05 Cloud forecast
In the footsteps of Xero
issue eight
12 Keeping it at arm’s length
What to watch out for when it comes to Transfer Pricing
14 What does it mean for you? The latest on the Financial Reporting Act
BEYOND THE NUMBERS | KEEPING YOUR BUSINESS FUTURE FIT
VILLA MARIA’S QUEST FOR QUALITY The secrets behind their success Harbour 6 North Hockey scores
How financial expertise made a big difference for this not-for-profit
have an 8 Why audit when you don’t have to?
A kiwi company shares their positive story
your 11 Do homework
Due diligence when you are buying, selling and valuing
Sell? Buy?
Time to weigh it all up? Sometimes navigating your way through business decisions is tough. For guidance contact Hayes Knight.
Business valuations • Due diligence • Sales & Acquisitions Visit hayesknight.co.nz
ISSUE EIGHT
contents
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BEYOND THE NUMBERS | KEEPING YOUR BUSINESS FUTURE FIT
FEATURES
BEYOND THE DAILY GRIND New Zealand hit the international business news headlines in early 2014 when it was described as “the rock star economy” of 2014. First reported by a US media network, this description (by an Australian economist for HSBC Bank) created a reasonable amount of interest both internationally and in New Zealand. It can be hard for many in New Zealand still experiencing difficult trading conditions to see our economy as a rock star. Running our organisations successfully can seem hard. Yet the comment and the analysis that led to it was educational for many. When compared to many other countries around the world, we live in a good, safe country with an economy that is stable, broadly positive, and forecasting a respectable level of growth based on sound fundamentals. This should be a good operating environment for us all. Sometimes we all need an outsider’s view in order to get some perspective. This helps to lift our sights out of the daily grind and detail, to appreciate what is good about our organisations and our prospects, and allow us to look forward strategically and positively. With that thought in mind I welcome you to this edition of Beyond the Numbers where we feature Villa Maria; and how it has grown to be internationally recognised as New Zealand’s most awarded winery. Villa Maria is a family business built on innovation, good business disciplines and family values. We also look at Warmup; a company related to the much touted building sector and some of the steps they have taken to grow and improve their business. Previously we have published articles and updates about the significant financial reporting reform. The related legislation has finally been passed into law by Parliament. Hayes Knight look forward to assisting your organisations and translating what this means for you. We hope this edition of Beyond the Numbers gives you some interesting and useful perspectives.
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Winning in the wine game
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Latest trends in cloud computing
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North Harbour Hockey builds accounting defence
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Warming up to the benefits of audit
The secrets behind Villa Maria’s success
Cloud forecast. In the footsteps of Xero
How financial expertise made a big difference for this not-for-profit
Kiwi company, Warmup, shares their positive story
NEWS, VIEWS & TOOLS FOR SUCCESS
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The business of buying, selling and valuing businesses
12
IRD’s focus on transfer pricing
14
Financial Reporting Act 2013 update
15
In brief
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Hayes Knight Group update
Doing your due diligence homework
What does it mean for you?
What does it mean for you?
A collection of short just-for-fun and news pieces
The latest news from Hayes Knight including Spotlight On two team members
CRAIG FISHER
Chairman, Hayes Knight
The information and advice contained in Beyond the Numbers cannot cover every financial situation or requirement. If you have further questions, we encourage you to contact a Hayes Knight business adviser for advice tailored to your specific circumstances. Hayes Knight Group in New Zealand is an independent member of Morison International and the Hayes Knight Australasian Group. Beyond the Numbers is published for Hayes Knight by Tangible Media www.tangiblemedia.co.nz Editor: Andrea Benvie. Account manager: Nikki-Lee Mark. Designer: Edgar Vadauskas. Cover Photo: Sir George Fistonich.
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business strategy
Winning in the wine game On the way out to Auckland Airport, you can suddenly vanish from industrial Mangere just by dipping into Villa Maria estate, where net-covered grapevines stretch out in each direction, green grounds roll for summer music events and there’s a restaurant with a view.
CEO Sir George Fistonich is in the tasting room today, in his element pouring a Riesling into a glass, commenting on its combination of citrus, and toasty aromas. On that bottle is a very modest price tag, but with a gold medal sticker proving it beats wines four times the price. Last year alone Villa Maria bagged four champion trophies at the Air New Zealand Wine Awards. Sir George’s unwavering commitment to quality is what has built Villa Maria’s highly respected brand and reputation for good wine – whatever the price tag. That, and hiring quality people.
Early focus
Sir George Fistonich was born to hardworking, winemaking Croatian parents in Mangere and eschewed a building career to start a vineyard in 1961, when the Kiwi wine industry was still a baby. New Zealand had a beer-drinking culture, and if wine was drunk it was sherry or port. In the 70s, the wine industry started to develop – Muller Thurgau, chardonnay, cabernets and merlots were starting to become popular. Then in the late 1970s the Sauvignon Blanc success story began. A new era was emerging. But Sir George wanted his growing business to have a single direction.
In 1979 he had his first strategic meeting with Professor Steve Bridges, a marketing and sales guru with outstanding success in both academic and practical marketing (he was inducted into Marketing Magazine’s Marketing Hall of Fame in 2003). This meeting was when Villa Maria’s mantra was born. “I’ve always been passionate about quality, so we made an objective that we were going to make award-winning wines and focus on quality,” says Sir George. This led to acquiring more vineyards, and using contract growers but with a different method of pricing (Villa Maria started to pay for quality rather than quantity, and this was a major change in the way winemakers did business).
Having the best people
The new objective also required the hiring of viticulturists and advisors, with degrees in agriculture, horticulture and subsequently viticulture, to achieve the desired standards. Sir George says Villa Maria was one of the first New Zealand wineries to appoint professional viticulturists. “A lot of the strategy is about employing the right people – there is huge power in this. Steve Bridges was influential
business strategy
in the early days, setting up structure, getting the message through, marketing etc, and then George employed viticulturists to make sure they were getting premium grapes from the vineyard. There was not a very large skill base specialising in viticulture in those days, but the importance of great wine starting in the vineyard is widely recognised today.“ Villa Maria was also the first New Zealand winery to hire female sales representatives. To keep ahead of the pack, Villa Maria is always looking for that next big thing. For example, a dry white variety called arneis (from southern Italy and well-suited to New Zealand) is now being made into wine unique to Villa Maria. “It’s a nice aromatic wine somewhere between pinot gris and gewürztraminer – one of our nurseries imported it and took it through the quarantine process and we planted a reasonable amount of it. By nature we tend to look at new varieties and think about the future; people might tire of sauvignon blanc. You’ve always got to be looking at other varieties, guessing what’s around the corner.”
Covering all bases
It’s easy to see Villa Maria has always had innovation as a core value, but with change comes reaction, and Fistonich has been careful to anticipate every angle. For example, when Villa Maria became the first company in the whole world to go cork free worldwide (to avoid the 8 per cent of wine that was tainted by cork), there was a backlash. “A number of wine companies together explored and examined the best way to seal wine, and came up with screw caps, Villa Maria was the first to take it to another stage. The public wouldn’t accept it – screw caps weren’t romantic enough – and sommeliers didn’t like it, but in the end I thought ‘No, our mantra is to make quality wine, and we can’t do it using corks’. So we carried on with the change.” Villa Maria made a statement to be a cork free zone and from there, we started the marketing assault in the UK, which was a very sophisticated wine market, home to the Institute of Masters of Wine. Those members have passed an extremely testing course where only around five per cent succeed in achieving the MW designation, they’re very talented and can recognise wines from all around the world by taste alone. “We approached the UK first because it had 150-200 Masters of Wine, many of whom understood the problems corks were creating. We printed T-shirts, and did a detailed video presentation for one of the largest distribution companies. We put a lot of work in to marketing and press interviews and we took the cork-free story to the international market.” Nevertheless, the caps created 12 months of painful customer backlash, even product deletions in the United States. But Villa Maria took it in its stride – every letter of complaint that came in would be answered with a warm letter containing a list of reasons why Villa Maria wasn’t using corks, with letter-answering the first priority every morning. “Every one of the letters was answered with ‘thank you for your reply, obviously you have a passion for wine so we have something in common,’ then ‘10 reasons why we are doing this, and if you want more explanation we have a 20 page detailed form we’re happy to give to you’,” says George.
“Funnily enough, we had a 90 per cent conversion, thanking us for our time, and a lot of them said ‘we’re now going to become missionaries for you.’ “ It was the quality of service to the customer that made the conversions, says George. “A lot of people when they write a letter in reply, they say ‘thank you for your bloody letter but you really don’t know what you’re talking about, you don’t understand.’”
In the family
Villa Maria is a totally New Zealand-owned family business and proud of it, Sir George says. His daughter Karen is chairman. “I think the fact that we’re family owned is why we can make quality decisions. For example, people from corporations can be driven by what they’ve got to achieve by the balance date, in terms of profitability. But often the wine industry is quite volatile – you can have a good vintage when the sun shines brightly making the wines high quality, but when it rains the wine goes down in quality. It’s not bad wine, but it’s the difference between a $15 bottle and a $30 or $50 bottle,” he says. In those less-than-ideal years, Villa Maria sticks to its goal of excellence and absorbs the costs – it doesn’t make reserves, single vineyards or cellar selections; it will instead downgrade everything into commercial wine. If even then it is not up to Villa Maria standards, it will be sold off in bulk. “In a year like that we may have low profitability, but we’ll make it up the following year or the year after where in a good year we can sometimes double our Reserve and Single Vineyard wine production, so we take a long-term view,” he says. Villa Maria also has interests in a public company, Terra Vitae, which grows grapes – and the long-term thinking spilled over into this company too, with the hiring of an experienced large scale farmer as chairman. They bought a block of land to plant vines some years ago, then the wine glut hit – but they still planted, to some shareholder consternation, following the farmer’s long-term view. The glut passed.
“To keep ahead of the pack, Villa Maria is always looking for that next big thing”
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business strategy
Sir George believes taking a long-term view is good business
“I’ve always been sense that some corporations would be better off using. “But passionate about it can be difficult with shareholders,” he says. quality, so we Build it and they will come made an objective Sir George is a big advocate of the importance of the industry to New Zealand tourism – indeed, tourism that we were wine worldwide – because of the experience wineries provide for going to make the older tourists who tend to have money and enjoy wine. developed his offering to cater to this market. “Villa award-winning He’s Maria fought hard and managed to open New Zealand’s wines and focus first winery restaurant, there’s now about 85 restaurant-cafes on quality” on vineyards in New Zealand. That’s incredibly important for our tourism.”
Villa Maria is part of the Family of Twelve wineries, a group of New Zealand-owned wineries who have been together 8-9 years now. The wineries are Kumeu River, Villa Maria, The Millton Vineyard, Craggy Range, Ata Rangi, Palliser Estate, Neudorf Vineyards, Nautilus Estate, Lawson’s Dry Hills, Fromm Winery, Pegasus Bay, and Felton Road. They share ideas and marketing – such as sponsoring many wine and food journalists to come to New Zealand and visit all 12 wineries, from Northland to Otago on a winery trail hitting all regions. Wine bottles sold overseas are also an advertisement for New Zealand, says Sir George. “We export to 60 countries around the world. We’re lucky in that a wine has a label and has the ability to make a statement, whereas no one knows where our great beef and lamb comes from when it’s served by looking at it. A wine label can have a powerful impact on tourism because it advertises where it’s from”.
Behind the wine
Of course, a passion for wine may drive the business, but the back office structures and systems must keep pace. As well as having a good finance team, Villa Maria has used Hayes Knight for over a decade now, firstly in providing independent financial review services and then in auditing the annual financial statements. In this way the firm has provided independent assurance and an objective view to
Villa Maria’s board. “Hayes Knight has assisted us through business growth with good consistency in their audit team – which might not happen with larger companies with higher churn. They do go beyond the numbers. I appreciate them because they make a point of getting to know the company, and are very aware of the company’s objectives,” says Sir George. And that objective is to achieve quality – in all aspects of the business. So far, so good.
innovation
Latest trends in cloud computing Xero has been making headlines since it’s debut into the world of cloud computing. However, we are now seeing continuing emergence of cloud computing and experiencing the effect this is having on New Zealand’s organisations. While Xero continues to dominate the market and the media, we are also seeing the rise of “add on” applications and the increased use of integration providers.
What is cloud computing?
In its simplest form cloud computing is storing and accessing data over the internet rather than via your computers hard drive. Many of our clients now experience and use cloud computing as a standard business tool. More clients are mobile, technically savvy and they want up to date data that is easily accessible and available to them anywhere, anytime. As a fast growing industry, Forbes.com predicts end user spending on cloud services will reach $180 billion globally by 2015.
Add on applications
The number of Xero add on applications are also growing as new software products are being developed at an everincreasing rate. These applications integrate seamlessly with Xero and can be broadly categorised as follows: • • • • • •
Point of Sale Inventory/Stock Management Customer Relationship Management (CRM) Job Costing Payroll Reporting
The use of add ons can provide a complete business solution while offering online, real time data on virtually all key areas of a business. Most clients now operate one, if not several add on applications as part of their overall cloud
computing platform. Increasingly clients are using the likes of reporting tools e.g. Spotlight Reporting to enable business decisions to be made faster and with better information.
Cloud integration solutions
As with any new technology, some clients have experienced frustrations when integrating their systems with cloud applications. This can often occur when you are dealing with multiple cloud application providers and contacts. As a result, a range of businesses have sprung up to offer the service of cloud integration solutions. The benefit of using these providers is the customisation they can offer, the ability to adapt systems to suit your business, while also offering scalability. The better integration solution providers take an approach that is more customer and results focused, rather than pushing a particular online product that may not provide the best solution. For both new and existing systems, successful integration for many of our clients is where the greatest value and biggest business improvements can be experienced.
Trends in cloud computing
We are seeing larger clients take to cloud computing. While initially Xero and other similar applications were seen as more applicable for small organisations, now larger operators, across multiple industries, are adopting cloud based products. The monthly pricing models offer a real solution to what has often historically been an expensive addition to existing, stand-alone systems. This is especially evident for non-accounting applications such as CRM systems. At Hayes Knight we work with many add on partners and integration solution providers. If you would like a no obligation consultation please contact your local Hayes Knight Advisor.
“The use of add ons can provide a complete business solution while offering online, real time data on virtually all key areas of a business”
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governance
governance
North Harbour Hockey builds accounting defence When the North Harbour Hockey Association (NHHA) needed assistance to upgrade their accounting system, they knew exactly who to go to. Having an informal association with the Hayes Knight team, CEO Riki Burgess knew Hayes Knight as a professional accounting firm with a community focus.
Directors in Albany, provided support. Scott attended the monthly board meetings as an advisor on a regular basis. He also provided financial modelling assistance on the structure of the existing loan to the Charitable Trust.
“As a not for profit organisation, every penny counts” says Riki. “Our existing accounting system wasn’t providing us with quality information that was easy to understand. We found it was taking us more and more time to get the information we were after. This was costing us man hours that could have been used elsewhere”.
As the Association needs changed, they approached Hayes Knight for further assistance. Amanda Billington, one of the Associates who works closely with Scott Travis volunteered to assist. Amanda has now been elected as a board member of the Association. As a keen sportsperson, Amanda has had previous experience with sporting clubs (she has been on the Mairangi Bay Tennis Club committee).
Hayes Knight North undertook a review of their existing system and an analysis of what information was required by the various users. They helped transition the Association onto Xero and provided the training required to the administration team. The chart of accounts was updated and the cost centre reporting revamped to provide a format that was easy to read and understand.
“Having never played hockey before and not really knowing the rules, it was a bit daunting at first” admits Amanda. “However, the various members of the board complement each other as we have a wide range of skills. Each member has their area of expertise and we can all contribute to the overall success of the Association. I was able to bring my knowledge of other sporting codes and apply it here.”
NHHA is the second largest hockey association in New Zealand with around 4300 players active in winter and 2000 players in the summer season. The Association has a diverse community to cater for with it’s catchment area extending from Devonport to Warkworth and Massey through to Helensville, accommodating midgets through to masters. Over time, the North Harbour Hockey Stadium has grown into New Zealand’s largest hockey centre. And recent plans have been announced for a national stadium to be built at North Harbour’s Rosedale Park. Board and management have had to develop with the growth to maintain the Association’s ability to deliver on their strategic plan.
Amanda has previously worked with a number of clients in an advisory role. This previous experience has proven valuable in her new role. Amanda is also a member of the Institute of Directors.
“We identified that we were lacking financial expertise on our board and turned to Hayes Knight to provide assistance” says Riki Burgess. Initially Scott Travis, one of the Business Service
Riki comments, “As a community not-for profit organisation, Hayes Knight has offered us invaluable support. Importantly their expertise, ability to understand our business and to provide quality advice allows us to continue to grow as an Association both in numbers as well as becoming more financially secure”. If you are a not-for-profit organisation that would like your accounting systems reviewed and possibly upgraded, please contact your Hayes Knight Advisor.
“…their expertise, ability to understand our business and to provide quality advice allows us to continue to grow as an Association“
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governance & innovation
Warming up to the benefits of audit The world of construction is heating up as market buoyancy increases‌ so how does a business in this industry ensure it is in the best shape? It gets independent objective and expert advice to compliment its own skills.
The past few years have seen many New Zealand companies finding it comparatively tough as their markets have faced negative pressures. Yet some companies have coped well. Not surprisingly these same companies are now well placed to capitalise on the forecast upswing in the economy. So what are the differentiators? What is the secret that some have found while others struggle? The answer is, there is no single silver bullet. The key to success is often just a persistent drive for improvement. Hayes Knight Audit client, Warmup New Zealand, is a good example. Managing Director, Paul Fielding established the New Zealand operation in 1994 after emigrating from South Africa. Warmup Heating Systems was established in South Africa in 1983 as a small manufacturer of undercarpet heaters and is now a renowned international group, specialising in electric radiant undertile and undercarpet heating.
Growth through diversification
As the Australasian Warmup license holder in New Zealand, Paul and his team have built the business by expanding its array of solutions to include a comprehensive range of floor heating products like undertile, undercarpet, insulation boards, in-concrete heating for timber and concrete floors with custom thermostats to ensure accurate running costs.
governance & innovation
Hayes Knight Audit Director, Jason Stinchcombe, Warmup Managing Director, Paul Fielding (right)
This growth in range and sophistication of products is always needed to keep up with the increasing consumer demand for energy efficiency products and luxury in our homes. As the value of houses increases, people are willing to invest more in affordable luxury and thus invest in quality products. Paul explains that Warmup thrives on innovation “Whilst our international manufacturer has constantly invested in upgrading our products with cutting edge technology, we have also had to keep innovating locally to ensure that we keep abreast of the changing needs of our customer and meet the demands of the building & electrical codes of practice.” Also key to Warmup’s success has been taking advantage of their wide distribution network and penetration in the retail sector across New Zealand. “This has allowed us, in the last 5 years, to diversify into other residential and commercial related product segments. We now offer a range of indoor and outdoor heaters, stainless steel bathroom accessories, drains, heated towel rails, mirror demisters, insulation boards and tiled shower solutions and other related products across our three key brands; Warmup, Marmox, and Forme Bathroom Collection” says Paul. Objectivity is key to challenging systems and processes. Paul recognises that in order to grow, systems need to change
and keep up and he comments “Key to our success has been a relentless desire to ensure we invest in our systems and follow the best practice. Every aspect of our business is important - but finances are critical.” For this reason, in 2011 Warmup commenced with an independent audit of their annual financial statements. “I feel I have a good handle on the financial drivers of the business and we also have a very
3 key facts about Warmup 1. Warmup predominantly operates in the residential construction segment, installing underfloor heating and tiled shower solutions. 2. Warmup clients include national retailers, medium to large housing construction companies, group builders, home owners and tradesmen, who are being served by the head office and its local distributors/national retailers throughout New Zealand. 3. A market leader in its segment, Warmup has heated in excess of 75,000 homes nation-wide, resulting in their well being and comfort all year round.
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governance & innovation
competent in-house Finance Controller. We are not required by law to have an audit. However I was interested in getting an objective assessment of our financial statements and the underlying systems and processes that are used to create them.” says Paul. Paul has no current intentions to sell the business, but he strongly believes having an independent assurance over their financial history would assist in any future sale. Paul comments on how it has provided a degree of comfort to their bankers, and adds “More importantly the audit process has identified some systems and control areas where further improvement opportunities have been explored and implemented.” Hayes Knight Audit Director Jason Stinchcombe agrees “It is great to work with progressive thinking business people like Paul and his team. While many people see an audit as a grudge purchase, Warmup has recognised the value it can add both to internal processes and external credibility.” To discuss the benefits of having a financial audit on your business, even if it is not a compulsory legal requirement, talk to your Hayes Knight Advisor.
“Key to our success has been a relentless desire to ensure we invest in our systems and follow the best practice…”
Client Q&A – 10 minutes with Paul We spent some time asking Paul Fielding, owner of Warmup, a few questions to reveal some of his personal insight into the building industry, it’s future and the driving forces behind Warmup’s success • Why did you get involved in this industry and what drives you in it? With a successful entrepreneurial background, I have always believed in the concept of affordable luxury for the homeowners. It was, is and will always remain a fact that “technology is life changing”. So why not use it to the best advantage in my new home “New Zealand”? Hence in 1994 a bit of market research gave me an insight into the non-existent concept of underfloor heating products in the New Zealand market. New Zealanders then used conventional modes of heating and “Warmup” undercarpet was the perfect launching pad for my new beginning in a new home. Coincidently “Warmup” was one of the first companies to launch this concept in New Zealand. With a passion for technology, further opportunities were explored to diversify to other floor heating options, such as undertile heating. We have kept the momentum going thereon, adding more products to the profile and will continue to do so. • Any insights into your business philosophies – specifically on-going improvement? A mature market always beholds a sense of belonging and Warmup is one company which has and will continue to thrive on this philosophy. Our intention is to provide the homeowners such a feel where they can live with tranquillity. Warmup has moulded itself into a company that can be trusted in every aspect of its interaction with the end users of its products. Our constant market research, technological changes and innovation has enabled us
to be the first company in New Zealand to provide a lifetime warranty on its core product, along with a substantial warranty on other products. • How do you see the current building market and opportunities and challenges ahead? The building industry in the last 10 years has seen significant volatility. Residential construction was at its historical low due to the Global financial crisis between 2009 – 2012. These 3 years of crisis led to market consolidation and correction, eliminating the small operators and inferior product suppliers in underfloor heating. Warmup, with its focus on quality, strong brand and customer support, has been able to sustain and remain profitable in these difficult times. Going forward, with the rebuild of Christchurch gaining momentum and increased migration on a year-to-year basis, the building sector seems to be quite buoyant. The current and foreseen shortage of housing in Auckland, Wellington and Canterbury region will stimulate further growth. With Warmup enjoying extensive relationships with the big players in the construction industry, the company is extremely well placed to capitalise on the growth opportunity as under floor heating is now considered a basic necessity rather than a luxury in any home. Increasing house prices coupled with corresponding increase in disposable income of New Zealanders, the residence renovation sector has also experienced increased momentum. The underfloor heating, bathroom accessories & tiled shower solutions form an integral part of such renovations.
due diligence
The business of buying, selling and valuing businesses As the economy has improved over the last 6 to 12 months we’ve seen a noticeable increase in activity in the mergers and acquisitions space. With business confidence growing, companies are looking at acquisitions as a way to grow their revenues over and above organic growth. Cashed up investors are also looking for solid businesses in which to invest. As business advisors, we are often asked to complete key tasks in the merger and acquisition process. These tasks usually include undertaking due diligence for the purchaser and/or performing a valuation on the business. Due diligence is about doing your homework - opening the hood and having a thorough look at all aspects of a business. By assessing key risks the due diligence process looks to confirm if your understanding of a target business is correct. It should be non-negotiable and the first item on your purchase checklist. People undertake due diligence regularly when making purchase decisions, whether it’s where to go on holiday, buying a new vehicle or a new house. It is even more important to do your homework thoroughly when purchasing a new business, especially given the significant funds that are often involved. When considering buying or selling a business, one of the first questions we are asked is ‘how much is it worth’? Business valuations generally revolve around two factors – how much money is an owner likely to make from the business in the future and how much risk is associated with the business. The higher the perceived risk, the higher the return that an investor expects to receive. When valuing a business, our role is to determine both the likely future earnings and the key risk areas that the business has.
So what trends are we seeing?
Last year the demand for good quality small to medium sized businesses increased. Generally buyers are astute and are getting the necessary advice. Because of this, we are encouraging clients considering selling to prepare well before putting the business on the market. Have up to date, accurate reports and figures readily available. Prospective buyers can lose confidence easily, often when a number of small, almost insignificant items start to add up and cause doubts. In a recent case we saw a deal fall over simply because of a delay in being able to provide accurate, current trading data.
We have also seen an increase in companies looking for bolt-on opportunities. This involves acquiring a similar business, then attaching the new business onto the existing operations, while often stripping out a number of overheads such as rent and administration costs. Some industries are in also in consolidation mode. Demographics are driving activity as owners retire or wish to exit, resulting in fewer, larger players in the industry Businesses and investors are also looking at acquiring companies along the value chain. A supplier or associated business in a similar or related industry is often attractive as skills can sometimes be transferred and profits can be made at numerous stages along the process. With the increased demand for businesses, buyers are willing to accept lower rates of return from a business purchase than they were two years ago. This is in part a reflection of the greater business confidence that New Zealand is experiencing and an increase in the number of people wanting to be their own boss through purchasing a small business.
Final thoughts
Remember, a due diligence doesn’t only need to happen when you are looking to buy. Many businesses have benefitted from going through an internal due diligence process, asking the hard questions and thoroughly examining all areas of their business. Making improvements and updating systems now not only results in a better sale price at a later date, it also often means more profit for the owner in the meantime. Likewise, a business valuation involves us examining many areas of risk that a particular business has. By identifying these risks, we can then work with business owners to reduce them. Hayes Knight has recently completed a large number of due diligence and valuation assignments from small businesses through to multi-million dollar companies with nationwide operations. We have significant experience in these areas and both our approach and reports are well respected by banks and clients alike. If you are considering purchasing or selling a business and want to find out how Hayes Knight can assist you with the due diligence and/or valuation process, contact your Hayes Knight Advisor.
“Due diligence is about doing your homework - opening the hood and having a thorough look at all aspects of a business”
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tax matters
IRD’s focus on transfer pricing Are you doing business overseas or looking to expand offshore? A transfer pricing exposure arises when a business has crossborder, inter-company transactions. The IRD’s view is that these transactions need to be charged on an arm’s length basis. That is, the charge is what two totally independent parties would agree on when they transact with each other.
Governments around the world have introduced transfer pricing rules to stop associated businesses taking advantage of different tax rules, tax rates, or to avoid paying tax. These rules prevent profits being shifted across jurisdictions through the pricing of their intra-group transactions.
The IRD’s concern is if these prices are manipulated and transactions are not on an arm’s length basis, profits may be shifted out of New Zealand.
Statutory rules
New Zealand’s transfer pricing rules set out five transfer pricing methods (comparable uncontrolled price (CUP), resale price, cost plus, profit split and comparable profits methods).
tax matters The arm’s-length amount of consideration must be determined by applying whichever method or combination of methods will produce the most reliable measure of the amount completely independent parties would have agreed upon after real and adequate bargaining.
At the very least, the following questions should be considered each year:
If the IRD reviews a taxpayer’s transfer prices and determines them to be inadequate, the IRD will only substitute an arm’slength price if it will increase New Zealand’s tax base.
1. Has any restructuring taken place?
Burden of proof
3. Has there been a change in the group’s business strategy, impacting on transfer prices?
Where a taxpayer has set their transfer prices in line with the transfer pricing rules, the burden of proof falls on the IRD. Hence, it is extremely important that taxpayers have up to date transfer pricing documentation in place to support the transfer prices they have used. In situations where the IRD looks to substitute an arm’s-length price for the actual price, the IRD must prove that either the IRD’s price is a more reliable measure, or the taxpayer has not co-operated with the IRD.
Documentation
The IRD has set out the process taxpayer’s need to follow with respect to documenting and demonstrating arm’s-length, cross-border associated party transactions. The extent of the process and the level of detail required in the documentation will depend on the size of the taxpayer’s business and the significance of the transfer pricing transactions. Before you incur costs for the preparation of transfer pricing documentation, the level of potential transfer pricing risk needs to be considered. The IRD does not expect taxpayers to prepare levels of documentation that are disproportionate to the amount of tax at risk. It may be satisfactory to simply complete a transfer pricing questionnaire, evaluate the results and make notes to explain why the pricing is considered appropriate. This represents a small amount of time to identify any potential risk and provide an adequate explanation. It is far better than having no documentation at all. If you have historic transfer pricing documentation in place, don’t rely solely on that. Businesses need to undertake regular re-evaluation of both the cross-border transactions and transfer prices to determine that the prices are, and remain, at arm’s-length.
What if adequate documentation is not maintained?
If no transfer pricing documentation has been prepared and the business is reviewed or audited by the IRD, the IRD is free to claim that they can demonstrate a more reliable measure of the arm’s length amount. If that was to occur, and prices are restated resulting in a higher tax position for the taxpayer, the IRD is likely
2. Is the business now performing different functions or assuming new risks?
4. Have any long term supply contracts been concluded or amended recently? 5. Is the bottom-line profit result still commercially realistic? 6. Has there been a major change in the line of business that impacts significantly on prices or profitability? 7. Are the comparables used three years ago still truly comparables? In addition, it is not sufficient to rely on transfer pricing documentation that has been prepared by an overseas parent company on a worldwide basis. Either the New Zealand business prepares its own transfer pricing documentation or at the very least, the global transfer pricing documentation is reviewed from a New Zealand perspective and details are recorded as to why New Zealand’s transfer prices meet the arm’s-length principle
to take the view that the taxpayer has not exercised reasonable care (which is a 20% shortfall penalty) or, even worse, that the taxpayer has been grossly careless in determining its transfer prices, resulting in a 40% shortfall penalty.
Where to from here?
If your transfer pricing documentation is up to date the good news is you don’t need to do anything, or at least not until the end of the financial year when you will consider those seven questions listed above. If your transfer pricing documentation is historic or has been prepared by an overseas parent entity, then, consider the seven questions and either have the documentation updated or at least add an appendix to the documentation, recording any changes. If no transfer pricing documentation has been prepared it would be advisable to make an appointment with one of the Hayes Knight tax consulting specialists to discuss your transfer pricing risks and what documentation needs to be prepared, if any.
Hayes Knight joins NZICA National Tax Committee Phil Barlow, Tax Director at Hayes Knight North has recently been appointed to the NZICA National Tax Liaison Committee. The Committee comprises 5 Institute members from around NZ, along with various IRD heads of department who meet quarterly to discuss important tax matters.
“Before you incur costs for the preparation of transfer pricing documentation, the level of potential transfer pricing risk needs to be considered”
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financial reporting update
Financial Reporting Act 2013 update On 3 December 2013 the Financial Reporting Act and the Financial Reporting (Amendments to Other Enactments) Act became law. These two Acts, combined with new financial reporting frameworks rolled out by the External Reporting Board, create fundamental changes to the financial reporting rules in New Zealand. For most businesses, these changes take effect from 1 April 2014 – so what does this mean for your organisation? Fit for purpose reporting obligations
The key driver behind the changes to legislation is to make New Zealand’s financial reporting fit for purpose – recognising that one size does not fit all. To this end, the new requirements differ according to: • The nature of your organisation – whether you are for profit, or public benefit; and • The scale of your organisation, and whether you have any public accountability For profit entities that are still required to prepare general purpose financial statements will have a choice between full reporting under NZ International Financial Reporting Standards (NZ IFRS), or a new simplified format of the same known as NZ IFRS Reduced Disclosure Regime (NZ IFRS RDR). (Albeit existing standards will be retained for one further year – which will enable those that wish to continue as they currently report to do so). For public benefit entities (for example charities, schools and government bodies), four “tiers“ of financial reporting rules exist. A diagram to help you navigate through the new financial reporting frameworks can be found in the same article posted on the News section of our website.
For profit entities
Reduced obligations for small to medium sized companies Most companies will no longer be required to prepare general purpose financial statements i.e. follow legally mandated accounting standards. Going forward, New Zealand companies will only be required to prepare general purpose financial statements if they are: • a FMC reporting entity – a new term that includes most entities previous known as issuers – but also other catches other investment management entities. The rules around this aren’t straightforward – and
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certainly if you have raised capital from the public or operate in the financial services sector you should seek clarification of your status “large” - For locally owned companies: Where annual revenue exceeds $30m or your assets exceed $60m - For overseas companies or subsidiaries of overseas companies: Where annual revenue exceeds $10m or your assets exceed $20m public entities (e.g. SOE’s) companies that have 10 or more shareholders (though can opt out with a 95% majority vote); or companies that have fewer than 10 shareholders and have opted to (5% shareholders individually or collectively can require this by requesting in writing)
More than 90% of NZ companies will therefore not be required by law to prepare general purpose financial statements at all. However, this doesn’t mean that financial statements don’t have to be prepared. Companies will still be required to prepare financial statements at least to a minimum standard specified by Inland Revenue Department. Using solely the IRD requirements should see a reduction in the amount of disclosure required to be contained within the financial statements – particularly where companies had previously prepared financial statements under the more complex NZ IFRS standards. Organisations also need to consider if there are any contractual or other requirements to prepare financial statements under generally accepted accounting practice – for instance, in their banking arrangements or the terms of any earnout arrangements. Often such agreements refer to “Generally accepted accounting practice” or will refer to the legacy Financial Reporting Act 1993 - which may no longer be appropriate. Generally accepted accounting practice (GAAP) will now be represented by the accounting standards issued by the External Reporting Board.
“These financial reporting legislation reforms are significant but should be net positive for New Zealand in better balancing the costs and benefits of compliance” Less financial statements to file and shorter deadlines Only FMC Reporting Entities, large overseas companies, large subsidiaries of overseas companies, and large New Zealand companies with 25% or more overseas ownership will need to file. (For accounting periods commencing after 1 April 2014) . Previously, five months and twenty working days was the deadline for all entities that were required to file. This deadline is now four months for FMC Reporting Entities and five months for others still required to file.
Public benefit entities
Mandatory compliance with GAAP for charities For charities, compliance with the appropriate tier of financial reporting will become mandatory for periods commencing after 1 April 2015. In the past there has been a great divergence in the quality of financial reporting by charities – which is hoped to be resolved by mandating compliance. These changes will increase the robustness of charities’ financial reporting – something of national importance given the scale of the “third” sector within New Zealand. The degree of change of reporting under the new tiers for the public sector and not-for-profit entities will vary considerably - depending on the framework. These financial reporting legislation reforms are significant but should be net positive for New Zealand in better balancing the costs and benefits of compliance. Need help understanding the impact on your organisation? Talk to your Hayes Knight Advisor.
The definition and requirements for these entities is contained in the Financial Markets Conduct Act 2013. The NZ Institute of Chartered Accountants is also developing a set of rules to help standardise practice, though these are yet to be released at the time of writing.
in brief
Crowd funding gets the go ahead Some of the biggest changes in recent times are about to take place to the New Zealand Securities industry. Cabinet has recently approved Phase 1 of the Financial Markets Conduct Act 2013 as part of the Government’s financial market overhaul. Coming into force on 1 April 2014 the changes will be an exciting development for both start up businesses and investors. The changes will make it much easier for small fast growing businesses to raise money through crowd funding and peer to peer lending. Crowd funding is the collective effort of individuals who pool their resources, providing a platform where investors receive shares in the companies they invest in. This will provide a new avenue for early stage and growth companies to source capital needed for growth. Under the new regulations, offers engaging in equity crowd funding and peer to peer lending will no longer need to prepare a prospectus or an investment statement before fund raising from the public. There are also no investor caps on the amount an investor can invest in a company for crowd funding provided the company can only raise up to $2million a year. We see these changes as positive for start-up businesses and investors, creating new opportunities to drive business growth in New Zealand. If you want to find out more about the upcoming changes or crowd funding opportunities please contact your Hayes Knight Advisor.
Words of wisdom Here are a couple of lessons in life that could have easily been prescribed by auditors…
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All the excuses under the sun… Chances are New Zealand’s IRD has heard just about every one of these excuses for late filing of tax returns reported in a newspaper article about the UK Revenue Service. The more ‘interesting’ excuses they heard for missing deadlines included; • Farmer recovering from a run-in with a cow… • Trader whose wife refused to hand over the mail… • Taxi driver with a bad back unable to climb up the stairs to retrieve his form… • An actor too busy touring the country with his one-man play… • Financial services firm claiming “we don’t really do anything”… • Accountant too busy filing his clients returns to file his own… Filing income tax returns is part and parcel of remaining compliant with the IRD - no matter how creative your excuse is, it won’t be accepted!
Law reform coming for incorporated societies As we have reported previously in News articles on our website, the law relating to incorporated societies is under review. The Government has now announced that they are happy with the Law Commissions’ report and their suggested comprehensive recommendations to modernise the 1908 Act. While this process will take some time, if you are involved in an incorporated society and looking to make any changes, then we strongly suggest you review the proposed reforms. For more information on this topic see the News section on our website www.hayesknight.co.nz
“Learn from yesterday, live for today, hope for tomorrow. The important thing is to not stop questioning.”
Albert Einstein
“It’s not the lions and tigers that’ll get you… it’s the mosquitoes”
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Hayes Knight Group news
Hayes Knight Group update Welcoming Hayes Knight Audit graduates
In our on-going commitment to growing great professionals, Hayes Knight Audit has just taken on 6 new audit graduates in our 2014 intake. We are delighted to welcome, Dallas Hopkins, Phillipa Baker, Hemi Joyce, Rachel Watson and Blake Skelton.
We have two new Associates‌. Hayes Knight is delighted to announce that effective 1 April 2014, Shelley-ann Brinkley and Amanda Billington have been promoted to the role of Associate.
Hayes Knight North new starters
Hayes Knight North gives a warm welcome to these new starters; Martyn Ecroyd (BAS Intermediate), Patricia Butrat (BAS Intermediate) and Sam Robinson (BAS Intern)
Shelley-ann and Amanda add a significant level of expertise and experience to the leadership team at Hayes Knight. These appointments reflect the continuing growth of Hayes Knight on the North Shore. We congratulate them on this achievement.
Another new addition to the Hayes Knight North team! Team building on the water In support of one of Hayes Knight Audit’s charitable clients, The New Zealand Sailing Trust, the team had the privilege of enjoying some time on Steinlager 2. The iconic New Zealand racing yacht is one of the yachts, among others, that the Trust owns and operates.
Hayes Knight Group news
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SPOTLIGHT ON… Amanda Billington
Amanda has been with Hayes Knight North since June 2009. Currently she holds the role of Associate in our Business Services team. We ask Amanda about this role and others and how they help her deal with business clients. We can see from an article earlier in this magazine that you are involved with the North Harbour Hockey Association. Are you involved with any other organisations? I have been involved with Collaborative Advocacy NZ since I did my training in 2011. Being one of only two trained accountants, I hold the role of Treasurer and am on the Committee. This has given me more exposure to local lawyers and I have learnt a lot about Family Law.
keep my finger on the pulse with the market and gives me exposure to lots of different industries. With Hockey I am gaining governance experience and learning a lot about the challenges that face not for profit organisations. I have already been able to transfer this valuable knowledge from being involved with Hockey by adding value to one of my business clients. What type of clients do you enjoy working with? I love to work with clients that are open to new ways of looking at things and those that are looking for business advice. We can obviously help with the financials, but it is solving business problems that I really enjoy. What do you enjoy most about working at Hayes Knight North? Every day is different - there is no chance to get bored! Great team, great clients – what else can you ask for?
How has your involvement with these two organisations assisted you with dealing with your business clients? With Collaborative Advocacy NZ I have been regularly assisting with business valuations and providing advice on asset values. This helps me
Wayne Tukiri
Wayne has been with Hayes Knight Audit since mid 2009, where he was appointed in the dual role of Audit Manager and the Group’s Training Academy Manager. Since the re-organisation of the firm in 2013, Wayne has continued in the Audit Manager role with lead responsibilities for recruitment and learning and development functions within Audit. We talk to Wayne about why audit and training is such a great match and why he is passionate about training. Why do you think that mixing your role as an auditor with that of a training manager works well? It goes back to these words I saw in Hayes Knight’s advertisement for the role in 2009 : “Are you a Chartered Accountant with a passion for people?”I have always enjoyed exercising both sides of the brain – the analytical, sceptical, logical thinking required to be an auditor and the creative, empathetic, artistic side required to effectively engage with peoples’ learning. Doing both and facing the challenge of making training effective and engaging (or even fun!) has kept the role interesting for me. What do you see as being the 3 key ingredients for career progression in the auditing field? 1. A real thirst for learning – the accounting/auditing landscape has undergone, and continues to undergo, huge change whereby standing still is actually going backwards. People have to embrace the challenge of continually up-skilling.
“Every day is different - there is no chance to get bored!”
2. People skills – its not just about numbers! A successful audit career requires the auditor to become an excellent communicator (listening skills, not just talking) and also develop an innate level of intuition when dealing with people (seeing beyond the obvious). A sense of humour helps too! 3. Integrity – in all its forms. Honesty of self, treating people with dignity, being straight up, doing what you say you will, taking the right course even when it is harder. Are there any particular organisations in NZ that you feel do training well and why? The most obvious answer is NZICA’s Foundations/PAS programme that I have worked extensively with since its inception in 1998. It is now coming to an end with the harmonisation with Australia and new CA qualification programme, but it was a bold new approach in its time. Focused on competency development rather than being just knowledge based, I have enjoyed working with countless people who have grown professional and even life skills through the programme. It has also done the same for me. Do you share any of these admirable qualities at Hayes Knight Audit when it comes to training? Absolutely. Many of the skills learnt from facilitating these workshops have been invaluable to me when designing training for Hayes Knight. Getting, and keeping, people engaged is always the challenge – I’m very aware of the “death by powerpoint” risk. Fundamentally, its about facilitating learning…rather than teaching.
Winners of Hayes Knight Junior Team of the Year - North Harbour Sports Award Congratulations to Markus Somerville and Jack Simpson who were winners of the Hayes Knight Junior Team of the Year presented recently at the North Harbour Sports Award dinner. The pair won the award in recognition of these accomplishments in sailing during 2013; • • • •
2nd at 29er World Championship, Aarhus 2013 3rd ISAF Youth Sailing World Championship, Cyprus 2013 1st Aus 9er National Championships, Melbourne 1st NZ 29er Nationals, Auckland 2013
Markus Somerville pictured with Hayes Knight Audit Director, Craig Fisher, upon receiving award
Auditing your business is no different to servicing your car regularly
We can show you what can be done to improve your business, helping to ensure it is in better shape if you decide to sell. Talk to us about the benefits of opting for regular business audits.
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