Foss Craig: Financial Reporting Bill — First Reading 
Text is incorporated into the Bound Volume 
Foss Craig: Financial Reporting Bill — First Reading 
[Sitting date: 28 November 2012. Volume:686;Page:6898. Text is incorporated into the Bound Volume.] 
Hon CRAIG FOSS (Minister of Commerce) 
: 
 I move  
That the Financial Reporting Bill be now read a first time. 
 I nominate the Commerce Committee to consider the bill. The bill rationalises financial reporting obligations across the statute book in three ways. First it makes all reporting obligations consistent with the goal of financial reporting. That goal is to provide information to external users who have a need for an entity’s financial statements but are unable to demand them. Second it standardises the interface between the Financial Reporting Act and other Acts. It does so by placing core definitions and provisions that will have broad application to reporting entities in what will become the new Financial Reporting Act and by placing all substantive reporting obligations in other industry sector or entity-specific Acts. Third it makes the language of financial reporting in different Acts broadly consistent. This change is needed to replace old-fashioned concepts and Acts that were passed prior to 1993. It is also needed to recognise the fact that some existing provisions are no longer needed because those issues are now fully addressed in accounting standards issued by the External Reporting Board or XRB as it is also known. 
The Financial Reporting Bill will replace the Financial Reporting Act 1993. It includes two major changes for specific classes of entities. The first is to remove the requirements for medium and small companies to prepare annual reports including financial statements. Those changes appear in Subpart 3 of Part 4 of the bill. The main purpose of a company’s annual report is to provide accountability by senior management to shareholders. But the great majority of New Zealand companies are small to medium sized enterprises and the managers of the companies are also shareholders. So they already have access to the company’s financial information without waiting for the annual report. 
The Institute of Chartered Accountants of New Zealand agrees that this reform is needed. It describes the current requirements as “expensive and time-consuming” and the reforms as “a welcome reduction in red tape for many businesses”. The changes to small to medium sized enterprises mean that the Inland Revenue Department will need to beef up its company tax filing requirements. I understand that separate empowering legislation will be introduced by the Minister of Revenue at a later date. The net effect will be reduced compliance for many companies. 
The bill also adds a power for the External Reporting Board to issue accounting standards for registered charities. These changes appear in Subpart 2 of Part 4 of the bill. Registered charities are required to attach financial statements to the annual returns they file under the Charities Act. However the absence of accounting standards has led to reporting by some charities that is inconsistent with generally accepted accounting practice or GAAP as it is often called. Clear rules are required to improve charity reporting and increase comparability between charities. The External Reporting Board has stated that it is planning to introduce simple format reporting for 95 percent of charities. This change will benefit the many preparers who are volunteers with limited accounting or bookkeeping skills because it will reduce uncertainty about what is expected of them. 
A further change will be to remove the inconsistencies in the way that financial reporting is currently provided for in different Acts for different classes of reporting entity. There are three different approaches at present. Most reporting obligations for issuers are to be found in the Financial Reporting Act 1993. The reporting obligations for companies also appear in the Financial Reporting Act but the auditing-related provisions appear in the Companies Act. The obligations for all other reporting entities are largely found in other Acts. The consistent approach in the bill is to place standard definitions and provisions in the new Financial Reporting Act. 
 Those provisions appear in Parts 1 and 3 of the bill. For example Part 3 includes a standard provision for auditor qualifications that will apply to most statutory audits other than audits of financial statements prepared by issuers and public entities. This provision will replace numerous existing provisions in other Acts. 
Subparts 1 and 2 of Part 2 relate to the External Reporting Board and its statutory functions powers and responsibilities. Those provisions are similar to the current provisions in Part 3 of the 1933 Act as amended by the Financial Reporting Amendment Act 2011. There are some changes that will make the External Reporting Board’s functions fully consistent with the contemporary domestic and international accounting standards environment. For example clause 11(c) includes a new power for the External Reporting Board to issue authoritative notices. This change will amongst other things allow the External Reporting Board to issue New Zealand equivalents of conceptual frameworks published by the International Accounting Standards Board and the International Public Sector Accounting Standards Board. 
Part 4 and schedules 1 and 2 propose amendments to more than 80 other Acts. The most significant changes appear in Part 4 of the bill. Schedule 1 includes other amendments and the consequential amendments appear in schedule 2. Most of the provisions in Part 4 and the two schedules state whether entities or classes of entities are required to prepare financial statements in accordance with generally accepted accounting practice and if so whether the auditing and publication of financial statements are also required. 
Many of those amendments relate to Acts that require financial statements to be prepared but include no explicit requirement to prepare them in accordance with the accounting standards issued by the External Reporting Board. This is a particular issue with Acts that pre-date the Financial Reporting Act 1993. The bill proposes amendments to those Acts by making it clear that the financial statements must comply with generally accepted accounting practice. Part 4 and the two schedules include provisions stating that audits must be carried out in accordance with audit and assurance standards issued by the External Reporting Board. 
Finally I wish to draw the House’s attention to Supplementary Order Paper 93 which was tabled on 31 July 2012 the same day as the Financial Reporting Bill was introduced. This Supplementary Order Paper relates to financial reporting by issuers banks insurers and other financial market participants covered by the Financial Markets Conduct Bill. These changes are included in the Supplementary Order Paper rather than in the Financial Reporting Bill itself because it would have been inappropriate to introduce the Financial Reporting Bill in a form that anticipated that this House will pass the Financial Markets Conduct Bill. Tabling the Supplementary Order Paper on the day that the Financial Reporting Bill was introduced provides the select committee with the opportunity to consider the financial reporting system for financial market participants as a whole. 
At present there are substantive reporting obligations for financial market participants that are in several Acts. Supplementary Order Paper 93 proposes that the reporting obligation for all financial markets conduct reporting entities would ultimately be consolidated in the Financial Markets Conduct Act. This change will bring conventions of financial reporting obligations by financial markets conduct reporting entities within the Financial Market Conduct Bill liability regime. 
To conclude the bill and the Supplementary Order Paper are a once-in-a-generation opportunity to update financial reporting law and to make the reporting system fully consistent with the goals of financial reporting. The bill includes very important compliance and cost-reducing changes for medium and small sized companies. It also includes changes that will improve the quality of financial reporting by registered charities. 
I would also like to acknowledge the collaborative nature and the cross-party support I believe that this bill carries with it and I fully acknowledge that collaborative spirit for this and other bills. I commend this bill to the House.