Taxation changes introduced in the May budget are distorting corporate financial accounts by more than $1 billion this financial year, two leading professional directors say.Tony Frankham and Rob Challinor are highlighting the accounting implications on c
Taxation changes introduced in the May budget are distorting corporate financial accounts by more than $1 billion this financial year, two leading professional directors say.
Tony Frankham and Rob Challinor are highlighting the accounting implications on corporate balance sheets following the elimination of tax deductions for depreciation on buildings with an expected life of 50 years or more.
They said the combined effect on New Zealand companies will exceed $1 billion in terms of reported bottom-line earnings, with estimates of the reported earnings by companies that have advised the market to date exceeding $900 million.
This figure does not include state-owned enterprises or private companies.
“This is a serious understatement of the performance of corporate New Zealand, which is likely to be misunderstood and misreported and therefore mislead investors and others. We think it affects the credibility of the accounting profession,” the pair said.
Action to address the problem through changes to the IFRS reporting standard regimes have been initiated by a group of 19 senior company directors but changes would require consultation and would not be immediate.
The difficulties arise through the application of international financial reporting standards (IFRS) announced in this year’s budget.
The New Zealand equivalent of International Accounting Standard requires a deferred tax liability to be set up representing the difference between the carrying values of buildings for accounting purposes and the value for tax purposes – now being zero.
This makes an existing building in the books at $10 million require a deferred tax charge to current profit, at the new corporate tax rate of 28%, of $2.8 million and the equivalent liability to be recorded in the balance sheet.
Mr Frankham and Mr Challinor said the accounting rules were seriously distorting the earnings of many companies and the effect for investors was misleading.
The bizarre impact on certain companies was so material their financial statements will arguably not present a “true and fair view” as the market perceives that term.
The liabilities were pointless in the sense they measured something that had no practical application or purpose.
“They are non-cash, have no relevance to underlying or future performance and will not affect the ability to pay dividends.”
Many professional directors did not regard this accounting entry as a real liability in the economic sense, the directors said.
“The danger is many people will not understand the deferred tax liabilities are merely accounting entries to comply with the rigid application of the international accounting standards that New Zealand companies are obliged to use.
“The deferred tax liabilities required say nothing about the company that is useful to shareholders, potential investors, directors or managers.”
