The government has proposed a series of significant changes to the Financial Reporting Act to make the process of preparing financial reports less complicated and costly for small and medium sized businesses (SME). We talked with Mark Hucklesby, partner at Grant Thornton New Zealand, about how these changes will affect those who own a franchise.
Change is in the air, and while the topic may not sound riveting at first glance, Grant Thornton partner and national technical director Mark Hucklesby will assure you it is. The government has announced a series of changes to New Zealand’s financial reporting framework and Hucklesby has been in the game long enough to know this is a big deal. “Changes on this scale only happen once in a generation,” he says.
Currently, all companies – both large and small are required to prepare “general purpose” financial statements (GPFS) annually. A GPFS is suitable for all users.
For the last three years, the Ministry of Economic Development has been looking into what changes could make this process simpler and easier for businesses. After a close look at Australia’s more cost effective system, the governmenthas proposed a series of amendments to the statutory financial reporting framework that will result in only very large businesses (with more than $60 million in assets or $30 million in revenue) being obliged to produce a GPFS. All companies that fall beneath this threshold will be given the option to re-engineer their financial statements. They will be referred to as “special purpose” financial statement (SPFS) – which allows them to be far more specific and tailored to showcase a business’s strengths. These changes will relieve a significant number of companies, many of which will be franchisees, from some of their current reporting responsibilities.
Hucklesby says these changes should be seen by franchisees as an opportunity, not a threat, because they will allow for the financial statements to be prepared in a way that more appropriately reflect their business’s activity. “It’s like they previously had a strait jacket on, without a lot of wiggle room,” he says. “They had to prepare a balance sheet and an income statement in a predetermined way in accordance with the financial standards. SPFS is like wearing a kaftan – they have a lot more flexibility to move around and can step outside the previous rigid accounting rules.”
The benefit of having this flexibility may require business owners to put a bit more effort into reviewing their financial statements. But in Hucklesby’s opinion, the benefits are definitely worth the extra effort. “Financial statements are an important selling document, particularly if you decide later on that you want to exit the franchise,” he says. “Unlike a GPFS, a SPFS can showcase what the owner deems to be the franchise’s strengths – be it the turnover, the large inventory or the strong cash flow.”
For most franchisees, there are three groups interested in financial statements: the owners, Inland Revenue and the franchisee’s bankers. SPFS can be tailored to meet the needs of all three parties. Only one set of accounts will need to be prepared, says Hucklesby, as in many cases the accountant can apply the same rules to the SPFS as what is required to be put into a tax return. “Therefore, the time and cost associated with preparing two sets of accounts – a financial reporting set for the banker and the owners, and one for Inland Revenue (reflected in the IR10) – may be a thing of the past.”
Whether or not a franchise is affected by these changes will depend largely on how money within the business is accounted for. The 80/20 rule is likely to kick in here, Hucklesby says. “For those franchisees that operate largely on a cash basis it’s unlikely the amendments will make much of a difference to the accounts that are prepared and the costs involved,” he says. “However, those with more complex billing arrangements – such as different settlement provisions or staged delivery – are more likely to be affected by the amendments. They need to start focussing their attention on the changes that will be taking place and make sure none are overlooked,” says Hucklesby.
The potential compliance cost saving to SME’s is the main purpose behind these changes. The government looked at Australia’s current regime and saw no reason why it shouldn’t work here. “The government recognises that anything they can do to reduce compliance costs for small and medium sized businesses is going to be good for the country. They estimate that more than $90 million of savings will be achieved.”
And for those considering buying into a franchise these amendments should be encouraging. Hucklesby says that generally speaking, these changes should make it easier to start a franchise and they will ensure compliance costs are kept under control. “The changes will certainly not make it more difficult.”
Over the next year, Hucklesby is expecting there to be an increasing amount of dialogue on this topic. The last time changes of this significant occurred was in 1993 when accounting standards were given the full force of the law. “Almost twenty years later we’ve moved to another regime which recognises that providing these accounts takes time and effort,” he says.
It is expected that these changes will come in to force mid 2013.
Advice for Franchisee’s:
- There will be a lot of media coverage over the next twelve months about these changes. Keep an eye out for this
- Read up on the changes
- Become familiar with what changes you should be making to existing financial reporting statements
- Check for updates on the NZICA and XRB and your accountant’s websites
- Speak with your accountant
- Say that you understand there have been some changes to the financial reporting requirements and ask how it will affect your franchise
- Ask if there are any tasks you’re currently doing that you no longer need to do
- Discuss the impact these changes will have on your year-end tax position
- Be careful - you still have to prepare accounts. If you fail to do this and the business goes bust you will incur heavy fines and penalties
- These amendments still won’t allow you to ignore accrual accounting
- Franchises need to be aware that if you have more than 10 shareholders, there are new protocols surrounding the appointment of auditors
- At the moment the government is focussed on companies but have signalled they will eventually look at trusts and partnerships as well. Watch this space.