Part 5: Changes to Financial Reporting Standards

Central government: results of the 2002-03 audits.

For many years, government departments, Crown entities, State-owned enterprises, and other public entities have been required to present their financial statements in accordance with generally accepted accounting practice (GAAP). GAAP means:

  • approved financial reporting standards, so far as those standards apply to the entity; and
  • in relation to matters for which no provision is made in approved financial reporting standards and that are not subject to any applicable rule of law, accounting policies that are appropriate in relation to the entity and have authoritative support within the accounting profession in New Zealand.

The Accounting Standards Review Board (ASRB) has responsibility under the Financial Reporting Act 1993 to approve financial reporting standards. All existing financial reporting standards have been developed by the Financial Reporting Standards Board of the Institute of Chartered Accountants of New Zealand (FRSB) before being approved by the ASRB.

For the last decade, financial reporting standards in New Zealand have been sector-neutral. Sector-neutral standards are standards developed with regard to, and which establish standards and guidance for, the full range of entities to which they apply. The credibility of our public sector financial reporting has undoubtedly been enhanced by the fact that the same standards are applied by all entities.

In December 2002, the ASRB announced its decision that New Zealand entities would be required to apply new standards based on International Financial Reporting Standards (IFRS)1 for reporting periods beginning on or after 1 January 2007. Entities would have the option to apply the new standards from periods starting on or after 1 January 2005. The timetable was driven by a desire to allow the corporate sector in New Zealand to make the transition, if desired, at the same time as Australia and Europe.

IFRS apply only to profit-oriented entities. We understand that the new New Zealand standards to be based on IFRS will be called New Zealand International Financial Reporting Standards (NZ IFRS)2. The format, language, and structure of IFRS will be preserved in NZ IFRS, but the ASRB has decided that a single set of standards should exist in New Zealand for application to all entities. Retention of a single set of standards retains some of the benefits of sector-neutral standards, most notably efficiency in application of the standards (in that preparers and auditors will have a better understanding of single set of standards) and efficiency in preparation of standards.

In order that the standards can be applied by what the ASRB calls public benefit entities3 (including almost all public sector entities), additional measurement and recognition requirements will be introduced, and additional or amended disclosure requirements may be established. It is possible that additional or amended disclosure requirements may apply to profit-oriented entities as well.

In June 2003, we raised concerns with the ASRB that inadequate consideration was being given to the effects of the changes to standards on public sector reporting in New Zealand. After discussion, the ASRB established the following guidelines to be used in adapting IFRS in New Zealand:

  • The IFRS disclosure requirements cannot be reduced for profit-oriented entities.
  • Additional disclosure requirements can be introduced for all entities.
  • The IFRS recognition and measurement requirements for profit-oriented entities cannot be changed.
  • Recognition and measurement requirements can be amended for public benefit entities, with a rebuttable presumption that amendments will be made for differences between IFRS and the corresponding International Public Sector Accounting Standard (IPSAS)4 or existing New Zealand Financial Reporting Standards (FRS), based on the IPSAS or FRS as applicable.
  • Introduction of guidance materials for public benefit entities should be based on the same principles as apply to introduction of recognition and measurement requirements as outlined above.
  • Elimination of options in IFRS is permitted for all entities, on a case-by-case basis. Where an IFRS permits options that are not allowed in existing FRS, a strong argument would need to be made in order for the ASRB to agree to the retention of such options in the NZ IFRS. In reaching a view on this issue, the ASRB will be mindful of the approach adopted by the Australian Accounting Standards Board5.

During the past year, the FRSB has been developing the new standards to be based on IFRS. To date it has issued 37 exposure drafts of new standards, typically with each exposure draft being available for a two-month period for public comment.

It is unclear at present exactly what the new standards will mean for public sector entities. The full effect will become clearer towards the end of 2004. But, as further changes will be made in IFRS for application in 2006 and beyond, there may be further effects by the time public sector entities need to comply with the new standards for the first time.

Adoption of NZ IFRS by the Crown

In August 2003, the Government announced that NZ IFRS would be implemented in the Crown financial statements as part of the 2007 Budget. This means that the first set of audited Crown financial statements reported under NZ IFRS will be for the year ending 30 June 2008 (with comparatives for the year ending 30 June 2007 also based on NZ IFRS). This means the Crown will have to restate its opening balance sheet as at 1 July 2006. This also means that the 2007 Budget (published around May 2007) will also need to be prepared under NZ IFRS.

We understand that most entities consolidated into the Crown financial statements will be following the Crown’s timetable for adopting NZ IFRS. However, should entities adopt earlier, they will need to continue reporting to the Crown under the existing FRS framework. That is, these entities need to be able to report under both the NZ IFRS (for their own reporting) and FRS (for consolidation purposes) frameworks until the year ending 30 June 2007.

Our concerns

We have a number of concerns about the transition to the new standards, including:

  • the process being followed;
  • the possible content of the standards; and
  • the effect on the public sector.

The Transition Process

In order to meet the same timetable as adopted in Australia and Europe, the new standards need to be in place in the very near future to enable entities to comply for periods starting on or after 1 January 2005 (necessitating an opening statement of financial position at 1 January 2004 for the earliest adopters). This has meant the complete set of standards is being changed in an 18-month period. This tight timetable has placed enormous pressure on the accounting standard-setting boards (the ASRB and FRSB) but has, in our view, placed an impossible burden on those being asked to comment on the standards. As a result, the number of submissions has been very low.

We have commented on most of the proposed standards. The Treasury has also provided submissions on the exposure drafts issued to date. We have worked with the Treasury to ensure cohesive and co-ordinated consideration is given to public sector issues. Nevertheless, the breadth and depth of our consideration has been far less than for previous new standards. We acknowledge and accept responsibility on behalf of the broader public sector to consider the effect of the proposed standards, but we have found it difficult to contribute at the level we would have liked. The end result of the speed of the process must inevitably be that the quality of the final standards is compromised.

Possible Content of the Standards

Notwithstanding the establishment of the ASRB Guidelines described in paragraph 5.7 (see pages 70-71), we still have concerns that the issues relevant to public sector entities are not being given sufficient consideration at the appropriate point in the process. In our view, lack of appropriate consideration could lead to standards being issued that contain inappropriate requirements for public sector entities, or do not have sufficient guidance to ensure appropriate and consistent application of some requirements.

There have been exposure drafts issued with proposed requirements for public sector entities that simply do not make sense. A good example of such an exposure draft is ED NZ IAS 16: Property, Plant and Equipment. The exposure draft proposed that:

  • where property, plant and equipment are revalued, there would be disclosure of the carrying amount that would have been recognised had the assets been carried under the cost method; and
  • revaluation movements would be accounted for on an individual basis rather than within classes (groups) of assets.

Many public sector entities do not have the records to enable them to disclose, for assets that are revalued, the carrying amount of those assets under the cost method. In any event, we see no value in that disclosure for users of financial reports. The expense of seeking to obtain the cost information, or some arbitrary alternative based on the carrying value when first adopting accrual accounting or NZ IFRS, cannot meet any cost/benefit test that might be applied.

Accounting for revaluation movements on an individual asset basis may not be able to be done by public sector entities because of a lack of information held in relation to individual asset movements in the past.

We and others have argued strenuously against these proposals. We now understand that both of these proposed requirements will be changed in the final standard so that they are optional for public sector entities. Such changes are very welcome.

However, given that these two matters were considered in the development of the current New Zealand Financial Reporting Standard – FRS-3: Accounting for Property, Plant and Equipment – and the International Public Sector Accounting Standard – IPSAS 17: Property, Plant and Equipment – and were not requirements in either of those standards, we question the robustness of the process for development of the exposure drafts of NZ IFRS. It appears that the requirements applicable to profit-oriented entities were to be imposed on public benefit entities without regard to their different circumstances.

There have also been exposure drafts issued that do not retain the extensive and valuable guidance in current New Zealand financial reporting standards that are of relevance particularly to public sector entities. Again, a good example of such an exposure draft is ED NZ IAS 16. It is proposed that that exposure draft contain only some of the extensive valuation guidance currently in FRS-3. We are concerned that invaluable guidance, built up over a decade based on our experience as the first country to apply accrual accounting in the public sector, could disappear on approval of a new standard.

We are also concerned about the likely content of other standards, including, in particular, the standard dealing with consolidations. Our existing standards FRS-36: Accounting for Acquisitions Resulting in Combinations of Entities or Operations, and FRS-37: Consolidating Investments in Subsidiaries include extensive guidance that has been built up through the experience of applying consolidation principles in the public sector over the last decade. The nature of relationships and arrangements between entities frequently differs markedly between the public sector and the private sector, so this guidance can be and has proven very useful in seeking to apply the standards.

We are concerned at the risk that much of this guidance may be lost, and that there could be broader effects – for example, in regard to the Auditor- General’s mandate, which is determined by the definition of public entities in the Public Audit Act 2001. That definition relies in part on the requirements of any approved financial reporting standard (currently FRS-37). It is important that any such broader issues are properly considered in the development of the standards.

Significant adoption challenges for some entities will also arise from the adoption of the international financial instruments and income tax standards. New Zealand does not have a financial reporting standard dealing with accounting for financial instruments. (Financial Reporting Standard No. 31: Disclosure of Information about Financial Instruments only deals with disclosure of information about financial instruments.) In relation to accounting for income tax, the requirements in the international standard (currently on issue as exposure draft ED NZ IAS 12 Income Taxes) represent a substantial change from the current New Zealand standard, SSAP-12 Accounting for Income Tax.

Effect on the Public Sector

We are also concerned about the effect of the change to NZ IFRS on public sector entities. The change has been driven by profit-oriented entities operating in international markets or which have subsidiaries in other jurisdictions or which are subsidiaries of companies in other jurisdictions. In our view, the change to NZ IFRS will not result in any immediate net benefits to the users of financial reports of public sector entities.

We acknowledge that the adoption of IFRS-based standards will fill some gaps in the existing financial reporting requirements. The most notable gaps filled include recognition and measurement of financial instruments and accounting for revenue of an exchange nature. Standards on these matters are welcome.

However, important issues of relevance to the users of reports of public sector entities – such as how to properly account for non-exchange transactions and how to report broader (non-financial) measures of performance – have received no attention in the past few years. The latter has been a concern for us for many years, and we are disappointed at the absence of any progress.

The change to NZ IFRS raises concerns because it will:

  • force all public sector entities to focus once again on the core financial aspects of their reporting rather than the more complex and broader aspects of performance reporting;
  • demand additional training of entities and auditors to enable the change to be made in a reasonable fashion;
  • result in costs – costs which will arise without concomitant benefits for most public sector entities; and
  • require effort without any real improvement in the quality of information for users of the reports of public sector entities.


We have made a major and ongoing commitment to the quality of financial reporting by public sector entities. We will continue to do so through representation on the FRSB6, by providing guidance to auditors on new requirements, and by making submissions on proposals that may affect public sector entities.

However, we are concerned that the speed of the process, and the limited consideration of the needs of the users of public sector reports, will adversely affect the quality of reporting over the coming years.

We will continue to monitor developments and work with the sector as best we are able. To this end, the Auditor-General has recently established a Project Steering Committee to lead our response to the change to NZ IFRS.

1: The term IFRS is used to refer to International Accounting Standards Board (IASB) standards. The standards comprise:

  • International Accounting Standards (IASs), inherited by the IASB from its predecessor body, the International Accounting Standards Committee (IASC), and the interpretations of those standards.

  • International Financial Reporting Standards (IFRS) – the new standards being issued by the IASB, and the interpretations of those standards.

2: NZ IFRS will comprise:

  • New Zealand International Accounting Standards (NZ IASs), and the interpretations of those standards.

  • New Zealand International Financial Reporting Standards (NZ IFRSs), and the interpretations of those standards.

3: Public benefit entities are entities whose primary objective is to provide goods or services for a community or a social benefit, and where any risk capital has been provided with a view to supporting that primary objective rather than for a financial return to equity shareholders.

4: IPSAS are developed and issued by the Public Sector Committee of the International Federation of Accountants for application to public sector entities.

5: One of the functions of the ASRB is to liaise with the Australian Accounting Standards Board with a view to harmonising New Zealand and Australian financial reporting standards (section 24, Financial Reporting Act 1993).

6: As the auditor of the Accounting Standards Review Board, no member of the Auditor-General’s staff is able to be a member of that Board, so our input is made through the FRSB.

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