Finance

Understanding financial reporting and financial literacy are core competencies for directors. The board needs to ensure the probity of financial reports and processes and that there is a high standard of regulatory compliance. Directors have a legal duty to exercise their powers and duties with the care, diligence and skill that a reasonable director would exercise. This includes taking steps to be properly informed about the financial position of the company. Directors also have a key role in ensuring a company is, and remains, solvent.

In this section:

  • Key organisations and websites
  • Financial reporting
  • Audit
  • Financial markets
  • Tax
  • Integrated reporting
  • Intangible assets

For an overview of the director’s role see A Director’s Guide (2013), by the IoD and FMA.

The Four Pillars of Governance Best Practice provides an overview of financial reporting and an introduction to basic accounting principles.

Chartered Accountants Australia and New Zealand has tools and guides directors and audit committees to help understanding and communication on audit quality.

Key acts in New Zealand’s reporting framework are:

The Companies Act requires companies to prepare financial statements that comply with the Financial Reporting Act. There is a new legislative financial reporting framework with the introduction of the Financial Reporting Act 2013, which makes changes to the types of entities that will have external financial reporting obligations.

Key organisations and websites

The External Reporting Board (XRB) develops and implements financial reporting standards and auditing and assurance standards.

Chartered Accountants Australia and New Zealand brought together the New Zealand and Australian member organisations in July 2014 and has over 100,000 members from the accounting and business professions.

The Financial Markets Authority (FMA) (replaced the Securities Commission) enforces securities, financial reporting, and company laws as they apply to financial services and markets. It also regulates securities exchanges, financial advisers and brokers, trustees, issuers – including issuers of KiwiSaver and superannuation schemes, and auditors of issuers.

The Companies Office for filing annual returns and other requirements.

Financial reporting

The Financial Reporting Act 2013, and related changes to other Acts, came into effect on 1 April 2014. As a result, there will be changes to the way about 95 per cent of New Zealand businesses report.

Under the new Act:

  • Most small and medium sized businesses will not have to follow XRB accounting standards from their 2014/15 financial year. However, they may still need to produce financial statements for the likes of the board, the IRD or the bank.
  • Large business and those issuing debt or equity securities will have to follow one of two suites of standards – Full Standards or Standards with Reduced Disclosures. The definitions of ‘large’ includes businesses that have assets exceeding $60 million or revenues exceeding $30 million a year.

The XRB has information and guidance on the reporting requirements for different types of entities.

The solvency test

The Companies Act prescribes a number of circumstances in which a director must apply the solvency test, for example before a company can enter into certain transactions and make any distributions, such as dividends, to shareholders. The Four Pillars provides an overview of these requirements.

Chapman Tripp’s 2008 Guidelines for directors of companies in financial distress, identifies the key practical steps that directors should take when a company is in financial difficulties.

For a general overview see Company Management and the Solvency Test by FindLaw NZ.

Audit

External auditing is critical for integrity in financial reporting. It is important that the board ensures the quality and independence of the external audit process.

Under the Public Audit Act 2001, the Auditor-General is the auditor of all public entities, including SOEs, Crown entities, schools, Crown companies, and local authorities and the organisations they control.

Audit committees

Audit Reporting: A significant change is coming in the way auditors communicate their findings to investors and other users. A new international auditing standard (ISA 701) requires auditors to include company specific text about ‘key audit matters’ in their annual audit report. These are the matters which were of most significance in the audit and the auditor will include a succinct description and meaningful summary of procedures that were taken to address the matter. The new standards are applicable for year-ends on or after 15 December 2016. It is important that directors understand the impact of the changes. For further information see the CAANZ report “Revolutionising Reporting: Why Care? The Future of Audit Reporting”. Additionally IoD members should read the “Emerging issues audit committees need to know about” directorsbrief.

An audit committee plays an important role in examining financial reporting compliance and controls, and in strengthening corporate governance.

The Four Pillars provides an overview of the practice and procedures for audit committees, including a suggested approach to committee tasks and sample terms of reference for an audit committee.

Guidance on Audit Committees (‘The Smith Guidance’) United Kingdom Financial Reporting Council (revised edition 2013).

PWC Audit Committee Guide for director's responsibilities and how audit committee members add value.

The Auditor-General’s 2008 good practice guide, Audit committees in the public sector, sets out the principles and good practices needed to set up and effectively operate an audit committee in the New Zealand public sector.

The IoD’s Audit and Risk Committees course provides directors with tools to get the most out of the audit/and or risk committee and ensure it is set up to achieve the board’s objectives.

Internal audit

An effective internal audit function can add significant value to an organisation through independent review and advice to support effective risk management and internal control. The Institute of Internal Auditors of New Zealand (IIANZ) is a member-led group for internal auditors.

The IoD has also produced this one page summary document detailing how directors can get the most out of an internal audit.

Financial markets

The Financial Markets Conduct Act 2013 (FMC Act) aims to promote and facilitate the development of fair, efficient, and transparent financial markets and to promote the confident and informed participation of businesses, investors, and consumers in the financial markets. The Act covers offences relating to misleading or defective disclosures. It is being implemented in two stages (from 1 April 2014 and 1 December 2014) and will replace the Securities Act 1978 and the Securities Market Act 1988.

For coverage of the Financial Markets Conduct Act see this 2013 guide from the FMA , and this guide from Chapman Tripp.

The FMA also provides an overview of the Status of Investigations into Failed Finance Companies.

Tax

SMEs: On this page, which is targeted to SMEs, the IRD provides an overview of the basic tax obligations businesses need to fulfil. This resource will potentially be useful for owner operators and further information and tools are available on their website.

Multinationals: Managing tax risk is a key element of a multinational entity’s global risk plan. This booklet from the IRD is intended to inform planning by describing Inland Revenue’s compliance priorities.

New Zealand tax: KPMG have published a guide on New Zealand tax for internationally mobile people and businesses. For companies looking at relocating to or doing business in New Zealand, it is worth noting.

International Taxation issues: In response to international tax developments, the Organisation for Economic Cooperation and Development (OECD) developed an Action Plan on Base Erosion and Profit Shifting (BEPS) to reform the system. BEPS is the term used to describe tax planning strategies that take advantage of gaps and mismatches in tax rules.

In New Zealand, BEPS and international tax reform is one of Inland Revenue’s three broad areas for its 2015-16 tax policy work programme. Its work included a survey during June of about 300 foreign owned multinationals operating in New Zealand about transfer pricing and financing to help evaluate exposure on base erosion and profit shifting.

For more information about what ‘BEPS’ is, see this Grant Thornton report.

The Business and Industry Advisory Committee (BIAC) to the OECD has also issued this Statement of Tax Principles for International Business in September 2013 that provides voluntary guidance for businesses to promote good tax behaviour.

Integrated reporting

Integrated reporting is intended to show the value created by an organisation over time by providing information about an organisation’s strategy, governance, performance and prospects, in the context of its external environment.

The International Integrated Reporting Council (IIRC) is a global coalition of regulators, investors, companies, standard setters, the accounting profession and NGOs. The IIRC has developed a corporate reporting framework, The International Integrated Reporting Framework, to better demonstrate value creation.

Australian Institute of Company Directors has published a Comparison guide of ASIC’s Regulatory Guide 247 “Effective Disclosure in an Operating and Financial Review" and the International Integrated Reporting Framework.

Tomorrow's Business SuccessA guide and toolkit, by the IIRC and Tomorrow’s Company, for Chairmen, CEOs and CFOs, sets out how integrated reporting can help future business success.

KPMG produced the paper Integrated Reporting: A key milestone on the journey to better business reporting in December 2013. Also from KPMG: Integrated Reporting in practice: The South African story, (June 2012).

A director’s guide to integrated reporting from Deloitte (2015) provides a useful overview of the drivers and benefits of integrated reporting. Deloitte have also published The New Integrated Reporting Framework: A Review Guide for Audit Committee Members.

The Evolution of Corporate Reporting for Integrated Performance is a useful Background paper from the 30th Round Table on Sustainable Development (June 2014).

Showcasing the business case for integrated reporting, BlackSun have produced The Integrated Reporting Journey: the Inside Story.

The International Federation of Accountants (IFAC) released a paper, setting out a vision for the role of professional accountants in supporting integrated thinking and thereby helping to align capital allocation, corporate behaviour, financial stability and sustainable development.

NZ Post produced its first (also New Zealand’s first) integrated report in 2013.

The Global Network of Director Institutes’ (GNDI) perspectives paper, Integrated Reporting, August 2013, discusses some concerns about Integrated Reporting, including risks around compliance and over prescription.

The article, How do you measure value?, in the June/July 2013 edition of boardroom discusses the value of integrated reporting and asks how boards know that they receive the right information to adequately assess risks and opportunities.

Intangible assets

Directors Brief - 2016/6: Understanding and valuing intangible assets. The balance between tangible and intangible assets has changed as the knowledge economy and increasing consumer brand awareness have shifted the goal posts with over 80% of company value now being intangible. 

Chartered Accountants Australia and New Zealand and IPONZ provide guidance on maximising the potential of Intellectual Property (IP) for your business including identifying and managing your IP, commercialisation of IP, financial aspects of IP and the impact of social media.

The Innovation Policy Platform discusses knowledge-based capital and intangible assets and the implications for innovation.

Can you own the haka?  This Chapman Tripp brief pitches intellectual property law against the cultural rights and expectations of all New Zealanders. 

The Centre for Accounting Governance and Taxation Research addresses the challenge of reporting intangible assets at fair value.