SUBMISSION Financial Reporting Bill

Transcription

1 SUBMISSION SUBM MISSION ON THE: Financial Reporting Bill 4 February 2013

2 4 February 2013 Secretariat Commerce Committee Select Committee Services Parliament Buildings WELLINGTON 6160 Dear Sir Re: NZICA The (NZICA) welcomes the opportunity to comment on the Financial Reporting Bill (Bill). NZICA is the membership body of choice for more than 33,000 accounting and business professionals who work across New Zealand and the world. The changes in the Bill are consistent with earlier proposals and NZICA is principally supportive of these. The remaining NZICA recommendations and commentary should be contextualised against this principally supportive view. In considering the Bill and canvassing our membership several salient themes arose. First, the removal of statutory General Purpose Financial Reporting requirements for small and medium companies provides a basis for compliance relief and is in alignment with NZICA s strategy of adding value beyond compliance related activity. However, such compliance relief must be tempered with Inland Revenue requirements that will re-impose some of the earlier compliance costs. Second, NZICA will develop a Special Purpose Reporting Framework that will be recommended to our members. This framework will establish a minimum recommended standard for NZICA members who provide services to many small and medium companies, limited partnerships and others not covered by the Bill. NZICA has made significant progress with assistance from the chartered accounting community throughout New Zealand. Third, the genesis of the Bill can be traced back to a number of discussion documents where NZICA has had adequate opportunity to make submissions. Such consultation has enabled change to be made in the course of due process. This submission therefore covers only the residual elements where improvement to the proposed legislation should be made or clarification is sought. The residual change elements are considered to fall under the categories identified in Addendum A., Tower Building, 50 Customhouse Quay, Level 7, PO BOX 11342, Wellington 6142, P is the operating name for the Institute of Chartered Accountants of New Zealand

3 Submission on the Financiall Reporting Bill If you have any queries or equire clarification of any matters inn this submission, please contact Dr Michael Fraser Director - Technical Services Team. Yours faithfully John Hodge CA General Manager Technical and Quality Assurance 3

4 Addendum A Addendum A provides coverage to three categories where: change could be made to improve the proposed legislation; clarification is sought; and potential redundancy in wording might be addressed. This coverage should be considered in the context of the principally supportive comments detailed in the covering letter. Furthermore, the principally supportive comments provide the basis for a commentary weighted toward operational content. Changes to Improve Proposed Legislation 1. Reduction in the reporting time NZICA acknowledges that the usefulness of financial information is enhanced by it being issued on a timely basis. The proposed reduction in preparation time will ensure all entities are brought into line with a three month timeframe and financial information will be available earlier in many instances. For some entities, such as those listed on the New Zealand Stock Exchange, this will have limited impact. However, the positive impacts resulting from a reduction in preparation time are given less weighting by some NZICA members. This difference in view is unsurprising given our membership base is broad and not homogeneous. A cohort of NZICA members utilises the full five month period for preparing the financial statements. As such, a counter argument to the benefits of timeliness is provided. The impetus of the Bill is to decrease unnecessary compliance costs and, where possible, increase the usefulness of information. The concentration of report preparation to a default date and blanket reduction in time to prepare accounts may increase compliance costs and decrease quality respectively. The argument against a reduction in reporting time is further extended when the time-critical nature in securing a report prepared is considered. It is for this reason that a segment of NZICA membership believe that the blanket reduction in time taken to prepare a report is not fitting with the objectives of the Bill. NZICA agrees that timeliness is an important attribute of financial reporting. While NZICA principally supports the proposed change an acknowledgement is made to a segment of NZICA membership who believes this may be counter-productive to the objectives of the Bill. At this stage, NZICA would not like to see the preparation deadlines reduced any further than proposed. In summary, NZICA welcomes the timeliness of financial information so long as it is not to the detriment of the quality of the financial information. 4

5 2. True and fair override NZICA notes the absence of the true and fair override prohibition in the proposed legislation and believes this may be the subject for confusion. The current legislation requires a reporting entity to follow the requirements of GAAP. In situations where preparers believe the application of an accounting standard may not provide a true and fair view, the standard must be complied with and supplementary disclosure made in order to achieve true and fair presentation. This view is subject to scrutiny by the entity s auditor. The process followed in the current legislation is well understood and the legacy of addressing a true and fair override prohibition in legislation that is later removed may give rise to the perception that the standards (given the force of law) must be followed in a prescriptive manner that was not intended. Therefore, NZICA recommends maintenance of the status quo. 3. Recognition of large The conceptual basis of economic significance as a factor for determining what level of reporting should apply is well founded. However, the recognition criteria are less well suited when new or restructured entities are considered. The proposed requirement for either assets or revenue to reach a pre-specific threshold for two preceding accounting periods means that new or restructured entities that are large may not have a statutory basis to produce meaningful financial information related to their size for almost three years. NZICA acknowledges that the legislative mechanisms to address the above recognition challenge may not be readily available. Further work to explore whether the inclusion of a requirement to report under the obligations of a large entity when an entity clearly meets the pre-specified thresholds is necessary. 4. Inclusion of registered charities The inclusion of registered charities under the proposed legislation has been met with a mixed response. When viewed with an accountability and decision-usefulness lens, the inclusion of registered charities in the proposed legislation is well founded. Some of NZICA s membership cites the inclusion as a progressive step due to numerous instances where donors have subsequently discovered their funds have been spent on activities for which they were not intended. Some members of this group extend the argument to include registered charities to incorporated societies. A small number of members cited the increased compliance cost required under the proposed legislation as not being reconciled with the perceived benefits of accountability afforded. In addition to the inclusion of registered charities being incorporated in the proposed legislation, NZICA anticipates audit size thresholds as discussed in recent Ministry consultation papers would be considered. 5

6 5. Use of the term operating payments The Financial Reporting Bill is considered by many to provide a consistent frame of what currently exists across a number of pieces of legislation and standards. As such, it is important that terminology is used consistently. The term operating payments is one such area where consideration should be given to the objective of consistency. The Financial Reporting Bill, Part 2 para 45, notes the requirement of a total operating payments calculation to determine whether an entity is a specified nonprofit entity and if it can apply a non-gaap standard. The basis of accounting required for this calculation is cash accounting. In contrast, the new accounting standards framework (the PBE framework) comprises of a different basis of accounting. Under the PBE framework all entities are required to start in tier 1, and they can only move down if they meet the criterion and elect to do so. The criterion to determine this movement includes a size measure based on expenses; a calculation based on accrual accounting. This definition allows micro entities to identify whether or not application of a non-gaap standard is permissible prior to the preparation of accrual accounts. The term operating payments should be defined in either the proposed legislation or in the accounting standards Use of the term non-gaap The term non-gaap provides a second example where further reference, or change, to terminology may be beneficial. NZICA believes that confusion may arise due to the (mistaken) assumption that non-gaap is the opposite of GAAP. The acronym GAAP is defined to mean generally accepted accounting practice. In the Bill non-gaap standards are applicable financial reporting standards, thus financial statements that are prepared to comply with non-gaap standards do comply with generally accepted accounting practice. For example, Part 1, preliminary provisions, para 6 notes the meaning of financial statements. Para 6(b) states includes any notes giving information relating to those statements that are required by an applicable financial reporting standard or a non-gaap standard. Part 1, preliminary provisions, para 8 notes the meaning of GAAP as being in compliance with applicable financial reporting standards or authoritative notices. When paragraphs 6 and 9 are considered together they appear contradictory. That is, in the Bill non-gaap standards are applicable financial reporting standards and so financial statements that are prepared to comply with a non-gaap standard do actually comply with generally accepted accounting standards. 7. Incorporation of New Zealand audit firms The impetus of making disparate pieces of legislation and standards consistent is a positive attribute of the proposed legislation. The regulation of auditors is one area where considerable focus has resulted in positive reform. However, further aspects of this reform should be made more explicit within the Bill. For example, NZICA considers that, insofar as the Bill addresses amendments to the Companies Act relating to the appointment of auditors, the Bill should include an amendment to enable the incorporation of audit firms in New Zealand. NZICA understands that the policy work and broader consultation in relation to such a change has now been completed. 1 A draft definition is included in the XRB Tier 4 Exposure Drafts. 6

7 Additional Information In the course of considering the proposed legislation several areas arose where further information was sought or additional exploration was necessary prior to stating NZICA s position. 8. Audit opt-out provision for large companies The proposed change to permit New Zealand incorporated companies to opt out of an audit has been questioned by some of our members when considered against the conceptual basis of economic significance. The reasoning is that compliance relief obtained by not having to audit accounts of a large entity does not outweigh the economic ramifications. That is, financial failure of a large entity would have widespread economic impact and should be afforded the mechanisms such as financial report preparation, audit and filing to mitigate this. It is noted that some members were in support of this provision. When an entity reaches the threshold for large, consideration of the taxation base and other issues of accountability are exacerbated. This reasoning has been the accepted basis for Australian standard setters. Other arguments against the opt-out provision cited information access to minority shareholders. That is, minority shareholders may be left with poor quality information despite having invested significant financial resource. It is this latter issue that NZICA believes can be addressed with provision(s) that explicitly safeguard access to financial information and systems for minority shareholders. Further consideration might be afforded, by way of example, as to how the 95% thresholds might be operationalised given the multiple interpretations from within our membership. When section 207(H) is contrasted with Section 148 (the section replacing 75(3) Limited Partnerships) the intent is clear. Section 148 clearly indicates that 95% of the partners who hold capital are required to respond favourably when presented with an audit opt out decision. However, in Section 207 the 95% threshold may be interpreted as follows: 96% of shareholders were present with 95% of whom voted to opt out. Such a situation would mean approximately 91% of the shareholding supported the decision to opt out. 9. Amendments to the Companies Act relating to the Solvency Test The Companies Act condition of solvency requires companies to meet their financial obligations both now and in the future. The existing legislation provides GPFR as the basis of determining whether a company is able to meet the above solvency requirements. However, the removal of the statutory requirement to prepare GPFR for a number of users means that the reliance on the financial statements to ascertain solvency is changed. Explanatory Note Part 4, Subpart 3 p18 acknowledges the requirements of the Companies Act. However, further detail as to how solvency might be ascertained for users no longer required to prepare GPFR is unclear. Is the legislator s intention that statutory required IRD statements will provide the new basis for ascertaining solvency for the user group in question? 7

8 10. Licensing of Credit Union auditors When Part 4 para 123 is considered it is apparent that an appointed auditor must be qualified. However, when this paragraph is coupled with paragraphs 35(1) 35(2) and 57 the appointed auditor for a Credit Union is not required to be licensed even though they will be FMC Reporting Entities. It is unclear whether such an omission is the result of a deliberate policy. 11. Exclusion of trusts The exclusion of trusts from the proposed legislation has drawn critique from a cohort of our membership base. The critique is based on economic significance and separation of ownership being two of the three fundamental principles not well served by the decision to exclude trusts. The reasoning is exacerbated when New Zealand s high number of trusts in comparison to other OECD countries is considered. New Zealand trusts own billions of dollars and generate significant revenue. This cohort of our membership asks for Ministry officials to reconsider the exclusion of trusts from the proposed legislation. No details as to how this recommendation might be operationalised were received from members. General Commentary 12. Group structuring The proposal to no longer have a statutory requirement to prepare parent company financial statements when group financial statements are prepared has generally been well received by our members. However, a number of members raised the possibility that group structuring might occur in a manner in contrast to the legislative intent. This might include restructuring an entity in order to avoid the size threshold. NZICA notes that this is not a challenge isolated to New Zealand as similar legislation is in effect in Australia. While there are mixed views relating to statutory requirements for making all overseas companies report other mechanisms that provide a level of transparency relating to the parent should be explored. NZICA wishes to acknowledge this as an area that may require further work and notes the above structuring would only occur under certain ownership structures. Minor Points 13. Audit must be carried out in accordance with auditing and assurance standards It is not readily apparent what Subpart 7 Amendments to Industrial and Provident Societies Act 1908 para 8F(2) adds beyond para 8F(1). 8