Appendix - Proposed minimum financial reporting requirements
These are the proposed minimum financial reporting requirements for special-purpose financial statements (SPFR) for companies that are in the tax base.
These minimum requirements are high-level and, while financial statements and accompanying schedules must be prepared to at least these minimum requirements, they may be prepared to a higher standard or even be general-purpose financial statements, so long as the required information is provided. If they are prepared to a higher standard that is recommended by a professional accounting body or by the External Reporting Board, items specifically footnoted on page 10 would not be explicitly required.
The minimum requirements proposed are:
- The financial statements should consist of a balance sheet and a profit and loss statement which shall be appropriately detailed.
- They should be based on double-entry historical cost-based financial statements prepared using accrual concepts.
- Where reasonably possible, tax values can be used for the determination of income and expenditure, fixed assets and depreciation, and the balance sheet.
- A statement of accounting policies and changes thereto that is sufficiently detailed that a user can understand the material policies that have been applied or changed in the preparation of the financial statements.
- Comparable figures for the last year should be disclosed.
- The financial statements or supporting schedules should show:
- The relevant (for that taxpayer) IR 10 key points.
- A fully detailed financial statement to taxable income reconciliation.
- A reconciliation of tax losses and movements therein for the year including loss offsets and subventions, if any.
- Related party transactions, except for:
- casual sales and purchases, and other immaterial irregular non-remuneration transactions; and
- transactions that are between New Zealand tax-resident companies that have a common balance date and are part of the same wholly owned group.
- Notes should detail (qualifying companies are exempt from the first two requirements, look-though companies are exempt from all three of these requirements):
- the available subscribed capital (shareholders’ funds that can be returned tax-free to shareholders in qualifying circumstances) per class of shares issued;
- any amount of realised capital gains that could be distributed tax-free upon the liquidation of the company; and
- a reconciliation of opening to closing imputation credits.
- If a forester, a statement of cost of bush as at balance date and a reconciliation of movements.
- If a specified livestock owner, detail of livestock valuation methods, valuations and calculations for taxation purposes.
- A reconciliation of movements in shareholders’ equity, and loans or current accounts to/from the owner and related parties.
- An appropriate note detailing “Exceptional items” – box 26 of the IR 10.
- An appropriately detailed taxation-based fixed asset and depreciation schedule.
- Interest should always be grossed up for resident withholding tax.
- Dividends should be grossed up for imputation credits to the extent that the dividend is taxable and the credits are usable to reduce the taxpayer’s tax liability for that year.
- All realised and unrealised gains and losses that are recorded in the financial statements should be recorded in the profit and loss.3
- When cash (and therefore book) and tax will never directly match (for example, portfolio investment entity and foreign investment fund income, entertainment expenditure) the financial statements should reflect the cash based position with the adjustment to the tax position being part of the book-to-tax reconciliation.
Explanation and comment (in no particular order):
- The financial statements can be GST-inclusive or GST-exclusive, so long as the end result is “net taxable income”. However, where the taxpayer is registered for GST, GST-exclusive financial statements are strongly recommended.
- Taxpayers are welcome to use a higher financial reporting standard if they desire, or to disclose more information, so long as there is an appropriate reconciliation back to “net taxable income”. For example, land and improvements may be included at valuation (and from Inland Revenue’s perspective it does not matter who does the valuation, so long as the fact of revaluation is disclosed). Further, taxpayers may adopt specific financial reporting standards for part or all of their financial statements.
- “Appropriately detailed” has been deliberately left open for the judgement of the person preparing the financial statements. For example, the sales and trading stock purchases of a corner grocer are likely not to be broken down in lines, whereas, for a livestock farmer, sales and purchases of livestock will be detailed. However, in both cases a detailed listing of other expenditure will be expected. Where there is insufficient detail Inland Revenue has the power to ask for more detail. Further, the key points for the IR 10 should be part of the financial statements or the supporting schedules.
- A fully detailed financial reporting profit to tax reconciliation is mandatory, except when there are no adjustments. For example, this will detail any movements in non-deductible provisions on a line-by-line basis and allow for the reversal of any non-taxable gains and/or losses.
- Related-party transactions except as specified, must be disclosed with appropriate supporting information – to/from, for, and the dollar amount. This should include remuneration, rents, dividends and interest. In this context, “related party” is as used in the IR 10 and its associated material.
- The requirement to take all realised and unrealised gains and losses to the profit and loss account, is to ensure that that the profit and loss statement is comprehensive and that these items are not be separately taken directly to shareholders’ equity.
- The IR 10 currently requires dividends to be recorded net of imputation credits. Consideration is being given to changing the IR 10 from the 2014–15 year to allow, in appropriate circumstances, dividends to be grossed up by any attached imputation credits.