Significant changes are being made to the financial reporting standards from 01^st April 2014. What does this mean to you as a small business owner? Basically the changes are being made in the way your end of year accounts are prepared. The whole idea is to make it simpler to prepare end of year accounts so you will have less compliance cost and can focus more on growing your business.

The initial draft suggested that financial statements were not required for all businesses with less than $30 million turnover, but the IRD objected to that and suggested financial statements are required with a minimum standard level. The requirement for the IRD is to have a basic set of accounts on which they can rely upon in the event of auditing a business.  To reflect those changes The Tax Administration (Financial Statements) Order 2014 has been passed which is effective from 01 April 2014, which means your first set of accounts prepared on this basis would be for the year ending 31^st March 2015.

These are important changes to all profit entities for financial reporting purposes. A company is not defined large if it has a turnover of less than $30 million or $60 million assets.

Entities not large in size (representing 95% New Zealand businesses) will not comply with GAAP but must at least follow IRD’s minimum requirements. Section 21B and 21 C are inserted in Tax Administration Act 1994, which states a company must prepare financial statements in accordance with prescribed applicable minimum requirements.

 Minimum requirement from the Inland Revenue Department:

1. 1.A business with less than $30,000 either income or expense and the business is not a part of group of companies, does not need to follow even minimum requirement, which means do nothing except filing return.
2. 2.Non-active company exempt from the minimum requirements.
3. 3.Minimum requirements also apply to Look Through Companies.
4. 4.The financial statements should consist of a balance sheet which sets out the assets, liabilities, and net assets, and a profit and loss statement which shows income and expenditure.
5. 5.The financial statement must be prepared applying double-entry method of recording and principles of accrual accounting.
6. 6.Where reasonably possible, either historical costs, or market values, or tax values can be used for the determination of income and expenditure, fixed assets and depreciation, and the balance sheet.
7. 7.A statement of accounting policies and changes thereto that is sufficiently detailed that a user can understand the material policies that have been applied or changed in the preparation of the financial statements.
8. 8.Comparable figures for the last year should be disclosed.
9. 9.The financial statements or supporting schedules should show:
   1. a)The relevant (for that taxpayer) IR 10 key points.
   2. b)A reconciliation of the company’s financial statements and taxable income for the income year.
   3. c)A reconciliation of tax losses and movements therein for the year including loss offsets and subventions, if any.
   4. d)Related party transactions except for immaterial irregular transactions.
   5. e)Notes should detail (qualifying companies are exempt from the first two requirements, look-though companies are exempt from all three of these requirements):
      1. i.the available subscribed capital (shareholders’ funds that can be returned tax-free to shareholders in qualifying circumstances) per class of shares issued;
      2. ii.any amount of realised capital gains that could be distributed tax-free upon the liquidation of the company; and
      3. iii.a reconciliation of opening to closing imputation credits.
10. f)A reconciliation of movements in shareholders’ equity, and loans or current accounts to/from the owner and related parties.
11. g)An appropriate note detailing “Exceptional items” – box 26 of the IR 10.
12. h)An appropriately detailed taxation-based fixed asset and depreciation schedule.
13. i)Interest should always be grossed up for resident withholding tax.
14. j)Dividends should be grossed up for imputation credits to the extent that the dividend is taxable and the credits are usable to reduce the taxpayer’s tax liability for that year.
15. k)All realised and unrealised gains and losses that are recorded in the financial statements should be recorded in the profit and loss.
16. 10.Associated persons transactions
    1. a.this is one of the new and most critical requirements for Small and medium size companies as they will be required to provide details of all associated persons transactions such as:
    2. b.Interest expense, rental and lease payments, wages & salaries, management fee, royalty payments, and loans between the company and associated persons.

We believe these changes are significant for the small and medium size businesses as they will save on compliance cost, but for the very small businesses it may not bring savings in compliance cost as they still have to prepare financial statements in a prescribed format described by the IRD. In a next article we will write about changes being made to Goods and Services Tax Act effective from 01-04-2014, which will allow non-resident entities to register and seek GST refund. Until now non-resident businesses could not seek GST refund.

About the author:

Saurav Wadhwa is an Auckland based chartered accountant and a director of IBBZ Accounting Limited. Saurav is a tax specialist with Masters in Tax with Distinction (Auckland) and have 10 years of experience in the industry. He is very passionate about helping small business owners. His easy going personality and a friendly nature makes him easily approachable. For all your tax problems, small business accounting, overdue tax returns,  tax debt, tax consultancy, and IRD audits & disputes  you can contact him at This email address is being protected from spambots. You need JavaScript enabled to view it.  or 027 5555 458.

Disclaimer:

Information above is provided for general use only, if you are intending to rely on any of the information above please consult with us or seek a professional advice. We accept no responsibility of what so ever if above information result in any kind of loss to you, tax laws differs and varies for individual circumstances.