changes have been proposed by the Ministry of Economic Development in an attempt to find a balance between the cost of reporting and the benefits that are obtained from financial reports which can assist both the directors and shareholders to make economic decisions, to promote accountability and transparency or both. It is proposed that from around mid 2013 small and medium sized companies will no longer be required to prepare General Purpose Financial Reports (“GPFRs). Instead they will be able to prepare special purpose financial reports (“SPFRs”) which may be required to comply with the tax obligations. The New Zealand Institute of Chartered Accountants are currently developing revised requirements in regards to those special purpose financial reports.

These changes will affect SMEs and will result in a reduced reporting burden for those companies. While the default position for small or medium sized companies with 10 or more shareholders will be to prepare general purpose financial reports, those companies will be able to opt out of those reporting obligations if 95% of voting shares support the motion. Companies of less than 10 shareholders will only have to prepare GPFRs if shareholders representing the 5% or more of voting shares require it. The reduced reporting obligations will reduce compliance costs for both small and medium sized companies as 1) there will be a reduction in the number of disclosures they all need to make and 2) there will be a move from reasonably complex reporting requirements to a simple type of reporting which is specifically for tax purposes.

 While it is hard to quantify exactly what the cost and benefits of the amended reporting requirements will be, it has been estimated that savings of at least $100.00 per year for small companies to $5,000.00 for a medium sized company could be made.

While indications are that these changes are going to be accepted and into force in mid 2013, there remains an ongoing obligation of directors to keep accurate records and to provide those reports to shareholders.

 Graham Healey, Langley Twigg