the statutory framework for financial...

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THE STATUTORY FRAMEWORK FOR

FINANCIAL REPORTING

Discussion Document

September 2009

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ISBN 978-0-478-33673-3 (PDF) ISBN 978-0-478-33674-0 (HTML) © Crown Copyright First Published September 2009 Competition, Trade and Investment Branch Ministry of Economic Development PO Box 1473 Wellington New Zealand http://www.med.govt.nz Permission to reproduce: The copyright owner authorises reproduction of this work, in whole or in part, so long as no charge is made for the supply of copies, and the integrity and attribution of the work as a publication of the Ministry is not interfered with in any way.

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Table of Contents

Page Information for Submitters 5 Abbreviations 6 Questions for Submitters 7 Executive Summary 10 Introduction 17 Part 1: Objectives of the Review 18 Part 2: Problem definition 19 Part 3: Institutions and Statutory Responsibilities 20

3.1 Background 20 3.2 Options for Making Accounting and Auditing Standards 24 3.3 Options for Making Tiers of Financial Reporting 25

Part 4: Financial Reporting Principles and Indicators 27 4.1 Identifying the Principles and Indicators 27 4.2 Applying the Indicators to Preparation, Publication and Assurance 30 Part 5: The Application of the Indicators to For-Profit Entities 34

5.1 Background 34 5.2 For-Profit Entities and Public Accountability 35 5.3 For-Profit Entities and Economic Significance 35

5.3.1 Background 35 5.3.2 Applying the Economic Significance Indicator to For-

Profit Entities 36 5.4 For-Profit Entities and Management-Ownership Separation 38

5.4.1 The Application of the Indicators 38 5.4.2 Preparation by Small and Medium Companies 40

5.5 Conclusions on For-Profit Entities 42 Part 6: The Application of the Indicators to the Public Sector 43 Part 7: The Application of the Indicators to Private Non-Profit Entities 45

7.1 Background 45 7.2 Non-Profit Entities and Public Accountability 47 7.3 Non-Profit Entities and Economic Significance 48 7.4 Non-Profit Entities and Separation 49 7.5 The Implications for Small Non-Profit Entities 49 7.6 Conclusions on Non-Profit Entities 51

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Part 8: The Application of the Indicators to Māori Asset Governance Entities 53 8.1 Background 53 8.2 Māori Trust Boards (Maori Trust Boards Act 1955) 53 8.3 Te Ture Whenua Māori Act Entities 54

8.3.1 Māori incorporations 55 8.3.2 Māori reservations 56 8.3.3 Māori land trusts 57

8.4 Conclusions on Māori Governance Entities 58 Part 9: Other Issues 59

9.1 Consequential Issues 59 9.1.1 Assurance standards enforcement 59 9.1.2 Changing monetary thresholds 62 9.1.3 The exemption powers in the FRA 62 9.1.4 Inactive entities 63 9.1.5 The solvency test 64

9.2 Other Issues 64 9.2.1 Parent company financial statements 64 9.2.2 Filing by contributory mortgage brokers 67 9.2.3 The filing deadline for companies 68 9.2.4 Remuneration disclosures in relation to key management 69 9.2.5 Out-of-date language in other legislation 71

Part 10: The New Zealand-Australia Implications 72 Appendix: A summary of MED’s proposals for each class of entity 77

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Information for submitters

Queries about the review and submissions in response to this discussion document should be sent to:

Email: [email protected]

Post: Review of the Financial Reporting Framework Competition, Trade and Investment Branch Ministry of Economic Development PO Box 1473 Wellington

Phone 04 4742 914 or 04 4624 239 Fax: 04 4991 791 It would be useful if submissions sent in hard copy or faxed were also provided in electronic form (PDF, Microsoft Word 2000 or compatible format).

Questions in the discussion document are intended to provide a focus for the issues. Broader comment on the issues will also be welcomed.

The closing date for submissions is Friday 29 January 2010.

Publication of submissions, the Official Information Act and the Privacy Act

Other than submissions that may be defamatory, the Ministry intends publishing all submissions on its website http://www.med.govt.nz. The Ministry will not publish your submission on the internet if you have any objection to its publication. However, it will remain subject to the Official Information Act 1982 and may, therefore, be released in part or full. The Privacy Act 1993 also applies.

When making your submission, please state if you have any objections to the release of any information contained in your submission. If so, please identify which parts of your submission you are requesting to be withheld and the grounds under the Official Information Act 1982 for doing so (e.g. that it would be likely to unfairly prejudice the commercial position of the person providing the information).

Disclaimer

Views expressed in this discussion document are the preliminary views of the Ministry of Economic Development and do not reflect government policy.

Readers are advised to seek specific advice from an appropriately qualified professional before undertaking any action in reliance on the contents of this discussion document. The Crown does not accept any responsibility whether in contract, tort, equity, or otherwise any action taken or reliance placed on, any part, or all, of the information in this document, or for any error or omission from this document.

Acknowledgment

The Ministry would like to thank members of a steering group that provided MED with advice and a report which has contributed to the development of this discussion document. In particular, we would like to thank Joanna Perry, Kevin Simpkins, Bede Fraser, Patricia McBride, Vanessa Sealy-Fisher, Carole Greer and Kimberley Crook.

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Abbreviations

AASB Australian Accounting Standards Board AIFRS Australian equivalents to International Financial Reporting Standards ASIC Australian Securities and Investments Commission ASRB Accounting Standards Review Board (NZ) AUASB Auditing and Assurance Standards Board (Australia) FASB Financial Accounting Standards Board (US) FDR Framework for Differential Reporting FRA Financial Reporting Act 1993 FRO Financial Reporting Order 1994 FRC Financial Reporting Council (Australia) FRS Financial Reporting Standards FRSB Financial Reporting Standards Board of the New Zealand Institute of

Chartered Accountants FTE Full time equivalent GAAP Generally accepted accounting practice GPFR General purpose financial reports IASB International Accounting Standards Board IASCF International Accounting Standards Committee Foundation ICAA Institute of Chartered Accountants in Australia ICANZ Act Institute of Chartered Accountants of New Zealand Act 1996 ICNPO United Nations International Classification of Nonprofit Organisations IFAC International federation of Accountants IFRS International Financial Reporting Standards IMF International Monetary Fund IOSCO International Organisation of Securities Commissions IPSASB International Public Sector Accounting Standards Board ISA International Standards on Auditing MED Ministry of Economic Development MOU The Trans-Tasman Memorandum of Understanding on the

Coordination of Business Law NZICA New Zealand Institute of Chartered Accountants (‘Institute’) NZ IFRS New Zealand equivalents to International Financial Reporting

Standards NZ Framework The New Zealand equivalent to the IASB Framework for the

Preparation and Presentation of Financial Statements NZ Preface New Zealand Preface to New Zealand equivalents to International

Financial Reporting Standards and Financial Reporting Standards PBE Public Benefit Entity PSB Professional Standards Board of the New Zealand Institute of

Chartered Accountants SEM Single Economic Market TTAASAG Trans-Tasman Accounting and Auditing Standards Advisory Group TTWMA Te Ture Whenua Māori Act 1993 XRB External Reporting Board (proposed for NZ)

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Questions for submitters

Institutions and statutory responsibilities (Part 3)

Q1 What comments do you have on the proposal to transfer the Institute’s financial reporting and assurance standards responsibilities to a reconstituted ASRB?

Q2 What comments do you have on the proposals for the manner of setting the number of tiers and the qualifying criteria for each tier?

Financial reporting principles and indicators (Part 4)

Q3 What comments do you have on the Primary Principle and the Indicators of financial reporting? Should any other principles and/or indicators be considered?

Q4 What comments do you have on our broad conclusions in relation to preparation, publication and distribution; and assurance?

The application of the indicators to for-profit entities (Part 5)

Q5 What comments do you have on the tests (annual income, total assets and employee numbers) for determining whether a for-profit entity is economically significant? What comments do you have on the two-out-of-three test or the alternative “revenue plus one other” approach outlined in Section 5.3.1? What comments do you have on the current thresholds of $20m revenue, $10m assets and 50 FTE employees?

Q6 What comments do you have on the proposal to make no changes to the filing requirements for companies with 25% or more overseas ownership?

Q7 What comments do you have on the proposal to remove filing requirements for overseas-incorporated companies whose New Zealand businesses are not large?

Q8 What comments do you have on the preparation/opt-out and no-preparation/opt-in proposals for for-profit entities that meet the Separation Indicator only?

Q9 What comments do you have on the criteria we have used to illustrate the proposals described in the previous question (i.e. (a) 10 or more shareholders for identifying companies with a significant number of shareholders; (b) 5% of voting shares by value for opt-in; and (c) no vote against for opt-out and opt-down)?

Q10 What comments do you have on the proposal to remove the requirement for medium and small companies to prepare GPFR? What are the compliance cost implications?

Q11 What comments do you have on the Australian ‘grandfathering’ provision, exempting existing large companies at the time of the law change, from lodging financial statements with ASIC?

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Q12 What comments do you have on the advantages and disadvantages of requiring large non-issuer companies (and other entities impacted) to file financial statements under a ‘grandfathering’ regime?

The application of the indicators to public sector entities (Part 6)

Q13 What comments do you have on the proposal to retain the requirements for all public sector entities to publish assured GPFR?

Q14 Do you consider that the changes outlined in Part 3 will provide an appropriate framework for public sector entity standards setting?

The application of the indicators to private non-profit entities (Part 7)

Q15 What comments do you have on the proposal to use annual operating expenditure as the means for determining whether a private non-profit entity is small, medium or large?

Q16 What comments do you have on the proposals to use annual operating expenditure of $20,000 and $20 million as the cut off points between small and medium, and medium and large respectively? If you consider that other criteria should be used, what are those criteria and what cut-off points should be used?

Q 17 What comments do you have on the proposal that financial reporting obligations outlined in this Part would not apply to gaming machine societies?

Q18 What are your views on the preparation, distribution, publication and assurance proposals appearing in Part 7.6 and the Appendix insofar as it relates to private non-profit entities?

The application of the indicators to Māori asset governance entities (Part 8)

Q19 What are your views on the proposal to make no changes in relation to Māori trust boards?

Q20 What are your views on the proposals appearing in Part 8.3.1 in relation to Māori incorporations as summarised in Part 8.4?

Q21 What are your views on the proposal to make no changes in relation to Māori reservations?

Q22 What are your views on the proposal for the Māori Land Court to continue to have the responsibility for setting financial record keeping and reporting obligations for Māori land trusts?

Q23 What are the advantages and disadvantages of requiring economically significant Maori land trusts to publish GPFR?

Consequential issues (Part 9.1)

Q24 What are your views on the advantages and disadvantages of giving assurance standards the force of law?

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Q25 What are your views on the proposal to make it an offence to unduly influence, coerce, manipulate or mislead an auditor?

Q26 What are your views on the proposal to make it an offence to recklessly or knowingly include false or deceptive matters in an audit report?

Q27 What are your views on the proposal to introduce a requirement to change statutory monetary thresholds within a certain time period? What are your views on the ten year proposal?

Q28 What are your views on the proposals appearing in Part 9.1.3 concerning the three exemption powers?

Q29 What are your views on the proposed change to the solvency test?

Other issues (Part 9.2)

Q30 Do you consider that the parent company preparation and filing requirements should be retained, modified or removed? What are the compliance cost implications?

Q31 Assuming the parent company requirements were to be modified, what modifications should be made?

Q32 What are your views on the proposal to require contributory mortgage brokers and the broker’s nominee company to make GPFR available to investors?

Q33 Do you consider that the filing deadline for entities with publication requirements should be reduced? What are your views on the IMF suggestion of four months?

Q34 What are your views on the issues relating to remuneration disclosures for key management personnel?

New Zealand-Australia Single Economic Market (Part 11)

Q35 Do you have any comments on the proposals appearing in this document from a Single Economic Market perspective?

MED’s proposals for each class of entity (Appendix)

Q36 Do you have any comments on the proposals in the table in the Appendix?

General question

Q37 Do you have any other comments?

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Executive summary

This discussion document should be read together with a companion discussion document released simultaneously by the ASRB entitled Proposed Application of Accounting and Assurance Standards under the Proposed New Statutory Framework for Financial Reporting.

The main purposes of the MED document are to propose changes to the standards-setting infrastructure and discuss which entities should have financial reporting obligations. The main purpose of the ASRB discussion document is to identify the changes that it would implement in the event that the changes that are outlined in the MED document were to be enacted. This division between the two documents is consistent with the division of responsibilities, which is as follows:

• The Government and Parliament should decide which entities will have reporting obligations (i.e. the “Who” question); and

• The ASRB should decide on the reporting obligations for each class of reporting entity (i.e. the “What” question).

The issues and the main preliminary conclusions in relation to the MED discussion document are summarised below.

Part 1: Objectives

The main objective is to create a financial reporting framework that is coherent, complete and consistent. There is also a need to balance the benefits of financial reporting against the compliance costs, to have a system that is as simple and clear as practicable and promote New Zealand-Australia financial reporting convergence.

Part 2: Problems

The discussion document identifies a large number of issues. The three major issues are as follows:

a. The inconsistencies between the financial reporting principles and the actual GPFR preparation, audit and publication requirements – in particular, some stakeholders have concerns about the current obligation on all companies to prepare GPFR;

b. The ASRB does not have the power to approve standards for some classes of entities that have statutory requirements to prepare financial statements. In particular, it cannot approve standards for Registered Charities. From a user perspective, this reduces the value of the financial information filed with the Charities Commission because the recognition and measurement principles and rules applied by the preparer may be unclear and the lack of consistency makes it more difficult for users of financial statements to compare entities; and

c. The allocation of statutory functions is inefficient, incomplete, inconsistent and, in some respects, opaque. For example, the standards setting functions are split between two bodies, there are no standards for Registered Charities, entities with similar user needs are treated differently and parts of the financial reporting system do not work in ways that would be expected based on a plain reading of the FRA.

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Part 3: Institutions and statutory responsibilities There are three broad issues in relation to the financial reporting infrastructure. First, the FRA is silent about the responsibility for making financial reporting strategy-related decisions. This means that most strategic decisions are made by the FRSB or in an indirect way through the standards setting process. However, the ASRB is unable to initiate the process of making a standard. It must therefore seek to persuade the FRSB to make strategically important proposals to the ASRB. Corporate governance principles would suggest that the peak body (I.e. the ASRB) should be responsible for setting the strategic direction within the broader framework provided by the FRA. Secondly, the reporting system is not structured in the way that one would expect based on a plain reading of the Act. For example, the Act identifies two tiers of reporting. In fact, an intermediate tier was created by the two standards bodies, for very good reasons, by using a statutory power that was not obviously designed for such a purpose. Thirdly, the financial reporting standards-making responsibilities are split between the ASRB and the Institute. Assurance standards making is the sole responsibility of the Institute. These processes are inconsistent with the need for standards to be seen to be designed and approved in ways that are independent of the interests of the accounting profession. We are proposing to deal with these problems by consolidating all functions, along with the responsibility for making and approving assurance standards within a reconstituted ASRB, to be called the XRB. Thus, the XRB would be responsible for setting the strategy and designing and approving financial reporting and assurance standards. The other major issue addressed in this section relates to the processes for deciding the number of tiers of financial reporting and the qualifying criteria for each tier. Some of those decisions have been made by Parliament, others by the Government, and yet others jointly by ASRB and the FRSB. We conclude that there should be a single process for all such decision making. Our specific proposal is that the XRB should make recommendations to the Responsible Minister, who would decide to accept or reject them as a whole or refer them back to the XRB for further consideration. Part 4: Financial reporting principles and indicators Part 4 describes and discusses the purpose, principles and indicators of financial reporting. The overarching reason for imposing financial reporting obligations is to provide information to external users who have a need for an entity’s GPFR but are unable to demand them. There are three indicators that financial reporting is needed:

• Public accountability – Public accountability arises when an entity receives money direct from the public. The main examples are non-profit public sector entities, issuers of securities and charities;

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• Economic significance – Large entities can have a significant impact on the national or regional economy if they fail. Therefore, there can be a broad societal interest. This is particularly important for suppliers who extend credit to facilitate sales, customers who prepay for goods and services and employees who have part of their compensation deferred; and

• The separation of ownership and management – There is a concern that managers of an entity may not manage owners’ and members’ money as well as the owners would themselves. Therefore, owners and members need access to financial information where there is a certain degree of ownership separation from management.

The remainder of Part 4 outlines our broad conclusions about what those indicators mean in terms of preparation, assurance and publication or distribution of GPFR. More detailed discussions of the application of the indicators appear in subsequent parts of the discussion as follows:

• Part 5: For-profit entities;

• Part 6: Public sector entities;

• Part 7: Private non-profit entities; and

• Part 8: Māori asset governance entities.

Appendix One summarises those parts by describing the status quo and outlining proposals for all entity forms in tabular form.

Part 5: The application of the indicators to for-profit entities

Preparation requirements for companies

The main issue in this section is whether every company should continue to be required to prepare financial statements annually. We note that none of the indicators of financial reporting apply to 98-99% of companies. We therefore conclude that the requirements to prepare financial statements should be removed for all but the 1-2% of companies that are issuers, large and/or do not have separation. The following points are also made:

• The requirement on all companies to keep proper accounting records should be retained;

• Even though small and medium companies would not be automatically required to prepare GPFR, shareholders should be able to require the company to prepare and, if so, have an assurance engagement completed; and

• While the requirement to prepare GPFR would be removed, special purpose reporting (e.g. for taxation purposes) would still involve the preparation of accrual-based financial reports to a minimum standard.

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• Special rather than general purpose reporting is likely to substantially reduce compliance costs. Medium companies are likely to be able to reduce their use of sophisticated measure techniques (e.g. impairment tests), apply accounting policies that are targeted at the special purpose use (e.g. tax depreciation rates) and substantially reduce the number of notes to the accounts (i.e. both detailed breakdowns of major items and additional disclosures (e.g. directors’ remuneration and interests). There is also likely to be a reduced need for notes to financial reports prepared by small companies.

Filing by large non-issuer companies

Other large non-issuer companies and other for-profit entities are not required to file financial statements.1

We are seeking views on the approach adopted in Australia in regards to this issue. In 1995 the Australian Parliament introduced a requirement for new proprietary companies that were large to lodge GPFR with ASIC. However, proprietary companies that were incorporated prior to 1995 (that were either large at the time or subsequently became large) do not have to lodge. These “grandfathered” large proprietary companies only have to prepare GPFR and have them audited. This policy has had a significant impact over time and about 70% of large proprietary companies are now required to lodge GPFR with ASIC. However, large proprietary companies that now file financial statements make up a small proportion, just 0.3% in total, of the 1.6 million registered companies in Australia.

The application of the economic significance indicator to large non-issuer companies may mean that the companies GPFR help to contribute to good business decision-making, may ensure that financial disciplines that are placed on issuers are extended to non-issuer companies, and ensures, due to their economic significance, that creditors, employees and other stakeholders have good information about the company.

We are also seeking submitter views on the advantages and disadvantages of requiring large non-issuer companies (and other entities that may be impacted, such as not-for-profit entities or Maori Land Trusts that meet the economic significance indicator) to file financial statements.

Filing by overseas companies

This Part also addresses overseas company filing issues. The main issue relates to overseas-incorporated companies that carry on business in New Zealand, most of which are required to file GPFR with the Registrar of Companies. The discussion document concludes that overseas-incorporated companies that are not issuers and/or not large should no longer be required to file GPFR.

Part 6: The application of the indicators to public sector entities

The issues are straightforward for non-profit public sector entities. They are all publicly accountable because the great majority of their revenues are obtained from taxpayers and ratepayers. Therefore, they should all be required to publish assured GPFR.

1 An entity is large if it exceeds any two of the following: (i) total assets of $10 million; (ii) annual revenue

of $20 million; and (iii) 50 employees. See section 19 of the FRA.

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We also conclude that all for-profit public sector entities should continue to be required to publish audited GPFR because it is the most effective way of ensuring that the ultimate owners (i.e. taxpayers and ratepayers) are able to obtain access to GPFR. In addition, a small number of for-profit entities that have majority public ownership (e.g. some port companies) are issuers. The private shareholders continue to need to have access to the GPFR.

Part 7: The application of the indicators to private non-profit entities

The financial reporting obligations imposed on different classes of private non-profit entities are inconsistent among themselves and, in many respects, inconsistent with the indicators of financial reporting. For example, industrial and provident societies are required to have an audit completed but incorporated societies are not. There is no reason to treat them differently.

Another issue is that some non-profit entities, notably Registered Charities, are required to file financial information but there are no financial reporting standards underpinning the information that is filed. This creates uncertainty about the measurement and recognition principles and rules that have been used in preparing the information, which means that the information is of limited value to users.

Our main preliminary conclusions are that the following changes should be made in relation to private non-profit entities:

• The XRB should be empowered to make standards for all private non-profit entities with statutory obligations to prepare GPFR;

• Entities that accept donations from the public are publicly accountable. Nevertheless, the great majority of private non-profit entities should have no financial reporting obligations because they are too small to justify the preparation and distribution costs. Our preliminary conclusion is that only those with annual operating expenses of $20,000 or more should be required to prepare GPFR;

• Unincorporated societies (other than those that register with the Charities Commission) should have no financial reporting obligations because it is impractical to regulate and enforce regulation against those entities; and

• The Separation Indicator is likely to be met almost all of the time. Where only that indicator is met it should be for the members to decide whether the entity shall prepare GPFR and, if so, have an assurance engagement completed.

Part 8: The application of the indicators to Māori asset governance entities

The four classes of Māori asset governance entities (i.e. trust boards, reservation, incorporations and land trusts) are identified and the reporting issues are discussed. For the same reasons as discussed in relation to companies, MED has concluded that the non-large non-issuer Māori incorporations should no longer have to prepare GPFR. Likewise, shareholders should be able to require an incorporation to prepare and, if so, have an assurance engagement completed.

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Part 9: Other issues

Ten secondary issues are discussed in this section. Five are issues that arise due to the application of the indicators and changing the financial reporting system outlined in Parts 3 and 5-8 of the discussion document. The other five issues would arise even if none of the changes proposed in this paper were to be made.

Of the five related issues, arguably the most important is the legal status of assurance standards approved by the XRB. Our preliminary conclusion is that assurance standards should not have the force of law because it could reduce audit quality. Our view is that it would provide incentives for auditors to take a very risk-averse box-ticking approach rather than exercising professional judgment. We note that this proposal would not change the current situation whereby the courts consider the requirements imposed under the standards in determining the duty of care owed in negligence and other civil cases.

We also express preliminary views to create the following audit-related offence provisions, which we consider would promote audit quality:

• To attempt to unduly influence, coerce, manipulate or mislead an auditor; and

• To recklessly or knowingly include false or deceptive matters in an audit report.

Of the five issues that are unrelated to the rest of the paper, arguably the most important is whether to retain the requirement for parent-only financial statements to be prepared. At present, a reporting entity that has one or more subsidiaries must prepare consolidated and parent-only GPFR. Consolidated statements are useful because they provide information about all of the assets, liabilities and activities under the parent company’s control. However, parent company statements only provide information about the parent’s investments in its subsidiaries. That information is only used by a subset of users, mainly those working in a credit risk assessment role. The issue is whether the additional costs associated with preparing parent-only financial statements are outweighed by the benefits to that subset of users. If not, the options would be to remove the requirement to prepare parent-only financial statements or require additional notes to the consolidated financial statements that would meet those users’ needs. We have not drawn any conclusions about this matter.

Part 10: The New Zealand-Australia Single Economic Market implications

There are major differences between the financial reporting frameworks applying in Australia and New Zealand. The proposals in the discussion document would bring the two countries’ reporting requirements and infrastructure much closer together. Consistency is important for the following reasons:

• To increase the opportunities for two countries’ standards bodies to remove existing differences between their standards, meaning that entities with reporting obligations in both countries would only need to prepare one set of GPFR;

• To make it easier for users in one country to interpret GPFR prepared in the other country; and

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• To facilitate the creation of joint transTasman bodies at the strategic and/or standards setting level. The main driver of whether there should be separate or joint bodies is which option would maximise the two countries’ joint international influence. At present, this is achieved by the two countries having separate bodies. However, circumstances can change. Creating broad functional equivalence now would make it easier to implement mergers in the future.

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Introduction

1. This MED discussion document and a companion discussion document prepared by the ASRB, entitled Proposed Application of Accounting and Assurance Standards under the Proposed New Statutory Framework for Financial Reporting, together address a number of problems with the statutory framework for financial reporting. MED addresses issues relating to the policy and law of financial reporting. The ASRB outlines how it would respond if Parliament were to enact the changes that are outlined by MED. The way that the issues are divided between the two documents is described in more detail below.

The MED discussion document

2. The MED discussion document outlines:

2.1. Proposals to rationalise the institutional arrangements and the allocation of statutory responsibilities;

2.2. A proposed statutory process for determining how the number of tiers of financial reporting and the qualifying criteria for each tier will be determined (Our preliminary view is that the ASRB should make recommendations on these matters to the Minister of Commerce, who would either accept or reject them in full, or refer them back for further consideration);

2.3. Preliminary views on whether each class of entity should be required to prepare financial statements and, if so, whether the statements will need to be audited and/or published or distributed in one way or another (e.g. filing with the Registrar of Companies); and

2.4. Some other issues with the financial reporting legal framework, such as whether the requirement to prepare parent-only financial statements should be retained.

The ASRB discussion document

3. The ASRB discussion document:

3.1. Makes proposals about the number of tiers and the qualifying criteria for each tier; and

3.2. Generally describes the nature of the financial reporting and assurance requirements tentatively proposed for each tier.

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Part 1: Objectives of the Review

4. The main objective of the review is to produce a financial reporting system that works effectively and efficiently for all categories of entities in New Zealand. More specifically, the objectives are to produce a financial reporting system that:

• Is underpinned by coherent financial reporting principles;

• Weighs the benefits of financial reporting against the associated compliance costs. Those costs are as follows:

� The costs of preparing annual GPFR that would not otherwise be prepared;

� The costs of carrying out audits that would not otherwise be carried out;

� The costs associated with publishing financial statements; and

� The costs of developing and promulgating accounting and assurance standards.

• Is consistent. Entities with similar external user need characteristics should have similar financial reporting obligations;

• Is clear. The obligations that are imposed on each class of entities should be clearly defined. Clarity is needed both in terms of defining the tier of reporting an entity is included within and the resulting preparation, assurance and publication or distribution obligations that are imposed on it; and

• Facilitates the ability of the New Zealand and Australian standards setters to produce harmonised financial reporting standards. This would mean that an entity that has reporting obligations in both countries could produce a single GPFR that meets the legal requirements in both countries.

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Part 2: Problem Definition

5. There are five broad sets of issues with the financial reporting system.

6. First, the allocation of responsibilities under FRA is incoherent, incomplete and, in many respects, opaque. In particular:

6.1. There is no clear rationale for the way that functions are allocated between the Government and the ASRB, with some being performed by the Institute;

6.2. The ASRB does not have the power to approve standards for some entities with financial reporting obligations (e.g. registered charities);

6.3. The FRA is silent about the allocation of the responsibility between the ASRB and the Institute for making decisions about the strategic direction of the New Zealand financial reporting system, and

6.4. Parts of the financial reporting system do not work in the way that would be expected based on a plain reading of the FRA.

7. Secondly, there are inconsistencies in the financial reporting obligations that are imposed on different entity types whose users have the same information needs. Although the principles underpinning financial reporting policy are recognised and used in many parts of the financial reporting system,2 they are not consistently applied. In many cases, the law prevents the standards setters from applying them in a fully effective manner, with some classes of entities consequentially having inappropriate reporting requirements. For example, there are no powers to make standards for Registered Charities.

8. Thirdly, the Institute has a major role in making financial reporting and assurance standards. This creates a perception that there is a lack of independence in the way that standards are set in New Zealand. In most overseas jurisdictions standards are designed and approved independently of the interests of the accounting profession.

9. Fourthly, some consequential issues arise due to the need to make changes in response to the problems outlined above. For example, if most companies were no longer required to produce GPFR there would need to be a change to the solvency test in the Companies Act, which refers to GPFR.

10. Finally, there are some other issues. For example, there is a discussion of whether the requirement to prepare parent company financial statements should be retained, modified or removed.

2 For example, they are discussed in the NZ Preface and the NZ Framework, and used in the FDR.

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Part 3: Institutions and Statutory Responsibilities

PART 3.1: BACKGROUND

The status quo

Making and approving standards

11. Under the FRA:

11.1. The ASRB is responsible for reviewing and approving financial reporting standards submitted to it for approval. Standards approved by the ASRB have legal force;

11.2. The Institute is able to submit draft financial reporting standards and amendments to standards to the ASRB for approval. This function is carried out by an Institute board, the FRSB. The FRSB operates largely independently of the Institute Council and Executive Board.3 Much of the work is undertaken by Institute staff; and

11.3. Organisations and persons other than the Institute are able to submit draft standards to the ASRB for approval, but this rarely happens.

12. The FRSB and the Institute need to do many things to carry out the Institute’s standard-setting function. In particular, they expose draft IFRS and other standards for comment in New Zealand, analyse submissions, consider whether any changes are needed to make IFRS standards fit New Zealand’s needs, make submissions to the IASB and prepare standards where there is no IASB standard (e.g. the standard on prospective financial information, which is required to be applied by issuers and public sector entities).

13. There is also an international role for the FRSB. It generally liaises and seeks to influence the IASB and the IPSASB. It also has a very close relationship with the AASB.4

Setting the strategy

14. The FRA is silent about the responsibilities for making decisions that affect the broad direction of New Zealand financial reporting policy. In practice this function is split between the ASRB and the FRSB, with both making important decisions. For example, in 2002 the ASRB decided, after consulting with the FRSB, that New Zealand would adopt IFRS. The ASRB also issued Release 8 – The Role of the Accounting Standards Review Board and the Nature of Approved Financial Reporting Standards. The FRSB issued the NZ Framework and the NZ Preface, both of which are major operational strategy documents.

3 The FRSB’s high degree of autonomy means that standards design is more independent of the

interests of the profession than the FRA would suggest. 4 The FRSB and AASB agreed a protocol for cooperation in 2006, which provides the framework

for the transTasman coordination of operational strategies, policies and work programmes.

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15. The absence of explicit provisions on strategy responsibilities means that many of the high level decisions are made through the standards approval process. Consequently, some major decisions have been made by the ASRB in response to proposals put to it by the FRSB. For example, when the ASRB issued Release 9 in 2007 (which delayed the adoption of IFRS for certain small entities pending the outcome of this review) it did so in response to a recommendation by the FRSB.

16. Thus, the ASRB has some powers to make major decisions about the direction of financial reporting in New Zealand. However, for the most part, the ASRB can only influence the strategic direction by encouraging the FRSB to submit proposals to it. This is not explicitly stated in the FRA and it is not readily inferred. Nor is it sensible. Governance principles would suggest that the peak body (i.e. the ASRB) should set the strategy.

Setting the medium term work programme

17. The standards work programme has two parts: the international agenda and the domestic agenda.

18. The international agenda for profit oriented entities is set by the IASB alone or jointly with the FASB. For public sector entities it is set by the IPSASB. National standards bodies, such as the FRSB and ASRB, need to fit in with the priorities, work programmes and deadlines set at the international level.

19. Under the scheme of the FRA, the domestic elements of the medium term work programme are largely under the control of the FRSB, but in practice the ASRB exercises influence in the way stated above in relation to strategy issues. In addition, due to the high levels of cooperation between the FRSB and AASB, including cross-membership, there is a high level of trans-Tasman work programme coordination.

The reporting tiers

20. There are three reporting tiers in New Zealand:

• Tier One: NZ IFRS;

• Tier Two: The FDR, which provides about 20 exemptions from the Tier One requirements for certain classes of entities.5 Most of the exemptions relate to disclosure. A small number are measurement-related; and

• Tier Three: Simple reporting requirements for small companies6 in accordance with the FRO.

5 An entity qualifies for the FDR if it is not publicly accountable and either has no separation

between owners and the governing body of the entity or is not large. An entity is large if it exceeds any two of the following: (i) total assets of $10 million; (ii) annual revenue of $20 million; and (iii) 50 employees. See Paragraphs 4.25 and 4.23 of the FDR.

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21. Parliament established two tiers in the FRA. The top statutory tier comprises entities that are required to comply with GAAP (i.e. entities that fall within Tiers One and Two, as defined in the previous paragraph). The other statutory tier is Tier Three.

22. The FRA does not give explicit authority to the ASRB to create more tiers. Nevertheless, the two boards created Tier Two. The FRSB submitted the FDR for approval to the ASRB. The ASRB approved it by using a power in the FRA to give directions on the accounting policies that have authoritative support within the accounting profession.7 The FRSB then issued the FDR.

23. The boards could add more tiers in this way. However, they could not do so within the existing Tier Three because they do not have the power to design or approve standards for small companies.

24. There are consequential inconsistencies in the responsibilities for setting the thresholds that define which entities are in each tier. The ASRB and FRSB set the qualifying criteria that allow entities that would otherwise be in Tier One to report in accordance with the Tier Two requirements. Parliament set the qualifying criteria for Tier Three.8

Presentation and disclosure

25. There are inconsistencies in the ways that the presentation and disclosure requirements for entities within each tier are set. The requirements for Tier One appear in NZ IFRS, which are recommended by the FRSB and approved by the ASRB. The requirements for Tier Two appear in NZ IFRS and the FDR. The Tier Three requirements appear in the FRO. Thus, in a real sense, the government of the day set the Tier Three presentation and disclosure requirements.

Recognition and measurement

26. The recognition and measurement principles and rules are clearly set out for Tiers One and Two in NZ IFRS and the FDR. Clause 4 of the FRO outlines some basic measurement rules for Tier Three.

27. In theory, accountants should prepare small company financial statements in accordance with NZ IFRS and the FDR to the extent that they regard them relevant. However, our understanding is that most practitioners outside the Big 4 and the next level of accounting firms have little understanding of NZ IFRS and little reason to learn about them. In practice, most prepare financial statements based on their understanding of what is generally regarded as best practice by the profession.

6 A company is small if it meets two or more of the following tests: (i) total assets of no more than

$1million; (ii) annual revenue of no more than $2 million; and (iii) no more than five full-time equivalent employees. See section 6A of the FRA.

7 See section 24(1)(d) of the FRA.

8 See section 6 of the FRA.

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Assurance standards

28. The Institute does not have explicit authority to make assurance standards. However, that role is implicitly provided through the ICANZ Act, because it empowers the Institute to regulate auditors. The PSB, which is a board of the Institute, submits draft standards for consideration by the Council of the Institute, which has responsibility for deciding whether to approve them. Approved assurance standards are mandatory for Institute members carrying out assurance engagements.

Responsibilities for administering statutes

29. There are close linkages between the FRA and ICANZ Act. However, the FRA is within the Commerce Portfolio and the ICANZ Act is within the Finance portfolio. In practice, the Minister of Commerce and MED have taken responsibility for matters covered by the ICANZ Act, such as the regulation of auditors.

Comment on the status quo

30. The legal framework for financial reporting is incoherent, incomplete, inconsistent and, in many respects, opaque. The best that can be said about it is that the ASRB, FRSB and the Institute have found ways to make it work, notwithstanding its obvious deficiencies. However, the status quo is unsustainable. The lack of clarity in relation to some statutory responsibilities, the misallocation of other responsibilities, the inability to make standards for some forms of entities, and the major differences between the way the system works in practice and the way it is described in law means that the FRA is inconsistent with at least three of the five principles of good regulatory practice.9

31. The main changes that are needed are:

31.1. To rationalise the institutional arrangements and clearly state where the responsibility for the statutory functions shall lie;

31.2. To remove the inconsistencies between the way the system works in practice and what would be expected based on a plain reading of the legislation; and

31.3. To empower the standards body to approve standards for all classes of entities which have statutory requirements to prepare financial statements.

9 Those principles are efficiency, effectiveness, transparency, clarity and equity.

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PART 3.2: OPTIONS FOR MAKING ACCOUNTING AND AUDITING STANDARDS

32. Our preliminary view is that changes are needed with two aims in mind. First, efficiencies can be obtained by incorporating standards making and approval functions within a single body. Secondly, standards setting should be carried out and be seen to be carried out independently of the interests of the profession.

33. In our view there is only one feasible alternative to the status quo; to consolidate all standards-related responsibilities within the ASRB and rename it to reflect its broader responsibilities. The key features of this proposal are as follows:

33.1. The ASRB would be renamed as the XRB. As is the case with the ASRB, the XRB would be an independent crown entity;

33.2. The XRB would be responsible for setting the financial reporting strategy within the overall context provided by the new Act. The XRB would also have all responsibilities for designing and approving financial reporting standards and assurance standards;

33.3. XRB governance issues such as accountabilities and the process for making appointments to the board would be consistent with the template for independent crown entities in the Crown Entities Act 2004;

33.4. It would be within the powers of the XRB to establish committees to carry out any of its statutory functions. The XRB would consequentially be responsible for the oversight and governance of those committees in accordance with the provisions of the Crown Entities Act 2004;

33.5. The XRB would need staff to do the work that is currently carried out by the Institute;10

33.6. Approved financial reporting standards would continue to have the force of law;

33.7. At present assurance standards only apply to Institute members. Transferring responsibility for their design and approval to the XRB would make them mandatory for all audits that are required to be performed under Acts, Regulations and other statutes. The related enforcement issues are discussed in Part 9.1.1; and

33.8. The Institute would continue to regulate its members. Therefore, it would continue to set professional ethics and standards and impose the requirements for non-statutory assurance engagements.

10

The ASRB’s companion discussion document proposes a move away from the policy of sector neutrality, which would create a need to maintain more than one set of standards. This change might suggest a need for more staff and resources than is currently the case.

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PART 3.3: OPTIONS FOR MAKING TIERS OF FINANCIAL REPORTING

34. As previously noted, there is no consistency in the responsibilities for making tiers and defining the qualifying criteria for each tier. We consider that there should be a single process in relation to these matters. This would allow for a fully consistent approach to be taken. We have identified the following options for determining the number of tiers and the qualifying criteria:

Option A: To include them in an Act of Parliament;

Option B: To include them in Statutory Regulations;

Option C: To assign the responsibilities to the XRB;

Option D: To assign the responsibilities to the XRB, subject to appeal to the High Court;

Option E: To assign the responsibilities to the XRB, subject to disallowance by the Regulations Review Committee of Parliament; and

Option F: To give the XRB the power to make recommendations to the Responsible Minister. The Responsible Minister would be able to accept or reject the recommendations, or refer them back to the XRB for further consideration within a specified time period (e.g. 30 working days).

35. We consider that the criterion for deciding the number of tiers and the qualifying criteria for each tier should be that the benefits to users are likely to outweigh the associated compliance costs for preparers regardless of which option is adopted.

Discussion of the options for making tiers of reporting

36. A disadvantage of Options A and B is that they would remove the formal linkages between determining which entities have to prepare and what they have to prepare. To illustrate why this is a problem, consider what would happen if a tier included two classes of reporting entity whose users had fundamentally different information needs. The XRB would be placed in the difficult position of having to decide whether to approve standards that did not fully meet one set of users’ needs, were too complex or detailed for the other set of users’ needs, or a combination of the two. However, this risk should not be overstated. Although the formal linkages would be absent, it would be reasonable to expect informal dialogue among the XRB, the Minister and officials.

37. An additional disadvantage with Option A is that good qualifying criteria that became suboptimal over time might not be changed until many years later because Parliamentary time is scarce and successive governments may regard changing them as a low priority.

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38. Option C would deal with the problems associated with Options A and B. However, bearing in mind that the XRB would be exercising the coercive power of the State, Option C is unsatisfactory from an accountability perspective. Options D, E and F would provide accountability.

39. A feature of the High Court option (Option D) is that it would provide a higher degree of accountability because the XRB’s decisions would be scrutinised in considerably more detail. It is a matter of opinion whether this is an advantage or a disadvantage. A disadvantage of Option D is that it could add to the burdens of an already busy court system. In addition, appeals could be time consuming (compared with Options E and F) thereby creating unnecessary business uncertainty. Option D is also a much higher cost option than Options E and F.

40. Under Options E and F, strongly interested parties may lobby to veto a particular proposal, with a resultant risk that the lobbying power of interest groups could prevail over sound financial reporting principles. This would not matter so much if investors and other user groups that benefit from financial reporting were more powerful lobbyists than preparers. However, experience in New Zealand and overseas generally indicates that the reverse is true.

41. However, an advantage of Option F (compared with Option E) is that neither the XRB nor the Minister could act unilaterally. This should provide the XRB with a strong incentive to make high quality recommendations because it is very likely that any major problems would be drawn to the Minister’s attention.

42. Our preliminary view is that the lobbying risks would be manageable under Option F as long as it had the following features:

• The Minister would be required to apply the same criterion that the ASRB is required to use (i.e. whether the benefits to users exceed the costs to preparers); and

• The Minister could only reject a recommendation or refer it back for further consideration if he or she considered that the proposal was incomplete or not within the range of acceptable options.

43. To conclude, our preliminary view is to favour Option F because it combines the benefits of leaving the detailed analysis to the expert body and having an adequate level of accountability.

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Part 4: Financial Reporting Principles and Indicators

PART 4.1: IDENTIFYING THE PRINCIPLES AND INDICATORS

Introduction

44. This Part identifies the two purposes, the main principle and the three indicators of financial reporting. The indicators are then applied to all types of entity and conclusions are drawn about the entities that should have reporting obligations. The indicators are applied to for-profit entities in Part 5, non-profit public sector entities in Part 6, private non-profit entities in Part 7 and Māori asset governance entities in Part 8. The Appendix summarises the status quo and our preliminary proposals for all entity forms.

The principle and the indicators

45. The primary principle and three indicators that financial reporting is needed are identified in Box One.

BOX ONE: FINANCIAL REPORTING PRINCIPLE AND INDICATORS

The Primary Principle

The overarching reason for financial reporting is to provide information to external users who have a need for an entity’s financial statements but are unable to

demand them

Indicators that an entity meets the primary principle

The major indicators that an entity should have financial reporting obligations are:

• Public accountability

• Economic significance

• The separation of ownership and management

The Primary Principle

46. GPFR are used for two purposes. One purpose is to promote accountability by entities to external users by requiring the disclosure of information about the entity’s financial performance and position. For example, GPFR promote accountability by:

• Public sector entities to taxpayers;

• Companies to shareholders; and

• Charities to donors.

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47. The other purpose is to provide information that is useful to a wide range of users in making economic decisions. For example, GPFR provide information to investors, potential investors and their advisers that can contribute to decisions about whether to buy a business, buy the assets of a business or buy, hold or sell shares. In addition, GPFR can be a useful starting point for potential acquirers of the shares or assets of a business.

48. Some users are able to demand the financial information they need. For example, banks and other lending institutions impose financial information disclosure requirements, whether general or special purpose as a condition of lending money. Philanthropic and government entities do the same thing in relation to grants. However, most other users are unable to demand the information they need because they have little or nothing to give in exchange. As noted in the NZ Framework, many users have to rely on GPFR as their major source of financial information. The standards underlying GPFR should be designed with their needs in mind.11

The Public Accountability Indicator

49. Public accountability arises when an entity receives money directly from the public. The entities that are publicly accountable are:

• Non-profit public sector entities – Taxpayers and ratepayers provide the only or the predominant source of funding for the great majority of non-profit public sector entities (e.g. the government itself, government departments, crown entities and local authorities);12

• Issuers13 – Some entities seek funding through debt or equity instruments that are offered to the public. In addition banks, insurance companies, mutual funds and other entities take deposits from the public and/or hold assets in a fiduciary capacity for broad groups of outsiders. All money obtained in these ways is the public’s money; and

• Charities – Charities are publicly accountable because they receive donations and bequests directly from the public.

The Economic Significance Indicator

50. The idea underpinning economic significance as an indicator is the economic or social impact that a large entity is likely to have on the national or a regional economy if it fails. There is, therefore, a broader stakeholder interest in the financial position and performance of large entities even if they do not have public accountability.

51. In particular, groups other than equity investors and lenders provide resources as a consequence of their relationship with an entity, even though the contractual

11

NZ Framework, paragraph 6. 12

The flow-through of public money to another entity does not, in and of itself, mean that the recipient entity is publicly accountable. For example, a firm that provides consultancy services to a government department is not consequentially publicly accountable.

13 Comprising all registered banks, unit trusts, insurers, retirement villages, credit unions,

participatory securities and other entities that issue securities as defined in the Securities Act.

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relationship is not that of a capital provider. For example, suppliers may extend credit to facilitate a sale. Customers may prepay for goods and services. Employees may have some of their compensation deferred for many years. To the extent that suppliers, customers, employees or other groups make decisions to provide resources to the entity in the form of credit, they are providers of capital.14

The separation of management and ownership indicator

52. The main idea underpinning this indicator is the concern that management may not manage other people’s money as well as the other people would themselves. This “principal-agent” problem explains the reason for corporate governance, which involves putting oversight systems and rules in place with the aim of modifying managerial behaviour and improving entity performance. Those systems and rules, which include the governance of financial resources, are imposed by parliaments, governments, regulators, boards, and owners or members.

53. At some point of separation, the principals need to be able to access GPFR to enable them to assess the financial performance, financial position and, in some cases, the cash flows of the entity.15 Our assessment of the separation indicator in relation to each of the broad categories of entities is as follows:

53.1. For-profit entities: The Separation Indicator applies to for-profit entities where significant numbers of owners of the business are not involved in its management. This is the case with some for-profit entities. However, it does not apply to most for-profit entities including sole traders, closely-held companies and most partnerships;

53.2. Public sector entities: The Separation Indicator applies to all public sector entities, whether non-profit or for-profit, because the ultimate owners are taxpayers and ratepayers. However, separation is only of academic interest to non-profit public entities because they are all publicly accountable; and

14

IASB, Exposure Draft of an improved Conceptual Framework for Financial Reporting, IASCF, May 2008, Paragraph OB6; and FASB, Exposure Draft – Conceptual Framework for Financial Reporting: The Objective of Financial Reporting and Qualitative Characteristics and Constraints of Decision-Useful Financial Reporting Information, Financial Accounting Series No 1570-100, 29 May 2008, Paragraph OB6.

15 NZ Preface, FRSB, March 2005, Paragraph 2(a).

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53.3. Private non-profit entities: The Separation Indicator applies in different ways depending on the purpose of the entity:

53.3.1. The Separation Indicator applies to private non-profit entities whose purposes are to promote the interests of the members of the entity (e.g. sports clubs). It seems likely that the committee or board of most such entities would only be a small proportion of the total membership. Therefore, the separation indicator will almost always apply; and

53.3.2. The Separation Indicator applies in a different way in relation to private non-profit entities with charitable purposes. Arguably, the principals are the beneficiaries of such entities, in which case all such entities fit within the Separation Indicator. However, separation is only of academic interest because they are all publicly accountable.

PART 4.2: APPLYING THE INDICATORS TO PREPARATION, PUBLICATION AND

ASSURANCE

54. In this sub-part, we draw general conclusions about the application of the indicators and whether entities should therefore be required to prepare GPFR, have an assurance engagement completed and distribute or publish the GPFR. Those high level conclusions are then applied more specifically to each entity type in Parts 5-8 and the Appendix.

Applying the Indicators to preparation and publication or distribution

55. Preparation and publication/distribution are discussed together because preparation serves no purpose (in terms of accountability or economic decision making by external users) unless the preparer has obligations to ensure that the external users have access to the GPFR. In this context:

• “Publication” means a general requirement to make the GPFR available to the New Zealand public. Examples of publication are filing with a statutory officer (e.g. the Registrar of Companies or the Registrar of Incorporated Societies), forwarding them to a government department (e.g. the Ministry of Education in relation to schools and the Department of Internal Affairs for local authorities) and to forwarding them to a Minister of the Crown for tabling in Parliament (e.g. crown entities and government departments); and

• “Distribution” means, at minimum, making the user aware that the GPFR are available (e.g. alerting users by email that the GPFR appear on a specified website). It can also mean sending the GPFR to users by post, attaching them to an email or making them available at a meeting of the entity.

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56. Our preliminary views in relation to preparation and publication or distribution are as follows:

56.1. For entities that are publicly accountable:

56.1.1. Issuers and public sector non-profit entities should be required to prepare and publish GPFR;

56.1.2. Private non-profit entities which have charitable purposes and are not small should be required to prepare and publish GPFR;

56.1.3. Small private non-profit entities which have charitable purposes should not have preparation requirements because the financial reporting costs outweigh the benefits to users; and

56.1.4. Unincorporated private non-profit entities which have charitable purposes should not have preparation requirements because enforcement is impractical.

56.2. Most economically significant entities should be required to prepare and publish GPFR;

56.3. The default position for entities with a significant degree of separation between management and the owners or members should be a requirement to prepare GPFR and to distribute them to owners or members. However, the owners or members should be able to opt out of the requirements to prepare; and

56.4. The default position for entities that do not fall within the definition of any of the Indicators should be to have no preparation requirements. However the owners or members of the entity should be able to require the preparation and distribution of GPFR and determine which tier of financial reporting standards will be used.

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Applying the indicators to assurance

57. The purpose of an assurance engagement is to enhance the degree of confidence of intended users in the financial statements. This is achieved by the expression of an opinion by the auditor on whether the financial statements are prepared, in all material respects, in accordance with an applicable financial reporting framework.16 In general, misstatements, including omissions, are considered to be material if, individually, or in the aggregate, they could reasonably be expected to influence the economic decisions of users.17 In other words, without assurance GPFR are of less value because users do not know whether they can rely on them. Therefore their information needs are not being fully met.

58. There are two forms of assurance engagement. IFAC defines them as follows:

• Reasonable assurance (i.e. an audit): The objective is a reduction of assurance engagement risk to an acceptably low level in the circumstances of the engagement, as a basis for a positive form of expression of the practitioner’s conclusion; and

• Limited assurance (i.e. a review engagement): The objective is a reduction in assurance engagement risk to a level that is acceptable in the circumstances of the engagement but where that risk is greater than for a reasonable assurance engagement, as the basis for a negative form of the expression of the practitioner’s conclusion.18

59. Our preliminary views in relation to assurance are as follows:

59.1. Public sector and for-profit entities that are publicly accountable should be required to have an assurance engagement completed;

59.2. Private non-profit entities that are publicly accountable and have preparation requirements should be required to complete an assurance engagement unless their small size means that the assurance-related benefits to users are likely to be outweighed by the costs of a review engagement;

59.3. All economically significant entities should be required to have an assurance engagement completed;

59.4. Assurance should be the default position for entities with a significant degree of separation between management and the owners or members. However, the owners or members should be able to opt out;

16

“Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance with International Standards on Auditing” (ISA 200) in Handbook of International Auditing, Assurance and Ethics Pronouncements¸ International Federation of Accountants, April 2009 edition, paragraph 3 , page 78.

17 ib id, page 79.

18 “Glossary of Terms”, IFAC, Handbook …, p18

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59.5. If the owners or members of an entity that does not fall within the definition of any of the Indicators decide that the entity will prepare GPFR, then the owners or members will also be able to require an assurance engagement to be carried out. The owners or members will be able to specify either an audit or a review engagement; and

59.6. The XRB would determine the level of assurance (i.e. audit or review) that should apply to entities required to have an assurance engagement completed.

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Part 5: The Application of the Indicators to For-Profit Entities

60. This Part is structured in the following way:

• Part 5.1 provides background information;

• Part 5.2 identifies for-profit entities that should have reporting obligations because they are publicly accountable;

• Part 5.3 identifies for-profit entities that should have reporting obligations because they are economically significant;

• Part 5.4 identifies for-profit entities that should have reporting obligations because there is separation of management and ownership; and

• Part 5.5 summarises our views on preparation, assurance and publication and distribution proposals for for-profit entities.


61. The following for-profit entities are currently required to prepare and file audited GPFR and distribute them to the owners:

• Issuers;

• Overseas-incorporated companies that are carrying on business in New Zealand;

• Companies with 25% or more overseas ownership which are large;19

• Māori incorporations;20

• Non-issuer building societies; and

• Non-issuer friendly societies if the receipts, and payments and assets are greater than or equal to $20,000.

62. The following for-profit entities are currently required to prepare and distribute GPFR, but not file:

• All companies other than those covered by the previous paragraph;

• Limited partnerships; and

• Non-issuer friendly societies other than those listed in the previous paragraph.

19

An entity is large if it exceeds any two of the following: (i) total assets of $10 million; (ii) annual revenue of $20 million; and (iii) 50 employees. See section 19 of the FRA.

20 See Part 8.3.1 for a discussion of financial reporting for Māori incorporations.

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PART 5.2: FOR-PROFIT ENTITIES AND PUBLIC ACCOUNTABILITY

63. Issuers of securities are publicly accountable because they invite the public to invest directly. It is clear that all issuers should continue to be required to prepare and file assured GPFR.

64. It can also be argued that there is public accountability by companies to creditors because the liability of the owners is limited. However, for cost-benefit reasons our view is that creditors’ interests are more appropriately considered from an economic significance perspective.

PART 5.3: FOR-PROFIT ENTITIES AND ECONOMIC SIGNIFICANCE

PART 5.3.1: BACKGROUND

65. We concluded in Part 4 that the financial reporting obligations for publicly accountable entities and economically significant entities should be no different. Both classes of entity should be required to prepare and publish assured GPFR. Therefore, our view is that economic significance only needs to be discussed in relation to large entities that are not publicly accountable.

66. At present, the economic significance indicator is only applied to companies with 25% or more overseas ownership. The relevant definition appears in section 19A of the FRA. It states that a company is large if it exceeds any two of the following tests: (i) consolidated assets of $10 million; (ii) consolidated annual revenue of $20 million; and (iii) 50 full time equivalent employees in the company and its controlled entities.

67. There is a possible risk with this approach in relation to overseas incorporated and owned companies. Some such companies may have substantial annual revenue but fall below both of the other thresholds. If so, then it might be better to modify the test so that a company would only be excluded from the definition of large if it was below the threshold for revenue, and one or both of the thresholds for assets or employees. To illustrate, a company with annual revenue of $25 million, assets of $5 million and 40 employees would not meet the extant definition but would meet the alternative definition of “large”.

68. As a starting point for discussion, we are seeking submitters’ views on whether asset values, annual revenue and numbers of employees are appropriate measures of economic significance, whether the two-out-of-three approach remains appropriate, and whether the current numbers in section 19A of the FRA should be retained.

69. Most economically significant for-profit non-issuer entities are companies. However, a small number of other entities, such as large partnerships within the professions are also economically significant.

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70. 520,000-odd companies are registered in New Zealand and many other for-profit entities operate in New Zealand, including partnerships, trading trusts and sole traders. There are no reliable statistical data on the number of entities that meet the current test for defining a large company. However, Australia uses the same two-out-of-three approach for distinguishing between large and small proprietary companies and ASIC statistics may provide some guidance. The employee number test in Australia and New Zealand are the same (i.e. 50 employees) and the monetary tests are about 50% higher in Australia (A$12.5 million for assets and $A25 million for revenue) than New Zealand (NZ$10 million and NZ$20 million).

71. About 1.6 million companies are registered in Australia and about 33,000 entities are required to prepare GPFR comprising 20,000 public companies,21 7,000 registered schemes and 6,000 large proprietary companies. Thus, about one Australian company in 260 is a large proprietary company.

72. Due to the relative sizes of the Australian and New Zealand economies (about 6:1) we can reasonably assume that New Zealand companies are smaller than Australian companies across the size distribution. If it is assumed that the economy size factor and the lower thresholds for economic significance in New Zealand balance each other out, then 1:260 could be used to approximate the ratio of large non-issuer companies to total companies in New Zealand. This would suggest that there are about 2,000 economically significant non-issuer companies in New Zealand, using the current definition of “large” in the FRA.

73. We acknowledge that the number could be materially different in absolute terms (e.g. it might be half or double 2,000). However, that is unlikely to matter from a policy perspective. The key point is that only a very small proportion of non-issuer companies and other for-profit entities would have financial reporting obligations for economic significance reasons.

PART 5.3.2: APPLYING THE ECONOMIC SIGNIFICANCE INDICATOR TO FOR-PROFIT

ENTITIES

74. This section considers each of the following issues in relation to for-profit entities:

• Companies with 25% or more overseas ownership;

• Overseas-incorporated companies carrying on business in New Zealand; and

• All other economically significant companies and other for-profit entities.

21

The definition of “public company” in Australia is similar to the definition of “issuer” in New Zealand.

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Companies with 25% or more overseas ownership that are not issuers

75. The requirements are already consistent with the Economic Significance Indicator for this class of companies. Under sections 19 and 19A companies with 25% or more overseas ownership are only required to file audited GPFR if they are large.

Overseas-incorporated companies carrying on business in New Zealand that are not issuers

76. Under section 19 of the FRA, an overseas-incorporated company carrying on business in New Zealand must file its financial statements and where relevant, consolidated financial statements, unless it is a subsidiary22 of another company that is required to file and has filed parent-only and consolidated financial statements. In addition, section 8(2) states that an overseas company that is required to file must also file financial statements for its New Zealand business as if that business were conducted by a company formed and registered in New Zealand.

77. The Economic Significance Indicator would suggest that the current filing obligations on overseas-incorporated companies are excessive. GPFR should only be required to be filed if the New Zealand business of the overseas company is large.

78. A non-indicator argument that has been put to us is that overseas-incorporated companies’ financial statements could be used for detecting money laundering and terrorist financing. We do not agree with this proposition. GPFR provide aggregated financial information, not information about individual transactions. It would seem very unlikely that they could be used to detect money laundering or terrorist financing.

79. The most cost-effective approach to combating money laundering and terrorist financing is to target high risk transactions and monitor industries that are prone to risks of crime or dishonesty. This approach is already being used in other legislation including the Financial Transactions Reporting Act 1996 and the Gambling Act 2003. Another targeted piece of legislation, the Anti-Money Laundering and Countering Financing of Terrorism Bill, was introduced into Parliament in June 2009.

80. Our preliminary conclusions are that:

• The filing requirements should be removed for non-large overseas-incorporated companies; and

• The test for “large” should be consistent with the test used for companies that have 25% or more overseas ownership.

22

“Subsidiary” includes a subsidiary of a subsidiary, no matter how many steps removed. See section 2 of the FRA and section 5 of the Companies Act 1993.

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All other economically significant non-issuer companies and other for-profit entities

81. Other large non-issuer companies and other for-profit entities are not required to file financial statements.

82. We are seeking views on the approach adopted in Australia in regards to this issue. In 1995 the Australian Parliament introduced a requirement for new proprietary companies that were large to lodge GPFR with ASIC. However, proprietary companies that were incorporated prior to 1995 (that were either large at the time or subsequently became large) do not have to lodge. These “grandfathered” large proprietary companies only have to prepare GPFR and have them audited. This policy has had a significant impact over time and about 70% of large proprietary companies are now required to lodge GPFR with ASIC. However, large proprietary companies that now file financial statements make up a small proportion, just 0.3% in total, of the 1.6 million registered companies in Australia.

83. The application of the economic significance indicator to large non-issuer companies may mean that the companies GPFR help to contribute to good business decision-making, may ensure that financial disciplines that are placed on issuers are extended to non-issuer companies, and ensures, due to their economic significance, that creditors, employees and other stakeholders have good information about the company.

84. We are also seeking submitter views on the advantages and disadvantages of requiring large non-issuer companies (and other entities that may be impacted, such as not-for-profit entities or Maori Land Trusts that meet the economic significance indicator) to file financial statements.

PART 5.4: FOR-PROFIT ENTITIES AND MANAGEMENT-OWNERSHIP SEPARATION

PART 5.4.1: THE APPLICATION OF THE INDICATORS

The application of the separation indicator to companies – preparation issues

85. There is no “one size fits all” solution in relation to the Separation Indicator. There may be a need to prepare financial statements in relation to a small company with only two shareholders if one shareholder is solely responsible for managing the business.

86. However, there may not be any need for financial statements in relation to a small family owned company with four shareholders, all of whom participate in the management of the company in one way or another. In addition, circumstances can change. For example, there may be no need for GPFR in relation to a husband-wife owned company. However, that could change if the marital relationship broke down.

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87. Nevertheless, once the number of owners reaches a certain point, there can be confidence that the Separation Indicator will always or almost always be met. For example, it would seem very unlikely that all of the owners would be involved in the management of a company if there were ten owners.

88. We consider that the way to deal with the variety of circumstances that can arise is to have default rules combined with the opportunity for shareholders to depart from those default rules. The two options we have identified for for-profit entities that are neither publicly accountable nor economically significant are as follows:

Option A

• Preparation/opt-out: The default rule is that all for-profit entities with a certain number of owners (e.g. 10) would be required to prepare financial statements and have them assured. However, owners would be able to waive the assurance requirement, or both the preparation and the assurance requirement in certain circumstances (e.g. if no shareholder or member voted against a motion to this effect at a general meeting of the entity).

• No preparation/opt-in: The default rule is that all for-profit entities with less than a certain number of owners (e.g. 10) would not be required to prepare financial statements. However, owners would be able to require the entity to prepare financial statements in certain circumstances (e.g. if 5% of owners by value voted in favour at a meeting of the entity). If this option was exercised, the owners would also be able to:

o Decide on the tier of reporting; and

o Require an assurance engagement to be completed and, if so, determine whether an audit or review engagement shall be completed.

Option B

• To adopt “no preparation/opt-in” for all for-profit entities.

Comment on Options A and B

89. Our preliminary view is to favour Option A because it appears to be a better targeted solution. However, we need comments from submitters on whether it would work in practice before deciding whether to recommend Option A or B, or another option that had not occurred to us at the time of writing. We are also seeking comments on whether ten owners is an appropriate cut-off point between preparation/opt-out and no-preparation/opt-in.

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PART 5.4.2: PREPARATION BY SMALL AND MEDIUM COMPANIES

90. If the Indicators were to be applied and the current test for economic significance was retained, then non-issuer companies that did not meet or exceed two out of the three size tests (i.e. $20m annual revenue, $10m assets and 50 FTE employees) would no longer be required to prepare GPFR, unless the shareholders demanded it. Such a position would be consistent with the state of the law in Australia. As noted above, the 1.55 million Australian companies that are small proprietary companies are not automatically required to prepare GPFR.

91. Our preliminary view is that New Zealand should remove the requirement imposed on medium and small companies to prepare financial reports. However, we anticipate that many small and medium companies would prepare special purpose annual financial statements of one sort or another (potentially using criteria similar to the FRO, with reduced requirements – for example, around the provision of notes to the financial reports) for the following reasons:

• The owners of some companies that are not closely held are likely to demand financial statements for accountability reasons;

• Many companies, particularly those that are not small, will produce the information for internal strategy, planning and financial management reasons;

• Annual financial statements are a cornerstone of banks’ risk management strategies. They would continue to require financial information to: (a) decide whether to lend money to a business, and (b) monitor performance once a loan has been approved; and

• To meet specific regulatory requirements (such as the filing of taxation returns).

92. While the requirement to prepare GPFR would be removed under the proposals, special purpose reporting would still involve the preparation of accrual-based financial reports to a minimum standard. Nevertheless, we would envisage significant overall compliance cost savings to result from the removal of GPFR reporting requirements for medium entities and some reduction for small entities for the following reasons:

• Medium companies: The special purpose financial statements that would be required of medium companies under a regulation-related legal requirement could be much simpler than the GPFR-compliant reports they are currently required to produce. For example, we anticipate that medium companies preparing special purpose reports would:

o No longer prepare detailed notes covering some or all of the following:

� Detailed breakdowns of major items; and

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� Additional disclosures such as related party transactions, directors’ remuneration and interests, and management and employee compensation.

o Reduce their usage of sophisticated measurement techniques, such as annual impairment tests. The alternatives are to revalue long-lived assets less frequently or not account for impairments at all; and

o Use accounting policies related specifically to users’ needs (e.g. tax depreciation rates for tax-related special purpose reports) rather than the policies mandated under GAAP.

• Small companies: The main simplification impact of reduced reporting requirements would be a reduced need to prepare notes to the accounts.

93. The total amount of the compliance cost savings resulting from the removal of the requirement to prepare GPFR are difficult to estimate for the following reasons:

• It is difficult to anticipate what obligations banks would impose on lenders;

• The amount saved by medium companies could vary substantially depending on the size and the complexity of the business. The compliance reductions for companies at the high end of the medium company range (i.e. companies with annual revenue of $10-20 million) could be in five figures;

• It would seem very likely that a significant number of small companies do not comply with the legal obligation to prepare financial reports in accordance with the FRO. However, it would be very speculative to attempt to estimate the number;

• Law-compliant small companies might save up to $500 a year; and

• Although it is known that there are 520,000 registered companies, it is unknown how many fit within the definitions for small and medium. However, based on our conversations with Chartered Accountants that specialise in the SME sector, we estimate that 400,000 are small and 100,000 are medium.

94. If our assumptions are correct then the compliance cost savings might be as follows:

• Medium companies: 25,000-50,000 companies saving an average of $2,000-$5,000. The saving is $50 million to $250 million a year; and

• Small companies: 100,000-200,000 companies saving an average of $250. The saving is $25 million to $50 million a year.

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95. The total saving would be between $75 million and $300 million a year. Note, however, that we have included these amounts with some hesitancy. The underpinning assumptions may be incorrect by a substantial amount. We are seeking submissions on the compliance cost implications.

96. As the proposed role of the XRB is to set financial reporting standards for GPFR, it would not be responsible for preparing or approving any special purpose reporting requirements.

PART 5.5: CONCLUSIONS ON FOR-PROFIT ENTITIES

97. If the MED proposals outlined in this Part were to be implemented then the situation for for-profit entity reporting would be as follows:

97.1. Issuers, large overseas-owned companies and large overseas-incorporated companies will be required to file audited GPFR with the Registrar of Companies;

97.2. We are seeking comments on the ‘grandfathering’ approach adopted in Australia. When the law changed in 1995, existing for-profit entities that were large are not legally obliged to lodge financial statements with ASIC. However, those companies either incorporated, or that became large after the law change, are now required to lodge;

97.3. Other than issuers and large for-profit entities, the default position for for-profit entities with a significant level of ownership-management separation (e.g. 10 shareholders) will be to prepare audited GPFR and make them available to owners. However, shareholders may choose to opt-out of an assurance engagement or opt out of preparing; and

97.4. The default position for all other for-profit entities will be to not have GPFR obligations. However, shareholders may require the entity to prepare and distribute GPFR, specify the basis for reporting, and/or require an audit or review engagement to be completed. In addition, such companies will prepare special purpose reports.

98. To be clear, we are not proposing any changes to the requirement for companies to keep proper accounting records. There would be no changes to the obligations contained in section 194(1) of the Companies Act for the board of a company to cause accounting records to be kept that:

a) Correctly record and explain the transactions of the company; and

b) Will at any time enable the financial position of the company to be determined with reasonable accuracy.

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Part 6: The Application of the Indicators to the Public Sector

99. Public sector entities include the Crown, government departments, crown entities, state-owned enterprises, crown-owned companies, school boards of trustees, local authorities, council-controlled organisations and council-controlled trading organisations. They also include some very small entities such as reserve boards and cemetery boards.

The Application of the Public Accountability Indicator to Public Sector Entities

100. Most public sector entities are PBEs. That is, they are entities whose primary objective is to provide goods or services for a community or social benefit and where any equity has been provided with a view to supporting that primary objective rather than for the financial return to equity shareholders.23 For the reasons given in Part 4, all public sector entities that are PBEs are publicly accountable. They should all be required to publish assured GPFR.

101. In addition, a small number of for-profit public sector entities are publicly accountable because they are issuers (e.g. some port companies). They should be treated in the same way as other issuers (see Part 5.2).

The Application of the Separation Indicator to Public Sector Entities

102. As all non-profit public sector entities and issuer for-profit public sector entities are publicly accountable, the only entities that need to be discussed under this heading are non-issuer for-profit public sector entities. Examples are state-owned enterprises, companies that are owned by local authorities (e.g. energy companies) and company subsidiaries of public sector entities.

103. The formal ownership arrangements for for-profit public sector entities vary. For example, state-owned enterprises have two shareholders: the Minister of Finance and the Minister for State-Owned Enterprises. The shares in many local authority companies are held by trusts that are owned by one or more local authorities. Regardless of the variations in formal shareholding arrangements, in a real sense taxpayers and ratepayers are the ultimate owners of all public sector for-profit entities. Therefore, ownership is very widely dispersed and separated from management. The most effective way of ensuring that taxpayers and ratepayers have access to the GPFR is to continue to require for-profit public sector entities to publish audited GPFR by one means or another.

The Application of the Economic Significance Indicator to Public Sector Entities

104. No discussion is required under this heading. All public sector entities fall within the meaning of either the Public Accountability or the Separation Indicator.

23

NZ Preface (2007), paragraphs 27-28.

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Conclusion on the Application of the Indicators to Public Sector Entities

105. We conclude that all public sector entities should continue to be required to publish assured GPFR.

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Part 7: The Application of the Indicators to Private Non-Profit Entities

7.1 BACKGROUND

106. All private non-profit entities fall within the definition of PBE used by the FRSB and ASRB. That is, they are entities whose primary objective is to provide goods or services for a community or social benefit and where any equity has been provided with a view to supporting that primary objective rather than for the financial return to equity shareholders.

107. A more detailed description is provided by the United Nations International Classification of Nonprofit Organisations. The ICNPO taxonomy states that for an entity to be part of the non-profit sector it must meet all of the following criteria:

• Organised: The entity must be institutionalised to some extent. This can mean that an organisation is either formally registered or that an unregistered entity shows proof of having regular meetings, rules of procedure or some degree of organisational permanence;

• Private: The entity must be institutionally separate from the government, meaning they are neither part of the governmental apparatus, nor controlled by the government;

• Non-profit distributing: Any surplus generated by an organisation must be applied to tasks related to the organisation’s mission;

• Self-governing: The organisation must have its own internal procedures for governance and must not be controlled by outside entities; and

• Non-compulsory or voluntary: Membership and contributions of time and money are not required or enforced by law or otherwise made a condition of citizenship or determined by birth.24

108. The application of the ICNPO taxonomy was applied to New Zealand in a 2006 study.25 The study identified the following profile for the private non-profit sector in New Zealand:

• Culture and recreation – Large numbers of arts, cultural, sports and recreational groups; many museums and galleries; some local community news media entities; and service clubs;

• Education and research – A small proportion of primary and secondary schools, many adult or community education providers, some research organisations and most early childhood service providers;

24

Margaret Tennant, Jackie Sanders, Michael O’Brien and Charlotte Castle: Defining the Nonprofit Sector: New Zealand, Working Papers of the Johns Hopkins Comparative Nonprofit Sector Project, No 45, The Johns Hopkins Center for Civil Society Studies, September 2006, pp 32-41.

25 ib id, pp 24-32.

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• Health – Some union and community health services; all primary health care organisations; a few church and other private hospitals; most palliative care services; and a large number of mostly smaller, non-residential mental health services; some rest homes and aged care hospitals; a range of disability health service providers; most ambulance and air rescue services and surf patrols; most emergency services; and some support services for children;

• Social services and emergency relief – Most providers of social services especially those aimed at disability, the family and the elderly; some employment services; some emergency services; and some children support services;

• Environmental and animal protection – Most entities falling within this category;

• Development and housing – Small numbers of housing providers, neighbourhood centres and houses, most community development projects, and some employment and training groups;

• Civic and advocacy groups – Advocacy groups representing specific and local interests, political parties, and many legal aid services;

• Philanthropic and other intermediaries – Volunteer centre and other volunteer promotion and brokerage groups, and philanthropic trusts and foundations (including family trusts, community trusts and gaming trusts);

• International organisations, aid and relief – Most overseas aid and development organisations;

• Religious congregations and associations – Churches, mosques, temples and synagogues, and other religious organisations;

• Unions, business and professional associations and Chambers of Commerce; and

• Other organisations where it is not clear which ICNPO category they should be assigned to.

109. The report also notes that tāngata whenua organisations are active in the non-profit sector, particularly in culture, education, health and social services.

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110. The New Zealand non-profit sector comprises a large number of entities which have been established for very diverse purposes. It is diverse in at least two other ways. First the entities vary from very small locally focused entities through to large national organisations. Nevertheless, the great majority of private non-profit entities are small or very small. Of the 97,000 private non-profit entities identified by Statistics New Zealand in 2007, 84% have GST expenditure or sales of less than $30,000, annual income of less than $40,000 and do not employ any staff.26

111. Secondly, they can be unincorporated or incorporated, and there are a number of incorporation options. If they choose not to incorporate, members of the group are personally liable for the group’s debts and any damage suffered as a result of the group’s actions or negligence.27 The Statistics New Zealand report stated that 61% were unincorporated.

112. In most cases, incorporation creates a separate legal identity that can enter into contracts, buy and sell property, raise loans, provide for perpetual succession and limit the liability of members. Of those that are incorporated, they may be incorporated societies, industrial and provident societies, friendly societies, credit unions or statutory entities with their own enabling legislation. A small proportion of non-profit entities have other corporate forms, such as company registration. Societies and trusts are not separate legal identities, but an arrangement where the trustees hold property for the trust’s charitable purposes.28

113. There is some variation of financial reporting treatment of incorporated non-profit entities. Most forms of incorporated non-profit entities are required to file annual returns including basic financial information, at minimum. However, entities registered under the Charitable Trusts Act 1957 have no preparation or filing requirements per se.

114. In addition any entity with a charitable purpose, whether incorporated or not, must register with the Charities Commission to be eligible for certain tax exemptions. Registered charities are required to file annual returns with the Commission, including fill-in-the-box financial information. However, there are no explicit measurement and recognition principles or rules to govern the financial information that is provided.

PART 7.2: NON-PROFIT ENTITIES AND PUBLIC ACCOUNTABILITY

115. A large number of non-profit entities are publicly accountable because they accept donations directly from the donating public.

116. Non-profit entities can receive other types of preferential treatment. For example, churches may be only required to pay a peppercorn rent. Other non-profit entities may receive free accommodation and services or other non-cash benefits. Our view is that such benefits only create public accountability if they

26

Counting Non-profit Institutions in New Zealand, Statistics New Zealand. 27

op cit, Tennant et al, p 17. 28

ib id p 18.

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are provided under statute. In other cases, it is for the entity that grants the benefit to provide for any accountability in whatever manner it may see fit.

PART 7.3: NON-PROFIT ENTITIES AND ECONOMIC SIGNIFICANCE

117. We consider that there is no reason to assume that the economic impact of the failure of a non-profit entity on the community would inherently be greater or smaller than an equal sized for-profit entity. This means that the Economic Significance Indicator should be applied in similar ways across sectors, meaning that large non-profit entities should be required to prepare and publish GPFR.

118. However, the approach to defining “large” may need to be different to that used in relation to for-profit entities for the following reasons:

• Given the large number of volunteers in the non-profit sector, employee numbers is unlikely to be a good proxy for economic significance;

• In the private sector, assets are a good proxy for economic significance because it can be reasonably assumed that all of the entity’s assets will be used for economic purposes. However, this will not apply for many non-profit entities. For example, a religious organisation may have a place of worship on valuable land in a city’s central business district. This is not an indication that the entity is economically significant; and

• Income can vary considerably from one year to the next. Operating expenditure is less likely to vary to the same degree. Therefore, annual expenditure may be a more useful measure of economic significance.

119. Our preliminary conclusion is that operating expenditure is the best proxy for economic significance. For the purposes of discussion, we are seeking views on the possible use of $20 million of operating expenditure in a financial year as the threshold for economic significance. We note that it would seem likely that most economically significant non-profit entities would have filing requirements for other reasons (e.g. registered charities).

120. We would also note that the Economic Significance Indicator should not be applied to donors simply because they might donate $20 million or more in a financial year. The recipient entity creates the economic impact, not the donor. For example there is no general societal interest per se in the financial affairs of major private philanthropists from a financial reporting perspective.

PART 7.4: NON-PROFIT ENTITIES AND SEPARATION

121. As noted in Part 3, the Separation Indicator is underpinned by the principal- agent problem. This is the concern that the persons who manage an entity need to be held accountable to those who have a direct interest in its effective and efficient operation. This has the following broad implications for private non-profit entities:

• “Management” needs to be given a broad meaning because the great majority of non-profit entities do not have paid managers. Rather, they are

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volunteers who have been elected to the board or committee by the members to run the affairs of the entity; and

• The identity of the principal varies depending on the purpose of the entity as follows:

o If the purpose of the entity is to promote the interests of its members (e.g. a sports club) then, clearly, the members are the principals. It is to be expected that in the great majority of cases a significant proportion of members will not be on the governing body. Therefore there is a separation issue almost all of the time; and

o If the purpose of the entity is to promote the interests of third parties (i.e. the entity is a charity) then the identity of the principals is less clear. It might be considered that either the members or the beneficiaries of the entity might be regarded as the principals. This debate does not have to be addressed in this discussion document. In either case, the Separation Indicator applies. The only difference is that the degree of separation is greater if the beneficiary group is regarded as the principal.

122. To conclude, our proposal is that the Separation Indicator should be regarded as applying if an entity has ten or more members. This test will be met for the great majority of non-profit entities. It is possible that the Separation Indicator does not apply to some very small entities.

PART 7.5: THE IMPLICATIONS FOR SMALL NON-PROFIT ENTITIES

123. The main conclusion from the discussion above is that all but a very small proportion of non-profit entities will fall within the meaning of at least one of the Indicators of financial reporting. However, we are not suggesting that all non-profit entities should consequentially be obliged to prepare GPFR. On the contrary there are two very important reasons why the great majority of non-profit entities should not have any obligations under the FRA:

• Most private non-profit entities are very small. The preparation compliance costs would be disproportionate to the benefits obtained from financial reporting; and

• There is no generally available mechanism to bring unincorporated entities within the financial reporting system.

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124. Both of these issues are discussed below.

The size issue

125. At minimum, GPFR implies the preparation and distribution of financial statements that are useful to a potentially wide range of users. The nature of the likely requirements for small non-profit entities is described by the ASRB in Section 4.4 of its companion discussion document. In brief, the ASRB is proposing that only Simple Format Reporting be required for small non-profit entities. The ASRB would use a template approach, require the use of accrual accounting, and require the preparation of simple statements of financial performance, financial position and service performance.

126. Although this reporting is minimal compared to that required for larger entities, the compliance costs for very small entities could still be disproportionately high. For cost-benefit reasons, we conclude that very small entities should not, therefore, be required to prepare GPFR. We are seeking submissions on the possibility of exempting private non-profit entities that have operating expenditure of less than $20,000 in a financial year.29

127. Cost-benefit considerations would also suggest that a significant proportion of private non-profit entities with preparation requirements should not be required to incur the additional cost of having an assurance engagement completed. The minimum cost for a review engagement is $3-4,000. We are seeking submissions on the possibility of limiting the assurance engagement requirement for the private non-profit sector to entities with operating expenditure of $100,000 or more.30

128. We would note, however, that even though there would be no statutory assurance and, in some cases, GPFR preparation obligations on small private non-profit entities, some would, for other reasons, prepare special purpose financial statements and, in some cases, have them assured. For example, such requirements might be imposed by donors, grantors or the entity’s members.

Unincorporated entities

129. With the exception of unincorporated entities that register with the Charities Commission, it is impractical to regulate and enforce regulation against unincorporated entities.

29

We do not have reliable statistical data on the number of non-profit entities that would be below that threshold.

30 Statistics New Zealand data indicate that only 4,000 of the 97,000 non-profit institutions have $100,000 or more of operating expenditure.

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130. It might be argued that this problem could be resolved by requiring all non-profit entities to incorporate. However, we would not support such a change. The great majority of unincorporated entities are likely to be very small and would not, therefore, have financial reporting obligations under the proposals outlined above to exempt non-profit entities with annual operating expenditure of less than $20,000. The additional compliance costs associated with requiring 60,000 entities to incorporate would seem to be out of all proportion to the relatively small accountability benefits obtained by having a fraction of the 60,000 preparing GPFR.

131. A more targeted approach would be to require all non-profit entities to incorporate if their operating expenditure exceeded $20,000 the previous year. However, that approach is unlikely to be effective because of the enforcement problem identified above.

132. We conclude that unincorporated entities should not be required to prepare GPFR. However, as noted above in relation to small entities, others (including members and donors) may require the preparation of financial statements in some form or another.

Gaming machine societies

133. Gaming machine societies are non-commercial corporate societies that are either:

i. Incorporated under the Incorporated Societies Act 1908; or

ii. Incorporated as a Board under the Charitable Trusts Act 1957; or

iii. Incorporated as a company under the Companies Act 1993 (but in this case, they must be non-profit companies incorporated and conducted solely for authorised purposes as defined in the Gambling Act 2003); or

iv. A working men's club registered under the Friendly Societies and Credit

Unions Act 1982.

134. They are strictly regulated by the Department of Internal Affairs in accordance with the provisions of the Gambling Act 2003. Under this regulation:

• They are licensed only to raise money for authorised (i.e. community) purposes;

• Many of them are clearly significant in terms of revenue;

• They are not-for-profits;

• They are private sector entities, but they have a purpose that is essentially

a public purpose;

• They enjoy a specific statutory exemption from income tax, but they pay a specific gaming machine duty;

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• They do not need to be registered with the Charities Commission in order to receive that exemption from income tax;

• They are required by section 108 of the Gambling Act 2003 to prepare

annual reports including either financial statements required by the FRA or financial statements prepared in accordance with generally accepted accounting practice.

135. Our preliminary view is that the financial reporting proposals outlined above

should not apply to gaming machine societies. It would appear that financial reporting obligations would not add anything to the existing regulatory measures.

PART 7.6: CONCLUSIONS ON NON-PROFIT ENTITIES

136. In summary, our preliminary proposals in relation to non-profit entities are as follows:

Non-profit entities that would have no mandatory financial reporting obligations (However the members would be able to require the entity to prepare GPFR and make them available to members)

• Entities with operating expenditure in the relevant financial year of <$20,000;

• Unincorporated entities, with the exception of those that choose to register with the Charities Commission; and

• Gaming machine societies.

Non-profit entities that would be required to prepare and file GPFR

• Registered charities with operating expenditure of ≥$20,000 would be required to file GPFR with the Charities Commission. However, the Commission would continue to be able to require smaller entities to file special purpose financial information;

• Entities that are not registered charities, are incorporated in one way or another, raise funds from the public and have operating expenditure of ≥$20,000 would be required to file GPFR with the Companies Office; and

• Entities that are not registered charities, are registered under the Charitable Trusts Act 1957, raise funds from the public and have operating expenditure of ≥$20,000 would be required to file GPFR with the Companies Office.

Non-profit entities that would be required to file assured31 GPFR

31

Note that the ASRB, in its companion discussion document is proposing that an audit would only be required for entities with operating expenditure of ≥$1 million. A review engagement will be required for entities if the operating expenditure is ≥$100,000 and <$1 million.

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• Entities that are both required to file GPFR with the Charities Commission or the Companies Office, and have annual operating expenditure of ≥$100,000; and

• Non-profit entities that are not publicly accountable but have operating expenditure of ≥$20 million32 will be required to file assured GPFR with the Companies Office. In the case of donor entities, this requirement would only apply if the entity has non-donation operating expenditure of $20 million or more.

32

In the case of donor entities, this requirement would only apply if the entity has non-donation operating expenditure of $20 million or more.

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Part 8: The Application of the Indicators to Māori Asset Governance Entities


137. The purpose of this part of the discussion document is to consider the role that financial reporting has in contributing to the good governance of Māori asset-specific entities. We do this by describing the objectives and main features and the financial reporting requirements for each governance model, applying the Indicators to each model, drawing preliminary conclusions about which Māori asset governance entities should be required to prepare GPFR and, if so, whether they should be required to publish or distribute them to owners or members.

138. The forms of Māori asset governance are:

138.1. Māori Trust Boards; and

138.2. Te Ture Whenua Māori Act entities comprising:

138.2.1. Māori incorporations;

138.2.2. Māori reservations; and

138.2.3. Māori land trusts.

PART 8.2: MĀORI TRUST BOARDS (MĀORI TRUST BOARDS ACT 1955)

Description

139. The Māori trust board model is generally suited to hapū and iwi whose main objectives are political, social and cultural, or for holding assets that are unlikely to be sold. Each board is a body corporate with perpetual succession and has the usual rights and obligations that such a status would imply. The main function of a board is to administer its assets for the general benefit of the beneficiaries. The boards are permitted to provide money for the benefit or advancement of any class or classes of beneficiary or any specific beneficiary. Examples of uses to which the money can be put are the promotion of health, education and vocational training, and the social and economic welfare of the beneficiaries.

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140. At present, Māori trust boards are accountable to the Minister of Māori Affairs. For example, the board members are appointed by the Governor-General, the annual financial statements are required to be audited by the Auditor-General and transmitted to the Minister of Māori Affairs. In February 2009, the Government agreed to provide direct accountability by boards to their beneficiaries and bring financial accountability into line with generally accepted practice for government entities. Under the proposed system, boards will be required to hold an AGM, prepare financial statements for audit not later than five months after the end of a financial year and appoint an independent auditor (replacing the requirement that the financial statements be audited by the Auditor-General). We understand that the proposed changes will be included in the next Māori Purposes Bill.

Application of the Indicators to Māori Trust Boards

141. Each board is responsible for administering the assets on behalf of all the members of a specified hapū or iwi. Therefore, the Separation Indicator is met for all Māori trust boards. In addition, some of the boards administer significant assets and therefore meet the economic significance indicator.

142. Our preliminary view is that all Māori trust boards should continue to be required to prepare GPFR in accordance with GAAP and have an assurance engagement completed by a suitably qualified person. In addition, they should be required to make the financial statements available to beneficiaries.33

143. To conclude, we are not proposing any changes to the financial reporting obligations imposed on Māori trust boards.

PART 8.3: TE TURE WHENUA MĀORI ACT ENTITIES

144. The purpose of the TTWMA was to reform the laws relating to Maori land in accordance with the principles of the Treaty of Waitangi. Parliament stated that its intention was to facilitate and promote the retention, use, development and control of Māori land as taonga tuku iho by Māori owners, their whanau, hapū and descendants, and protect wāhi tapu. The TTWMA relates to three classes of entity as follows:

• Part 13 relates to Māori incorporations;

• Part 17 relates to Māori reservations; and

• Part 12 relates to Māori land trusts.

145. Each class of entity identified in TTWMA is discussed below.

33

Given that many boards have thousands of beneficiaries it would seem likely that the most effective and efficient way of doing so would be by some means of filing or publication.

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PART 8.3.1: MĀORI INCORPORATIONS

146. The Māori Land Court can constitute a Māori incorporation over one or more blocks of Māori freehold land provided that at least one of the blocks has more than two owners. The Court fixes the number of shares and allocates them to the owners and trustees. The shareholders elect a committee of management. Incorporations constituted under the TTWMA have similar powers to companies constituted under the Companies Act 1993.

147. The current financial reporting requirements are as follows:

147.1. Statements of financial position and performance must be prepared;

147.2. An audit must be completed by a Chartered Accountant or a member of an association of accountants constituted in a Commonwealth country which has been approved by the Minister of Commerce; and

147.3. The audited financial statements must be filed with the local District Land Registrar.

148. Māori incorporations have a considerable amount in common with companies constituted under the Companies Act 1993. The discussion of the application of the Indicators in Part 5 of this discussion document can also be applied to Māori incorporations. Thus, any change to the application of the economic significance indicator to companies may also have a flow on impact for Maori Incorporations that are large, such that:

148.1. Māori incorporations that are issuers or are large34 should continue to be required to file audited GPFR;

148.2. The default position for non-large Māori incorporations with a significant number of shareholders (e.g. 10 or more) should be preparation/opt-out; and

148.3. The default position for non-large Maori incorporations with less than the same number of shareholders should be no preparation/opt-in (Part 5.4.1 for a discussion of opt out and opt in).

149. These proposals would mean that most Māori incorporations (i.e. incorporations that are neither issuers nor large) would no longer be required to file GPFR. The decision whether to prepare GPFR and have them assured would lie with shareholders. However, as with other for-profit entities, many of those entities may prepare special purpose financial statements for other reasons (see Part 5.4.2).

34

The current definition of “large” is a two-out-of three test of (i) annual revenue of $20 million, (ii) total assets of $10 million, and (iii) 50 FTE employees.

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PART 8.3.2: MĀORI RESERVATIONS

Background

150. The TTWMA provides scope for a Māori reservation to be established over both Māori freehold and general land. Typically, reservations may be set aside over land that is culturally, spiritually or historically significant to Maori. Common purposes include Papakāinga, Marae, urupa, church sites, and sports and recreation grounds. They can also be set aside over fishing grounds, springs, timber reserves, places of scenic interest and wāhi tapu. The land within a designated Māori reservation is inalienable while the reservation subsists.

151. The main function of the trustees of a Maori reservation is to administer the reserve for the beneficiaries named in the relevant Māori Land Court order. The beneficiaries are usually a hapū although it is possible to set a reservation aside more narrowly (e.g. a local community) or broadly (e.g. the people of New Zealand). Clause 15 of the Māori Reservations Regulations 1994 requires the trustees to maintain up-to-date records and accounts in relation to their administration of the reservation. However, there are no requirements to prepare financial statements.

Application of the Indicators of financial reporting to Maori reservations

152. Our preliminary assessment of Māori reservations against the three indicators of financial reporting is as follows:

• Public accountability: Schedule 1 of the Local Government (Rating) Act 2002 provides that land set aside for the purposes of a Marae or meeting place which does not exceed 2 hectares is non-rateable. However, this does not raise public accountability issues. The rates exemption is based on the recognition of reservations’ unique status as taonga to be protected;

• Economic significance: Reservations do not usually generate revenue. If they do, the amounts are usually very low. This Indicator does not apply; and

• Separation: This indicator is always met. However, provision is already made for supervision by the Māori Land Court where revenue is derived from Māori reservations. Our view is that the status quo provides sufficient scope for the beneficiaries’ needs to be protected from a Separation Indicator perspective.

153. To conclude, we consider that there is no need for any financial reporting changes to be made in relation to Māori reservations.

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PART 8.3.3: MĀORI LAND TRUSTS

Background

154. Part 12 of the TTWMA provides for the following five categories of trust for Māori freehold land:35

• Ahu Whenua: Manage whole blocks of Māori freehold land. Ahu Whenua trusts are often used for commercial operations and is the choice of trust for many farming operations on Māori freehold land;

• Whenua Tōpū: Manage land belonging to an iwi or hapū. Whenua Tōpū trusts share many of the features of Ahu Whenua trusts;

• Whānau: A trust over beneficial interests or shares in Māori land or general land owned by Māori. They enable whanau members to bring together all of their interests or shares for the benefit or advancement of the whanau and the descendents of the tipuna named in the trust order;

• Kai Tiaki: A trust over land interests and personal property of minors or disabled persons who are unable to manage their affairs; and

• Pūtea: A trust over non-economic smaller share interests within a block or blocks of land. The shares and any income they produce are held for Māori community purposes.

Application of the Indicators to Māori land trusts

155. Section 211 of the TTWMA states that the Māori Land Court has exclusive jurisdiction to constitute Māori land trusts. Therefore, the governance accountabilities are established through the trust deeds that are approved by the Court. Section 230 of the TTWMA states that the Māori Land Court is responsible for making such provisions it considers necessary or desirable, in the trust order, in relation to financial record keeping, filing, inspection and auditing of the accounts of the trust.

156. Although the purposes of the five forms of trusts vary, the governance model is broadly the same and the financial reporting issues can be discussed together. Our analysis in terms of the Indicators as follows:

• Public accountability: There are no public accountability issues in relation to Māori land trusts;

• Economic Significance: Some Ahu Whenua, Whenua Tōpū and Whānau are economically significant. There are no economic significance issues in relation to Kai Tiaki and Pūtea trusts; and

35

Māori incorporations and Māori trust boards may also hold Māori freehold land. Such land can also be held under a private or charitable trust as long as the TTWMA provisions regarding land alienation restrictions are complied with.

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• Separation: Section 223 of the TTWMA states that the trustees of all Māori land trusts are responsible for the proper administration and management of the business of the trust. Although the trustees are often beneficiaries of the trust, other beneficiaries will not be trustees. Therefore, the Separation Indicator is met.

Conclusions on Māori land trusts

157. Our main conclusion is that the diversity of purposes and size of Māori land trusts means that there is a need for flexibility. The section 230 power for the Māori Land Court to set financial record keeping, filing, inspection and auditing requirements would seem to provide for that flexibility. However, it is not clear whether the wider societal interest in economically significant trusts is currently being met through section 230 of the TTWMA.

158. To conclude, the existing requirements would seem to be appropriate for the great majority of Māori land trusts. However, as noted, a change in the application of the economic significance indicator could have a flow on impact for large Māori land trusts, who would be required to publish audited GPFR even if the trust deed does not require it. If that requirement was to be imposed then the definition should be consistent with the definition of “large” used elsewhere (see the discussion in Part 5.3.2.).

PART 8.4: CONCLUSIONS ON MĀORI GOVERNANCE ENTITIES

159. Our preliminary conclusions are as follows:

Māori trust boards and reservations

• No changes are needed.

Māori incorporations

• Non-large non-issuer Māori incorporations should no longer be required to prepare or file GPFR;

• The default for non-large non-issuer incorporations with a significant number of shareholders (e.g. 10 or more) should be preparation/opt-out; and

• The default for non-large non-issuer incorporations that do not have a significant number of shareholders should be no preparation/opt-in.

Māori land trusts

• To note the flow on implications of the discussion in Part 5 with regards to whether economically significant entities should be required to publish GPFR; and

• No changes are needed in relation to land trusts that are not economically significant.

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Part 9: Other Issues

160. The following issues are considered in this section of the discussion document:

160.1. Part 9.1: Issues that arise as a consequence of the proposals made earlier in this document. Those issues are:

• The enforcement of assurance standards;

• The process for changing the statutory dollar thresholds;

• The impact of the changes on the exemption powers in the FRA;

• The treatment of inactive companies; and

• The impact of the changes on the solvency test in the Companies Act.

160.2. Part 9.2: Other issues comprising:

• The need for parent company financial statements;

• Filing by contributory mortgage brokers;

• The filing deadline for companies;

• Reporting employee remuneration; and

• The inconsistency of financial reporting-related language in other legislation.

PART 9.1: CONSEQUENTIAL ISSUES

PART 9.1.1: ASSURANCE STANDARDS ENFORCEMENT

Whether assurance standards should have the force of law

161. At present, assurance standards are approved by the Council of the Institute. Approved standards are mandatory for all Institute members. A consequence of passing responsibility for approving standards to the XRB is that they would apply to all statutory audits. That would have the secondary benefit of making it clear that the standards apply to overseas-qualified auditors that are permitted to carry out issuer and company audits. However, the more important issue is whether assurance standards approved by the XRB should have the force of law.

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162. The main argument for making such a change is to make it possible for the Securities Commission and the Registrar of Companies to take cases against auditors who are alleged to have not applied the standards. The costs associated with obtaining a criminal record could promote greater compliance with the standards. It would also harmonise our position with Australia.

163. The main argument against giving assurance standards the force of law is that some auditors may be so concerned about the consequences of technical breaches of the standards that they may follow them to the letter rather than apply their professional judgment. If so, audit quality may be reduced and the cost of carrying out audits may increase.

164. Our view is that the risk of reducing audit quality is a significant factor in balancing this issue. We are seeking views on what submitters consider to be the advantages and disadvantages listed of giving assurance standards the force of law.

Civil enforcement

165. At present, the courts consider the requirements imposed by the standards in determining the duty of care owed in negligence and other civil cases. Depending on the circumstances, the courts can depart from the standards if they see fit. We consider that it is appropriate for the courts to have such flexibility. The status quo should be retained.

Possible new offence provisions

166. We are also asking whether the following enforcement provisions should be added in relation to auditing and auditors:

• Making it an offence to attempt to unduly influence, coerce, manipulate or mislead an auditor; and

• Making it an offence to recklessly or knowingly include false or deceptive matters in an audit report.

167. In our view, the main matters to consider in assessing whether such provisions should be added to New Zealand’s laws are:

• The impact on audit quality;

• The impact on general deterrence; and

• Whether the conduct is egregious.

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168. The general deterrence issue is underpinned by economic behavioural theories of choice. Those theories state that some individuals will respond to changes in opportunity costs, the likelihood of apprehension and the severity of the punishment.36

Unduly influencing, coercing, manipulating and misleading an auditor

169. Section 311 of the Australian Corporations Act obliges auditors to report to ASIC in relation to any matter that, in the opinion of the auditor, constitutes an attempt to unduly influence, coerce, manipulate or mislead the auditor.

170. Independence of mind is central to the role of the auditor. However, intimidation is one of several threats to the auditor’s independence. In addition, it can be difficult for an auditor to detect misstatements if two or more people within an entity collude to provide misleading information. Therefore, it can be argued that an offence provision of this nature would contribute to audit quality because it would strengthen the independence of the auditor.

171. A counterargument is that the auditor already has sufficient leverage to deal with undue pressure. The auditor can threaten to resign or give a qualified audit opinion and, if necessary, carry out the threat. If an auditor or auditing firm is unwilling to use the existing powers in appropriate circumstances then it could be argued that an obligation on the auditor to report the offending conduct would make little if any difference.

172. Our preliminary view is that such a prohibition should be made. We consider that the range of conduct appearing in the Australian prohibition is serious enough to be treated as a criminal offence. In addition, we cannot think of any circumstances where such conduct would be appropriate. Therefore it appears that there would be no downsides to adding such a provision.

Recklessly or knowingly including false or deceptive matters in an audit report

173. Section 507 of the UK Companies Act 2006 states that an auditor commits an offence if he or she knowingly or recklessly causes an auditor’s report on a company’s annual accounts to include any matter that is misleading, false or deceptive in a material particular. A person guilty of an offence under section 507 is liable to a fine on conviction on indictment or on summary conviction.

174. In New Zealand, this conduct could be at risk under civil law. It is also possible that some of the conduct might be regarded as fraud in certain circumstances. Overall, however, such a provision would extend the scope of criminal law in New Zealand.

36

Becker, Gary S., Crime and Punishment: An Economic Approach, 76 Journal of Political Economy 169 (1968)

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175. We do not think that adding a prohibition like this would affect the way that the great majority of auditors go about their task. However, the possibility of obtaining a criminal record could promote more socially desirable conduct by any auditors who are dishonest or grossly incompetent. Therefore, it is unlikely to reduce audit quality and could, on rare occasions, improve audit quality. In addition, the conduct in question is invariably unacceptable. Our preliminary view is that such an offence provision should be added to the law.

PART 9.1.2: CHANGING MONETARY THRESHOLDS

176. There are various proposals in this discussion document to have monetary value thresholds in legislation. For example, we have proposed a $20,000 annual expenditure threshold for determining whether or not small private non-profit entities should be required to prepare GPFR. A problem with including monetary amounts in Acts of Parliament is that they can become inappropriately low over time.37 For example, a 3% increase in costs, revenues or asset values each year totals 34% over ten years. A 5% increase a year totals 63% over ten years.

177. Parliamentary time is scarce and making needed changes are often a low priority for ministers and officials. It is generally much easier to make such changes through secondary legislation. We consider that there should be a mechanism for the Government to change monetary values in this way. Two options are:

• Option A: A general provision which would allow changes to be made as and when required; or

• Option B: A specific provision requiring each monetary amount to be reviewed within a specified number of years.

178. The main risk with Option A is that needed changes will not be made due to inertia effects. A risk with Option B is that if the maximum time period between changes is short then it may lead to unnecessary reviews being carried out. Our view is that Option B will be the better option as long as the maximum amount of time is substantial. We propose 10 years.

PART 9.1.3: THE EXEMPTION POWERS IN THE FRA

179. The FRA includes the following exemption-related provisions:

179.1. Section 29A describes a power for the ASRB to exempt classes of entities from reporting standards. That provision has not been brought into force;

37

An extreme example is the maximum penalty of 10 cents a day for operating an incorporated society without having a registered office (see s 18(4) of the Incorporated Societies Act 1908).

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179.2. Section 35A states that the Securities Commission may grant exemptions to directors of issuers that are incorporated outside New Zealand. The exemption can be granted if it would not cause significant detriment to New Zealand investors; and

179.3. Section 35B empowers the Registrar of Companies to grant exemptions to overseas companies where the New Zealand financial reporting requirements are unduly onerous or burdensome.

180. The purpose of sections 35A and B are to grant relief where differences between the home country’s and New Zealand’s financial reporting system would impose a compliance burden without compensating gains for New Zealand users.

181. Our preliminary views on whether these powers need to be retained are as follows:

181.1. Section 29A should be repealed. The fact that it has not been brought into force in the three years since it was enacted tends to indicate that it is not needed. In addition, it would not seem to fit with the changes proposed in relation to the powers of the XRB;

181.2. Section 35A should be retained. The only change proposed in this document that might impact on issuers is the possible modification to, or repeal of, the parent company financial statement filing requirements, which is discussed later in this Part of the document. Although that change could reduce the need for exemptions, the power will still be needed in relation to other differences between the requirements in New Zealand and other jurisdictions which have sound financial reporting systems (e.g. the absence of a requirement to prepare cash flow statements in the United Kingdom); and

181.3. Section 35B should be retained. Some possible changes floated in this discussion document may reduce the need for the use of the power. Other than the parent company issue, the proposed removal of filing requirements for non-large overseas-incorporated companies would tend to suggest that there would be less need for such exemptions. However, the power may still be needed for other reasons.

PART 9.1.4: INACTIVE ENTITIES

182. Section 10A of the FRA states that inactive reporting entities do not need to prepare GPFR. This provision would become redundant if the proposals to remove preparation requirements for small companies are implemented.

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PART 9.1.5: THE SOLVENCY TEST

183. Section 4 of the Companies Act 1993 includes a solvency test which is aimed at protecting the interests of the company and its creditors. Several sections in the Act prohibit actions by the directors (e.g. distributions to shareholders) if the company would not be solvent immediately after carrying out that action. The test is met if the company is solvent in both a balance sheet and a cash flow sense.

184. Section 4(2)(a) states that the directors must, when applying the solvency test, have regard to:

i. [The company’s most recent GPFR]; and

ii. All other circumstances that the directors know or ought to know affect, or may affect, the value of the company’s assets and liabilities, including its contingent liabilities.

185. This test could and, in our view, should be maintained for companies that are obliged or choose to prepare GPFR. However, subsection (i) could not be retained in its current form if the great majority of companies were to no longer be required to prepare GPFR. We have identified the following options:

• To refer, instead, to the accounting records that companies are required to keep under section 194(1)(a)-(b);38 or

• To rely solely on the test in subsection (ii), with the word “other” being deleted.

186. Our preliminary view is that the first option is better. The requirement to keep proper accounting records effectively requires a company to produce a trial balance. This provides important information about whether the company is solvent.

PART 9.2: OTHER ISSUES

PART 9.2.1: PARENT COMPANY FINANCIAL STATEMENTS

187. Under sections 13 and 10 of the FRA, a reporting entity that has one or more subsidiaries must prepare consolidated and parent-only company financial statements. Consolidated financial statements present information about all the resources and activities within the boundary of the reporting entity. The parent company financial statements present information about the parent’s investment in its subsidiaries and returns on that investment.

38

Those subsections are quoted in Part 5.5 of this discussion document.

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188. There is a consensus that GPFR users need the information provided by the consolidated financial statements. However, there are differences in views about whether the parent-only company financial statements should also be required. The arguments for and against were summarised in a document that was simultaneously released in 2008 by the IASB and FASB.39 It states that parent company financial statements are argued by some to be useful for the following reasons:

• Legal separation between a parent and its subsidiaries can significantly affect the cash flows available to equity investors, lenders and other capital providers of the parent entity; and

• Lenders and other creditors of the parent typically have a claim over the assets of the parent, not the subsidiaries. In addition, parent-only financial statements can provide useful information about assets that are protected from claims of the subsidiaries’ creditors.40

189. Others argue that parent-only financial statements should not be required for the following reasons:

• They are potentially misleading because they present information about the parent’s investment in its subsidiaries, not the underlying assets, liabilities and activities;

• They are potentially misleading because, even though all the parent’s assets, liabilities and activities are included in the parent-only financial statements, some of them are highly aggregated and offset;

• Information about the parent company’s return on its investments in subsidiary companies does not provide reliable information about the performance of those subsidiaries; and

• Parent-only financial statements are special purpose, not general purpose, because they only serve the information needs of a subset of capital providers. It would be better to provide any information that is useful to that subset (e.g. restrictions on the flow of dividends from subsidiaries to parents) in the notes to the consolidated financial statements.41

39

Preliminary Views on an Improved Conceptual Framework for Financial Reporting: The Reporting Entity, IASCF, May 2008 at paragraphs 119-140; Conceptual Framework for Financial Reporting: The Reporting Entity – Preliminary Views, Financial Accounting Series No 1580-100, FASB, 29 May 2008 at paragraphs 119-140.

40 ib id at paragraphs 128-130.

41 ib id at paragraphs 132-135.

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190. A paper prepared for the AASB addresses these issues in the context of the Australian financial reporting system.42 The paper concluded that:

190.1. Many financial report users, predominantly those working in roles involving credit risk assessment, use information from parent entity financial reports. However, the frequency of use and particular components of the financial reports used varies across financial report user groups. There is no particular subset of information that would satisfy the parent entity information needs of all GPFR users. Therefore there is limited potential to reduce parent entity reporting requirements to less than a full set of financial reports (financial statements and notes);

190.2. In relation to the obligations to lodge audited parent entity financial reports with ASIC, the paper concluded that there was some potential for reducing the parent entity reporting requirements without compromising the needs of GPFR users. In particular, the report concluded that;

190.2.1. The requirement to publish the parent entity financial reports in the annual report could be removed;

190.2.2. Parent entities could be exempted from the lodging requirements if they:

• Do not conduct substantive operations (including treasury operations);

• Are not borrowing entities; and

• Are not single guarantors for the debt of one or more subsidiaries.43

190.2.3. Exempted parent entities should provide additional information in the notes to the annual report providing details of:

• Whether audited parent entity reports have been lodged with ASIC and, if not, a statement indicating that all three exception criteria have been satisfied;

• Parent entity shareholders’ funds, if different from the consolidated amounts;

• How the group is structured, including which entities within the group conduct the major trading and treasury operations;

42

Cotter, Julie Relevance of Parent Entity Financial Statements, AASB, 2003. 43

This recommendation would have no relevance to New Zealand.

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• The entities in which the group’s borrowings and contingent liabilities reside; and

• Class orders, guarantees and indemnities, including which entities are party to the guarantees.

MED comment

191. The report commissioned by the AASB includes a considerable amount of useful qualitative information, which was obtained in one-on-one interviews. The results of these interviews underpin most of the conclusions appearing above.

192. The only conclusion we would question is the one to the effect that many financial report users use information from parent entity financial reports. Of the 70 users that answered the relevant survey question, 22 (i.e. 31%) stated that they used parent entity financial statements either “very often” or “often” and another eight answered “sometimes”. However, bankers dominated the “very often” and “often” categories. Ten of the 11 in the “very often” category were bankers, as were seven of the 11 who answered “often”.

193. In our view the needs of bankers should not be given a great deal of weighting. Bankers are able to demand financial information from borrowers and potential borrowers. Therefore, they do not meet the Primary Principle test. Only five of the remaining 46 users (11%) answered in the “often” or “very often”. However, 46 is a small sample size and the actual percentage could be considerably higher or lower. Our conclusion is that it is difficult to draw robust conclusions about the proportion of users in Australia who find parent-only financial statements useful.

Conclusions on parent-only financial statements

194. We have no preliminary views on whether the parent-only financial statement preparation requirements should be retained, modified or removed. We are seeking submissions on this matter.

PART 9.2.2: FILING BY CONTRIBUTORY MORTGAGE BROKERS

195. There are differences in the definitions of “issuer” appearing in the FRA and the Securities Act. In essence, the FRA definition relates to a person who allots securities under a prospectus or investment statement (or who would have needed to absent an exemption made by the Securities Commission). This definition means that issuers of securities are required to file GPFR for as long as they have unredeemed securities. However, the Securities Act definition of “issuer” also includes contributory mortgage brokers. As a result of the difference in definitions of “issuer”, contributory mortgage brokers are regulated under the Securities Act but do not have financial reporting obligations under the FRA.

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196. Although they have no obligations to prepare GPFR either for individual schemes or for the entity and distribute them to investors, the Securities Act (Contributory Mortgage) Regulations 1988 require:

• The broker and broker’s nominee company to maintain books of account and other accounting records in respect of the business carried on by the broker which correctly record and explain transactions of the broker and the broker’s nominee company; and

• The completion of quarterly audits of the accounting records of the broker and the broker’s nominee company. The auditor is required to send the audit report to the broker.44

197. Our view is that the existing requirements fail to provide investors with the information they need either for accountability or decision making purposes. Consistent with the Public Accountability Indicator, an entity that holds assets in a fiduciary capacity as one of its primary business activities should be required to make GPFR available to investors. They should, therefore, be added to the definition of “issuer” in the FRA.

PART 9.2.3: THE FILING DEADLINE FOR COMPANIES

198. In 2005 the IMF undertook a Financial Sector Assessment Programme review of New Zealand. This included an assessment of the adequacy and effectiveness of New Zealand’s observance of various international standards and codes, including IOSCO’s Objectives and Principles of Securities Regulation. Principle 14 states that there should be full, accurate and timely disclosure of financial results and other information that is material to investors’ decisions.

199. The IMF report noted that the Companies Act requires annual reports to be completed within five months of the end of the financial year. It further notes that entities with publication requirements must file audited financial statements with the Registrar of Companies within 20 days after the expiry of the five month period.

200. The IMF report expresses concern about the application of these provisions to unlisted public issuers. Most unlisted issuers in New Zealand are closely held and there is limited secondary market trading in their securities. Therefore, lack of timely disclosure is somewhat less problematic than it would be in respect of larger, actively traded issuers. However, the IMF concluded that amending the requirements to provide for more timely disclosure by unlisted public issuers would be helpful. The IMF concluded by giving the following examples of changes that might be made to provide for more timely disclosure:

• A requirement to make a preliminary announcement of annual results within 60 days of year end; and

44

See clauses 38 and 39 of the Securities Act (Contributory Mortgage) Regulations 1988.

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• A requirement to file audited financial statements within four months of year end.

201. The first proposal is not a financial reporting issue and is not considered in this document. The second proposal would be consistent with the Public Finance Act, which provides three months for preparation by public sector entities and one month for the annual report to be tabled in Parliament.

202. We are seeking comments on:

• The proposal to shorten the time for filing by unlisted issuers and the four months instanced by the IMF; and

• Whether all other entities with filing requirements (e.g. large companies that have 25% or more overseas ownership) should also have the time limit for filing reduced to four months.

PART 9.2.4: REMUNERATION DISCLOSURES IN RELATION TO KEY MANAGEMENT

203. Section 211(1)(g) of the Companies Act states that company annual reports must state the number of employees with total remuneration of $100,000 per year. It also requires a breakdown of employee numbers in brackets of $10,000. The aim of this requirement is to contribute to the overall accountability to shareholders by providing in information about the remuneration of key management personnel.

204. Our view is that these numbers have become too low over time. The $100,000 threshold is no longer a good proxy for identifying individuals in senior management positions and the $10,000 bands disaggregate the information to a level of detail that is unnecessary from an accountability perspective. In addition, the $100,000 threshold would seem to be even less relevant if GPFR preparation requirements are to be limited in future to issuer and large non-issuer companies.

205. As a basis for discussion, we invite comments on the following tentative proposals:

205.1. Substantially increase both the employee remuneration threshold (e.g. to $150,000 or $200,000) and the band width (e.g. to $25,000), and include a requirement to review the two numbers periodically (e.g. within ten years) in accordance with the proposals outlined in Part 9.1.2.

205.2. Change from a rules-based to an outcomes-based approach, as is the case in Australia. Section 300A of the Corporations Act:

205.2.1. Limits disclosures to key management personnel but requires full disclosure of their remuneration;

205.2.2. Requires discussion of the board’s remuneration policy and its relationship with company performance;

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205.2.3. Requires disclosure of performance conditions necessary for elements of remuneration, why they were chosen and how assessments are made if the conditions were satisfied;

205.2.4. Requires disclosure of the elements of remuneration that are performance related and those that are not; and

205.2.5. Requires information on the amount of employee entitlements that are paid in options.

206. We are seeking submissions on whether there is a need for change and, if so, whether one of the options outlined above should be adopted or whether an alternative approach might be taken.

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PART 9.2.5: OUT-OF-DATE LANGUAGE IN OTHER LEGISLATION

207. About 50 other Acts, Regulations and other statutes require specified entities to keep proper financial records and, in some cases, prepare, publish or distribute financial statements and have them audited. Those statutes were enacted or made at various different times and there are inconsistencies in the language used. In some cases the language is archaic. For example section 113 of the River Boards Act 1908 refers to “a full and particular statement of the accounts of, assets, and liabilities of the Board.”

208. In other cases, the difference in language has led to substantive preparation inconsistencies. For example, under GAAP, a Tier One entity must prepare a Cash Flow Statement. However, some of the older statutory provisions do not include such a requirement.

209. Our view is that all out-of-date references to financial record keeping financial reporting should be replaced using standardised modern terminology. For example, the language used in relation to preparation would be something like “… must prepare financial statements in accordance with generally accepted accounting practice.” This language has the added advantage of flexibility because there will be no need to amend the legislation as GAAP changes over time.

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Part 10: The New Zealand-Australia Implications

THE SINGLE ECONOMIC MARKET AND FINANCIAL REPORTING

210. The aim of the Single Economic Market is to ensure that transTasman markets for goods, services, labour and capital operate effectively and support economic growth in both countries. More specifically, the aim is to make changes that would reduce discrimination and costs arising from different, conflicting or duplicate regulatory requirements.

211. The financial reporting frameworks should also seek to advance the goals stated in the Trans-Tasman Memorandum of Understanding on the Coordination of Business Law. Other than stating that the purpose of the MOU is to support the SEM objectives, it states that the two Governments should minimise impediments to the development of transTasman business activity.

212. We consider that the SEM-related objectives, as they apply to the financial reporting framework are as follows:

• Entities that have financial reporting obligations in both countries should have to prepare only one set of GPFR in accordance with one set of standards; and

• The legislation should provide the New Zealand standards bodies with the maximum opportunity to work jointly with Australian standards bodies.

213. Before addressing those matters, we first outline the financial reporting obligations that are imposed by the Australian Corporations Act 2001.

Australian entities that are required to prepare and lodge a directors’ report and audited financial report with ASIC

• Companies that are listed on a stock exchange (i.e. listed public companies);

• Public companies that are not listed on a stock exchange other than those only limited by guarantee. This category includes companies limited only by shares, a small number of ‘no liability’ public companies and public companies limited by both shares and guarantee;

• Public companies that are limited by guarantee. The great majority of these companies have a non-profit focus;

• Large proprietary companies that are not grandfathered;

• Registered schemes. This requirement applies to schemes that are both listed and not listed on a stock exchange; and

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• Unlisted disclosing entities.45

Australian entities that are required to prepare a directors’ report and audited financial statements but have no requirement to lodge them with ASIC

• Grandfathered large proprietary companies.

Australian entities with no GPFR preparation requirements

• Small proprietary companies. However, they must maintain written financial records that would enable true and fair financial statements to be prepared and audited.

214. In addition, ASIC can grant relief from financial reporting to proprietary and unlisted public companies that are wholly owned by another company that are party to a deed with a cross-guarantee with their parent and meet certain other conditions.

SEM OBJECTIVE #1 – ENTITIES WITH PREPARATION OBLIGATIONS IN BOTH

COUNTRIES SHOULD HAVE TO PREPARE ONLY ONE SET OF FINANCIAL STATEMENTS

IN ACCORDANCE WITH ONE SET OF STANDARDS

Background

215. The aims of SEM, insofar as they relate to financial reporting, would suggest that there should be a single set of financial reporting requirements for dual listed issuers and the small number of other companies that are incorporated in one country but also need to prepare in the other country. This would require:

• Either:

o TransTasman alignment of the qualifying criteria for each tier of reporting;46 or

o The ability for an entity that might be in the top tier of reporting in one country and the second tier of reporting in the other country to opt-up to the top tier;

• A single set of standards within that tier of reporting.

45

This category comprises (i) unlisted registered schemes that have issued a managed investment product to 100 or more people; (ii) unlisted public companies that have issued a management investment product to 100 or more people using a disclosure document; and (iii) unlisted companies that have issued a debenture,

46 Australia currently has a single tier of reporting for issuers and companies. However, we should

not preclude the possibility that Australia might adopt a second tier in the future.

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216. Looking at these three matters, the proposals outlined in this document would not create any statutory impediment to align the requirements for dual-listed issuers. The two countries’ standards setters could agree to remove the differences between reporting standards if they concluded that the benefits outweighed the costs.

217. The situation in relation to non-issuer entities that have reporting obligations in both countries is, or might be as follows:

• If the entity was in the top tier in both countries then, as with issuers, the SEM objective would be achieved by a resolution of the differences between the reporting standards in both countries;

• If the entity was in the top tier in one country and the second tier in the other, then, assuming the alignment of reporting standards, there would be no issue as long as the entity had the ability to opt-up from the second to the top tier. This is currently the case in New Zealand. An entity that qualifies for the FDR can choose to prepare in accordance with NZ IFRS and the ASRB discussion document proposes that opt-up continue under its proposed new framework; and

• If the entity was in the second tier of reporting in both countries, then it would be necessary to align the two countries’ second tiers of reporting for for-profit entities. There is no statutory impediment to such an alignment taking place. However, it would be for the two countries’ standards setters to determine whether the benefits exceeded the costs.

Public sector and private-non-profit sector entities

218. At present, there is no obvious need to align Australian and New Zealand financial reporting standards that apply to public and private non-profit entities. However, our view is that the legislation should be sufficiently flexible to accommodate unknown changes, including the possibility that PBE alignment will be beneficial in the future.

Conclusions on having a single set of requirements in both countries

219. To conclude, it is for the two countries’ standards setters to determine whether it is in the countries’ combined national interests to establish transTasman standards that would allow entities with reporting obligations in both countries to prepare a single set of GAAP-compliant GPFR. Our view is that the empowering legislation in New Zealand should facilitate such change.

220. The one significant difference that would remain relates to the treatment of large non-issuer companies. 4,393 out of 6,107 (i.e. 70%) large proprietary companies lodged their financial statements with ASIC in the year to 30 June 2007. The remaining 1,714 were grandfathered. There are no filing requirements for large non-issuer companies in New Zealand however the discussion document seeks comments on the Australian approach to this issue.

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SEM OBJECTIVE #2 – LEGISLATION SHOULD PROVIDE THE MAXIMUM

OPPORTUNITY FOR NEW ZEALAND AND AUSTRALIAN STANDARDS BODIES TO

WORK TOGETHER

221. A considerable amount has been achieved in recent years through TTAASAG; cross-membership between the ASRB and FRC, and the FRSB and AASB; and various initiatives by those bodies, such as close working relationships the FRSB and AASB that have developed under the Protocol for Co-operation between the Australian Accounting Standards Board and Financial Reporting Standards Board. The boards’ achievements were acknowledged when they jointly won the “Social, Government & Community Award” at the 2006 Trans-Tasman Business Awards.

222. A possible barrier to further transTasman initiatives is the lack of functional and constitutional equivalence between the bodies. In particular, the ASRB and the FRC have quite different responsibilities. The ASRB’s main role is to approve standards. The FRC’s functions are to set the strategy for financial reporting and assurance standards, oversee and monitor the AASB and the AUASB and monitoring and assessing the nature and overall adequacy of the systems and processes used by Australian auditors to ensure compliance with auditor independence requirements. In addition, the FRSB and the PSB are boards of the Institute while the AASB and the AUASB are government bodies that are independent of the interests of the profession.

223. The proposals in Part 3 will remove or provide scope for the removal of the main differences. All of the standards-related functions carried out by the ASRB and the Institute would be the responsibility of the reconstituted ASRB (i.e. the XRB). It would be open to the XRB under the Crown Entities Act 2004 to establish subsidiary boards to perform the financial reporting and assurance standards setting roles, which would mean that there would be transTasman functional similarity. The ASRB has proposed the establishment of such subsidiary boards in its companion discussion document.

224. The main differences that would remain are as follows:

• The responsibility for making appointments to the peak bodies: All XRB members would be appointed by the Responsible Minister. Most FRC members are nominated by stakeholder entities including professional accounting bodies, business sector organisations and regulators. The FRC also includes federal, and state and territory government department representation;

• Membership numbers: The XRB would have 7-9 members. The FRC has 18 members;

• Secretariat: The XRB would make its own secretariat arrangements. The FRC Secretariat is provided by the Australian Treasury;

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• The status of the subsidiary bodies: Any standards boards would be committees of the XRB. The AASB and the AUASB are stand-alone boards; and

• The responsibility for appointing the chairs of the standards boards: The XRB would appoint the chairs of any subsidiary boards it established for standards setting purposes. The Australian Treasurer appoints the chairs of the AASB and AUASB.

225. Our view is that the differences listed above are insignificant from an SEM perspective at present. The changes outlined in this discussion document would mean that the XRB and FRC would have very similar statutory responsibilities and would allow the XRB to establish subsidiary boards that have the same responsibilities as the AASB and the AUASB. In particular, the changes would facilitate stronger strategy coordination.

226. The changes could also facilitate the establishment of joint transTasman bodies in the future. However, we would emphasise that there is no foreseeable need to do this at the strategic and oversight level or the standards setting level. At present, Australia and New Zealand can maximise their joint influence on the IASB and other international organisations and forums by continuing to have separate bodies. However, circumstances can change.

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Appendix: A summary of MED’s proposals for each class of entity (NB, where an entity falls within two or more categories, the higher or highest level of reporting shall apply)

Status quo Class of entity

Preparation Audit Publication and distribution MED’s preliminary view

Entities that are for profit or usually for profit

Issuer of securities (incl. overseas issuer)

Yes

Yes File with the Registrar of Companies Public accountability. No change.

Large non-issuer company (including co-operative company)

Yes Yes, but shareholders can opt out

Make available to shareholders Economic significance. Retain preparation and audit requirements. Discussion document seeks comments on the ‘grandfathering’ approach adopted in Australia.

Large company with 25% or more overseas ownership

Yes Yes File with the Registrar of Companies Economic significance. No change.

Large overseas-incorporated companies

Yes Yes File with the Registrar of Companies Economic significance. No change.

Large partnership No No Partners disclose true accounts and full information to other partners.

Economic significance. Discussion document seeks comments on the ‘grandfathering’ approach adopted in Australia.

Large limited partnership

Yes No No requirements. Economic significance. Discussion document seeks comments on the ‘grandfathering’ approach adopted in Australia.

Non-large non-issuer company (including co-operative companies)

Yes Yes, but shareholders can opt out

Make available to shareholders

Non-large company with 25% or more overseas ownership

Yes Yes Make available to shareholders

Non-large overseas-incorporated companies

Yes Yes File with the Registrar of Companies

No indicators met. Remove mandatory requirements. Introduce default of preparation/opt-out if the company has ten or more shareholders. Introduce default of non-preparation/opt-in if the company has fewer than 10 shareholders.

Non-large partnership No No

Partners disclose true accounts and full information to other partners.

Requirement is relevant where there is separation. No change.

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Non-large limited partnership

Yes No No requirements. Separation, because limited partners must not participate in the management of the business. However, no change needed as limited partners can demand financial information they need.

Building society (non-issuer)

Yes Yes Table book of accounts at the annual meeting and send copies to members.

Separation. No change.

Friendly society (non-issuer)

Yes Yes, if assets, and receipts &

payments both ≥$20,000

File with the Registrar of Friendly Societies and Credit Unions. Provide a copy to members and any interested persons.

Separation – Retain requirement to provide to members. Remove “interested persons” requirement. Increase audit threshold to $100,000 of expenditure.

Retirement village (some are non-profit)

Yes Yes File with the statutory supervisor (if there is one for that village) or the Registrar of Retirement Villages.


Government entities

The Crown, government department or crown entity

Yes Yes Table in Parliament Public accountability. No change.

SOE or Crown-owned company

Yes Yes Table in Parliament Separation. No change

School board or trustee Yes Yes Provide to Secretary of Education, publish in a community forum & make available for inspection at the school.

Public accountability. No change.

Local authority Yes Yes Provide to Secretary of Internal Affairs, Parliamentary Library and generally make available to the public.


Council-controlled trading organisation

Yes Yes Distribute to shareholders and make available to the public.


Council-controlled organisation

Yes Yes Distribute to shareholders and make available to the public.


Other public sector entity (e.g. Cemetery Board)

Yes Yes Various means of publication Public accountability. No change.

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Private non-profit entities

Registered charity Yes - In accordance with

the prescribed form

No File with the Charities Commission. Commission requires financial statements to be filed if they have been prepared.

Public accountability because they obtain donations direct from the public. Empower the Responsible Minister to approve tiers on the recommendation of the ASRB. Empower the ASRB to approve standards.

Incorporated society Yes – In accordance with

the prescribed form

No Submit to a general meeting. File with the Registrar of Incorporated Societies (unless it is a registered charity).

Public accountability. Remove preparation and filing requirements if annual operating expenditure <$20,000. Introduce assurance if annual operating expenditure ≥$100,000.

Industrial and provident society

Yes - In accordance with

the prescribed form

Yes File with the Registrar of Industrial and Provident Societies. Annual reports are sent to all members and interested parties.

Public accountability. Remove preparation and filing requirements if annual operating expenditure <$20,000. Remove assurance if annual operating expenditure <$100,000.

Charitable trust No No None If a charitable trust receives money direct from the public, then it is publicly accountable. If so, and the trustee or society is incorporated, then: (a) there should be preparation & filing requirements if operating expenditure is ≥$20,000, and (b) assurance requirements if operating expenditure ≥$100,000.

Unincorporated societies

No No None No practical approach to enforcement. No change.

Maori governance entities

Maori trust board Yes Yes Yes Separation. No change.

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Status quo

Class of entity Preparation Audit Publication and distribution

MED’s preliminary view

Maori incorporation Yes Audit not required if

gross revenue <$25,000

Yes Economic significance: Remove preparation, filing and audit requirements for entities that are not large. Separation: For non-large corporations, introduce defaults of (a) preparation/opt-out if the entity has 10 or more shareholders, and (b) non-preparation/opt-in if the entity has fewer than 10 shareholders.

Maori reservation No No None Separation. Retain existing provision for Māori Land Court to provide supervision where revenue is derived from a Maori reservation.

Māori land trusts Yes and no Yes and no Yes and no Diverse situations. Retain Māori Land Court powers to make whatever requirements are needed in the circumstances. Add a requirement for economically significant trusts to publish audited GPFR.

Trusts and trust accounts

Licensing Trusts Yes Yes Tabled in Parliament and published in a community forum


Community Trust Yes Yes Tabled in Parliament and published in a community forum


Various trust accounts (e.g. accountants, solicitors and realtors)

N/A Yes Yes, usually quarterly. Special purpose audits aimed at detecting theft. Indicators do not apply. No changes proposed.

the statutory framework for financial...

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