Organisations face growing disruption, complex systems and evolving risks when it comes to managing technology. Here’s how to approach your pathway to resilience.
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Inland Revenue has issued an open submission to reduce the complexity of compliance with fringe benefits tax (FBT) - a welcome move toward modernising the regime and addressing long-standing complexity, particularly around motor vehicles and minor benefits.
Major public sector agencies have been instrumental in driving lasting benefit through strategic procurement and broader outcomes. Think hydro dams, railways and hospitals built by the previous generation. This approach has lifted the quality and resilience of public services, the capability of a range of suppliers and also set a precedent for addressing the burgeoning issue of infrastructure technical debt.
Grant Thornton New Zealand and JB Were are hosting an insights session to help you address these issues. It will be an invaluable update if you’re charged with governance, or hold a position within senior management or finance teams of large Tier 1 or Tier 2 charities. And, if you’re a CA ANZ or CPA member, you can also add one hour to your verifiable CPD time.
While we grapple with the threat of sustained environmental challenges, corporates and other reporting entities need to consider how the impact of climate change on their organisations is reflected in their financial statements. The key challenge is assessing this within our current accounting framework even when don’t yet have specific climate accounting standards. David Pacey addresses these challenge and how you can report the impact of climate change in your financial statements.
It is year end and you’re probably feeling very organised, right? You’re already talking to your accountant and auditor regularly about the information you need to supply. You’re thinking about changes within your business that need to be incorporated into your reporting. You’ve agreed a timeline to make sure everyone is on the same page. Fantastic. Your business will be audited on time, your bank loan covenants will be met, stakeholders will be reassured, and your company’s reputation will be upheld. Wait, does that not sound familiar? Unfortunately, not all businesses are as organised as we might like them to be. In practice, companies collect up all the information they think is necessary and pass it onto their accountant hoping it will be sufficient. Partly this is because businesses are so caught up with other work that understandably seems more urgent. It can also be tricky to know what your accountant and auditor need to know – and the list can be long. What does your accountant need to know? Some of the major considerations are as follows. • If there were any findings, recommendations or inefficiencies identified by your accountant or auditor last year, take steps to address them and implement any necessary improvements. • Ensure you’re applying the right reporting standards and tier and you’re meeting deadlines like bank covenants and parent reporting requirements. • Set a timeline to ensure everyone is on the same page, and so that you or your team is available to address any questions or concerns promptly. • Estimates and judgements require careful consideration and review by management. These can include impaired inventory, changes in asset valuations or a change in asset useful life, and impairments. • Changes like new leases, amended lease terms, or adjustments affecting revenue recognition timing should be assessed. Evaluate how fluctuations in interest rates may impact your reporting accruals and provisions should also be considered. • Changes in rules could impact your accounting, such as depreciation on commercial property, or new accounting standards either internationally or locally. • There may be events you need to disclose and consider, like major transactions, or contingent assets and liabilities. • If you’ve changed your goods and services terms or offerings, this can affect how you account for income recognition. If this isn’t clearly understood, a large amount of analysis and rework may need to be completed in a short timeframe. • Have you closed an acquisition deal and immediately moved to the celebrations without thinking about how to account for it, or what the disclosure requirements and tax implications are? If so, you could be facing delays and unforeseen costs. These are just some of the possible considerations – the list goes on. Ideally you should maintain an ongoing dialogue with your accountants throughout the year to avoid unexpected issues at year-end. Incorrect or incomplete information can lead to inaccurate reporting. Getting it wrong can create big risks and serious costs Compliance failures can really snowball. Missing your internal timeframes including those of your Board, bank covenant reporting, allocated timeframes for audit, regulatory filings can all have major consequences. Worse still, if issues aren’t picked up until later, a restatement of your prior comparatives may be required. This would invariably result in increased costs, time delays, reputational damage, and potential increased scrutiny. These restatements are prominently noted in your financial statements for your readers to see. Failing to ensure robust planning for your financial statements process can also severely erode shareholder trust in the business, its governance, and its management teams. But all this can be avoided when a business is organised and clear channels of communication are maintained. As they say, a fail to plan, plan to fail.
The recent EBOSS Builder Sentiment Report reveals a stark outlook for New Zealand's property sector. According to the report, 70% of builders anticipate a decline in building activity over the next 12 months, with 62% of respondents citing the current economic climate as a significant concern in the residential market. This widespread pessimism underscores the urgent need for targeted interventions to stabilise the industry and prevent further decline.
If left unaddressed, this negative sentiment risks not only stalling the construction of much-needed residential dwellings but it could also prompt a potential exodus of skilled tradespeople seeking opportunities abroad. As one respondent in the report noted, "The lack of certainty is pushing good people out of the industry," highlighting the immediate need for solutions that can restore confidence and retain talent.
Why Build to Rent?
Build to Rent (BTR) offers a unique opportunity to address two pressing issues simultaneously: the shortage of affordable housing and the current lull in construction demand. The EBOSS report identifies a "softening market" as a major challenge, with the majority of builders expecting fewer new builds in the coming year. BTR developments, which involve constructing residential properties specifically for long-term rental, can provide a steady stream of quality housing for New Zealanders while keeping the construction sector active.
However, the economic conditions and prevailing uncertainty have made New Zealand less attractive to institutional investors who might fund these large-scale projects. By introducing targeted incentives, such as rebates on qualifying BTR expenditures or tax breaks for large-scale residential developments, the Government could significantly improve the financial viability of these projects. This would not only attract much-needed investment but also ensure that the building sector remains engaged, even during periods of economic downturn.
Preventing a talent drain
The EBOSS report notes 45% of builders are considering reducing staff numbers, a move that could lead to a significant drain of expertise from the industry. If domestic opportunities continue to dwindle, there is a real danger our most qualified and experienced workers will seek employment overseas, leaving New Zealand ill-prepared to meet future demand when economic conditions eventually normalise.
By incentivising BTR projects, the Government can help maintain a robust pipeline of work for builders and tradespeople. This, in turn, will keep our skilled workforce engaged and prevent a depletion of expertise that could otherwise take years to recover from. The long-term nature of BTR projects means that once established, these developments will continue to generate employment and economic activity, creating a more resilient property sector overall.
The challenges facing New Zealand's property sector are significant, but they are not insurmountable. The EBOSS Builder Sentiment Report clearly illustrates the depth of concern within the industry. By taking a proactive approach and implementing targeted incentives, the Government can help steer the industry through this period of uncertainty.
Incentivising Build to Rent projects represents a strategic investment in the future of both our housing market and our construction workforce. It is a solution that not only addresses immediate concerns but also lays the foundation for a more stable and prosperous property sector in the years to come.
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.
If you only make one security tweak to your business, it should be this: turn on multifactor or two factor authentication. Multifactor authentication (MFA) is a simple change that can massively improve data protection. Without it enabled, your business or Not for Profit organisation could be in breach of the Privacy Act depending on the type of information you hold.
What is multifactor authentication?
Multifactor authentication means accessing a particular app or system requires more than one method of identification. Without MFA, you log on via one device, with a single set of credentials. MFA requires more from users based on three factors:
Something you have, like a smartphone or a secure USB key
Something you are, like a fingerprint or facial recognition.
Something you know, like a password or PIN.
For example, to log into Xero online, you enter your email and password. With MFA, you then need to confirm your identity another way – such as on your phone via the Xero app. If MFA is enabled for Microsoft Outlook and you log on using a device that isn’t trusted, you will also need to enter a security code that has been sent to a trusted email account or phone number.
Whether it’s a text code, a fingerprint or a phone confirmation, MFA ensures more than one ID method is required to get into your important data. Most platforms and applications give you the option to switch it on through your security settings.
It seems inconvenient – why would you bother?
Single-factor authentication can make it much easier for a cybercriminal to compromise your bank accounts, accounting software, or business systems from anywhere in the world. All they need is your email address and password, which might have been stolen or leaked, or gained through phishing.
With two-factor authentication, it becomes exponentially more difficult for malicious users to get access to your systems. According to Microsoft, there are more than 300 million fraudulent sign-in attempts on its cloud services daily: “All it takes is one compromised credential or one legacy application to cause a data breach.” It estimates that MFA can block more than 99.9% of account compromise attacks. If that seems too high, perhaps it is, but MFA is still highly effective; Google says its implementation of MFA halved the number of account compromises.
When you have MFA enabled, it’s less concerning if your password is leaked or compromised. That alone won’t be enough to allow a hacker to gain access.
Without MFA, you’re probably in breach of the Privacy Act
The Office of the Privacy Commissioner recommends all organisations, regardless of their size to introduce MFA. When a breach occurs, one question often asked is whether an organisation has taken reasonable steps to protect the data they hold. If it is deemed the organisation did not take reasonable steps to protect its data, this could result in a breach of the Privacy Act. What’s reasonable depends on the size of the organisation breached and the scale and sensitivity of data it holds. No matter how small your business or charity might be, it almost certainly holds some personal information. It might be as basic as a list of members’ names, phone numbers and email addresses. Or perhaps it’s a more complex customer management system that includes payment details, health information or biometric data. As such, implementing the MFA is no brainer.
Under the Privacy Act, every organisation or individual that holds data must collect it appropriately, keep it safe and allow the people it concerns to be able to access it (for more details, read the Privacy Principles).
The Office of the Privacy Commissioner describes two-factor authentication as a bare minimum for small businesses or organisations that hold digital information. Without MFA in place, if someone unauthorised accesses your business data, you are likely to be in breach of the Privacy Act. This could lead to a penalty under the Act starting from $10,000; the most ever awarded is just over $168,000.
The risks of a data breach go far beyond penalties, though. Your organisation may also experience potentially huge financial losses, reputational damage, and be forced to shut down. We know of one instance where a small online business experienced a data breach, and the cost of remediation and compliance was so high that dissolving the business was the best outcome. Cyber incursions are such a significant risk it’s hard to overstate their potential impact – yet many organisations are unaware of their responsibilities and risks.
It’s all part of everyday risk management
Cyber security can feel like a particularly thorny specialist topic that sits outside business as usual. But there’s a better way to think about it – cyber security is simply another risk management activity.
It’s not separate or unique or different to other risks in your business, so managing it should equally be an everyday task. This means switching on MFA and getting everybody using it automatically, as well as keeping up to date with software patches and managing passwords effectively. Simple steps like these go a long way to protecting your organisation from breaches.
In some cases, you might need to switch platforms to be able to access MFA for your organisation. We also occasionally see small regional organisations in areas that are digitally excluded, which can make this tricky. There may be workarounds available, or alternative platforms that can help.
Create awareness and provide training
We know that it can feel inconvenient to add MFA to apps you use frequently. If those who use your systems don’t understand the importance of using MFA, they may find this extra effort irritating, or try to switch it off.
It’s essential to have all users on board. Education is the key – you need to explain to everyone why MFA is vital and why it is well worth the additional effort. You need to create awareness and provide training. According to research by Verizon, 82% of all cyber attacks “involved a human element”, and phishing scams still dominate social engineering attacks.
We know that many small and medium enterprises and Not for Profits, don’t have in house IT and cyber expertise, however, being small or local doesn’t exempt you from the Privacy Act, so you still need to make the effort to not only enable MFA, but to understand your obligations under the Act, establish cyber security policies, and incorporate MFA into your overall approach to risk management.
The world of cryptocurrency saw more controversy this year with NFT markets collapsing, Sam Bankman-Fried being found guilty of a range of charges that could land him in prison for over 115 years, and Binance - the world’s largest exchange - agreeing to one of the biggest settlements in US history after violating anti-money laws and sanctions violations, by allowing terrorist groups to trade on its platform.
And so cryptocurrency’s renaissance begins …
Despite all the negativity, most cryptocurrency markets are up year on year in terms of price appreciation. This could be for a variety of reasons - speculation, artificial unregulated markets, or the maturity of the cryptocurrency industry increasing the confidence in the underlying asset. One element fuelling the fire of cryptocurrency markets is institutions looking to create financial products that allow traditional investors to get a piece of the virtual currency pie. Some of these include cryptocurrency spot exchange-traded funds (ETFs) or even the ability to gain crypto exposure in KiwiSaver.
A cryptocurrency spot ETF is a type of investment fund designed to directly track the price of digital currencies like Bitcoin for example. It is a regulated and stock exchange-traded product, which means it is subject to oversight by regulatory authorities. In the U.S. this is the Securities and Exchange Commission (SEC), and would be the Financial Markets authority (FMA) if such a product was ever to launch on the NZX. Spot ETFs are typically structured to hold actual cryptocurrency, and investors buy and sell shares of the ETF which should mimic the spot prices of the cryptocurrency.
Other opportunities already exist for New Zealand investors with the highest-performing KiwiSaver in terms of short-term (last 12 months) returns through Kouras’s Carbon Neutral Cryptocurrency Fund, with a one-year return of 66.52%. This fund invests in institutional investments that have direct bitcoin exposure. Allowing KiwiSaver investors to put up to 10% of their portfolio into this. It is definitely for those with a more aggressive growth strategy with the fund's Statement of Investment Policy and Objectives (SIPO) outlining the fund “is only appropriate for investors that have a very long investment horizon and who are willing and able to withstand significant volatility. The Fund is expected to deliver a 50% loss every 1-2 years.”
While these developments demonstrate how the industry is maturing, this evolution contradicts the founding principle of cryptocurrency: decentralisation. Bitcoin and other digital currencies were never intended to become investment assets sold on a stock exchange, unlike these newer products which rely on centralised institutions controlling and holding large amounts of cryptocurrency.
It’s time to start regulating the renaissance
All of this points to a growing imperative for regulatory intervention. A hybrid strategy is being explored by The Reserve Bank of New Zealand (RBNZ) to impose regulations on products that inherently have a lack of regulatory oversight. It has proposed a regulatory approach for the opportunities and challenges of new forms of private money like crypto assets.
Having experienced the challenges of a deregulated market during our work liquidating failed exchanges like Cryptopia and our views about stablecoins (a type of cryptocurrency), Grant Thornton New Zealand submitted an alternative approach in a submission to RBNZ.
Our perspectives recognise the potential significance to private money that stablecoins could have in the current financial landscape. Having seen the wild west of cryptocurrency, we remain advocates of the potential benefits of Distributed Ledger Technology (DLT) to revolutionise the financial industry. To advance products based on this technology, there is a need for robust regulation and risk management to protect New Zealand's monetary sovereignty, and to maintain trust in the global monetary system. Given the global nature of cryptocurrency, we believe that a coordinated, international approach is necessary to effectively address these risks.
On 30 June 2023, RBNZ published the outcome of its public consultation. The submissions reinforced RBNZ’s view that there are significant risks and opportunities with treating virtual assets as money. They have now decided against proposing a regulatory response at this point in time. Another reason outlined for taking a cautious approach lies in regulatory developments globally. There is likely to be real advantages to aligning crypto asset regulation throughout the world. As various overseas regimes are implemented, best practice for regulating crypto assets may become clearer.
This was reflected in our submission which stated the limited adoption of these new forms of private money including cryptocurrency means it is too early to develop a robust and futureproof approach to capture all potential risks associated with a new form of private money.
The UK is signalling they intend to regulate crypto activities in 2024 through formal legislation. Australia is currently running a consultation process for making crypto exchanges and digital asset platforms subject to its existing financial services laws; this will require platform operators to obtain an Australian Financial Services Licence.
These developments mean the RBNZ may be forced to change tactics and follow global changes. In the meantime, we will have to see what 2024 brings in the world of cryptocurrency.
There’s been a period of relative calm in the world of accounting standards in recent years, however they quietly continue to evolve and reflect the dynamic nature of business, and the need for transparency and accuracy in financial reporting.
Recently, several important changes have been made to New Zealand equivalents to International Accounting Standards (NZ IAS) to make financial statements clearer, comparable and relevant. Key updates have been made to:
1. material accounting policies for year ends from 31 December 2023 onward
2. accounting for estimates for year ends from 31 December 2023 onward
3. the presentation of current and non-current liabilities for year ends from 31 December 2024 onward
Understanding the implications and significance for your business
Changes to NZ IAS 1: Disclosure of material accounting policies
A shift from the significant to the material
The amendment to NZ IAS 1 emphasises the disclosure of material accounting policies. It requires entities to make material accounting policies prominent and easily accessible within financial statements.
Previously, businesses were only required to disclose their significant accounting policies. The move to releasing material accounting polices was made to reflect the fact that term and its application is described in detail in accounting standards, where the term significant is not.
How will this benefit my organisation and its stakeholders?
Transparent disclosure of accounting policies is crucial for stakeholders to comprehend how financial information is prepared and to assess the reliability of financial statements. By explicitly stating material accounting policies, companies provide clarity on significant judgments and assumptions applied in financial reporting, enhancing the overall transparency, trustworthiness and comparability of financial statements for different entities.
Investors and other stakeholders can make more informed decisions when they have a clearer understanding of the underlying principles and methodologies used in financial reporting. It encourages companies to critically evaluate their accounting policies, ensuring they accurately reflect the economic substance of transactions and events.
Businesses are encouraged to review the significant accounting polices previously disclosed to determine how they stack up against the new guidance to disclose material accounting policies.
Changes to NZ IAS 8: Accounting for Estimates
More consistency and reliability on the horizon
The revision to NZ IAS 8 addresses the accounting for estimates, emphasising the need for consistency and reliability when estimating uncertain future outcomes. Over time, a change in accounting estimates has become confused with a change in accounting policy.
The amendment replaces the definition for a change in accounting estimate with the definition for an accounting estimate as monetary amounts that are subject to measurement uncertainty.
Enhance the usefulness of your financial statements …
Estimates play a crucial role in financial reporting, particularly in areas such as fair value measurements, provisions, and impairment assessments. Ensuring the reliability and consistency of estimates turns your financial statements into a tool stakeholders can use to assess the potential impact of uncertainties on an entity's financial position and performance.
… And mitigate risk
The revised standard prompts companies to exercise greater diligence and transparency when making and disclosing estimates. By providing insight into significant judgments and uncertainties, you can mitigate the risk of misinterpretation and enhance stakeholder confidence in the reliability of your financial information. Additionally, it encourages robust internal controls and processes for estimating, monitoring, and disclosing uncertainties, all of which improves risk management practices.
Changes to NZ IAS 1: Presentation of Current and Non-current Liabilities
What is changing?
The amendment to NZ IAS 1 focuses on the presentation of current and non-current liabilities, requiring a liability to be classified as current if, among others, the company does not have an unconditional right to defer settlement of the liability for at least twelve months after the reporting period. The amendments to NZ IAS 1 clarify that the right to defer settlement must have substance, and it also discusses the impact of covenants on this assessment.
Why is this important?
Clearly presenting your current and non-current liabilities makes your liquidity and solvency position easier to understand. By segregating liabilities based on their maturity, financial statements provide valuable insights into an entity's short-term obligations and its ability to meet them, which helps stakeholders assess liquidity risk and financial health.
The amendments state that at the reporting date, instead of considering covenants that will need to be complied with in the future, when considering the classification of the debt as current or non-current, the entity should disclose information about these covenants in the notes to the financial statements. The standard setter introduced these so investors can understand the risk that such debt could become repayable early and therefore improving the information being provided on the long-term debt.
What is the impact on my business?
The revised standard prompts entities to reassess their classification of liabilities, ensuring compliance with the new presentation requirements. By clearly delineating between current and non-current liabilities, businesses enhance the clarity and relevance of financial statements, enabling stakeholders to make more informed assessments of an entity's financial position and performance. It underscores the importance of effective liquidity management and strategic planning to meet short-term obligations and sustain long-term growth.
What’s next?
After a period of relative calm, we are expecting to see a minimum of two new accounting standards over the coming year.
The first, IFRS 18, will impact the representation and disclosures of primary financial statements. Key changes include:
• new required subtotals included in the statement of profit or loss such as operating profit, profit before financing and income taxes,
• disclosures around management-defined performance measures (MPMs), and
• enhanced requirements for aggregation and disaggregation (i.e., grouping of information).
It is important to note that IFRS 18 is subject to consultation before the standard is adopted in New Zealand.
We are also anticipating a new standard outlining disclosure requirements for subsidiary, and potentially other entities, who do not have obligations to produce financial statements. When and how this standard might be applied in New Zealand will be subject to XRB consultation.
A lot of online scams are pretty obvious. Your bank isn’t going to send you emails about your balance expiring soon. And you know the IRD isn’t going to send you a text to transfer your tax rebate. Unfortunately, the types of scams most likely to affect New Zealand businesses are considerably more sophisticated.
