Part 2: Setting standards in New Zealand

The Auditor-General’s views on setting financial reporting standards for the public sector.

2.1
In this Part, I comment on setting financial reporting standards for the New Zealand public sector. I also include my assessment of the financial reporting standards now in place for the public sector.

Setting financial reporting standards until late 2002

2.2
Until late 2002, financial reporting standards were created in New Zealand for application by all entities preparing general purpose financial reports. The Financial Reporting Standards Board, a committee of the New Zealand Institute of Chartered Accountants, wrote the standards. The standards created until 1993 were known as statements of standard accounting practice (SSAP).

2.3
In 1993, the Accounting Standards Review Board was established as an independent Crown entity in accordance with the Financial Reporting Act 1993. The Accounting Standards Review Board had limited resources and limited functions, and its part-time members met only a few times per year. One of its main functions was to review and, if thought fit, approve financial reporting standards submitted to it, thereby giving the standards legal force.

2.4
From 1993 until late 2002, the Financial Reporting Standards Board created financial reporting standards (FRS). The Accounting Standards Review Board, if it thought fit, then approved those standards for application by certain reporting entities (including most entities in the public sector) when preparing their general purpose financial reports. Therefore, setting standards for financial reporting required both boards to co-operate.

2.5
FRS took into account the nature of the different entities that would be applying the standards. That is, the Financial Reporting Standards Board took account of entities in the public sector, not-for-profit sector, and private sector when determining financial reporting requirements. Taking account of a broad range of entities meant thinking about:

  • a broad range of transactions;
  • the various reasons for transactions being carried out;
  • a broad range of readers of financial statements; and
  • the range of information those readers needed.

2.6
As well as taking account of the broad range of entities, FRS were typically written using language that was appropriate to all entities. The language made sense for the public, not-for-profit, and private sectors. For example, the term "service potential" was used in conjunction with the term "economic benefits". The term economic benefits is generally used when referring to assets that generate net cash inflows, and therefore is relevant to the private sector. The term service potential is a broader idea that is used when referring to assets that are used to deliver goods and services in accordance with an entity's objectives. Therefore, it is more relevant to the public and not-for-profit sectors.

2.7
Creating financial reporting standards in this way meant that New Zealand financial reporting standards were widely accepted as "sector neutral". The term sector neutral was used because this type of standard took into account issues affecting all sectors and could generally be read, understood, and applied by all entities.

2.8
A sector-neutral approach to setting standards was, as far as I am aware, used only in New Zealand and Australia. In other jurisdictions, there is separation between public sector standards and private sector standards.

2.9
The general alignment of New Zealand and Australian financial reporting standards was not coincidental. One of the functions of the Accounting Standards Review Board set out in the Financial Reporting Act 1993 was to liaise with the Australian Accounting Standards Board with a view to harmonising financial reporting standards.

Deciding to adopt International Financial Reporting Standards

2.10
In June 2002, Australian authorities1 decided that entities subject to the Australian Corporations Act 2001 should be required to comply with the financial reporting standards of the International Accounting Standards Board for periods beginning on or after 1 January 2005. That Board's standards are known as International Financial Reporting Standards (IFRS).

2.11
I understand that the Australian decision was prompted by a European decision to adopt IFRS for entities listed on European stock exchanges. The European decision to adopt IFRS was also for periods beginning on or after 1 January 2005.

2.12
Adopting IFRS was expected to improve listed entities' access to international capital markets. Improved access was expected to arise because financial statements of listed entities across different jurisdictions would be directly comparable when prepared using the same set of standards.

2.13
The Australian announcement raised a critical issue for New Zealand, partly because of the Accounting Standards Review Board's responsibility to liaise with the Australian Accounting Standards Board with a view to harmonising financial reporting standards between New Zealand and Australia. The issue was debated by both the Accounting Standards Review Board and the Financial Reporting Standards Board.

2.14
In October 2002, the Accounting Standards Review Board decided that "listed issuers"2 would be required to comply with IFRS from 2007, but would be allowed to comply earlier. The Accounting Standards Review Board also committed to maintaining sector-neutral standards.

2.15
Members of the Accounting Standards Review Board together with members of the Financial Reporting Standards Board consulted with selected constituents about the announcement to adopt IFRS. I was one of those consulted.

2.16
At that time, I noted that every effort should be made to maintain sector-neutral standards. I was clear that sector-neutral standards did not mean private sector standards with addenda or boxed inserts. Rather, sector-neutral standards were ones that had regard to (and established guidance for) all entities applying them.

2.17
There were several characteristics I felt would be needed in sector-neutral standards based on IFRS. These characteristics included:

  • using sector-neutral language, such as service potential, in conjunction with economic benefits;
  • using illustrative examples reflecting a range of circumstances in the different sectors;
  • adding or changing requirements for the public sector where IFRS either did not cover or inappropriately dealt with a matter;
  • writing standards relevant only to the public sector, such as a standard dealing with social policy obligations;
  • keeping relevant guidance from financial reporting standards (FRS) and statements of standard accounting practice (SSAP);
  • eliminating some options in IFRS where there were no such options in FRS and SSAP; and
  • keeping standards relevant to New Zealand that did not have an international equivalent.

2.18
Although I supported sector-neutral standards based on IFRS, I did not consider that sector-neutral standards should be sought at any cost. At the time, I noted that if sector-neutral standards could not be delivered, then it would be preferable to either:

  • keep FRS and SSAP for application by public sector entities; or
  • explore public sector standards based on International Public Sector Accounting Standards (IPSAS).

2.19
In December 2002, after consultation, the Accounting Standards Review Board broadened its October 2002 decision by requiring all reporting entities in the public and private sectors to apply new standards based on IFRS. Entities would be required to apply the new standards for reporting periods beginning on or after 1 January 2007. There would be an option to apply the new standards early, from reporting periods beginning on or after 1 January 2005. The option meant that entities listed in both New Zealand and Australia could apply standards based on IFRS at the same time.

2.20
Also in December 2002, the Accounting Standards Review Board reiterated that there was strong support to continue to have one set of sector-neutral standards that applied to the public, private, and not-for-profit sectors.

2.21
The decision to give entities an option to apply the new standards early meant a set of standards based on IFRS would need to be in place by the end of 2004. The set of standards to be in place by the end of 2004 was referred to as the "stable platform". That is, those standards would be the initial IFRS-based standards that could be applied from periods beginning 1 January 2005. The stable platform would be added to and changed over time as the International Accounting Standards Board created or modified standards for which the Financial Reporting Standards Board established New Zealand equivalents.

Coming up with guidelines for adapting IFRS

2.22
After the Accounting Standards Review Board decision in 2002, the Financial Reporting Standards Board began work on the new set of standards. The Financial Reporting Standards Board needed to review all the International Accounting Standards Board's standards to find out what changes were needed for reporting entities in the public sector and not-for-profit sector.

2.23
In the first half of 2003, the Financial Reporting Standards Board worked on how to adapt IFRS for entities in the public sector and not-for-profit sector. Staff from my Office were involved in that task, and they kept me informed of progress.

2.24
During that time, it became clear that New Zealand would not be able to both:

  • produce sector-neutral financial reporting standards based on IFRS for application by all entities; and
  • have profit-oriented entities state that they complied with IFRS.

2.25
The reason it would not be possible to have both sector-neutral standards and the stating of compliance with IFRS was because of limitations imposed by the International Accounting Standards Board. The Board was clear about changes that could and could not be made to IFRS if entities applying the changed standards wanted to state their compliance with IFRS.

2.26
Changing to sector-neutral words and adding or changing requirements, other than additional disclosures, were changes that were not acceptable to the International Accounting Standards Board. The Board decided that such changes would affect the integrity of IFRS and potentially affect the way a standard was interpreted. This concern about compromising the integrity of IFRS later led to the Financial Reporting Standards Board's reluctance to make changes to IFRS when establishing New Zealand equivalents to IFRS (NZ IFRS).

2.27
Given that the main reason for adopting IFRS was that profit-oriented entities would be able to state that they complied with IFRS, sector-neutral standards were abandoned. Instead, the Financial Reporting Standards Board decided to maintain a single set of financial reporting standards, by adding some material to IFRS specifically for public benefit entities in the public and not-for-profit sectors.

2.28
Although described as a single set of standards, it was basically two sets of standards packaged together: one set for profit-oriented entities and the other set for public benefit entities. It was convenient for these sets to be packaged as one because they were substantially the same, with little additional material for public benefit entities.

2.29
By mid-2003, I was concerned that the way IFRS were being adapted to NZ IFRS meant public sector issues would not be given adequate thought. Because of these concerns, I wrote to the Accounting Standards Review Board, the body ultimately responsible for approving NZ IFRS.

2.30
I made it clear to the Accounting Standards Review Board that support from the public sector for NZ IFRS might not be sustained if the standards did not adequately cater for the public sector. I was also clear that the primary objective of those standards had to be providing quality reporting for people using financial statements.

2.31
The Accounting Standards Review Board responded to my concerns by agreeing to update its Release 6, which set out its procedures for establishing financial reporting standards. The update needed to deal with the adoption of IFRS and set clear expectations for the adaptation of IFRS for issue as NZ IFRS. Work was carried out from mid-2003 on the Accounting Standards Review Board's expectations for how IFRS could be adapted for issue as NZ IFRS. This culminated in the Accounting Standards Review Board publishing its Release 8 in May 2004,3 which updated Release 6.

2.32
Release 8 included several guidelines that are relevant to the public sector for adapting IFRS for issue as NZ IFRS. The effect of those guidelines for many entities in the public sector included:

  • disclosure requirements could be added or reduced;
  • recognition and measurement requirements could be amended;
  • guidance materials could be added; and
  • options could be eliminated.

2.33
Those guidelines were to be applied where there were features unique to public benefit entities; that is, most entities in the public sector and entities in the not-for-profit sector.

2.34
The guidelines addressed many of the characteristics I felt needed to be addressed at that time. However, I was disappointed that sector-neutral financial reporting standards could not be accommodated. Although disappointed, I was aware that the focus during this period was very much on adapting IFRS to NZ IFRS before 2005.

Adapting IFRS to NZ IFRS before 2005

2.35
Much of the adaptation of IFRS to NZ IFRS happened at the same time as the Accounting Standards Review Board was preparing its Release 8. The Financial Reporting Standards Board was kept informed about the guidelines in Release 8 as they were being worked on. Therefore, the Financial Reporting Standards Board was able to propose changes between IFRS and NZ IFRS during 2003 and 2004 that would be consistent with the guidelines, once they were published.

2.36
Part of the adaptation process required the Financial Reporting Standards Board to distinguish profit-oriented entities that had to apply IFRS from other entities for which modification to IFRS could be made. The term "public benefit entities" was established to encompass all reporting entities that were not profit-oriented entities.

2.37
The Financial Reporting Standards Board established a conversion working group that worked through much of the detail of adapting IFRS to NZ IFRS. That group proposed a considerable number of changes to IFRS for public benefit entities and some changes (predominantly adding disclosure requirements) for all entities. The Financial Reporting Standards Board accepted many of the working group's changes to IFRS as it established the NZ IFRS stable platform.

2.38
The pace at which IFRS were adapted to NZ IFRS was phenomenal. At that time, IFRS consisted of more than 30 reporting standards and more than 10 interpretations of standards. All of those documents had to be reviewed, mostly by the conversion working group, and changes proposed to the Financial Reporting Standards Board. The proposed NZ IFRS were then issued for comment during a period of just over 12 months.

2.39
My Office commented to the Financial Reporting Standards Board on some of the proposed new financial reporting standards. However, the large number of documents issued over such a short time meant that we did not have the capacity to submit on all matters. Nor did we have time to give detailed consideration to all of the changes that were being proposed. That, and the overall pace of change, concerned me.

2.40
Several other issues emerged during the adaptation process. I became increasingly concerned at what I saw as a reluctance to make changes to IFRS. For example, there were several areas where I thought guidance for public benefit entities was warranted. However, in my view, the Financial Reporting Standards Board was reluctant to add guidance for public benefit entities because of a concern that guidance could unduly influence profit-oriented entities. Such concern seemed misguided given that:

  • guidance could have been clearly labelled as relating only to public benefit entities; and
  • the Financial Reporting Standards Board had acknowledged that changes would be required.4

2.41
I was also concerned that very few public sector entities were commenting on proposed financial reporting standards. In my view, the lack of comment was because there were too many proposals and a general sense that IFRS had been adopted with little room to influence any change, even for public benefit entities. As a result, entities focused on training their staff about NZ IFRS so they could implement them.

2.42
Another concern was that the adoption of IFRS was dominating the use of standard setting resources. There were other important public sector reporting issues that were not receiving attention. In my view, the most important of these was the reporting of non-financial performance information. I acknowledge the challenges involved in setting standards for non-financial performance information, given that there has been little progress anywhere in the world on this matter.

2.43
Finally, I was concerned that the membership of the Financial Reporting Standards Board had not been changed to reflect the new approach to setting financial reporting standards. Given that IFRS applied solely to profit-oriented entities, a crucial role for standard setting was to establish standards that would be suitable for public benefit entities by making relevant and appropriate changes and adding guidance. In my view, the membership of the Financial Reporting Standards Board should have better reflected the role of the Board in the new environment.

2.44
Nevertheless, the Financial Reporting Standards Board completed the adaptation process and provided the initial set of NZ IFRS to the Accounting Standards Review Board before the end of 2004. The Accounting Standards Review Board approved that initial set in November 2004. This approval meant there was a stable platform in place for entities that chose to apply NZ IFRS from periods beginning 1 January 2005. The stable platform represented a significant milestone and, notwithstanding my concerns noted above, generally reflected well on those involved in the adaptation to NZ IFRS.

Creating financial reporting standards to supplement NZ IFRS

2.45
Since the initial stable platform of NZ IFRS was established in late 2004, there has continued to be considerable activity in setting financial reporting standards. Important areas of standard setting that were not covered by IFRS included setting standards consistent with NZ IFRS on prospective financial statements and summary financial statements.

2.46
Before NZ IFRS were introduced, standards on prospective financial information and summary financial statements had been an integral part of the previous set of financial reporting standards.

2.47
The stable platform of NZ IFRS that the Financial Reporting Standards Board established did not contain standards dealing with prospective financial statements or summary financial statements. There were no standards on these matters because IFRS, on which the stable platform was based, did not deal with those matters.

2.48
To the credit of the Financial Reporting Standards Board, it decided that New Zealand should not abandon the standards dealing with prospective financial statements and summary financial statements. Standards in both these areas are important to a considerable number of entities, including entities in the public sector. Many public sector entities have statutory responsibilities to publish forecast or summary financial statements, or both.

2.49
The Financial Reporting Standards Board decided to rewrite its standard on prospective financial information and to revise its standard on summary financial statements. My staff were involved in the changes to both those standards.

2.50
My staff involved in rewriting the standard on prospective financial statements told me that the overall aim was to produce a high-quality standard. The standard had to work for all entities, whether profit-oriented or public benefit. From an audit perspective, we have found the standard helpful, given its principles-based focus and proper consideration of issues affecting the public sector.

2.51
In my view, the standard on prospective financial statements is one of the better standards for the public sector since the adoption of NZ IFRS because it was designed in New Zealand with all sectors in mind (that is, it could be properly described as sector neutral).

Setting up a public benefit entity working group

2.52
In June 2005, the Financial Reporting Standards Board agreed to set up a public benefit entity working group to look at public benefit entity issues and make recommendations to the Financial Reporting Standards Board. I saw the setting up of this working group as a positive step and I was pleased that two members of my staff were involved.

2.53
My staff wrote to the chairman of that working group soon after it was established in late 2005. The letter set out what we saw as important public sector issues we would like the working group to address. We attempted to prioritise the issues and we were clear that the list was not intended to be an end in itself.

2.54
However, I am disappointed that most of the issues we raised with the public benefit entity working group have not been addressed in the past 3½ years. Many of the issues we raised related to NZ IFRS and a few were significant public sector issues in their own right that needed addressing.

2.55
I am aware that the public benefit entity working group invested a lot of its time and effort since 2005 in producing a financial reporting guide for not-for-profit entities. That guide was published in August 2007. Also, the working group prepared supporting material such as model financial statements and a financial statement disclosure checklist. I commend the working group for producing helpful guidance aimed at not-for-profit charitable organisations and clubs.

2.56
After the not-for-profit financial reporting guide was published, it was decided to defer the mandatory adoption of NZ IFRS for many of the entities the guide was aimed at. That decision was somewhat unfortunate for the working group, given all their time and effort.

2.57
The public benefit entity working group's focus on the not-for-profit financial reporting guide meant little progress had been made on the public sector issues my staff had raised with the chairman of the working group. Also, perhaps not surprisingly, other public sector issues have since arisen that, in my view, need addressing.

2.58
Unfortunately, despite its initial promise, the public benefit entity working group has had little real effect in getting relevant and appropriate changes made to NZ IFRS for public benefit entities, particularly those in the public sector.

Deciding to defer mandatory adoption of NZ IFRS for some entities

2.59
In the first half of 2007, the International Accounting Standards Board issued for comment a proposal for international financial reporting standards for small- and medium-sized entities. This proposal was for a self-contained set of financial reporting standards relevant to smaller profit-oriented entities. The Financial Reporting Standards Board prepared a discussion paper about the proposal and sought the views of people who were interested in financial reporting standards for smaller entities.

2.60
That proposal led the Financial Reporting Standards Board to hold consultation meetings throughout the country between April and July 2007. The ostensible purpose of the meetings was to hear people's views about the proposal for standards for small- and medium-sized entities. Instead, the meetings elicited a clear message about NZ IFRS.

2.61
The clear message was that NZ IFRS were not needed for many entities, particularly small- and medium-sized companies and similar entities in the private sector. I am aware that this message was brought to the attention of the Accounting Standards Review Board and government officials.

2.62
The outcome of those meetings probably contributed to a decision by the Government to review the financial reporting requirements applying to small- and medium-sized companies under the Financial Reporting Act 1993 (see paragraphs 2.67–2.72).

2.63
The announcement of the review led the Accounting Standards Review Board to delay the mandatory adoption of NZ IFRS for certain small entities. This decision was set out in its Release 9, published in September 2007, and applied to companies that were:

  • not an issuer as defined by the Financial Reporting Act 1993 (the Act), in either the current or preceding accounting period;
  • not required by section 19 of the Act to file financial statements with the Registrar of Companies; and
  • not large, as defined by section 19A of the Act.

2.64
A primary reason cited for the delay related to a possible outcome of the review – namely, that many small- and medium-sized companies that currently must prepare financial statements in accordance with generally accepted accounting practice solely because they are required to by legislation, might have that requirement removed. The removal of the requirement would mean that the costs associated with changing to NZ IFRS would have been wasted.

2.65
In addition to the delay announced by the Accounting Standards Review Board, the Financial Reporting Standards Board decided it would delay the mandatory adoption of NZ IFRS for some other entities that prepared general purpose financial statements but were not subject to the Act. Those other entities were entities that were not publicly accountable and were not large as defined in the Framework for Differential Reporting.5 However, neither of these delays had much effect on the public sector because most public sector entities were not able to take advantage of either of them.

2.66
The result of the delays is that the only entities required to apply NZ IFRS are issuers6 and most public sector entities. Of these, I expect there are more public than private sector entities. In my view, the large number of public sector entities using NZ IFRS reinforces the case for NZ IFRS to incorporate all the relevant and appropriate changes to ensure that they can be readily applied by the public sector.

Reviewing the financial reporting framework

2.67
The Ministry of Economic Development (MED) has been reviewing the financial reporting framework. The review is expected to result in the release of a discussion paper in the second half of 2009. Also, the discussion paper is expected to be accompanied by an Accounting Standards Review Board paper about the broad nature of reporting within the various tiers in the framework.

2.68
As a precursor to the discussion paper, the MED has carried out a “greenfields” review of the financial reporting framework (that is, the MED has thought about its recommendations assuming that there were no existing financial reporting requirements).

2.69
The MED consulted with staff in my Office in late 2008, seeking our comments about a financial reporting framework for reporting entities in the public sector. We noted that our generally held view is that all public sector entities have some level of accountability to Parliament and the public. In order to be accountable, we noted that public sector entities should be required to provide Parliament and the public with financial and, where appropriate, non-financial information that meets their information needs.

2.70
We were clear in our comments that the information that public sector entities were required to report should take account of the needs of those people using the information. We were also clear that the information required should be broadly proportional to the size, significance, complexity, and resources of each reporting entity. In that regard, we considered it necessary to have a framework that included different levels of reporting for different types of entity. We noted that the framework should encompass more than the current differential reporting regime.

2.71
We also expressed our view that the review of the financial reporting framework provided an ideal opportunity to reconsider the basis for financial reporting for all entities, other than:

  • listed entities;
  • those entities accessing international capital markets; and
  • other profit-oriented entities that wish to state their compliance with IFRS.

2.72
We noted that all other entities, including nearly all of the public sector, would be better served by creating financial reporting standards that are more appropriate to those entities and to the people using those entities' financial statements.

Reviewing the guidelines for setting financial reporting standards

2.73
In a letter to me in late 2007, the Accounting Standards Review Board noted the desirability of reviewing the guidelines for setting financial reporting standards as set out in its Release 8.7

2.74
I thought that a review of the guidelines was imperative and that urgent changes should be made to the framework for reporting by public benefit entities. In further correspondence with the Accounting Standards Review Board, I noted that the goal of the new guidelines needed to be high-quality financial reporting standards. Those standards also needed to provide the people who use financial statements with the information they needed.

2.75
The Accounting Standards Review Board decided to consult with representatives from selected organisations that had an interest in financial reporting by public benefit entities. The consultation was about the future of standard setting for public benefit entities to assist the Accounting Standards Review Board with the review of the guidelines.

2.76
Consultation meetings took place in mid-2008 and I was one of those consulted. Before the meeting I was provided with a confidential paper. The paper explained the background to the review of the process for setting financial reporting standards for public benefit entities and outlined some possible alternative approaches to that process.

2.77
In my view, the confidential paper that formed the basis of the consultation was not balanced because it favoured minimising changes to IFRS when establishing NZ IFRS. I gave serious thought to not taking part in the consultation. Nevertheless, I decided it was better to take part, and I conveyed my concerns during the meeting and subsequently in writing.

2.78
During the consultation, I made it clear once again where I thought the focus should be for setting financial reporting standards for public benefit entities; that is, it should be on setting high-quality standards that meet the information needs of people using the financial statements of public benefit entities. The focus did not need to be dictated by a rigid approach designed to minimise changes between IFRS and NZ IFRS.

2.79
Since that consultation, the Accounting Standards Review Board has issued for public comment a proposal to revise Release 8. Likewise, the Financial Reporting Standards Board has issued for public comment a document that outlines their proposed process for modifying, or introducing additional requirements to, IFRS for public benefit entities. I have had the opportunity to review these documents.

2.80
The Accounting Standards Review Board's proposed revisions to Release 8 contain some changes to how financial reporting standards based on IFRS would be established. Those changes make reference to the work of the International Public Sector Accounting Standards Board. The revised procedures are, in the main, reasonable if it is accepted that IFRS are the appropriate base for those standards. Nonetheless, even if one does accept IFRS as the appropriate base, the procedures are high level and, in my view, open to interpretation.

2.81
I consider that the Financial Reporting Standards Board's document on the proposed process for modifying or introducing additional requirements to IFRS for public benefit entities is the more important of the two documents because it contains the criteria for when IFRS will be modified for public benefit entities.

2.82
Based on what the Financial Reporting Standards Board has issued for comment, in my view it is unlikely there will be enough change to the way standards are set to alleviate my concerns. There continues to be undue focus on minimising changes between IFRS and NZ IFRS rather than on delivering high-quality financial reporting standards for public benefit entities.

Assessing the financial reporting standards for the public sector

2.83
I decided it was important for this discussion paper to assess the effects of the standard setting that has taken place in New Zealand in recent years. Therefore, in April 2009, my staff carried out an assessment of the financial reporting standards in place for public benefit entities.

2.84
Appendix 1 contains a high-level comparison of NZ IFRS with New Zealand's financial reporting standards that applied before NZ IFRS. The comparison is based on the standards in place under NZ IFRS as at 31 March 2009. Appendix 1 includes brief comments that reflect the judgements my staff and I have made about what has been gained or lost from adopting NZ IFRS.

2.85
One of the first and most obvious points to note is that NZ IFRS cover more topics than previous standards. For example, within NZ IFRS there are standards that cover accounting for revenue, employee benefits, and financial instruments. There were no standards covering these topics in the previous set of standards.

2.86
Having a set of standards that covers a broader range of topics is desirable. At a high level, greater coverage of topics should lead to greater consistency of reporting of transactions in general purpose financial reports of public sector entities. Greater consistency should help those that use financial reports, particularly those that use them with some frequency.

2.87
However, a detailed look at the comparison shows that many of the gains in the number of topics covered by NZ IFRS have been undermined by concerns about the quality of standards for public benefit entities. These concerns arise because:

  • there is less guidance on the application of requirements to the public sector (for example, guidance on property, plant, and equipment subsequent expenditure, components, and use of indices in a depreciated replacement cost valuation);
  • there are standards that do not address public sector aspects that could reasonably be expected (for example, how a public sector entity should account for a suspensory loan that is documented as a liability but, in substance, is equity); and
  • there are some questionable disclosures required, particularly where the costs associated with many disclosures exceed the benefits of making the disclosures (for example, disclosure of an entity's objectives, policies, and processes for managing capital even though most public benefit entities do not have capital to manage).

Concluding comments

2.88
For the past 6½ years, New Zealand's standard setting agenda has all but been determined by the International Accounting Standards Board. Setting the agenda this way has not helped public benefit entities because the International Accounting Standards Board has no mandate to consider public benefit entities.

2.89
Also, the pace at which the International Accounting Standards Board has issued new pronouncements has meant the Financial Reporting Standards Board has been unable to deal adequately with issues for public benefit entities. It is as if public benefit entities have been forgotten in the rush to issue International Accounting Standards Board pronouncements to ensure that profit-oriented entities in New Zealand can assert compliance with IFRS. The result has been generally poor standard setting for public benefit entities.

2.90
When I reflect on NZ IFRS for public benefit entities compared with previous financial reporting standards, I am disappointed. Since the decision to adopt IFRS as the basis for New Zealand's financial reporting standards, 6½ years have elapsed. I do not see 6½ years' worth of progress in public sector reporting. In my view, it is unfortunate that the concerns described above have undermined many of the gains.

2.91
I wonder where financial and non-financial reporting in the public sector would be today, had the Accounting Standards Review Board decided in 2002 that:

  • only listed issuers would be required to apply IFRS; and
  • New Zealand standards would be retained and improved for all other reporting entities.

1: The authorities involved in the decision to adopt IFRS were the Australian Financial Reporting Council and the Australian Accounting Standards Board.

2: Listed issuers are parties to a listing agreement with a stock exchange in New Zealand that have issued securities which are quoted on such an exchange.

3: Releases 6 and 8 were about the role of the Accounting Standards Review Board and the nature of approved financial reporting standards.

4: In paragraph 5 of the appendix to the New Zealand Equivalent to the IASB Framework for the Preparation and Presentation of Financial Statements (the NZ Framework), the Financial Reporting Standards Board explained its rationale for making changes to the International Accounting Standards Board Framework and IFRS. It noted that many "issues are not unique to public benefit entities but they may require more emphasis and consideration for the accounting standards to be relevant to public benefit entities and to ensure that the desired level of consistency in reporting by those entities is achieved".

5: The Framework for Differential Reporting is part of generally accepted accounting practice. The Framework sets out the concessions from NZ IFRS that are available to entities that qualify to apply the Framework.

6: Issuers are defined in section 4 of the Financial Reporting Act 1993 and include entities listed on a stock exchange in New Zealand, registered banks, life insurance companies, and unit trusts. Section 6 clarifies the definition of issuers for entities in the public sector.

7: The desirability for such a review was raised at a time when I was corresponding with the Accounting Standards Review Board on another matter. That correspondence was about concerns I had with a financial reporting standard the Accounting Standards Review Board had approved in July 2007, one that required compulsory capitalisation of borrowing costs. I elaborate on those concerns in Part 4, starting at paragraph 4.84.

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