Chapter 3 - Who should prepare financial statements and to what level
3.1 This chapter contains the specific proposals upon which submissions are sought. They are proposed to apply from years commencing on or after 1 April 2014 to active companies that will not then have a statutory obligation to prepare general-purpose financial statements. Chapter 4 discusses the detail that might apply to non-corporate businesses in the future.
To what level should the financial statements be prepared?
3.2 We suggest that the minimum requirements for these financial statements would be relatively straightforward historical cost, double-entry, accrual-based financial statements that would constitute special-purpose financial statements. Where appropriate (for example, for depreciation) the financial statements can be based on taxation-based amounts and concepts. Information to be disclosed would be sufficient to allow, where relevant, the preparation of the IR 10, and to allow a review of the entity’s performance.
3.3 Notes to the financial statements or separate schedules would include a statement of accounting policies and detail of related-party transactions. Where accounting profit and taxable income are different, a reconciliation would also be required, but tax values could be used wherever appropriate in the financial statements – for example, for depreciable assets or for farmers’ fencing expenditure.
3.4 Obviously the use of tax values in financial statements would not be appropriate where they did not follow the cash-based amounts. An example of this would include the ownership of a look-through company (LTC) where the cash could be dividends or loans, but the taxable values would be a proportion of the LTC’s taxable income. Another example would be the difference between cash and taxable income from say a listed PIE. These should be adjusted for in the tax reconciliation. However, this discussion is only relevant where the relevant asset (for example, the LTC or the PIE) is included as part of the taxpayers’ financial statements.
3.5 In reality, the minimum financial reporting requirements for companies would likely be only slightly more extensive than the present requirement of the Financial Reporting Order 1994, which presently applies to small companies.
3.6 Requirements would be principles-based, although some detail would be required. This is because it is inappropriate for Inland Revenue to attempt to set the format of financial statements or tell accountants the specific detail of what should be in financial statements. Rather, it is envisaged that Inland Revenue would set the principles and some of the detail and then rely on the judgement of the person preparing the financial statements. The proposed detail about the level of reporting and associated disclosures is contained in the Appendix.
3.7 Given the potential complexity of related parties’ information that we are asking for (see the Appendix) we propose that this requirement apply for tax years commencing on or after 1 April 2015. As a result of our preliminary discussions with software providers, we do not anticipate that any other of the information would be technically difficult to provide.
3.8 For medium-sized companies that are complying with the present requirement to prepare general-purpose financial statements, compliance costs should decrease as these are replaced by special-purpose financial statements. This compliance cost-saving has been factored into the proposed replacement of the Financial Reporting Act discussed above.
3.9 Current Tax Administration Act requirements that all taxpayers should have sufficient records to support their tax returns will be continued.
3.10 Inland Revenue officials are participating in the New Zealand Institute of Chartered Accountants’ SME Working Group which is developing a recommended accounting framework for special-purpose financial statements for SMEs. It has yet to be determined exactly how this framework will match with the minimum requirements that Inland Revenue is contemplating.
3.11 However, it seems very likely that if financial statements are prepared in accordance with the New Zealand Institute of Chartered Accountants’ SME framework, they will exceed Inland Revenue’s minimum requirements. The Inland Revenue requirements for financial statements would be minimum requirements – taxpayers would be free to include additional disclosures if they choose, and to comply with the framework, or even produce partially or fully GAAP-compliant[2] financial statements if they want to.