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An overview of the New Zealand reporting environment

Chapter 1

1-1

Learning objectives• Indicate the scope of regulation relating to New

Zealand external financial reporting

• Explain the general functions of the:• Accounting Standards Review Board

• Financial Reporting Standards Board

• New Zealand Securities Commission

• New Zealand Exchange

• Explain:• Conceptual frameworks for reporting

• Why NZ adopted IASB accounting standards

• The IASB’s relevance to NZ accounting standard setting

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Learning objectives• Describe

• the structure of the IASB• cultural differences and how this may effect

harmonisation of accounting standards• the use and role of audit reports

• Discuss • how heavily regulated NZ is• some of the arguments for and against the regulation of

financial accounting.

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Financial accounting defined

‘a process involving collecting and processing financial information

to meet decision-making needs of external parties’

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Users of general purpose financial reports

Users include:– present and potential investors– employees– lenders– suppliers and other trade creditors– customers– Government and its agencies– the public.

Users lack the power to demand specific information to meet their needs

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Sources of external financial reporting regulation

In NZ, external financial reporting is regulated by:– legislation – accounting standards– the New Zealand Securities Commission– the New Zealand Exchange.

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Legislation

Legislation governing financial reporting in New Zealand includes:

– Public Finance Act 1989– Local Government Act 2002– Crown Entities Act 2004– Financial Reporting Act 1993 (FRA)– Companies Act 1993 (CA)– Securities Act 1978– Security Markets Act 1988.

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FRA 1993

• Applies to all reporting entities.• Details:

– the overall financial reporting framework – reference to the conceptual framework– the composition of reports– the true and fair view, and – the fair presentation override.

• Defines the terms 'reporting entity', 'issuer' and 'GAAP‘.

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The Companies Act 1993

• Applies to all companies (narrower focus than FRA).

• Details administrative requirements, some disclosure requirements and directors' responsibilities.

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Accounting standards• Prior to 1993 accounting standard setting was in

the hands of the private sector.

• Share market crash of 1987 prompted review of standard-setting process.

• Report from inquiry recommended that:– legal backing be given to accounting standards– an Accounting Standards Review Board to approve

accounting standards be established– sanctions be introduced for non-compliance with

standards.

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Accounting Standards Review Board (ASRB)

• Established under the FRA.• ASRB is a body corporate under the FRA and a

Crown entity under the Crown Entities Act 2004.• The Governor-General appoints its members (no

fewer than 4 and a maximum of 7):– by virtue of their knowledge or experience in law,

business, finance, economics or accounting.

• Purpose is to review and, where appropriate, approve financial reporting standards.

• This results in legal backing for accounting standards.

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Financial Reporting Standards Board (FRSB)

• A board of NZICA.• Members appointed by the Council of the Institute

on the basis of sector representation and knowledge or experience in accounting.

• Historically FRSB proposed standards on basis of:– outcomes of IASC– harmonisation with Australia– issues raised by the accounting profession– changes in the business environment– reviews of existing standards.

• Since adoption of IFRS, FRSB makes submissions only to IASB, its role has significantly changed.

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New Zealand Securities Commission (SC)

• Established under the Securities Act 1978.

• It is expected to act independently of the NZ Government.

• It prescribes disclosure requirements in prospectuses for securities offered to the public in NZ and is able to enforce these requirements.

• The SC identifies a number of essential corporate government principles to enhance accountability.

• The SC seeks to strengthen investor confidence in NZ’s capital markets to attract investment internally and from overseas.

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The New Zealand Exchange (NZX)

• Sets uniform trading rules, ethical standards and listing requirements.

• These are additional reporting requirements over and above those provided by the accounting profession and legislation.

• Failure to comply with NZX’s rules can lead to suspension of trading in an entity’s shares.

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NZ’s adoption of IFRSs

• In October 2002, ASRB announced that from 2007 listed issuers would be required to report under IFRS.

• Followed Australia’s decision to report under IFRS:

– Seen as beneficial as NZ and Aus economically close

– Failure to follow could risk the credibility of financial reporting by NZ entities.

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NZ’s adoption of IFRSs

• NZ made some changes to IFRSs, becomes NZ equivalent to IAS and IFRS.

• NZ IAS standards are applied to both profit orientated and to public benefit orientated organisations:

• FRSB has added material that describes the scope and applicability of standards to the New Zealand context.

• NZ IAS standards have fewer options than equivalent IFRS standards.

• NZ IAS standards often require additional disclosure.

• Compliance with NZ IAS means compliance with IFRS.

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Impact of adopting IFRS

• Significant changes have occurred:– Intangible assets (research, brand names, mastheads) now

expensed and not capitalised.– Revaluation of intangible assets has been greatly restricted.– Amortisation of goodwill abolished—replaced by impairment

testing.– Revaluation of PPE is done on asset-by-asset basis and not

by class of assets for companies.– Retrospective changes now need to be made when there is

voluntary changes in accounting policy .– Items previously classified as equity, now defined as

liabilities.– NZ IAS 12 ‘Income Tax’ had some fundamental changes to

how tax is accounted for.

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International Accounting Standards Board (IASB)

• IASB comprises 16 individuals:– Each IASB member has one vote on technical and other

matters.– Publication of standard, exposure draft or final SIC

interpretation requires approval by at least eight board members.

– Other decisions require a simple majority.

• Board has full control over technical agenda.

• IASB publicly explains how conclusions were reached, what background information was used, and what the dissenting opinions were.

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International Cultural Differences and the Harmonisation of Accounting Standards

• Values inherent in accounting subculture influenced by society-wide values.

• Accounting systems are not ‘culture free’.

• Should different countries with varying cultural values adopt internationally uniform accounting practices?

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Use and role of audit reports

• An independent opinion of the financial information regarding:– true and fair view– compliance with the Companies Act 1993 and Financial

Reporting Act 1993– compliance with accounting standards.

• Helps establish credibility of the financial information.

• Auditor not responsible for preparation of financial information.

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All this regulation—is it really necessary?

Opinions range from the ‘free-market’ perspective to the ‘pro-regulation’ perspective.

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Free-market perspective

Beliefs:

• Demand and supply forces generate an optimal supply of information.

• Even in the absence of regulation there are private economics-based incentives to provide information.

• Information is produced to reduce conflict between parties with an interest in the organisation.

• Managers are best placed to determine what information should be produced.

• Financial statement audits can also be expected in the absence of regulation.

• Without regulation, entities would still be motivated to disclose both good and bad news.

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Pro-regulation perspective

Beliefs:• Accounting information is a public good:

– Once available it can be used and passed on without payment

– Parties using without incurring costs are known as ‘free-riders’

– In the presence of free-riders true demand is understated.• Regulation is required to alleviate the effects of market failure:

– Arguments that ‘on average’ the market is efficient ignore the rights of individual investors who might lose as a result of relying upon unregulated disclosures

– Ability to obtain information might depend on the individual’s control of scarce resources required by the entity.

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Summary

• The accounting environment has changed majorly in NZ.

• Standards are now made by the IASB and adopted as equivalents by NZ.

• There are a variety of legislative influences on NZ accounting.

• Auditors act as a check on accounting practice.• Reporting changes are frequent, requiring

accountants to keep up to date.• The amount of regulation required for fair outcomes

is debated.

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Summary (continued)

Other key issues addressed include:• Major sources of external financial reporting regulations.• Process of adopting accounting standards issued by IASB.• Structure of IASB.• Significance of cultural differences and harmonisation

of accounting standards.• Role of audit reports.• Whether regulation should be considered necessary

in financial reporting.

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