Rule changes tipped to bring clarity

The Bill's author, Commerce Minister Craig Foss, said 18,500 of New Zealand's 25,000 registered charities will use this standard. Photo / Warren Buckland

In the second of a series on financial reporting law changes, Stephen Gillam looks at shareholders and charities.

Changes to regulations about financial statements will be welcome news for shareholders but somewhat double-edged for registered charities.

The Financial Reporting Bill, due for its third reading in Parliament, will amend more than 80 current acts as it updates the law surrounding financial reports.

The changes to how charities will prepare financial statements have been designed to introduce certainty in how reports are prepared and balance public accountability with keeping costs at a reasonable level.

New Zealand Institute of Chartered Accountants spokesman John Hodge said the clarity and consistency in preparing reports was overdue.

"They haven't had a very clear set of requirements in the past, just the requirement to prepare an annual report but there hasn't been a lot of clarity about the kind of reporting they've had to do," Hodge said.

He said the bill would increase administrative costs by amending the reporting process, and by other proposed legislation to bring in stricter auditing regulations.

"What this will do is clean up the sector but it will increase costs," he said.

"But in our view that's not an increase that won't come with positives."

Under the bill, all charities will become subject to the External Reporting Board's proposed cash reporting standard.

Its author, Commerce Minister Craig Foss, said 18,500 of New Zealand's 25,000 registered charities will use this standard.

A specified not-for-profit organisation, which will have to produce a more detailed accrual report, has been defined as an organisation with an "operating expenditure" of at least $125,000 per accounting period.

This will allow organisations to hire a full-time worker and still prepare a cash report, rather than an accrual one.

Meanwhile, shareholders will be one of the major beneficiaries of the new legislation, as they will receive more flexibility in their companies' reporting.

New Zealand Shareholders Association spokesman Grant Diggle said the changes were a good move.

"The main thing investors want to see are well-prepared statements that are in a form that informed, but not necessarily expert, investors can understand," Diggle said.

Shareholders will effectively be given the choice of whether to prepare a financial report, prepare financial statements and to have them audited.

A closely held company (one with fewer than 10 shareholders) will only have to prepare a financial report if shareholders who hold at least 5 per cent of its voting shares agree to comply.

A widely held company (10 or more shareholders) can now opt out of preparing general-purpose financial statements, having its statements audited and preparing an annual report if at least 95 per cent of voting shareholders agree to do so.

Any shareholder will still be able to make a written request for a company's financial statements for tax purposes.

This decision can only be exercised for a single accounting period and will have to be renewed annually.

There is not yet a confirmed date for the bill's third reading.

Coming up

What the new law means for new companies and auditors