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Why would a business ever choose to invest more time and money in financial reporting? You might think it’s always better to just do the minimum and stick to the usual special purpose reporting that most Kiwi company’s produce. But when your company is serious about achieving a higher profile on an international stage, there could be some unexpected upsides to stepping up to more rigorous financial reporting. Instead of special purpose reporting, a company could benefit from adopting International Financial Reporting Standards (IFRS). Put simply, it’s an international accounting language that crosses borders so investors or shareholders who have a reasonable level of financial knowledge can compare listed companies across the globe. The standards are comprehensive, consistent, transparent and universal. Different jurisdictions have their own versions of IFRS and Aotearoa is no exception. We have NZ IFRS, a local version of IFRS which includes domestic requirements for our market while ensuring we comply with IFRS. The standards are updated regularly. NZ IFRS and which companies must comply Naturally, NZ IFRS is required for publicly listed companies, whether they’re based here or internationally. For some businesses, especially household names, you’ll often see the complying information packaged up in the financial section of a glossy annual report. For other businesses, the information will be available on the Companies Office website. Privately owned New Zealand companies with assets totalling more than $66 million or revenue over $33 million must also comply with NZ IFRS. Other entities deemed ‘publicly accountable’ may also need to report under NZ IFRS, for example regulated entities such as banks or insurers. Adopting IFRS sends a clear message your company is ready for the big leagues If your company doesn’t meet the threshold for mandatory adoption of IFRS, why would you choose to opt into the standards? Attracting the right buyers at the right price The first and biggest motivator is the prospect of a sale. Reporting under IFRS makes a company more attractive in the international marketplace. If your company has the potential to be purchased by a global corporation as a subsidiary, that potential buyer will be an IFRS reporter. By stepping up to IFRS, your company can be assessed more easily and accurately by the prospective purchaser. We’ve seen many Kiwi companies sold overseas in recent years, from huge sales like Vend ($455 million) and Timely (around $100 million), through to high-performing SMEs and farms. IFRS shows you’re speaking the same language, and that your company can easily slot into their own reporting regime. It also demonstrates that your business has the capability and capacity to comply with IFRS. Because this level of reporting is more complex, and requires a higher level of sophistication, it shows a purchaser that your company has the acumen and expertise to be a major asset on the balance sheet. Stepping up your capital raising game Another important motivator of switching to NZ IFRS early is fundraising. If your business is seeking to raise money from the capital markets, adopting higher-level reporting can help investors make a more informed decision. It can give them confidence in your company and allows them to have a more in-depth understanding of precisely how the company is performing. And, if your company is dealing in complex financial instruments such as hedging, foreign exchange or derivatives, there is no information in special purpose reporting that tells you how to treat these. NZ IFRS provides clear guidance about reporting on these types of activities. IFRS produces higher-quality financial statements Financial statements produced under NZ IFRS are considerably more accurate than those produced under the special purpose financial reporting framework. A higher level of scrutiny is applied across your organisation’s financials, and the standards themselves provide guidance about how to improve the accuracy of your statements. Here’s some examples to highlight how they differ: If your company has $1m debtors owing at the end of the financial year, special purpose reporting will value that at $1m. That’s a straightforward way to account for those monies owed. In contrast, NZ IFRS demands a closer look at the outstanding invoices. If the company historically sees a 5% rate of default, your NZ IFRS financial statements will provision for that and value the accounts receivable at $950k. This is a more accurate valuation of the receivable invoices. When a business exports goods, once the goods are on a ship and on their way overseas, they are invoiced and recorded as a sale. Under NZ IFRS, those goods might not actually be sold until they land at the receiving port – the sale would be reversed back into inventory until the product arrives and ownership passes. Unlike special purpose reporting, NZ IFRS requires right-of-use values for leased assets, which needs some detailed calculations to capture. There are hundreds more rules like these that contribute to IFRS providing much more detailed and accurate accounts. If you adopt IFRS, the quality of your accounts is going to be significantly higher, and it could change your final numbers quite substantially. Making a decision about whether to adopt NZ IFRS Adopting NZ IFRS does involve extra work and higher costs. You certainly wouldn’t adopt these standards lightly. Ideally, you should consider the costs and benefits to the business – is it worthwhile? If IFRS statements could make the difference between a sale or no sale, or maximise the value of your company, it could be an investment with a very impressive return. It won’t be right for every business, but for up-and-coming companies with great acquisition prospects, NZ IFRS can show you’re ready for the big stage.

The Holidays Act 2003 is one of the most difficult pieces of legislation for Kiwi businesses to comply with. In fact, it is so tricky, that one of the first major entities to be caught out for non-compliance was MBIE – the regulator in charge of Holidays Act compliance. This complexity has seen the Act continue to be in the news over the past few years for all the wrong reasons; three of the biggest stories to hit the headlines include: • The Auditor-General has estimated a $2.1 billion dollar holiday pay liability for the Government • McDonalds has been remediating its holiday pay non-compliance since 2019 • The former District Health Boards have become a “$1 billion nightmare” of Holidays Act non-compliance But the damage isn’t limited to the large end of town either – in fact, we are seeing the Labour Inspectorate pursue small to medium sized enterprises with greater frequency and more rigour, meaning compliance with the Act is essential for businesses of all sizes. What drives non-compliance in the aged care and retirement villages (RV) sector? The holiday pay calculation is straight-forward for organisations where team members consistently work 9-to-5, especially when they don’t have allowances, commissions, or bonuses. Underpayments in those situations are unlikely or immaterial. But this is where the simplicity stops. Where employee work patterns vary - as is the case throughout the aged care and RV sectors - the calculation becomes harder, and non-compliance is much more likely. Support staff often have variable work patterns, including work on weekends and public holidays, as well as complex remuneration structures that include a variety of allowances. The problem doesn’t end there though – bonuses are often common for senior leaders, and this can also contribute to potential non-compliance. Casual staff arrangements are common and we have started to see more pressure from the Labour Inspectorate on correct determination of employee entitlements (casual or otherwise). It is vital operators get these classifications correct to ensure compliance with the Act. These are just a few examples of the specific issues that apply to the sector, but there are almost certainly many other drivers of non-compliance that could apply to operators depending on their payroll system setup and internal payroll processes. Common red flags to look out for While we can’t provide an exhaustive list of what causes non-compliance, here are some of the more common red flags to look for, which might indicate you are inadvertently non-compliant with the requirements set out in the Act. 1. Recording leave balances in hourly or daily units: The Holidays Act defines leave entitlement in weeks, making it difficult to remain compliant when recording leave in hours or days. This is particularly true when employee work patterns change. 2. Complex or variable remuneration structures: The more pay components employees have, the more likely it is that there is non-compliance. Many allowances and bonuses that should be included in gross earnings calculations often aren’t. Examples of these include payments such as allowances or overtime rates that kick in when an employee works more than fifty hours, or daily allowances for long 12 hour shifts. 3. Variable work patterns: These often result in payroll systems inaccurately calculating an employee’s work pattern at any given time. This is a significant driver of non-compliance. 4. Weekend shifts and working public holidays: Many companies struggle to accurately determine statutory holiday and alternate day entitlements. 5. Incorrect identification of casual employees: Some companies fail to identify when their employees should no longer be classified as “casual”, meaning they aren’t awarded the annual leave they are entitled to. “But I have a compliant payroll system!” We often hear from clients that thought they were compliant with the law because their payroll provider said they were. Sadly though, using a major system or outsourcing the payroll function entirely does not necessarily guarantee compliance. As mentioned at the beginning of this article, even some of our largest organisations aren’t immune to slip-ups that snowball into very expensive remediations. So, what does this all mean for me? Although changes to the Act are in draft, they will not immediately guarantee compliance for those with non-compliant payroll systems, nor remove the requirement to address historic non-compliance. To ensure current and future compliance with the law, it is vital that you take a proactive approach in dealing with any possible holiday pay issues. This can limit the extent of any potential financial or reputational fallout.

You have completed your due diligence, signed all the paperwork, and have officially acquired an entity or a business. You might think all the hard work is done, but accounting for it may be harder than you think. Here’s some key questions you need to consider.

Beyond compliance: What are your annual financials really telling you? With the first six months of the 2024 year behind us and March 2023 year end compliance work in full swing, it’s always interesting to see common themes jumping out from clients’ financial reports. While annual compliance can be seen as a chore for many, it still provides important opportunities to discover valuable insights to keep your business safe and help it improve. What’s behind your record revenue numbers? To a large degree this is an inflation story, but we are seeing genuine growth in the mix as well. The key is maintaining and increasing the gains you’ve made. Revisit your goals for what you want your 2024 year-end financials to look like and develop or enhance your plan to get there. For example, what can you do to generate more leads and increase customer retention? From setting up a customer feedback programme to exploring where advertising your brand would be most effective, a little bit more investment in your sales and marketing efforts can make a huge difference. And, how well do you know your client base, and what are your most successful and profitable product lines? While you’re likely to have a reasonably accurate idea of where your revenue is coming from, investing in tools and software to segment your customer base can open up a whole new world of up-to-the-minute insights about what’s working well and what isn’t. You can then allocate more resource to the most successful products and services. Take the 80/20 rule for example – if 80% of your revenue comes from 20% of your customers or offerings – focus on that instead of everything else. This can also give you time and space to explore new products or services to enhance your customers’ experience. The margin squeeze: Reduced gross profit percentage A weaker New Zealand dollar, higher costs of freight and shipping in the earlier part of the 2023 financial year, and higher costs to purchase goods all contribute the squeeze. While businesses have put their prices up, contributing to the growth in revenue, in many cases it has not been by enough, or not soon enough to maintain gross profit margins to the same extent as in 2022. We typically see a lag in clients putting their prices up, often wearing cost escalation for fear of losing business and market share. Keep a regular eye on your month to month and year to date financial results, along with comparison to prior years. Once or twice a year just isn’t going to cut it in a volatile economic environment. This is where the power of periodic reporting comes in. These monthly reports act as a temperature check for your business by giving you updates about your key performance indicators which typically include: • Current ratio of liabilities to assets (working capital) • Gross and net profit margins • Interest cover • Stock turnover • Aged debtors and creditor payment times • Ratio of wages to sales It may sound onerous to set up, but it’s an invaluable exercise. Once you have reports automatically rolling over monthly, you can also streamline your annual compliance requirements, save a considerable amount of time trying to find historical information, and get regular up-to-date results that lead to improved decision-making. Overheads are creeping up What seems like death by a thousand cuts, with overheads up across the board, a little here and a little there, it absolutely makes a difference, particularly at the wages line. We’ve heard this in the media on a frequent basis and it has absolutely been playing out in clients’ results. Watch out for ‘lazy’ costs. It’s easy for excess to creep in when times are good and the cash is flowing. Consider what is necessary to core business and staff morale and retention, and focus on trimming the fat. Are you up to speed on technology developments within your industry, and continued emergence of AI? Are there tools or processes you could introduce to materially reduce overheads or improve efficiencies? This could include reducing the impact of travel on your overhead costs by using technology for meetings instead, or simply delaying capital expenditure for a certain period of time. Sometimes bigger cuts need to be made – particularly when it comes to wages, but proceed with caution and approach all decisions with a future focus. For example, if you need to reduce your headcount, will this increase again during your next growth phase? There’s always going to be costs for recruiting and training new team members, and if the labour market is tight how will this impact your ability to deliver products and services to customers? It all comes down to cashflow A cliché no doubt, but cashflow is absolutely the lifeblood of your business. There’s lots of levers you can pull to improve your position, including: Terms of trade with your customers: Can you reduce/re-negotiate payment terms, speeding up your cash conversion rate? Making customer payments easy: Set up a click through payment function within your invoices and enable payment by credit card. The easier it is to be paid, the sooner you will be paid. Focus on debtor collection: Stop putting off those tough conversations and start making your accounting software work for you – many products have automated reminders. Take the time to set this up and any other relevant functionality. It will save you time in the long run. Are you carrying too much stock? Does your stock system alert you to aged stock? And, without shooting yourself in the foot from a margin perspective, what clever ways can you clear excess stock profitably? Are you paying your creditors too soon? Make the most of payment terms available to you and consider re-negotiating with suppliers where applicable. Are you getting the best deal from your suppliers? Go to market and see what’s out there. We’ve seen some incredible cost savings for clients undertaking this activity. Consolidate your suppliers: If you’re using a multitude of suppliers, explore options where you can negotiate a better rate by spending more with fewer suppliers, resulting in cost savings overall Consider debt funding structures: You may be able convert short term bank overdrafts into term debt to spread the load during times of tight cashflow. Jump on the tax pooling bandwagon: Consider using tax pooling to smooth out or defer provisional tax payments. And above all, forecast, forecast, forecast! Failing to forecast cashflow and plan ahead can cause even the most profitable businesses to rapidly fail.

Many businesses continue to recover from the physical effects of extreme weather events experienced throughout the year, and will be dealing with the subsequent year-end reporting challenges. And some will also be going through the process of claiming insurance for physical loss or business interruption.

Good policies are essential for every business - how effective are yours? Almost everything happening within your business - from decision making and employee behaviour, to ensuring consistency and compliance throughout your organisation – should be guided by clear and effective policies.

The more you know about your business, the better your decision-making can be. That’s why we’re always surprised at how many businesses don’t produce consistent monthly reports. Periodic reporting checks the pulse of your business and gives you monthly updates on your key performance indicators.

Service reporting is all about your non-financial performance – the data that showcases the most meaningful parts of what your entity does. The standard is designed to help everyone see the fantastic work your charity is doing, and you might be surprised at the potential benefits of non-financial reporting. This service report tells all of your stakeholders:

In March 2024, PCI DSS version 3.2.1 is officially retires and version 4.0 comes into full effect – and if your business accepts card payments, you need to ensure you’re ready. PCI DSS protects your customers’ information when they provide their credit/debit card details or planned payments, and you must comply with the standard.

Payment Card Industry Data Security Standards (PCI DSS) were established in 2004 by Visa, Mastercard, Discover, JCB International and American Express to consolidate and simplify their individual security programmes. These standards determine how retailers and service providers should store, process, and transmit transactions to protect payment card data.

Included in this year’s budget announcements was a change to the tax rate for trusts, moving from 33% to 39% from 1 April 2024. Given the spotlight on trusts in recent years, the hike has not come as a surprise, however it will come as a shock to many Kiwis.

NZ IFRS 16 is applicable to all large-for profit entities and aims to improve transparency and comparability in financial reporting by requiring these entities to recognise the full extent of their lease obligations on their balance sheets.

Changes are coming to the way retention money is held in the form of The Construction Contracts (Retention Money) Amendment Bill (the Bill).

With interest rates on the rise there are more considerations than ever when it comes to preparing your New Zealand International Financial Reporting Standards (NZ IFRS) financial statements. Here’s four key areas CFOs and Directors need to be aware of when preparing their statements this year.

From asset impairment and future operating losses to insurance recoveries and everything in between, a host of additional financial reporting challenges now faces many businesses after NZ’s recent natural disasters. David Pacey takes you through many of the issues you need to take into consideration and how to ease any year-end accounting headaches early.

If you’re looking to ease the pressure on your operating costs, investing in electronic invoicing (e-invoicing) is a great place to start.