Financial Markets Conduct Act transitional tips for financial reporting

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1 Financial Markets Conduct Act transitional tips for financial reporting Jeromy Meerman, Senior Adviser, Issuer Disclosure Surveillance Financial Markets Authority - New Zealand We re in transition. The Financial Markets Conduct Act 2013 (the FMC Act ) is a once in a generation rewrite of New Zealand s securities law. It consolidates and updates the requirements for a number of financial markets participants and is being phased in over two years. As at the date of this article more than 250 entities have already reported under the new requirements and at least another 500 will be subject to the requirements by 1 December So what does that mean for your financial reporting? Do you need to comply? What s changing? When do you need to comply? Are you ready? This article provides a brief overview of the new requirements and a few tips to help you along the way. Who needs to comply? The Financial Reporting Act 1993 (FRA93) focused on issuers as needing to prepare, have audited and lodge financial statements. Under the FMC Act, entities that need to report are called FMC reporting entities. The concept of an 'FMC reporting entity' is broader than the definition of an 'issuer' under the FRA93, although it does not cover all financial market participants. An FMC reporting entity: Includes most entities who were 'issuers' previously, as well as most market service license holders under the Financial Markets Supervisors Act and the FMC Act. It also includes certain classes of entities, regardless of whether or not they make regulated offers. For example; banks, insurers, credit unions and building societies. Does not include brokers, qualifying financial entities (QFEs), financial adviser businesses, licensed auditors, registered audit firms, licensed independent trustees, retirement village operators or certain closely-held equity issuers.

2 What's changing? Many of the requirements for FMC reporting entities are similar to those for issuers under the FRA93. For example, financial statements still need to comply with generally accepted accounting practice (GAAP) and entities still need to hold appropriate accounting records. However, there are some key changes: Area Entities with subsidiaries Time frames Public accountability designation Responsibility for financial statements Issuers under FRA93 Have to prepare both parent entity and group financial statements. Five months for preparation and audit, with an additional 20 working days for lodgment. Are considered to have public accountability and must report using full NZ GAAP e.g. NZ IFRS. Directors are responsible for the preparation of the financial statements. FMC reporting entities under FMC Act Will not have to prepare parent entity financial statements if they have subsidiaries they will only need to prepare financial statements for their group. Four months for preparation, audit and lodgment. Will be designated as having higher public accountability or not. Those that do not have higher public accountability often can report using reduced disclosure standards. Directors are responsible for the preparation of the financial statements on behalf of the entity. The FMC Act also has a more measured criminal liability regime for directors. The FRA93 imposed strict liability on directors if they failed to comply with GAAP that is, there was presumed criminal liability for directors without needing to prove any criminal intent of behalf of directors. However under the FMC Act, a director will only face criminal liability if they willingly and knowingly fail to comply with GAAP. When do you need to comply? This is where things get tricky. The transitional legislation is complex and it is not necessarily where you would expect you ll find the key provisions in sections of the Financial Reporting Act At a high level these provisions state that even though the FRA93 has been repealed it still applies until the entity is required to report under the FMC Act. This means that once you are an FMC reporting entity, you ll need to report for any accounting period beginning on or after 1 April 2014.

3 There are multiple triggers that make you a FMC reporting entity. Some triggers are based on set categories. For example all banks, insurers, credit unions and building societies became FMC reporting entities on 1 April Similarly, all NZX listed issuers became FMC reporting entities on 1 December Many of these entities have already prepared financial statements under the FMC Act. Other trigger events can be controlled. For example, entities getting licenced under the FMC Act become FMC reporting entities when they get their licence. So to the extent you can control the effective date of your licence, by timing your application or requesting a specific effective date, you can control when you become an FMC reporting entity. If you make a regulated offer of financial products (that is, under Part 3, with a Product Disclosure Statement), you ll become an FMC reporting entity when you issue the financial products. You can also opt-in early. You can opt-in to all the ongoing requirements under the FMC Act early by choosing an 'effective date' and giving us and the Registrar at least 20 working days' notice that you are opting in. The Registrar has set up an online form that counts as your notice to us and the Registrar click here. Otherwise you ll become a FMC reporting entity on 1 December Transitional tips Tip 1: Plan ahead It is important to identify your transition balance date early to meet the shorter filing timeframes under the FMC Act (now four months from the end of your financial year). We have put together an online transitional tool to figure out your first balance date see here. To meet that deadline, you need to consider getting your auditors and audit committee across any significant issues earlier than in the past, and possibly plan for extra resources after year end. If you are new to preparing financial statements under NZ GAAP do not forget you will need comparative information, so you will need to prepare two full years of financial information. Tip 2: Request a licence effective date that works for you Say we have finished processing your MIS licence application prior to your 30 June 2016 balance date. If you have an effective date prior to 30 June 2016, you will need to prepare those financial statements under the FMC Act. This may be ideal for you, but if you would like some extra time to consider the new financial reporting requirements while you deal with other aspects of transition you may want to request an effective date that falls after your balance date. We consider these requests on a case by case basis but please note that we are unlikely to approve requests towards the end of the transition period if we are processing a lot of applications at that point in time.

4 Tip 3: Think about all your obligations if you are opting in You cannot opt in for financial reporting only. If you have subsidiaries and you are still reporting under the FRA93, you will still need to prepare both parent and group financial statements until you transition to the FMC Act. By opting in early, you can take out your parent financial statements and make your annual report a more concise and effective communication tool. Opting in is done on a security-by-security basis. Once you opt in for a security, all the ongoing requirements of the FMC Act apply to that security this includes any governance and ongoing disclosure obligations, as well as the financial reporting requirements. These other obligations can have big impacts on issuers of debt and managed and investment products, as well as continuous issuers. If you offer these products, you need to take this into account when opting in. However, some equity issuers who previously made one-off offers will have limited ongoing requirements other than financial reporting, and as such can practically opt in for financial reporting. Tip 4: Opt in before your balance date You cannot opt in after your balance date that is too late. You must elect and give both the FMA and the Registrar at least 20 working days notice prior to your balance date. For example: Balance date Notification due 31 December December March March June June 2016 Tip 5: Think about your schemes obligations Once you are an FMC reporting entity you must report under the FMC Act for all of the schemes you are the manager for under the FMC Act. This includes schemes you have registered under the FMC Act, as well as those you were required to report under the FRA93 but are not yet registered. It means you and your schemes will all be subject to FMC financial reporting requirements, including having to lodge financial statements within the new four month deadline. If you have got many schemes with different balance dates you will need to consider how this impacts your reporting schedule. The relevant requirement here is in section 57 of the Financial Reporting Act Section 57 applies regardless of how you became a FMC reporting entity. For example the trigger event could be because you're a licensed manager, a registered bank or a listed issuer. But please note it only applies for financial reporting. Other obligations for schemes such as quarterly fund updates only apply when the scheme is registered.

5 Tip 6: Retirement village operators do not need to opt in Retirement village operators are considered issuers under the FRA93. However, retirement village operators are not FMC reporting entities under the FMC Act. The FRA93 stopped applying to retirement village operators for accounting periods beginning on or after 1 April The financial reporting obligations for retirement villages can be found in the Retirement Villages Act There is no need for retirement village operators to opt in to the FMC Act or tell the FMA. Need more information? The financial reporting section of our website contains more information on all the above topics including more than 40 frequently asked questions. Click here.