Numbers mag summer 2014 issuu

No 32 SUMMER 2014

A STAPLES RODWAY PUBLICATION

HAPPY HOLIDAYS! GREATER CLARITY FOR INVESTORS The long road to financial services reform

SOLID FOUNDATIONS Hawkins Group seeking projects big and small

IRD INVESTIGATIONS Beware of DIY Disasters

Staples Rodway is an independent member of Baker Tilly International

www.staplesrodway.co.nz www.staplesrodway.co.nz

NUMBERS Summer 2014 • 1

DIRECTORS AUCKLAND

David Searle

(09) 373 1128

HAMILTON

Rosanna Baird

(07) 834 6800

TAURANGA

Chris Downey

(07) 578 2989

HAWKES BAY

Stuart Signal

(06) 878 7004

TARANAKI

Chris Lynch

(06) 757 3155

WELLINGTON

Robert Elms

(04) 472 7219

CHRISTCHURCH

Ross Erskine

(03) 343 0599

DISCLAIMER No liability is assumed by Staples Rodway for any losses suffered by any person relying directly or indirectly upon any article within this document. It is recommended that you 2consult • NUMBERS your advisor Summer before acting 2014 on this information.

No 32 SUMMER 2014

A MESSAGE FROM PETER GUISE Reflecting on 2014, it is clear that the conservative government policies of the past few years have begun to pay off for our economy.

With the election resulting in little change in the shape of Parliament, it looks like there will be continuing stability in the political environment over the next three years.

The New Zealand economy has been strong, with some reports suggesting that our economy is one of the better performing in the developed world. Some are saying that we are peaking, but as other economies begin to recover, we anticipate that the strategies adopted will result in continuing positive growth.

Change is something that we all have to cope with on a daily basis, and we are continuing to adapt and invest in our business to embrace new technologies such as cloud accounting, the single ledger for businesses, and increased speed in communications.

We have also responded to a new financial reporting environment brought on by last year’s changes to the Financial Reporting Act. In 2015, Staples Rodway will celebrate its 70th anniversary. This is a reflection of the continued support of our clients and staff. As a firm, we strive to be not just accountants and financial advisors to our clients, but also partners in their success. For your support, I thank you, and I hope we will continue to work together into the future.

To all the staff and clients of Staples Rodway, enjoy the festive season, your family and friends, and we look forward to seeing you in 2015.

Have a Merry Christmas, and a prosperous New Year.

Peter Guise CHAIRMAN, STAPLES RODWAY NEW ZEALAND

IN THIS ISSUE 2

Taking a hit for charity

2

Wellington supports cancer causes

3

Tauranga's CanTeen family experience

3

Taranaki gets sweaty for CanTeen

4

Solid foundations

6

IRD investigations: Beware of DIY disasters

8

Technology supports business growth

10 Ready for launch 12 5 tax issues for trustees 14 Employers update: Issues with seasonal and casual labour 16 Improving workplace Health & Safety through strong leadership 18 Greater clarity for investors 20 Spotlight on reducing complexity in financial reporting

TAKING A HIT FOR CHARITY TAURANGA STAFF MEMBER JAIME TEASDALE is no stranger to putting her "Jaime provided our team with weekly training updates, and can be very body on the line for charity. In 2013 Jaime volunteered to shave her head to proud of the effort she put in. Her enthusiasm inspired many of our staff, and raise funds for CanTeen Bay of Plenty, raising $2,090 to assist them in providing a large team attended the event to support her. Jaime was up against a taller their services to young people affected by cancer. In 2014 however, she took her boxer, from Brookfield New World. As we knew she would, Jaime took out a support for charity to a whole new level, and put up her hand to fight in the Dare resounding win for her bout and we are all very proud of her", says Tauranga to Fight for Youth Charity boxing fundraiser held in July 2014!

Director Lisa Stirling.

The event was organised and run by the Te Aranui Youth Trust, which is We commend Jaime on her support for charity, and look forward to seeing a local Trust set up in collaboration with the NZ Police to raise funds for the what she has in line for 2015!

DARE, Blue Light and Police Youth Development Programmes in the western Bay of Plenty. This well supported local event raised over $40,000.

There were 20 boxers involved in the event who were sponsored by local businesses, and included Police officers and firefighters as well as local business people and their staff. Training was provided by Hemi Niha and his team from the TKO Boxing Academy in Tauranga, who did a fantastic job of preparing the boxers for their big night.

Sponsored by Staples Rodway Tauranga, Jaime took on the task of preparing for the event and threw herself wholeheartedly into her training, up to 7 times per week. Preparation included gruelling Sunday morning sessions at Mount Jaime Teasdale victorious in the ring at the Dare Maunganui, running up and down the Mount 4 times (before to Fight for Youth Charity boxing fundraiser most of us had even thought about getting out of bed), as well as sessions in the boxing gym. There is no doubt about it, preparing for such an event takes a lot of guts, hard work and determination and Jaime exhibited all of these.

WELLINGTON SUPPORTS CANCER CAUSES CANCER SOCIETY FUNDRAISER

GILLIES MCINDOE RESEARCH INSTITUTE

Staples Rodway Wellington has continued its long time support of the Cancer David Hulston, a partner in the Wellington practice has for several years been Society by, again, being one of the key sponsors of the Friends of the Cancer a trustee of the Gillies McIndoe Research Institute.

Society’s annual fundraiser.

A client of Staples Rodway This year’s event was a sigWellington, Dr Swee Tan leads the nificant exhibition of artworks Institute and along with colleagues from private collections in the has made a major break through Wellington region. The exhibition in treating strawberry birthmarks. curated by Jill Trevelyan was held The findings from that research are at the New Zealand Academy of now being applied to find potential Fine Arts. The focus was on the cures for cancer. last fifty years of New Zealand art In December 2013 the dream of and featured artworks little seen having a dedicated research facilin the public arena by some of the ity finally became a reality when great New Zealand artists such as the state of the art facility, situated David Hulston meets John Key at the Colin McCahon, Toss Woollaston, next to the Wellington Regional opening of the new cancer research facility.

Michael Smither, Richard Killeen Hospital and the Otago University and Gretchen Albrecht.

The function was another great success in the ongoing work of the Friends of the Cancer Society with over $90,000 raised.

In addition to sponsoring the Friends of the Cancer Society the Wellington office continued its support of the annual daffodil appeal by manning a number spotsSummer around the2014 Wellington CBD. 2of •collection NUMBERS

Medical School was officially opened by the Prime Minister.

The Institute’s focus is now on building capability and raising funds to support the ongoing research.

If you are interested in the work of the Institute or supporting its activities further information can be found at www.gmri.org.nz

TAURANGA'S CANTEEN FAMILY EXPERIENCE STAPLES RODWAY TAURANGA HAS BEEN providing sponsorship and support to Lunch was enjoyed by all, with the kids (and their parents!) getting to mix CanTeen Bay of Plenty for several years now as part of the National partnership with the players, ask them questions and get autographs. Then the fun began! with CanTeen, and this year Director Lisa Stirling wanted to provide something A number of the players, along with Commercial Manager Matt Cairns had different to CanTeen families. The firm has also been a “Back of Jersey” sponsor their heads shaved by the kids with much hilarity. Lisa’s son Josh also volunfor jersey number 5 of the ITM Cup teered and a couple of the players Bay of Plenty Team, the “Steamers” shaved his head! The players then for a number of years, so Lisa and headed for their training gym her team decided to try and tie while the visitors headed to the these two sponsorships together in field with management and had a some way to benefit CanTeen. ball kicking competition, followed In conjunction with the BOP by a visit to the training gym.

Rugby Union management, an “It’s fair to say everyone had event for CanTeen families was a great time and the players and created, and the families were union really gave their all to giving invited to attend a luncheon and the families a great experience. spend some time with some of the They were very generous both Steamers players in early October. with their time and also giving Steamers players and Union staff sport their On arrival the Steamers the kids mementos such as rugby freshly shorn heads with local CanTeens. unveiled a new twist to the balls and other giveaways. I was planned events, as a number of the very proud to be involved in proplayers had volunteered to let the viding such a positive experience kids shave their heads and the team had put together a donation for CanTeen. for CanTeen” says Lisa. “On the night of the event I read a Facebook post from It has to be said that the BOP rugby union and the players really get behind one of the mums about what a great day her young son had had, and how he giving back to the community and the players are often out visiting schools and had gone to bed with the flag the players had autographed, under his pillow, getting across key messages such as anti bullying, and their commitment to and that was very humbling”. this event was exceptional.

Staples Rodway Tauranga looks forward to continuing their support for CanTeen.

TARANAKI GETS SWEATY FOR CANTEEN IT WAS AN UNLIKELY MIX of accountants and lawyers battling it out on sporting equipment that had heads turning to help CanTeen Taranaki's annual street appeal come alive.

To mark their annual appeal on the 19th of September, Staples Rodway Taranaki challenged local law firm Govett Quilliam to a fitness challenge on treadmills, bikes and rowing machines for 5 minute stints over 1 hour in the local Huatoki Plaza.

CanTeen Taranaki co-ordinator Katrina Angelo said the highlight of the event was that the two companies came out and supported CanTeen. "This event here is to bring awareness to what CanTeen is about," she said. "It's a competition with all the different elements like treadmills and bikes and whoever travels the most kilometres wins a prize and the bragging rights."

All staff were able to be involved in some way, with supporters, donation collectors, organisers and of course athletes all doing their bit to help out on the day. Paul Frankton, of Govett Quilliam, said his bike ride was tough. “Hell yeah, it was pretty hard for 5 minutes. It’s a great cause and happy to help CanTeen in this way,” he said. Daimon Stewart, Director at Staples Rodway Taranaki, echoed similar sentiments “No doubt CanTeen is a great charity to support and this challenge was another creative way of being able to do so, while also being a great team building activity . . . with bragging rights on the line!”

The winner’s trophy went to the Staples Rodway team which covered 65 km while the Govett Quilliam team travelled 59.6 km.

Staples Rodway Taranaki and Govett Quilliam collectively raised $1,500 from this event alone.

Louis Fourie giving it his all for CanTeen.

Staples Rodway has enjoyed a successful partnership with Hawkins, the country’s second largest building and infrastructure firm, for more than 40 years. We met recently with Hawkins’ CEO Geoff Hunt to talk about the foundations he’s putting in place to ensure the company’s future success.

G

EOFF HUNT IS A MAN on a mission: he wants Hawkins, the family-owned firm he joined 18 months ago, to grow by a third over the next three years and reach an annual turnover of $1 billion.

While he’s confident, Hunt’s not saying it will be easy. There are challenges to overcome, perhaps the most obvious being the typical boom-bust cycle of the construction industry.

“That’s something that’s clearly outside of our control, but the good news is we’re currently enjoying a peak, with forecast activity over the next 5 to 6 years at 40-year highs.

“We need to make the most of the good times by not just continuing to deliver great work for our clients, but also that we take the opportunity to put some solid foundations in place so we’re well placed to ride out the tougher times.”

Perhaps the most visible of these foundations completed under Hunt’s watch has been a refresh of the company’s brand, a process which he says has reminded staff what working at Hawkins is all about.

“When I started here there was a sense that the brand wasn’t in great shape; it was seen as a bit staid. Research showed that people thought of Hawkins as simply a builder, something which really undervalued what we do.

“We need to differentiate ourselves and stand out, and that process had to start inside the business with a culture shift.”

Hunt says the process involved peeling back the layers to understand what makes Hawkins and its people tick.

“Something we quickly discovered was that there’s a real, almost tangible, passion inside the business to achieve success. You can see it in our project teams in particular; you couldn’t find a group of more passionate people, and that’s what’s at the heart of Hawkins.”

Hunt says the key to future success is channelling that passion into greater collaboration – a word that comes up often during the conversation. He says the new brand reflects the collaborative approach that sets Hawkins apart from its rivals.

“It is a bit like a magic triangle between our clients, our partners and ourselves. Without three-way collaboration between Hawkins and our partners, including subcontractors, consultants and suppliers like Staples Rodway, and our clients – there will not be sustainable success.”

To Hunt, a prime example of collaboration means getting involved with the client much earlier in the project, therefore opening up opportunities to add real value – and move beyond just being a builder.

SEEKING PROJECTS BIG AND SMALL The bread and butter for the construction industry are the small-medium projects in the $20 million range, which tend to continue even during dips in the cycle and are highly competitive.

Hunt says the trick is to retain enough capacity in the business to deliver these smaller projects, but also to be able to ramp up quickly when the upswing comes.

“That’s where those strong collaborative relationships with consultants and subcontractors show their worth. You need to be able to draw on those relationships so you can confidently tender for the inevitable larger jobs that come along in a boom – Auckland’s Central Rail Loop and SKYCity Convention Centre, and Hawkes Bay’s Ruataniwha Irrigation Scheme (on which Hawkins is the preferred bidder) – for example.”

Hunt makes an interesting distinction between ‘utility’ projects and those which are more in the public eye.

to continue in education and enrolled in further study. That’s a wonderful result and we are industry partners in two more Maori and Pasifika trades training initiatives in Auckland and another in the Waikato .”

Hunt says he’s also working hard to ensure the Hawkins team stays ahead of the game through upskilling and embracing new technologies. A new management training programme, run in conjunction with Auckland University Business School, has just produced its first 18 graduates this year.

Another foundation strategy Hawkins is vigorously pursuing under Hunt’s leadership is offshore project opportunities.

“Offshore projects will certainly play a big part in reaching our $1 billion goal, and we’ve already got a healthy pipeline of around $200 million in this space. The Pacific is an exciting market for us because of its close location and its infrastructure deficit; we’re currently delivering an upgrade to Nadi Airport in Fiji and a motorway flyover in Papua New Guinea.”

Hunt agrees that Hawkins isn’t noted for civil construction work – like roading, for example – in New Zealand, but the Papua New Guinea job may be an indicator of future ambitions in that space.

Construction of the motorway flyover in Papua New Guinea

Geoff Hunt, Hawkins Group CEO

“Our infrastructure business has been involved in delivering mission-critical projects like the electrification of the Auckland commuter rail network, and water infrastructure. But it’s funny how these projects go unrecognised by the public because they’re largely behind the scenes.

“Community-focused projects, on the other hand, tend to be much more rewarding because of the involvement of, and response from, the community; I’d put the recently completed Grafton Gully Cycleway, Waterfront Auckland upgrade and the Manukau Institute of Technology in this camp.”

Indeed, being a good partner to the community is another important foundation for Hunt and Hawkins. One success story Hunt is keen to highlight is the He Toki ki Te Rika programme, a collaboration led by Te Ru-nanga o Nga-i Tahu with CPIT and Hawkins which provides trades training to Ma-ori youth in Canterbury.

“Since the programme began more than three years ago, more than 800 young people have acquired new skills through the programme with many of them going into full-time employment in the industry; and others have decided

www.staplesrodway.co.nz

Working in offshore markets presents some obvious challenges, says Hunt.

“With considerations like tax and currency key to whether an offshore project is a success or not; a trusted partner like Staples Rodway comes into their own.

“The Papua New Guinean Kina, for example, has devalued by about 30 per cent since the flyover project started. We need to ensure we have the right structures in place to adapt to these sorts of market dynamics.”

Hunt is firmly focused on getting the foundations right and achieving the $1 billion goal. Working collaboratively with clients and partners, and equipping the team with the right skills and technology to do great work, it certainly looks like Hawkins is on track for further success.

HAWKINS BY THE NUMBERS

650 permanent staff nationwide 23 dedicated health and safety staff $750 million current annual turnover 8,000 subcontractors/suppliers on Hawkins building sites each year $200 million pipeline of offshore projects 18 graduates from first year of Hawkins Business School 800 young Maori through the He Toki ki Te Rika trades training programme NUMBERS Summer 2014 • 5

IRD INVESTIGATIONS BEWARE OF DIY DISASTERS I have heard it said: "If you're a bit of an adrenaline junkie and looking for a new business thrill then try an Inland Revenue audit". That may be a bit extreme, but there is no doubt that the initial call or letter from Inland Revenue can get the heart racing.

I

F YOU RECEIVE A QUERY from Inland Revenue, there are a number of alternative approaches open to you, but your approach right from the start can have a direct impact on the outcome. There are some key matters you need to keep in mind:

Strategy If you receive a query from Inland Revenue, you need to think about your strategy and how you are going to approach this. First of all, it is not a good idea to be aggressive. Remember the investigators are real people and if you get on with them you are more likely to be successful.

case a Trust maintained that it bought and sold seven properties as residences for the beneficiaries of the Trust and that it was not liable for income tax, GST or shortfall penalties on unpaid tax. However, the exemption for residential property will not apply where there is a regular pattern of buying and selling your family home, and in this case the Authority found that a regular pattern of trading was established, and imposed income tax accordingly.

GST

Any contact from Inland Revenue should be an immediate alert that you need to consult your tax advisor.

Many Inland Revenue audits start with GST issues. The new zero-rated supply of land provisions seem simple, but are proving problematic. If you are preparing your own GST returns, we recommend you seek advice on difficult or high value transactions, particularly where they involve the transfer of land, sale of a business, or an asset where private use may be involved.

Taxpayer rights

Tax Losses

Consult your tax advisor from the start

Taxpayers have the right to be treated fairly and objectively. However, we have had a case lately where Inland Revenue did not necessarily abide with that right. The investigator may have made an honest mistake, but it is important to remember that an investigator may not always get it technically correct, and mistakes are not uncommon.

In this case the taxpayer was negotiating directly with Inland Revenue in relation to a FBT error arising several years ago. Inland Revenue expected the tax to be paid dating back for a seven year period, rather than the four year period they were entitled to. The Inland Revenue investigator had interpreted the statute bar period, a fundamental taxpayer right, incorrectly.

As tax advisors, we were able to advise the client of their rights and to reach agreement with Inland Revenue to apply the correct position. We also mitigated the FBT tax arrears by calculating a corresponding income tax refund. Finally, we reduced the interest exposure by purchasing historic tax credits through a tax pooling agent. In total, using our services saved the client over $20,000 in core tax, penalties and interest.

Examples like this highlight the risk of the DIY approach to Inland Revenue Investigations.

Consider a Voluntary Disclosure There are generous concessions available for voluntary disclosures if they are made in time, whether before or after an investigation is notified. Consult your tax advisor early on if you have any concerns you may have taken an incorrect tax position.

Remember, prevention is better than cure There are several areas that are currently attracting Inland Revenue’s attention:

Property Trading Property trading and speculation is taxable under our current rules, with or without a capital gains tax. In addition, GST will apply if your transactions constitute a “taxable activity”. And remember, you are not safe just because you live in the house.

A recent Taxation Review Authority Case (Trustees of the B Trust v.

Commissioner of Inland Revenue) was a timely reminder of this point. In that

6 • NUMBERS Summer 2014

Inland Revenue is also monitoring companies carrying forward tax losses and, when those losses are used, you should expect a review letter.

STOCK YOUR TOOLBOX NOW The good news is that there are a number of tools available to stock your toolbox now: Maintain records. Inland Revenue investigations are a fact of life of being in business. The best way to prepare for the inevitable is to ensure that your records are tidy, correct, and up to date. If Inland Revenue can quickly find that your records are in order and that you are complying with the tax rules, you can expect the investigation to be over and done with quickly. Where there is something to investigate, expect more digging.

Carry out pro-active reviews. If you have not been audited for a while, having your advisor carry out a “mock” investigation, or a targeted review of risk areas such as payroll, GST, or FBT can identify issues before Inland Revenue become involved.

If there are skeletons in your closet, there are concessions available for voluntary disclosures. If the disclosures are made before Inland Revenue commences an audit, shortfall penalties can be remitted completely in some situations.

Another tool in your prevention toolkit is accountancy insurance. An accountancy insurance policy will cover the costs of a professional advisor to undertake the audit or review on your behalf, up to a pre-agreed level. This levels the playing field with tax investigations. Where we have previously seen taxpayers concede their statutory rights or enter an agreement they do not believe is correct because of the cost of challenging Inland Revenue, taxpayers can stand their ground if they know their advisor costs will be covered. See your Staples Rodway advisor if you would like to know more about accountancy insurance.

If you have any questions or are unsure on a tax question, please contact us now. We have a number of tools that can help with an Inland Revenue investigation. Just like building, DIY is not always the best approach!

Article by Angela Hodges STAPLES RODWAY WAIKATO angela.hodges@srw.co.nz

TECHNOLOGY SUPPORTS

ZELAM'S GROWTH When your company is growing, and growing fast, it’s important that your business infrastructure, not least your IT setup, keeps pace. It’s a fact that Taranaki-based chemicals company Zelam – having doubled its turnover in the past four years and on track to repeat in the next four – was mindful of.

8 • NUMBERS Summer 2014

F

OR MORE THAN 25 YEARS Kiwi firm Zelam has researched and developed smart new chemicals for use in the agriculture and timber industries.

The privately-owned and operated company employs 50 staff and services the New Zealand market with research, testing, product development and enhancements.

“We’re a fully integrated business, overseeing products from concept to commercialisation,” says Zelam General Manager Andrew Thompson. “We develop and test formulations to meet specific agrichemical and timber treatment requirements then manufacture the final products at our world-class facility in New Plymouth.”

“Our business is steeped in R&D, it’s where all our products begin, so we invest heavily in this area,” says Andrew. “Earlier this year we were delighted to be awarded an R&D grant from Callaghan Innovation, which contributes 20 percent to our total R&D spend; it’s worth close to $3 million over five years.”

evolved to become very sophisticated,” says Andrew. “Going forward, we expect to see better efficiencies and internal processes, which will boost our productivity and customer service.”

While Zelam’s accelerated growth is exciting, it also presents challenges, so the company developed a five-year strategic plan to ensure it is well-placed to manage the journey. One key aspect of the plan was the need to review the company’s IT infrastructure.

“There is a tremendous amount of IT underpinning our business, from developing the recipes in the laboratory and managing the manufacturing programme to administering our business management and financial processes,” says Andrew.

“We quickly recognised that we needed support to understand what shape our IT infrastructure was in. We needed someone to come into our business, tear it apart to understand our systems, in order to help develop an IT strategy based on best practice to get us on track and help us achieve our five-year strategic plan.”

That “someone” was Staples Rodway; Zelam’s enquiries around town suggested Staples Rodway’s specialist business computing service was well equipped to complete an IT audit.

Staples Rodway’s Taranaki office, led by Rob McEwan, spent time with Zelam’s senior management team then, in a short timeframe, developed a comprehensive yet simple-to-grasp action plan to upgrade the company’s IT platform. Put simply, the plan articulated the risks and outlined the steps necessary to address each issue.

Given the significance of IT to the company, one of Staples Rodway’s key recommendations was to appoint a senior IT change manager to be part of Zelam’s executive team (Zelam leaned on Staples Rodway’s local HR team to achieve this). The IT change manager would implement the IT plan and manage the systems going forward. In the interim, Zelam engaged Staples Rodway to progress the plan.

Today, Zelam’s IT change manager is well ensconced in the new role and planning of a robust enterprise resource planning (ERP) system is underway. Rob and the Staples Rodway team remain valued advisors, providing a “sounding board” for the Zelam team.

“We have a young senior management team so it’s vital to have the right partners for our business; partners we can trust and build long-term relationships with,” says Andrew. “We now enjoy greater clarity about our operations and we can continue to grow with confidence.”

Zelam also keeps a keen eye on international markets and has plans to ramp up the export side of its business.

“We have had great success exporting our timber products and this will continue as our products and customer base evolve,” says Andrew. “Currently we export approximately 10% of our products offshore; we expect this to rise to 25% within five years.”

GROWING PAINS With Zelam’s recent growth spurt, the company has moved from being a niche provider to a big industry player.

“A number of things are driving this growth: our product portfolio development, customer relationships, and an agriculture and pastoral market that has

www.staplesrodway.co.nz

NUMBERS Summer 2014 • 9

READY FOR LAUNCH

Article by Simon Reichenbach STAPLES RODWAY ASSET MANAGEMENT simon.reichenbach@staplesrodway.com

The New Zealand Initial Public Offering (IPO) market has enjoyed a resurgence recently, with ten companies having joined the NZX main board so far this year, with a further 2 main board floats in the wings, as well as several smaller listings on the NZX Alternative market.

T

HIS TREND OF SHAREMARKET DEBUTS is partly symptomatic of the strong performance of the NZX over the last year (NZX 50 Gross index +13.7%) and the eventual aftermarket gains of a number of the electricity generation offerings.

Vendor motivations for listing publicly are varied. At present public listing is enabling companies to raise capital or sell down equity at higher multiples than that obtainable from trade buyers or private equity. Public investor appetite for new listings has been strong due to low returns from other investments or the growth potential where no dividends have been forecast by the IPO candidate.

PERFORMANCE Performance from the 2014 IPO crop has been mixed. Four of the IPOs are trading below their issue price. Of the issuers currently trading above the IPO price, returns have been strong with 3 companies trading at a price greater than 30% above the IPO price. On average an investor that was able to access all of the 2014 IPOs equally weighted, would have a 12% positive capital return on the issue price. If an investor could not acquire shares in the initial offer (which is common, given IPO offer tactics) and bought on the first day of trading then returns are more muted. The share price gain from buying on day one of trading and holding to 27 November was approximately 4%.

Although there has been a solid appetite for new issues from New Zealand investors this has not translated to indiscriminate demand. A number of proposed IPOs over 2014 have been deferred due to investor resistance to proposed pricing. Notably, Hirepool advanced to the stage of issuing a prospectus prior to withdrawing the offer. Other companies mooted for listing which have not progressed offers this year include Wherescape, PowerbyProxi and NZME. ISSUE PRICE $NZ

CURRENT PRICE $NZ

GAIN/ LOSS %

FIRST DAY TRADING PRICE $NZ

GAIN/LOSS FROM DAY 1 %

Genesis Energy

1.55

2.06

32.90

1.81

16.77

Intueri Education

2.35

2.70

14.89

2.71

15.32

Serko

1.10

0.95

-13.64

0.95

-13.64

Gentrak

2.40

2.15

-10.42

2.49

3.75

ikeGPS

1.10

0.95

-13.64

0.99

-10.00

Scales Corp

1.60

1.48

-7.50

1.58

-1.25

Metro Glass

1.76

1.92

9.09

1.76

0.00

Vista Group

2.35

3.68

56.60

2.55

8.51

Eroad

3.00

4.25

41.67

3.40

13.33

Orion Health

5.70

6.27

10.00

6.27

10.00

COMPANY

NOTE: Current price was as at 27 November 2014

PROCESS The IPO listing process varies with the nature of the security being offered, the scale of the offer and market conditions. The large government sponsored floats sought to achieve a wide spread of investors, emphasising New Zealand based

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ownership, and involved the raising of large amounts of capital. These offers provided investors without a strong relationship with a share broker an opportunity to acquire shares through a public pool, although not in large volumes.

Increasingly, non government issues are only available via broker firm offers where the broker bids for a portion of the issue and then allocates these to their clients. Share brokers in bidding for IPO stock are also competing against wholesale investors. The offeror provides an indicative price range and invites wholesale investors to bid for stock. The offeror then allocates stock on the basis of the bids and its listing objectives to achieve the desired spread and nature of shareholders while maximising the price obtained. The period of time which investors have to consider the merits of the offer has been truncated and given the indicative price range approach investors are left uncertain until the offer is finalised as to what the price will be and the amount of stock secured. Typically, non wholesale clients of the firm acting as manager to the issue will have a better chance of securing participation in the issue.

RECENT TRENDS Two trends in the recent and proposed crop of IPOs are evident.

1. Many of the issuers are ‘technology based growth’ companies. These companies are in a developmental stage – the stage of development varying between companies. This implies that the businesses are either not profitable or have low profitability relative to the indicate value sought. The IPOs are promoted on the potential market should the business prove successful which is often global in scope. In order to implement the business plan the company requires more capital as it is unable to generate sufficient cash internally for further development. The risk and return opportunity in these companies is high.

Should the business fail to achieve its goals at the expected rate then loss of value is potentially substantial given the high entry cost. Investors are required to have a high degree of conviction as to the likelihood of success and the potential scale of the opportunity. On the upside, successful execution of the business plan may multiply the value of the initial investment many times.

2. Several of the IPOs are based on business roll–ups. In this scenario the issuer assembles and amalgamates a group of smaller businesses in the same industry into a single larger entity. Business targets are typically in fragmented markets with many small participants that can be acquired on low multiples and that value then arbitraged in the public market. The consolidated business group should have scale advantages such as spreading overheads over a broader operational base. The risks in such a roll-up scenario are that integration takes longer than expected, the combined business suffers customer erosion and that unexpected costs emerge. Use of the public company structure provides the capital to make acquisitions both in cash and in the currency of the company’s scrip.

BUYER BEWARE Participation in IPOs is not an automatic value creation opportunity for investors and caution is warranted, particularly in bull market conditions if investors have an investment time horizon beyond the very short term. Difficulty in accessing opportunities also complicates the investment decision. IPOs do however present the opportunity to participate in new industries and the potential associated with them. The fact that IPOs are more numerous is also indicative in itself of a healthy investment market.

NUMBERS Summer 2014 • 11

5

TAX ISSUES FOR TRUSTEES

Do you have your own family trust, or do you act as a trustee for a friend’s family trust?

Are you currently acting as a trustee, and it seemed like a good idea at the time, but now you are not so sure? Complex issues can arise which can turn into a ticking timebomb come tax time.

Here are five top tax trust issues that we come across for our clients.

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HERE ARE A NUMBER OF taxation issues to consider when acting as a trustee. In the main, if the trust only owns the family home, then those issues should not be too complex, but you can never be too sure.

ISSUE 1 - TRUSTS CANNOT PASS OUT TAX LOSSES One of the advantages of a trust from a commercial perspective is that, although the assets are held by the trustees, the income from the assets does not have to go to the trustees. This is because most trusts in New Zealand have the ability to distribute income out to beneficiaries. This ability can sometimes be useful from a tax perspective; because the trustees can choose which beneficiary the income goes to, not that tax should ever be the reason for a distribution.

However, no such ability to distribute exists for losses. When a trust makes a loss, it cannot pass the loss out to the beneficiaries. If you are therefore considering investment in a venture that is anticipated to initially make losses, then a trust is probably not the best investment vehicle from a tax perspective.

However, you will have to consider many other issues before you can decide which vehicle should be used.

ISSUE 2 - TRUSTEES CAN BE PERSONALLY LIABLE FOR PENALTIES AND INTEREST IF THEY GET THE TAX WRONG Trustees owe a duty of care to the beneficiaries. If they do not live up to the high standard expected from them; for example, they do not file a tax return on time, or they pay tax late, then the trustees can be personally liable for the penalties and interest that may be charged. Trustees should therefore take their office seriously.

ISSUE 3 - SLEEPING TRUSTEES HAVE NO EXCUSE Some people become trustees as a favour to a friend. However, if anything goes wrong with the trust they may argue that they were merely a sleeping trustee (literally and figuratively) and should therefore not be held liable for any undesirable outcomes. The courts do not accept this as a defence.

If you are a trustee then it is no excuse to say that you were merely doing it as a favour, and therefore should not be held liable if something goes wrong.

Remember that trustees generally have an indemnity against the trust funds, but if there are no trust funds then creditors may come after the personal assets of the trustees. This is especially problematic where Inland Revenue is con-

12 • NUMBERS Summer 2014

cerned, because there is no way to limit the liability, apart from making sure the trust is run properly.

ISSUE 4 - CHANGES IN RESIDENCE OF TRUSTEES OR BENEFICIARIES CAN HAVE CATASTROPHIC CONSEQUENCES FOR THE TRUST A client recently came to see us about their family trust. As is not unusual, the client’s children were living in Australia. Unfortunately, they were not entitled to certain Australian tax exemptions. The parent’s trust had lent money to the children, and the Australian Tax Office picked this up when performing a data matching exercise. The end result was that the children had to pay tax on the value of the loans. Not just the interest, but actually the whole value of the loans, resulting in a significant amount of tax to pay.

The lesson from this episode is that where you have your wealth in a trust, and your children move overseas, make sure you take advice before they go. You may need to ensure that they get distributions before they leave, or if they are a trustee of the trust, that they are removed and other New Zealand resident trustees are appointed instead.

Also, if you are trustee and are considering moving overseas, then take advice as you could be giving rise to a whole new set of tax issues in your new country, even if none of the trust assets or trust beneficiaries are located in that country.

ISSUE 5 - WHERE A TRUST IS GST REGISTERED, PAST TRUSTEES STAY LIABLE FOR THE TAX UNTIL YOU TELL THE IRD THAT YOU ARE NO LONGER INVOLVED WITH THE TRUST A final warning for trustees of GST registered trusts or, more accurately, past trustees of GST registered trusts. If you do not tell Inland Revenue that you are no longer a trustee then you are still liable for the GST liabilities of that trust.

When you cease to be a trustee you should write to Inland Revenue advising Inland Revenue that you have ceased being a trustee, and keep a copy of this letter on file. If you don’t you find yourself in a position where you are liable for the GST without having any control over the proper operation of the trust.

This is not intended as advice for specific situations. Please refer to your usual Staples Rodway advisor for advice on specific situations.

Article by Sybrand van Schalkwyk STAPLES RODWAY TAURANGA sybrand.vanschalkwyk@staplestga.co.nz

EMPLOYERS UPDATE

ISSUES WITH SEASONAL AND CASUAL LABOUR We have recently had eye-opening experiences with our clients being subject to review by Labour Inspectors. Inspectors can request that the employer provides all time and wage records, leave records and employment agreements in order to complete a Minimum Standards Audit of the workplace. Audits can arise from a number of causes, including an application the employer has made to recruit overseas workers or via a complaint made by a current or ex-employee.

Article by Norma Blackett STAPLES RODWAY TAURANGA norma.blackett@staplestga.co.nz

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HE LABOUR INSPECTOR CAN GO back 6 years and, if a breach is discovered, the compensation payable to the employee can go back for the full period of their employment. The Labour Inspector can also impose a further fine for non compliance.

MINIMUM WAGE - ANNUAL AVERAGE CALCULATION OR WEEK BY WEEK? Many managers involved in seasonal work are employed on a salary basis. Their salary is divided into the number of weeks or months in the year, depending on the regularity of the payroll. Salary payments are made in equal amounts, irrespective of the hours worked with regard to the high season or the low season, and often there is no timesheet completed by the employee. An employment agreement signed by both parties may set out these arrangements.

The complaint An employee complained to a Labour Inspector that they believed their employer was not complying with the Minimum Wage Act. A signed employment agreement was in place, containing the provision for variable hours of work due to the seasonal nature of the business, with no set hours. The employee was on a salary, paid in equal amounts throughout the year. During the high season the employee worked up to 60 hours per week and during low season they worked between 30 and 40 hours per week. No timesheet was completed by the employee but a spreadsheet showing the hours worked was kept by the employer.

The employee claimed that during high season when they worked up to 60 hours per week, their hourly rate fell below the minimum wage rate. The employer maintained that the wage rate paid during the low season was well above the minimum wage rate and that over the course of a full year the overall wage rate was above the minimum wage rate.

The Labour Inspector findings The hourly rate paid to the employee for each separate payroll payment must reach the minimum wage rate. This did not occur when the employee was working up to 60 hours per week. The employer could not off set ‘overpayments’ made to the employee in low season against the ‘lower’ wage rate paid in high season. Paying equal amounts each pay period irrespective of the hours worked was in breach of the Minimum Wage Act. The employer was ordered to pay compensation to the employee for loss of wages during the high season, over the full period of their employment. The employer appealed to the Employment Relations Authority, who ruled in favour of the employee and the findings of the Labour Inspector.

What can you do to ensure compliance for seasonal workers?

An Employment Agreement must be in place for each employee. Penalties for a company in breach can reach a maximum of $20,000.

A timesheet must be completed by the employee and authorised by the employer.

All timesheets, wage and leave records must be kept for a minimum of 6 years.

Make sure the current minimum wage rate is paid at all times.

THE HOLIDAYS ACT AND CASUAL AND FIXED TERM EMPLOYMENT Casual Employment A casual employment relationship is one where the employee has no rostered days or hours of work. They do not know from one week to the next if there will be work for them. They are paid holiday pay on a ‘pay as you go’ basis with each payment made to them, which is shown as a separate entry on their pay-slip and not incorporated into their hourly rate of pay.

If a regular work pattern has been established this changes the employment relationship from casual to part time permanent. E.g. four hours every Thursday would be sufficient.

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Fixed Term Employment A fixed term employment relationship is one where: An employer has a project they need extra resources for.

An employee is on leave for an extended period of time and cover is required.

Seasonal work, where help is needed during the high season.

Important things to remember: The employment agreement must say that it is a fixed term agreement and give a genuine reason for this.

There must be an agreed start and end date given in the agreement.

Where the fixed term agreement is for less than 12 months, holiday pay can be paid on a ‘pay as you go basis’. Or, can be paid at the termination of the fixed term employment.

If the fixed term agreement is for more than 12 months, there will be an entitlement to annual leave after 12 months service and the ‘pay as you go’ method cannot be used.

Sick and bereavement leave entitlements may apply where the employment is in excess of 6 months.

There must be at least one month between the end of one fixed term employment relationship and the beginning of another, or the employment relationship may be judged to be continuous.

The complaint An employer was approached for casual work by a person stating: They were the main care giver for their young family Not available early morning or mid afternoon due to commitments to another part time job.

As the employer was unable to provide regular work, a casual working relationship was entered into. The employee was paid their holiday pay on a ‘pay as you go’ basis. This continued for 10 years until the employee terminated the employment on good terms, to find more permanent work.

Eighteen months after the employee left their employment the employer received a letter from a Labour Inspector. The ex-employee claimed they had not been paid their holiday pay correctly. The Labour Inspector requested timesheets, wage and leave records relating to the employee for the previous 6 years, in order to investigate.

The Labour Inspector findings The employment relationship was not casual. The employer was in breach of the Holidays Act with regard to the employee receiving holiday pay on a ‘pay as you go’ basis. The employer was required to make a 5 figure compensation payment to the employee. This ruling was based on the following: Initially the employment was a casual relationship. However, over time due to the gradual increase in hours worked, a pattern had developed which changed the nature of the relationship.

The employment relationship was seasonal and should have been changed to a Fixed Term casual relationship, starting at a given date in May and terminating on a given date in March each season.

Although a gap of more than one month each year had occurred, the employment relationship was not terminated through a final pay and written or verbal notice, therefore it was continuous.

As the employment relationship was continuous, the ex-employee was entitled to annual leave and the ‘pay as you go’ basis was not lawful under the Holidays Act. The employer owed the ex-employee 24 weeks of Annual Leave (6 years multiplied by 4 weeks entitlement).

The holiday pay previously paid on a ‘pay as you go’ basis, could not be off set against the annual leave entitlement that was owing to the ex-employee.

The lesson from the above cases is to make sure your employment relationships comply with legislation. If you would like further clarification on any of the above information, please contact your Human Resource advisor at Staples Rodway.

NUMBERS Summer 2014 • 15

IMPROVING WORKPLACE HEALTH & SAFETY THROUGH STRONG LEADERSHIP Each week one to two New Zealanders are killed while at work. There is an estimated 600 deaths each year from occupational diseases, such as asbestosis. The resulting damaged lives of workers, their families and friends as well as the financial cost of more than $3.5 billion is not ok.

Article by Julie Rowlands STAPLES RODWAY TARANAKI julie.rowlands@staplestaranaki.co.nz

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EW ZEALAND LEADS THE WORLD in many things but, unfortunately workplace health and safety (OH&S) is not one of them.

In a bid to address the country’s poor workplace safety history, legislation has been introduced by the government. Together with this, health and safety should be seen as an investment in good business practice, alongside improved productivity, reliability and an engaged workforce.

The Health and Safety at Work Act coming into force by the end of 2015 has a number of key goals including: Protecting workers and others by eliminating or minimising risk.

Providing for fair effective workplace representation, consultation, cooperation and resolution of issues.

Promoting advice, information, education and training on OH&S. Securing compliance with the Act. Scrutinising and reviewing actions taken by duty holders under the Act. Ensuring there is a framework of continuous improvement to achieve higher standards of OH&S. The Act also makes explicit the duties of company Directors. Directors will be required, by law, to be pro-active on health and safety issues. Every Director will be expected to understand the key risks within their organisations and assure themselves that these risks are being managed effectively. Directors will need to provide policy that sets the direction for health and safety management. Active commitment and consistent behaviours must be demonstrated and every Director needs to recognise that OH&S governance is as important as any other aspect of governance.

As a result of the legislative changes, leaders at all levels will be expected to take a strategic view of OH&S as it can no longer be considered as a compliance cost or as something to be delegated. Leaders need to take responsibility for building the culture within the business.

Your business culture today is the result of what has been valued by you in the business in the past few years, it is “the way we do things around here”.

Some organisations preach safety, good reporting and improvement but in fact practice fault finding, criticism and blame.

Cultural change takes leadership, a plan, and perseverance. It will require a change in understanding, mind-set and behaviour across the whole organisation and this is what is needed to meet the new OH&S legislative standards.

What does a strong health and safety culture looks like?

1. Everybody knows that if a job can’t be done safely it isn’t done at all.

2. There is open and honest communication across the organisation.

3. Incidents are investigated without fear of blame or retribution.

4. The organisation learns from incidents and near misses and makes sure they don’t happen again.

5. There is mutual respect between workers and managers.

6. There is emphasis on the use and continuous improvement of systems.

7. OH&S is adequately resourced with sufficient people, equipment and time.

8. People who break the rules or condone rule breaking by others are held accountable.

The benefits of a strong safety culture are many. They include better relationships between management and staff, more engaged and productive workers, fewer accidents/injuries and lost time, generally safer behaviours among workers and improved well-being and job satisfaction for all staff. A positive and robust OH&S culture that begins at the Board table and spreads throughout the organisation is good for business.

The government’s target is to reduce workplace fatality and serious injury rates by 25% by 2020. Worksafe New Zealand is the new regulator for workplace health and safety established to achieve this target. Already this year prosecutions have been significant. Some cases include: Construction company fined $30,000 and ordered to pay $10,000 reparation after a sub-contractor’s employee fell from a 5m height Fertiliser company fined $33,000 with $5000 reparation after an employee lost a finger when his hand was pulled into a packing plant machine.

Roofing company’s lack of appropriate scaffolding puts workers at real and unacceptable risk – no accident occurred - fined $15,000 Freight Company fined $52,000 over rock crusher accident – $15,000 reparation Forestry company fined $80,000 after worker hit by log – $40,000 reparation Maintenance Service Company fined $31,400 + $50,000 reparation after a worker’s right leg had to be amputated below the knee.

These examples highlight the far higher level of inspection and prosecution.

How much risk is your business exposed to with your current Health and Safety Culture?

Some questions to ask: 1. Are all employees committed to their own safe practices, and will they report unsafe acts?

2. Is there clear engagement and participation in safety?

3. Do you have a strong and honest reporting culture?

4. What behaviours are really valued – quick unsafe practice or safe practice that takes longer?

5. What do your staff perceive are the priorities in the business, safety first or profit first?

Putting staff through OH&S Training, or merely having good OH&S systems will not be enough. According to Gordon MacDonald, CEO WorkSafe NZ, "Health and safety has to be done with employees not done to them."

What are the important steps from here?

Right now, all Directors and team members need to understand what is expected and what impact the Health and Safety at Work Act, and WorkSafe NZ will have on them and the business. Next steps could include the following: 1. Review and assess the organisation’s current culture against your commitment to OH&S. 2. Establish clear and transparent business-wide OH&S KPIs. 3. Focus on motivated leaders who reinforce a strong OH&S culture that delivers against KPIs. 4. Build mutual and individual accountability across the business.

5. Fully integrate OH&S management systems into the business.

6. Develop a robust risk and hazard management process.

7. Ensure safety improvements are considered and actioned on a regular basis.

8. Ensure all incidents are investigated rigorously and required actions taken 9. Ensure the right people with authority and motivation to manage OH&S are in place with the required resource to deliver.

Rather than thinking “can I afford to make these changes?”, the question really is, “can I afford not to?”. Strengthening the health and safety culture through strong leadership in your business is vital.

NUMBERS Summer 2014 • 17

GREATER

CLARITY FOR

INVESTORS

Article by Tracey Cross DLA PHILLIPS FOX tracey.cross@dlapf.com

Financial services reform has been a long road– are we there yet?

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HE GOOD NEWS IS, YES we are – with 1 December 2014 marking the day that the Financial Markets Conduct Act 2013 came fully into force, largely completing the regulatory review which has been undertaken over the past 6 years.

With the Act in effect, heralding the biggest reform of New Zealand’s financial markets in 30 years, we are all witnessing once in a lifetime regulatory change. Now we will wait to see if this change achieves its objective of restoring confidence in our financial markets, creating robust capital markets and enhancing investor confidence, all essential elements in driving New Zealand’s business growth, exports and jobs.

But what does all this change mean?

The Act governs how financial products are created, promoted and sold, and the ongoing responsibilities of those who offer, deal and trade in them. The core features of the reform are really quite straightforward and include: clear, concise and effective information for investors, to enable them to make sound investment choices; licensed financial market service providers who, through the process of obtaining a licence from the Financial Markets Authority, must demonstrate they meet a range of capability standards; accountability of managed investment scheme and debt issuers to their Supervisors for core obligations under the Act; and a fair dealing regime which seeks to ensure financial service providers do not mislead or deceive investors.

From an investor’s perspective, the existing form of disclosure documents, being the investment statement and prospectus, disappear and are replaced by a single product disclosure statement, or PDS as it will be known. This will be a much more concise document – required to be worded in a clear and effective manner with its length and content heavily regulated. In addition, issuers of financial products will be required to disclose other material information and documents related to the offer on a publicly searchable register run by the Companies Office. This register, called “Disclose” is now up and running and can be viewed at www.business.govt.nz/companies/disclose.

The Act introduces a new concept – the managed investment scheme, which will encompass existing managed funds such as unit trusts, superannuation and KiwiSaver schemes, and collective investment entities such as property syndicates. Most registered managed investment schemes will have to have a licensed manager and an independent licensed supervisor, with scheme property held by the independent supervisor or another independent custodian. The Act establishes statutory duties for both managers and supervisors. This includes a duty to act honestly and with reasonable diligence, to act in the best interests of investors and to comply with professional standards of care.

The Act recognises the different types of schemes that may be offered to investors and provides specific and relevant rules, and some additional requirements, for these schemes. While KiwiSaver scheme requirements largely carry over, going forward superannuation schemes will need to be structured for the sole purpose of retirement. This will require that superannuation schemes have clear rules that ‘lock-in’ members’ savings until retirement, allowing withdrawals only in limited circumstances. This is a significant change for many existing superannuation schemes which contain very flexible withdrawal rules under the current “principal purpose for retirement” regime, and will bring them more in line with KiwiSaver schemes. In addition, self-managed superannuation schemes and certain discretionary investment management services are regulated under the Act. Governing documents such as trust deeds will need to be reviewed and amended to bring them into line with the new accountability requirements in the Act, which will be common to all managed investment schemes and issues of debt securities. The hope being that the risks to investors will be lessened through improved accountability of issuers and supervisors. All managed investment schemes will require a statement of investment policies and objectives, which will be publicly available, and which will be subject to on-going reporting to the Supervisor and Regulator.

The Act has consolidated the extensive range of exemptions that existed under the Securities Act 1978 into one schedule, clarifying the terminology around commonly used exemptions for offers to wholesale investors. New exemptions have been created to provide easier access to capital through the use of crowd funding and peer-to-peer lending platforms which are licensed by the Financial Markets Authority but are exempt from the requirement to provide the level of disclosure commonly seen when companies wish to seek funding from the public. Examples are PledgeMe and Snowball Effect, through which start-up ventures can issue shares to the public, and Harmoney which matches borrowers and lenders. While a welcome new addition to New Zealand’s capital markets, it remains to be seen whether investors reap the rewards of the inevitably higher risk they undertake in investing through this mechanism.

Staples Rodway Asset Management in conjunction with DLA Phillips Fox continues to monitor developments within the financial markets reform legislation to ensure client adherence to the revised regime.

If you are impacted by, or have any questions as to how the new Financial Markets Conduct regime may affect you, please contact Tracey Cross at DLA Phillips Fox on 09 916 3773.

NUMBERS Summer 2014 • 19

UNDER THE SPOTLIGHT

REDUCING COMPLEXITY IN FINANCIAL REPORTING

Article by Jackie Russell-Green NATIONAL TECHNICAL MANAGER jackie.russell-green@staplesrodway.com

The level of complexity in financial statements is a source of frustration for both preparers and users. Until recently, however, preparers have felt hamstrung by the detailed disclosure requirements of New Zealand equivalents to International Financial Reporting Standards and powerless to make changes. Recent action by the Financial Markets Authority has reminded preparers of the need for financial statements to tell the story of their business. Staples Rodway’s National Technical Manager, Jackie Russell-Green, examines what this means for businesses.

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HE ADOPTION OF NEW ZEALAND equivalents to International Financial Reporting Standards (“NZ IFRS”) led to a significant increase in the size and complexity of annual financial statements. Preparers of financial statements and market commentators alike have criticised this increased detail, arguing that it makes annual financial statements all but impossible for the average investor to understand and risks important information being lost among the volume of detailed information provided.

New Zealand’s market regulator, the Financial Markets Authority (“the FMA”), has recently issued a report (“Quality Financial Reporting: How to Improve Financial Statements”) calling for financial reporting to be made more understandable. The FMA’s report follows on from a forum on quality financial reporting that it held in September, which focussed on disclosure.

The FMA’s encouragement of clearer financial reporting gives New Zealand companies an opportunity to examine how to make their financial statements more understandable and relevant to investors.

When considering how to improve financial statements, the key question that needs to be addressed is who the financial statements are being prepared for and what information they need.

WHY ARE GENERAL PURPOSE FINANCIAL STATEMENTS PREPARED? General purpose financial statements are prepared for users who are unable to require the entity to prepare financial information that meets their specific needs.

Such users include existing and potential investors, lenders and other creditors. These users require information that will help them make decisions about providing resources to the business (such as buying, selling or holding equity and debt instruments and providing or settling loans and other forms of credit).

For investors, these decisions hinge on the returns, such as dividends and market price increases, that they expect from an investment in the entity. Similarly, decisions by existing and potential lenders and creditors depend on the principal and interest payments or other returns that they expect. To be able to make these decisions, users need information about the resources of the entity, claims against the entity and how efficiently and effectively the entity’s management and governing board have discharged their responsibilities to use the entity’s resources.

WHAT DOES THIS INFORMATION LOOK LIKE? To make the decisions that they need to make, users need information in financial statements that helps them to understand: The entity’s financial position, performance and cash flows and the key components of each of those The key judgements that management has made in preparing the financial statements (as users need to be able to assess whether they consider those judgments to be appropriate) Significant business developments and other matters of importance to the business The specific risks to which the business is exposed and the way in which management addresses those risks Items not recognised in the financial statements that might impact on the entity in the future.

Although companies already consider these information needs when preparing their financial statements, that consideration is tempered by a focus on meeting the disclosure requirements of all applicable financial reporting standards and thereby avoiding adverse attention from auditors and regulators. The FMA argues (and I thoroughly agree) that this has resulted in many financial statements containing so much immaterial information that the important information is not understood by users, either because they won’t read the financial statements due to the volume of information they contain, or because they can’t spot the important information in amongst all the detail.

WHAT NEEDS TO BE DONE?

providing information that is material to those users and removing immaterial information. The FMA’s report suggests that preparers of financial statements make the bold move to prepare just such financial statements.

What the FMA is encouraging amounts to a significant shift in focus for preparers (and indeed auditors), from meeting the detailed disclosure requirements of accounting standards, to meeting the needs of users of the financial statements.This means constantly considering materiality, rather than the specific disclosure requirements of applicable accounting standards.

Perhaps in recognition of the re-focus that this is likely to entail, the FMA report notes that it understands that many preparers include detailed immaterial information in their financial statements due to a concern that the FMA may intervene if the requirements of accounting standards are not fully complied with and states that the FMA approach to financial statement monitoring is risk based and that consequently immaterial items are unlikely to be questioned. In many ways this removes a significant source of concern for those companies that would like to prepare financial statements that provide only material information.

WHAT’S THE BEST WAY TO START THE PROCESS? Deciding to zero in on the needs of users when preparing financial statements is a bold change that will require: Board and executive commitment (as it is ultimately the board that is responsible for preparing the financial statements).

Reasonable lead times, as this is not a process that can be undertaken overnight. Fortunately, we’re some time away from reporting season, which provides time for those entities committed to making change to do so.

An understanding of the needs of users.

A willingness to really explain what the business does and how it does it, which will require disclosures that are specific to the company.

An agreed process for determining what is included, what is given prominence and what is not included in the financial statements.

A willingness to start with a clean sheet, as the look and feel of the financial statements may need to change considerably to more squarely focus on the needs of users. Some entities that have already undertaken the process have made some radical changes, such as incorporating accounting policies into notes and re-ordering notes so that early notes focus on the most significant items, rather than the notes following the order of the line items in the financial statements.

Engaging with your auditor early in the process.

Companies will also need to consider how they communicate the changes in the structure and volume of their financial statements to users of those financial statements.

CONCLUDING THOUGHTS Although I would like to have the final word, I think on this occasion it rightly belongs to the FMA, which concludes its report with the following words: “If all preparers and auditors focus on being bold and committed to change, and step back from the rules-based approach to disclosure requirements, we will see an improvement in the quality and value of financial statements for those that use them the most. This would be a great success for New Zealand investors and other consumers of financial information, and contribute to the promotion of fair, efficient and transparent financial markets.”

That seems to me to be a goal worth pursuing.

The Financial Markets Authority is encouraging New Zealand issuers to re-focus their financial reporting from rules-based compliance with all disclosure requirements in accounting standards to providing information that is material to the users of financial statements.

This approach would have considerable benefits for investors, lenders and companies themselves.

Financial statements will only be more useful to their users when they focus on

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NUMBERS Summer 2014 • 21

AUCKLAND Level 9, 45 Queen St PO Box 3899 Auckland 1140, New Zealand Phone 64 9 309 0463 Fax 64 9 309 4544 enquiries@staplesrodway.com

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22 • NUMBERS Summer 2014

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