CHANGES TO FINANCIAL REPORTING REQUIREMENTS FOR SMES

By Garreth Collard, Senior Property Accountant | February 20, 2014

Financial Reporting Act. What? What is that? Many small business owners assume that financial reporting requirements only affect large corporations. However, changes introduced under the Financial Reporting Act 2013 significantly altered the reporting obligations for thousands of New Zealand businesses, including Look Through Companies (LTCs), family-owned companies, and other small and medium-sized enterprises (SMEs).

At first glance, the reforms appeared to reduce compliance requirements for smaller businesses. Many business owners welcomed the news and immediately asked an important question:

“Does this mean I no longer need financial statements?”

The short answer is no.

While the Financial Reporting Act reduced certain statutory reporting obligations, it did not eliminate the need for proper accounting records, financial statements, tax compliance, or sound business reporting. Understanding the distinction is crucial. Many business owners and investors misunderstand the changes and risk creating compliance issues with Inland Revenue, lenders, shareholders, or directors. This article explains how the Financial Reporting Act changed reporting requirements, what obligations still apply to SMEs, and why quality financial reporting remains essential for every successful business. It also explains what special purpose financial statements are.

Understanding the Financial Reporting Act

Why the Financial Reporting Act Was Introduced

The Financial Reporting Act 2013 modernised New Zealand’s financial reporting framework. The Government wanted to simplify compliance obligations for smaller businesses while ensuring that larger entities and organisations with significant public accountability maintained robust financial reporting standards.

The legislation recognised an important reality: Smaller privately owned businesses generally do not require the same level of financial reporting as publicly listed companies, banks, insurers, or large corporate groups. Instead of applying identical reporting requirements across all entities, the Financial Reporting Act created different obligations based on business size and public interest considerations.

How the Financial Reporting Act Changed SME Reporting

The Previous Position

Before the reforms, many companies needed to prepare financial statements that complied fully with New Zealand Generally Accepted Accounting Practice (NZ GAAP).

Preparing full NZ GAAP financial statements often required:

Additional accounting work
More extensive disclosures
Greater compliance costs
Detailed technical knowledge

For many small businesses, these requirements provided limited practical benefit.

The New Approach

The Financial Reporting Act reforms removed the requirement for many smaller entities to prepare full NZ GAAP-compliant financial statements. Specifically, entities that do not meet the definition of a “large” entity generally no longer need to prepare general-purpose financial statements solely because legislation requires them. This change created greater flexibility for SMEs. However, many business owners incorrectly interpreted the reforms as meaning they no longer required financial statements at all. Nothing could be further from the truth.

Do SMEs Still Need Financial Statements?

Yes, Absolutely

The most common misconception surrounding the Financial Reporting Act involves the belief that small businesses can stop preparing annual accounts. In reality, most SMEs still need reliable financial statements for a wide range of purposes.

Key stakeholders continue to require high-quality financial information, including:

Business owners
Shareholders
Banks and lenders
Inland Revenue
Investors
Business partners
Potential purchasers

The Financial Reporting Act changed some legal reporting requirements. It did not eliminate the practical need for accurate financial information.

Why Financial Statements Remain Essential

Business Owners Need Accurate Information

Every business owner and property investor needs clear information about financial performance.

Without reliable financial statements, it becomes difficult to answer questions such as:

Is the business profitable?
How much cash does the business generate?
How much does the company or LTC owe its shareholders?
Can the company afford new equipment?
Should the business hire more staff?
Is the company financially stable?

Financial statements provide the information needed to make informed decisions.

Financial Statements Support Business Growth

Growing businesses often require additional funding. Likewise, if an investor wants to buy another rental property, the bank wants to know the numbers.

Before approving finance applications, lenders typically want to review:

Profitability
Asset levels
Cash flow
Existing debt
Historical performance

Businesses and investors who fail to maintain quality financial records often struggle when seeking finance.

Financial Reporting Act Requirements and Inland Revenue

IRD Still Expects Proper Records

The Financial Reporting Act did not change Inland Revenue’s expectations regarding record keeping.

IRD still expects businesses to maintain proper accounting records and be able to support information contained in their tax returns. According to Inland Revenue proposals discussed following the legislative changes, businesses would generally continue preparing special-purpose financial statements using historical-cost, double-entry, accrual-based accounting methods. This means accounting standards may differ from full NZ GAAP, but proper accounting remains essential.

Special Purpose Financial Statements Explained

What Are Special Purpose Financial Statements?

Many SMEs now prepare special purpose financial statements instead of full general-purpose financial statements.

Special purpose financial statements focus on the information needs of specific users, such as:

Inland Revenue
Banks
Shareholders
Directors

They generally provide practical, cost-effective reporting while maintaining financial accuracy.

Key Components of Special Purpose Financial Statements

Special purpose financial statements commonly include:

Balance sheet
Profit and loss statement
Comparative figures
Accounting policies
Supporting schedules
Tax reconciliations
Related-party disclosure schedules

These reports provide the information necessary for taxation, lending, and business management purposes.

The Financial Reporting Act and Look Through Companies

What About LTCs?

Many property investors and small business owners operate through Look Through Companies (LTCs). The Financial Reporting Act changes caused confusion among LTC shareholders because many believed the reforms eliminated the need for annual accounts.

However, LTCs continue to require reliable financial information for:

Shareholder reporting
Tax return preparation
IRD compliance
Asset tracking
Loan applications

The reporting requirements may be simplified, but proper accounting remains essential.

Directors’ Responsibilities Still Exist

The Companies Act Continues to Apply

Many directors incorrectly assumed that reduced financial reporting requirements also reduced their obligations under the Companies Act 1993. That assumption creates significant risk. The Financial Reporting Act changes did not remove directors’ duties under the Companies Act.

Directors must still:

Maintain proper accounting records
Understand the company’s financial position
Ensure the company can meet its obligations
Make informed decisions regarding distributions

These responsibilities remain critical regardless of the reporting framework adopted.

Solvency Certificates and Financial Reporting

Directors Need Reliable Information

Before approving certain distributions, directors may need to complete solvency assessments. A director cannot honestly assess solvency without accurate financial records.

Good financial reporting therefore supports:

Compliance
Governance
Risk management
Director protection

Businesses that neglect financial reporting often create unnecessary exposure for directors.

What Defines a Large Entity Under the Financial Reporting Act?

Understanding the Thresholds

The Financial Reporting Act uses specific size tests to determine whether a company qualifies as a “large” entity.

Historically, Section 19A identified large entities as those meeting at least two of the following thresholds:

Annual turnover exceeding $20 million
Assets exceeding $10 million
50 or more full-time employees

Businesses crossing these thresholds generally face additional reporting obligations. Most SMEs and basically all property investors operate well below these limits.

Why Banks Still Require Financial Statements

Lending Decisions Depend on Reliable Reporting

Many businesses finance growth through:

Bank loans
Overdraft facilities
Equipment finance
Property lending

Banks continue to rely heavily on financial statements when evaluating applications.

A lender typically reviews:

Profitability

Can the business generate sufficient earnings?

Debt Levels

Can the business comfortably service existing debt?

Cash Flow

Does the business produce adequate operating cash flow?

Asset Position

What security supports the lending?

Without financial statements, answering these questions becomes difficult.

Why Shareholders Need Financial Reporting

Owners Need Accountability

Shareholders rely upon financial reporting to evaluate performance.

Good reports help owners understand:

Business profitability
Asset growth
Cash generation
Dividend capacity
Long-term trends

Even when a company has only one shareholder, proper financial statements provide valuable insights.

How Financial Reporting Improves Business Decisions

Better Information Leads to Better Outcomes

Business owners frequently make major decisions involving:

Hiring staff
Purchasing equipment
Acquiring property
Expanding operations
Raising prices

Accurate financial reporting improves every one of these decisions. Without reliable information, owners often rely on instinct rather than facts.

Common Misunderstandings About the Financial Reporting Act

“I Don’t Need An Accountant Anymore”

Many business owners assumed the Financial Reporting Act eliminated the need for professional accounting services.

In reality, most businesses continue to need assistance with:

Year-end accounts
Tax planning
GST compliance
Cash flow forecasting
Income tax returns
Financial reporting

The focus may have shifted from full NZ GAAP reporting toward special-purpose reporting, but the need for sound accounting remains.

“I Only Need Records for Tax”

Tax compliance forms only one part of financial reporting. Good financial information supports business planning, financing, governance, and risk management.

“My Accounting Software Is Enough”

Modern software makes record keeping easier.

However, software alone does not:

Identify errors
Interpret financial results
Optimise tax positions
Provide strategic advice

Professional review remains valuable – even essential – for both business and investors.

Financial Reporting Best Practices for SMEs

Maintain Accurate Records Throughout the Year

Avoid leaving bookkeeping until year-end.

Regular record keeping improves:

Cash flow visibility
Tax compliance
Decision-making
Financial accuracy

Reconcile Accounts Regularly

Monthly reconciliations help identify mistakes early. (For property investors, yearly is fine)

Keep Supporting Documentation

Maintain records for:

Purchases
Sales
Loans
Investments
Payroll transactions

Good documentation strengthens financial reporting quality.

Seek Professional Advice

An accountant can help ensure that reports meet all relevant requirements while remaining practical and cost-effective.

The Benefits of Quality Financial Reporting

Stronger Financial Control

Accurate reporting reveals financial strengths and weaknesses.

Improved Access to Finance

Lenders value reliable financial information.

Better Tax Compliance

Well-prepared accounts reduce tax-related risk.

More Effective Business Planning

Management can make decisions with greater confidence.

Increased Business Value

Potential buyers often pay greater attention to businesses that maintain strong financial records.

Financial Reporting Act Changes: Opportunity Rather Than Threat

Reduced Compliance Burdens

The reforms aimed to reduce unnecessary compliance costs for smaller businesses. For many SMEs, this provides a practical benefit.

Focus on Useful Information

Rather than preparing financial reports solely to satisfy complex legislation, businesses can focus on producing information that genuinely assists stakeholders. This represents a more practical and commercially relevant approach to reporting.

How SMEs Can Prepare for the Future

Treat Financial Reporting as a Business Tool

Successful business owners do not view financial reporting as a compliance exercise. They view financial statements as management tools.

High-quality reporting helps businesses:

Increase profitability
Improve cash flow
Secure funding
Reduce risk
Achieve long-term growth

The Financial Reporting Act may have simplified some reporting obligations, but it has not reduced the value of quality financial information.

Summary

The Financial Reporting Act 2013 significantly changed financial reporting requirements for many New Zealand SMEs by removing the requirement for smaller entities to prepare full NZ GAAP financial statements in certain circumstances. Businesses that do not meet the definition of a large entity generally enjoy greater flexibility in their reporting obligations.

However, the Financial Reporting Act did not eliminate the need for financial statements, accounting records, or professional financial reporting. Business owners, shareholders, lenders, Inland Revenue, and directors still require reliable financial information to make decisions and meet their obligations. Special purpose financial statements have become the preferred reporting framework for many SMEs because they provide practical, cost-effective reporting without sacrificing accuracy.

For most business owners, the real takeaway is simple: good financial reporting remains essential. Accurate financial statements support better decision-making, stronger governance, easier access to finance, improved tax compliance, and long-term business success. Businesses that embrace sound financial reporting practices will place themselves in a far stronger position than those that view financial statements as merely another compliance requirement.

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