7 April 2022
From January 2022 the thresholds at which New Zealand financial reporting requirements are allowed, and to the levels under which audits and review engagements are required, have been updated. Let’s consider New Zealand’s reporting landscape while considering the changes.
A variety of reporting levels
Think of the reporting framework as a tree with two main branches – Public Benefit Entities (PBEs) and For-Profit Entities (FPEs), reflecting the reality that some entities operate in the public sector for public benefit and some operate at the for-profit end of the scale.
The needs of the readers of financial statements for for-profit entities and public-benefit entities will likely be somewhat different, so a distinction is made.
However, whether an entity is primarily for community and social benefit isn’t as clear-cut as it sounds, as most if not all entities have (hopefully) some kind of public benefit – the provision of healthy food for instance is part of the goal of an entity like Fonterra. But the type and purpose of transactions often make the distinction clearer – many transactions are non-exchange in nature, and specialised assets are often held for which there may be no commercial market.
Not all entities want or need to trade or invest internationally or even have much of a public face at all. The NZ XRB thankfully recognised this and drew some distinctions between outward-facing entities that require wide-scale credibility and smaller-scale local entities that will never have to be scrutinised on the international stage. Discussions of ownership, scale, public accountability, and purpose are factored into these distinctions.
Public Benefit Entities
The Public Benefit Entities (PBE) branch of the reporting standards is somewhat easier to navigate than the For-Profit bough.
If, after looking at founding documents, beneficiaries, and issues of funding we decide that the entity is indeed a PBE there are four slots of financial reporting that we can choose from.
Tier 1 – The plumpest fruit
To whom is the entity accountable? Where is the funding for the entity derived? An entity may be for public benefit but not publicly accountable – for example, a charity for helping the homeless that is funded by support from corporate sponsors.
Or an entity may be publicly accountable but for-profit rather than for public benefit – for example, banks, insurance and superannuation providers, publicly listed companies and others that trade debt or equity instruments to the public. The specific criteria are provided by the Financial Markets Conduct Act 2013 (FMC Entities) and by the IASB definition of public accountability.
Anything that is publicly accountable will fall into Tier 1 – full compliance with full PBE accounting standards.
Also falling into that basket will be large entities – defined in this case by expenditure – over $30million over the last two periods (note this has not changed). This size is specified by the XRB A1 Accounting Standards Framework document. There are only about 60 charities in this category in New Zealand.
Tier 2 – Not so large and not accountable
PBEs that are neither publicly accountable nor with expenses over $30million are graded based simply on their expenditure level over the last two periods.
Under $30million but over $2million drops into Tier 2 (again these thresholds are unchanged). These are subject to the same PBE accounting standards as the larger entities, but with some reduced disclosure requirements concessions (“RDR”).
There are about 900 NZ charities in this category. An important point to remember is that all PBE entities, regardless of size and type, will by default go into the Tier 1 unless they elect to adopt another category.
Tier 3 and 4 – Small in value but large in number
Dropping into Tier 3 will be entities under the $2million expenses mark, but over $140,000 (increased from $125k). Anything under that level may fall into Tier 4. Tier 3 uses what is known as “PBE Simple Format Reporting Standard – Accrual” (PBE SFR-A). Tier 4 uses “Public Benefit Entity Simple Format Reporting – Cash” (PBE SFR-C (“C” for “cash”)).
Over 90% of the 27,000 NZ registered charities fall into Tier 3 and 4. The XRB has published extensive guides and Charities Services has downloadable Excel templates for completing these reports (follow the links above).
But will they need to be audited or reviewed?
Which of these entities will be required to be audited? Under the Accounting Infrastructure Reform Bill, entities with expenditures over $1.1million (previously $1m) for the two preceding accounting periods are required to be audited.
Entities with expenditures between $550,000 (previously $500,000) and $1.1million for the two preceding accounting periods may opt for a review engagement. This work must be performed by a “qualified auditor” in compliance with the appropriate assurance standards.
Under $550,000 there is no statutory requirement for audit or review unless, of course, the founding documents or funding sources require this.
As noted, an entity may be publicly accountable and also for-profit rather than for public benefit – for example, banks, insurance and superannuation providers, publicly listed companies and others that trade debt or equity instruments to the public.
These entities are by default Tier 1 FPE, required to comply with full NZ IFRS standards. Also, as per the PBE rules, anything with a total expenditure of over $33 million (increased from $30million) in the two preceding periods will fall into this tier, whether publicly accountable or not, captured by their sheer economic weight.
Tier 2 – How large is large?
Similarly to the PBE branch, Tier 2 is only to be applied to non-publicly accountable entities, but the size criteria are a little more complex, and some other factors are considered.
For Tier 1 economic impact is measured in terms of expenditure, but Tier 2 uses a definition of size based on a combination of revenue and assets. Additionally, the thresholds for assets and revenue differ depending on whether the Company (and these are likely to be companies) are locally or overseas owned.
To be “large” in terms of Tier 2, a locally owned entity must have assets exceeding $66 million (increased from $60million) or revenue exceeding $33 million. These thresholds must be reached at the balance date of each of the two preceding accounting periods to apply.
The thresholds for an overseas-owned company are lower – presumably because there is perceived to be a higher risk. Assets exceeding $22 million (previously $20million) or revenue exceeding $11million (previously $10million) at the balance date of each of the two preceding accounting periods will trigger the “large” switch in this case.
That’s not all though… if the entity is not large in the terms above but has 10 or more shareholders it is also caught in Tier 2 – unless 95% of the shareholders agree to opt-out.
Remember that as with PBE entities, regardless of size and type, FPEs will by default go into the Tier 1 bin unless they elect to adopt another category.
The other 90%
After 1 April 2015, smaller for-profits could use NZ IFRS RDR, but so long as IRD and internal management requirements were met they were free to do what works best for them.
In effect, this means that most small NZ companies, partnerships and sole traders do not need to prepare financial statements that comply with General Purpose Accounting Principles (GAAP).
Of course, governance, banks and other investors need helpful information. To meet this need NZICA/CAANZ issued some optional guidelines (the SPFR for FPE framework). Entities that do not use these guidelines must still comply with IRD minimum reporting requirements.
Is an audit required?
Tier 1 entities always require an audit, which makes sense, as do “large” overseas companies that are Tier 2. “Large” local companies may, in terms of Tier 2, opt-out of the requirement for audit, as may smaller entities with 10 or more shareholders.
NOTE: Audit Assistant has a Financial Reporting Regime Testing Tool which may be used stand-alone, but is also incorporated into the newer templates. This has now been updated to the new thresholds, however, users will need to be mindful of the period being audited, to make sure that the results are applicable.