Jugdis Parbhu: New reporting rules unlikely to slash costs

Jugdis Parbhu, BDO Partner Business Advisory Services.

Opinion

Jugdis Parbhu, of BDO Auckland, says the new, simpler company reporting rules may not slash costs as much as some may think

The start of the new financial year on 1 April 2014 also means the start of new simpler, financial reporting regime for small to medium companies - though it's not likely to slash compliance costs for most businesses.

Who's affected?

The minimum financial reporting requirements developed by IRD affects companies (with turnover of less than $30m) that are no longer required to prepare general purpose financial statements. In practice this is usually limited to companies, though the threshold doesn't apply to New Zealand companies with overseas owners.

The framework simplifies the information that's required in financial statements and specifies the supplementary information that must be available. Given that the changes are likely to affect most New Zealand SME companies along with some (with turnover of less the $10m) subsidiaries of large companies and overseas companies - they should take note of the minimum requirements.

It is a good outcome for small companies (less than $30,000), but owners need to consider the impact of not having sufficient records to support a business value upon sale (egs small franchises such as lawn mowing rounds and so on).

For other companies (above $30,000 and less than $30m), there is no significant change from current position as they still need to have an adequate system to record financial transactions (for other tax reasons such as GST, etc).

However, for businesses that meet the size criteria, compliance costs are not likely to be slashed in most cases. There are probably more dollars to be made by focusing on growing the top line rather than a reduction in compliance costs especially for developing businesses.

Business owners also need to be asking themselves what is the right amount of financial information needed to grow and build value in their business?

Will simplified financial statements based on tax requirements provide enough information for a business to assess and forecast cash flow, monitor key drivers in their business or meet their banker's expectations?

What do business owners need to understand around financial reporting?

• Getting the correct results - If companies adopt the IRD minimum reporting framework as their sole basis of financial reporting, they risk misstating actual income or expenditure because:

- Interest received will be shown as a gross number (including RWT)
- Dividends received will be shown as a gross number (including RWT and IC -IC's are non-cash)
- Expenses may only be shown at the tax deductible amount (rather than actual spend)

Consequently, the company's operating result may not be correctly reflected in their financial statements, removing the ability to compare like businesses, or assess actual value or calculate cash flow assessments.

• Other financial data - Additionally, if companies need to record financial data for other management purposes, such as financial KPI's, they may need to record two sets of financial transactions - one for the IRD and the other for management.

• Additional costs - There will also be extra compliance costs involved in providing Inland Revenue with additional disclosures such as associated person transactions.

So what's the benefit for business?

While simplification of IRD reporting requirements will reduce compliance costs to a certain extent, whether or not it adds much value for the average SME is debatable.

IRD filing is one thing, but the business owner may still need to know the actual financial results to run their business.

SME owners also will need to be aware of the implications of the associated person's disclosures as these will highlight the transfer of wealth or income to other parties which Inland revenue the IRD may look to review those other parties.

There are ways to reduce compliance costs right now that won't make businesses wait until they prepare their 2015 financials - such as streamlined accounting software tools to automate and analyse transactions during the financial year, and improving the efficiency of preparing financial statements, providing sustainable gains right away.

It's also important to invest any compliance cost savings back into the back into the business. Focus on strategic planning, good governance, professional advice and mentoring - all providing long-term gains. Banking it by simply reducing your expenses will leave businesses at a disadvantage to competitors when they choose to invest it.

Everyone has to consider where they fall in the new regime for financial reporting no matter how they perceive themselves. In some cases the level of financial reporting will significantly increase in comparison to how the current position. If that applies then planning how to transition remains the key to avoiding unexpected cost and inconvenience.

Jugdis Parbhu is a Partner with BDO Auckland, part of the BDO chartered accounting and business advisory network.