Chapter 1 An overview of the New Zealand external reporting environment.

Chapter 1Chapter 1

An overview of the An overview of the New Zealand New Zealand

external external reporting reporting

environmentenvironment

Copyright Copyright 2003 McGraw-Hill New Zealand Pty Ltd 2003 McGraw-Hill New Zealand Pty Ltd PPTs t/a PPTs t/a New Zealand Financial Accounting 2eNew Zealand Financial Accounting 2e by Deegan and Samkin by Deegan and Samkin

Slides prepared by Grant SamkinSlides prepared by Grant Samkin

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ObjectivesObjectives

Understand the extent of regulation Understand the extent of regulation relating to which New Zealand external relating to which New Zealand external financial reporting is subject.financial reporting is subject.

Be able to explain the general functions Be able to explain the general functions of the Accounting Standards Review of the Accounting Standards Review Board, the Financial Reporting Standards Board, the Financial Reporting Standards Board and the New Zealand Stock Board and the New Zealand Stock Exchange.Exchange.

Understand the role of a financial Understand the role of a financial reporting standard and the process by reporting standard and the process by which it is developed.which it is developed.



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Objectives (cont.)Objectives (cont.)

Be able to explain the five elements of Be able to explain the five elements of accounting and be aware of the accounting and be aware of the respective recognition principles.respective recognition principles.

Be able to explain the objectives and Be able to explain the objectives and potential shortcomings of the New potential shortcomings of the New Zealand ‘Statement of Concepts for Zealand ‘Statement of Concepts for General Purpose Financial Reporting.General Purpose Financial Reporting.



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Objectives (cont.)Objectives (cont.)

Understand the role of the International Understand the role of the International Accounting Standards Board and be Accounting Standards Board and be aware of the program, currently in place aware of the program, currently in place within New Zealand, to harmonise New within New Zealand, to harmonise New Zealand financial reporting standards Zealand financial reporting standards with pronouncements issued by the with pronouncements issued by the International Accounting Standards International Accounting Standards Board and the Australian Accounting Board and the Australian Accounting Standards Board.Standards Board.



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Financial Financial accounting definedaccounting defined Financial accounting is a process Financial accounting is a process

involving the collection and processing of involving the collection and processing of financial information to assist the financial information to assist the decision-making needs of parties external decision-making needs of parties external to the organisation.to the organisation.

Contrasted with management accounting:Contrasted with management accounting:– focuses on providing information for decision focuses on providing information for decision

making by parties within the organisationmaking by parties within the organisation– largely unregulated.largely unregulated.

Financial accounting heavily regulated.Financial accounting heavily regulated.



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User demand for User demand for general purpose general purpose financial reportsfinancial reports Users may be defined to include:Users may be defined to include:

– present and potential investorspresent and potential investors– employeesemployees– lenderslenders– suppliers and other trade creditorssuppliers and other trade creditors– customerscustomers– government and its agenciesgovernment and its agencies– the public.the public.

Only certain users may have the Only certain users may have the power to demand specific information power to demand specific information to meet their needs.to meet their needs.



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Sources of external Sources of external financial reporting financial reporting regulationsregulations The Accounting Standards Review The Accounting Standards Review

Board (ASRB)Board (ASRB) The Financial Reporting Standards The Financial Reporting Standards

Board (FRSB)Board (FRSB) The New Zealand Stock Exchange The New Zealand Stock Exchange

(NZSE)(NZSE)



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Background to NZ Background to NZ accounting standard-accounting standard-setting processsetting process

Until 1993 regulation of accounting Until 1993 regulation of accounting profession was in the hands of the profession was in the hands of the private sector.private sector.

1987 share market collapse led to an 1987 share market collapse led to an inquiry to review share market law and inquiry to review share market law and recommend changes to ensure the recommend changes to ensure the existence of a fair and efficient existence of a fair and efficient market.market.



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Background to NZ Background to NZ accounting standard-accounting standard-setting process (cont.)setting process (cont.)

A number of recommendations made, A number of recommendations made, including:including:– legal backing be given to accounting legal backing be given to accounting

standardsstandards– an Accounting Standards Review Board be an Accounting Standards Review Board be

established to approve accounting established to approve accounting standardsstandards

– sanctions be put in place for non-sanctions be put in place for non-compliance with standards.compliance with standards.



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Accounting Standards Accounting Standards Review Board (ASRB)Review Board (ASRB)

Financial Reporting Act 1993Financial Reporting Act 1993 (FRA) is (FRA) is the primary statute governing the the primary statute governing the establishment of accounting establishment of accounting standards.standards.

ASRB constituted as a body corporate ASRB constituted as a body corporate under the FRA.under the FRA.

Functions of ASRB provided by section Functions of ASRB provided by section 24 24

of FRA.of FRA.



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Application of financial Application of financial reporting standardsreporting standards

Financial reporting standards approved Financial reporting standards approved by the ASRB normally apply to all by the ASRB normally apply to all financial statements prepared by all financial statements prepared by all reporting entities or groups.reporting entities or groups.

However, financial reporting standards However, financial reporting standards may be expressed to apply to specific may be expressed to apply to specific classes of issuers or companies (e.g. classes of issuers or companies (e.g. by size of the entity).by size of the entity).



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Application of financial Application of financial reporting standards reporting standards (cont.)(cont.) ‘‘Financial statements’ means Financial statements’ means

statements comprising:statements comprising:– a statement of financial positiona statement of financial position– a statement of financial performance (or a statement of financial performance (or

an income and expenditure account)an income and expenditure account)– a cash flow statementa cash flow statement– explanatory notes.explanatory notes.



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Application of financial Application of financial reporting standards reporting standards (cont.)(cont.) An issuer includes companies that An issuer includes companies that

have allocated securities to the public.have allocated securities to the public. Issuers includeIssuers include::

– entities that have allocated securities to entities that have allocated securities to the public by way of a registered the public by way of a registered prospectusprospectus

– unit trustsunit trusts– registered banks.registered banks.



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Application of financial Application of financial reporting standards reporting standards (cont.)(cont.) Small companies are treated as an Small companies are treated as an

exempt category.exempt category. Company or issuer is exempt if:Company or issuer is exempt if:

– total assets did not exceed $450 000total assets did not exceed $450 000– turnover did not exceed $1 000 000turnover did not exceed $1 000 000– the company was not a subsidiarythe company was not a subsidiary– the company did not have subsidiaries.the company did not have subsidiaries.



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Framework for Framework for differential reportingdifferential reporting

Applies to general purpose financial Applies to general purpose financial reports only.reports only.

Under the framework, qualifying entities Under the framework, qualifying entities are granted full or partial exemption from are granted full or partial exemption from complying with certain financial reporting complying with certain financial reporting standards.standards.

The framework’s use is justified on the The framework’s use is justified on the grounds that accounting standard grounds that accounting standard overload and compliance costs are overload and compliance costs are reduced.reduced.



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Financial reporting Financial reporting standards, GAAP and standards, GAAP and the true and fair viewthe true and fair view GAAP describes the basis on which GAAP describes the basis on which

general purpose financial reports are general purpose financial reports are normally prepared.normally prepared.

It encompasses specific rules, It encompasses specific rules, practices and procedures relating to practices and procedures relating to particular circumstances and broad particular circumstances and broad concepts and principles of general concepts and principles of general application.application.



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Financial reporting Financial reporting standards, GAAP and standards, GAAP and the true and fair view the true and fair view (cont.)(cont.) Financial statements comply with Financial statements comply with

GAAP only if those statements comply GAAP only if those statements comply with:with:– applicable financial reporting standards; orapplicable financial reporting standards; or– where there are no applicable financial where there are no applicable financial

reporting standards or rule of law, with reporting standards or rule of law, with accounting policies that are appropriate to accounting policies that are appropriate to the circumatances of the reporting entity the circumatances of the reporting entity and have authoritative support within the and have authoritative support within the accounting profession in New Zealand.accounting profession in New Zealand.



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Financial reporting Financial reporting standards, GAAP and standards, GAAP and the true and fair view the true and fair view (cont.)(cont.) Compliance with GAAP usually means Compliance with GAAP usually means

that financial statements give a true that financial statements give a true and fair view of an entity’s financial and fair view of an entity’s financial position, performance and cash flows.position, performance and cash flows.

Financial statements must provide a Financial statements must provide a ‘true and fair’ view.‘true and fair’ view.

No legal definition of ‘true and fair’ No legal definition of ‘true and fair’ view.view.



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Financial reporting Financial reporting standards, GAAP and standards, GAAP and the true and fair view the true and fair view (cont.)(cont.) Two views on ‘true and fair’ view:Two views on ‘true and fair’ view:

– could be met by companies could be met by companies complying with financial reporting complying with financial reporting standards when preparing general standards when preparing general purpose financial reports; orpurpose financial reports; or

– could imply more than simply could imply more than simply complying with financial reporting complying with financial reporting standards.standards.

Financial statements should include all Financial statements should include all information of a ‘material’ nature.information of a ‘material’ nature.



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Directors’ Directors’ responsibilitiesresponsibilities

Directors of a company are Directors of a company are responsible for the maintenance of responsible for the maintenance of accounting records.accounting records.

Although not specifically required, a Although not specifically required, a number of New Zealand companies number of New Zealand companies include a section in their directors’ include a section in their directors’ reports dealing with directors’ reports dealing with directors’ responsibilities.responsibilities.



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Directors’ reportDirectors’ report

No formal requirement for a directors’ No formal requirement for a directors’ report.report.

Section 211(1)(a) of Section 211(1)(a) of Companies Act Companies Act 19931993 requires that every annual report: requires that every annual report:– be in writingbe in writing– be datedbe dated– describe the state of the companies affairsdescribe the state of the companies affairs– will not be harmful to the business of the will not be harmful to the business of the

company or any subsidiary; orcompany or any subsidiary; or– change during the accounting period in:change during the accounting period in:

the nature of the businessthe nature of the business the classes of business in which the company the classes of business in which the company

has an interesthas an interest



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Directors’ report (cont.)Directors’ report (cont.)

A number of additional items must be A number of additional items must be disclosed, includingdisclosed, including::– particulars of entries in the interests particulars of entries in the interests

register made during the accounting register made during the accounting periodperiod

– names of persons holding office as names of persons holding office as directors at end of and during the directors at end of and during the accounting period.accounting period.



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Financial Reporting Financial Reporting Standards Board (FRSB)Standards Board (FRSB)

FRSB is a board of ICANZ.FRSB is a board of ICANZ. Members are appointed by the Council Members are appointed by the Council

of ICANZ.of ICANZ. FRSB is responsible for developing and FRSB is responsible for developing and

revising financial reporting standards, revising financial reporting standards, sources of authoritative support, sources of authoritative support, maintance of the Statement of maintance of the Statement of Concepts, guidance notes and Concepts, guidance notes and technical practice aids.technical practice aids.



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Development of a Development of a financial reporting financial reporting standardstandard

Until 1997, financial reporting standard Until 1997, financial reporting standard projects originated from:projects originated from:– outcomes of IASC work programsoutcomes of IASC work programs– harmonisation with Australiaharmonisation with Australia– issues raised by ICANZ membersissues raised by ICANZ members– responses to changes or new developmentsresponses to changes or new developments– review of changes to existing financial review of changes to existing financial

reporting standards in response to the reporting standards in response to the continued development of the Statement of continued development of the Statement of Concepts.Concepts.



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Development of a Development of a financial reporting financial reporting standard (cont.)standard (cont.)

In 1997 the FRSB decided that future In 1997 the FRSB decided that future financial reporting standards would be financial reporting standards would be developed based on those issued by developed based on those issued by the IASC or AASB.the IASC or AASB.

A discussion paper would accompany A discussion paper would accompany the exposure draft in which the the exposure draft in which the implications for New Zealand entities implications for New Zealand entities would be outlinedwould be outlined..



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Urgent issues group Urgent issues group (UIG)(UIG)

No formal UIG exists in New Zealand.No formal UIG exists in New Zealand. FRSB directs those seeking clarification FRSB directs those seeking clarification

on a financial reporting standard to:on a financial reporting standard to:– amendments to standardsamendments to standards– interpretations to standardsinterpretations to standards– guidance notes.guidance notes.



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New Zealand Stock New Zealand Stock Exchange (NZSE)Exchange (NZSE)

For entities listed on NZSE there are For entities listed on NZSE there are additional reporting requirements additional reporting requirements contained in Listing Rules.contained in Listing Rules.

NZSE can also require compliance with NZSE can also require compliance with a particular accounting standard, for a particular accounting standard, for example IAS 33 ‘Earnings Per Share’.example IAS 33 ‘Earnings Per Share’.



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The Conceptual The Conceptual Framework (CF)Framework (CF) FRSB is responsible for the FRSB is responsible for the

maintenance of the Statement of maintenance of the Statement of Concepts. Concepts.

Framework seeks to define the nature, Framework seeks to define the nature, subject, purpose and broad content of subject, purpose and broad content of general purpose financial reporting. general purpose financial reporting.

Argues that Statement of Concepts is Argues that Statement of Concepts is not a CF because a cohesive set of not a CF because a cohesive set of principles to guide financial reporting principles to guide financial reporting has not been established. has not been established.



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The Conceptual The Conceptual Framework (CF) Framework (CF) (cont.)(cont.) Central goal in establishing CF is Central goal in establishing CF is

general consensus on:general consensus on:– scope and objectives of financial reportingscope and objectives of financial reporting– qualitative characteristics that financial qualitative characteristics that financial

information should possessinformation should possess– elements of financial reporting.elements of financial reporting.



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Benefits of Benefits of Conceptual Conceptual FrameworkFramework More consistent and logical financial More consistent and logical financial

reporting standard can be developed.reporting standard can be developed. Increased international comparability.Increased international comparability. The Boards should be more The Boards should be more

accountable for their decisions.accountable for their decisions. Enhanced process of communication Enhanced process of communication

between the Boards and constituents.between the Boards and constituents. More economical accounting standard More economical accounting standard

development.development.



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SC 2 Reporting entitySC 2 Reporting entity

A reporting entity exists where it is A reporting entity exists where it is reasonable to expect the existence of reasonable to expect the existence of users dependent on general purpose users dependent on general purpose financial reports (GPFRs) for information financial reports (GPFRs) for information which will be useful to them.which will be useful to them.

GPFRs provide information to meet the GPFRs provide information to meet the needs of external users unable to needs of external users unable to acquire, or contract for, special purpose acquire, or contract for, special purpose financial reports.financial reports.



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SC 3 Objectives of SC 3 Objectives of GPFRsGPFRs

To provide information to assist users in To provide information to assist users in assessing the reporting entity’s: assessing the reporting entity’s: – financial and service performance, financial financial and service performance, financial

position and cash flowsposition and cash flows– compliance with legislation, regulations, compliance with legislation, regulations,

common law and contractual arrangements; common law and contractual arrangements; andand

– making decisions about providing resources to, making decisions about providing resources to, or doing business with, the entity.or doing business with, the entity.

Financial reporting has an accountability Financial reporting has an accountability and an information or decision-making and an information or decision-making role.role.



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SC 4 Qualitative SC 4 Qualitative characteristicscharacteristics

Identifies the characteristics of Identifies the characteristics of financial information necessary to financial information necessary to allow users to make and evaluate allow users to make and evaluate decisions about the allocation of decisions about the allocation of scarce resources.scarce resources.

Primary qualitative characteristics:Primary qualitative characteristics:– relevancerelevance– reliabilityreliability



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SC 4 Qualitative SC 4 Qualitative characteristics (cont.)characteristics (cont.)

Information is relevant if it can be used to:Information is relevant if it can be used to:– confirm or correct prior expectations about confirm or correct prior expectations about

past events (feedback value)past events (feedback value)– assist in forming, revising or confirming assist in forming, revising or confirming

expectations about the future (predictive expectations about the future (predictive value).value).

Information is reliable when it:Information is reliable when it:– corresponds with actual underlying corresponds with actual underlying

transactions and events (representational transactions and events (representational faithfulness)faithfulness)

– is capable of independent verification is capable of independent verification (verifiability)(verifiability)

– is free from bias (neutrality).is free from bias (neutrality).



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SC 5 Assumptions SC 5 Assumptions underlying the underlying the preparation of GPFRspreparation of GPFRs

Three basic assumptions underlie Three basic assumptions underlie GPFRs:GPFRs:– going-concern assumptiongoing-concern assumption– period reporting assumptionperiod reporting assumption– accrual-basis assumption.accrual-basis assumption.

Where assumptions are not appropriate Where assumptions are not appropriate or have not been used, the alternative or have not been used, the alternative assumptions used must be disclosed.assumptions used must be disclosed.



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SC 6 Influences on SC 6 Influences on qualitative qualitative characteristicscharacteristics

Four significant influences in adopting Four significant influences in adopting particular characteristics:particular characteristics:– balance between qualitative balance between qualitative

characteristicscharacteristics– balance between benefit and costbalance between benefit and cost– materialitymateriality– Prudence.Prudence.



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SC 6 Influences on SC 6 Influences on qualitative qualitative characteristics (cont.)characteristics (cont.)

GPFRs should include all financial GPFRs should include all financial information that satisfies the concepts information that satisfies the concepts of relevance and reliability, to the of relevance and reliability, to the extent that such information is extent that such information is material.material.

Materiality is a matter of professional Materiality is a matter of professional judgement although SSAP-6 does judgement although SSAP-6 does provide guidance on base amountsprovide guidance on base amounts..



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SC 7 Definition and SC 7 Definition and recognition of assetsrecognition of assets

Assets are defined as:Assets are defined as:– service potential or future economic service potential or future economic

benefits controlled by the entity as a result benefits controlled by the entity as a result of past transactions or other past events.of past transactions or other past events.



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Definition and Definition and recognition of assets recognition of assets (cont.)(cont.)

Three key characteristics of Three key characteristics of definition:definition:– there must be service potential or future there must be service potential or future

economic benefits;economic benefits;– the reporting entity must control the the reporting entity must control the

service potential or future economic service potential or future economic benefits; andbenefits; and

– the transaction or other event giving rise the transaction or other event giving rise to the control must have occurred.to the control must have occurred.



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Definition and Definition and recognition of assets recognition of assets (cont.)(cont.) An asset shall be recognised in the An asset shall be recognised in the

financial statements when:financial statements when:– it is probable that the service potential or it is probable that the service potential or

future economic benefits embodied in the future economic benefits embodied in the asset will eventuate; andasset will eventuate; and

– it possesses a cost or other value that can it possesses a cost or other value that can be measured with reliability.be measured with reliability.

‘‘probable’ is defined as ‘more likely rather than probable’ is defined as ‘more likely rather than less likely’.less likely’.



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Definition and Definition and recognition of liabilitiesrecognition of liabilities

Liabilities are defined asLiabilities are defined as::– future sacrifices of service potential or future sacrifices of service potential or

future economic benefits that the entity is future economic benefits that the entity is presently obliged to make to other presently obliged to make to other entities, as a result of past transactions or entities, as a result of past transactions or other past events.other past events.



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Definition and Definition and recognition of liabilities recognition of liabilities (cont.)(cont.)

There are three main characteristics:There are three main characteristics:– the entity is presently obliged to act or the entity is presently obliged to act or

perform in a certain wayperform in a certain way– the action will have adverse financial the action will have adverse financial

consequences for the entityconsequences for the entity– a past transaction or other event must a past transaction or other event must

have occurred to create the obligation.have occurred to create the obligation.



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Recognition in financial statements Recognition in financial statements again requires two tests to be met:again requires two tests to be met:– it is probable that the future sacrifice of it is probable that the future sacrifice of

service potential or future economic service potential or future economic benefits will be required; andbenefits will be required; and

– the amount of the liability can be the amount of the liability can be measured reliably.measured reliably.



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If a liability cannot be measured If a liability cannot be measured reliably but is potentially material it reliably but is potentially material it should be disclosed within the notes should be disclosed within the notes to the accounts.to the accounts.



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Definition and Definition and recognition of expensesrecognition of expenses

The definition is dependent upon the The definition is dependent upon the definition of assets and liabilities.definition of assets and liabilities.

Expenses are defined as:Expenses are defined as:– consumptions or losses of service potential consumptions or losses of service potential

or future economic benefits in the form of or future economic benefits in the form of reductions in assets or increases in reductions in assets or increases in liabilities of the entity, other than those liabilities of the entity, other than those relating to distributions to the owners, that relating to distributions to the owners, that result in a decrease in equity during the result in a decrease in equity during the reporting period.reporting period.



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Definition and Definition and recognition of expenses recognition of expenses (cont.)(cont.)

Expenses are recognised when:Expenses are recognised when:– it is probable that the consumption or loss it is probable that the consumption or loss

of service potential or future economic of service potential or future economic benefits resulting in a reduction in assets benefits resulting in a reduction in assets and/or increase in liabilities has occurred; and/or increase in liabilities has occurred; andand

– the consumption or loss of economic the consumption or loss of economic benefits can be measured with reliability.benefits can be measured with reliability.



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Definition and Definition and recognition of revenuesrecognition of revenues

Again the definition is dependent on Again the definition is dependent on asset and liability definitions.asset and liability definitions.

Revenues are defined as:Revenues are defined as:– inflows or other enhancements, or savings in inflows or other enhancements, or savings in

outflows, of service potential or future outflows, of service potential or future economic benefits in the form of increases in economic benefits in the form of increases in assets or reductions in liabilities of the entity, assets or reductions in liabilities of the entity, other than those relating to contributions by other than those relating to contributions by owners, that result in an increase in equity owners, that result in an increase in equity during the reporting period.during the reporting period.



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Definition and Definition and recognition of revenues recognition of revenues (cont.)(cont.) Revenues can be recognised in the Revenues can be recognised in the

financial statements when:financial statements when:– it is probable that the inflow or other it is probable that the inflow or other

enhancement or saving in outflows of enhancement or saving in outflows of service potential or future economic service potential or future economic benefits has occurred; andbenefits has occurred; and

– the inflow or other enhancement or saving the inflow or other enhancement or saving in outflows of service potential or future in outflows of service potential or future economic benefits can be measured with economic benefits can be measured with reliability.reliability.



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Definition of equityDefinition of equity

Equity is defined as:Equity is defined as:– the residual interest in the assets of the the residual interest in the assets of the

entity after deduction of its liabilities.entity after deduction of its liabilities. Directly a function of the definition Directly a function of the definition

given to assets and liabilities.given to assets and liabilities.



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Critical review of the Critical review of the Conceptual Conceptual Framework (CF)Framework (CF) Objective of GPFRs in CF implies that Objective of GPFRs in CF implies that

financial reports should be primarily financial reports should be primarily economic in focus.economic in focus.– Should social issues be ignored in the Should social issues be ignored in the

annual report?annual report? An individual's view of business An individual's view of business

responsibilities directly impacts on the responsibilities directly impacts on the perceptions of accountability.perceptions of accountability.



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Critical review of Critical review of the CF (cont.)the CF (cont.) In determining whether an entity is In determining whether an entity is

a reporting entity, is the need for a reporting entity, is the need for information to enable informed information to enable informed ‘resource allocation decisions’ the ‘resource allocation decisions’ the only or dominant thing to consider?only or dominant thing to consider?



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Critical review of Critical review of the CF (cont.)the CF (cont.) Economic focus of GPFRs ignores Economic focus of GPFRs ignores

transactions or events not resulting transactions or events not resulting from market transactions or an from market transactions or an exchange of property rights.exchange of property rights.

Ignores environmental externalities Ignores environmental externalities caused by business.caused by business.



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Critical review of Critical review of the CF (cont.)the CF (cont.) Financial statements included within Financial statements included within

reports only reflect financial reports only reflect financial performance and do not provide a performance and do not provide a means of assessing social means of assessing social performance.performance.

Financial press also generally uses Financial press also generally uses financial indicators as a guide to a financial indicators as a guide to a firm’s success.firm’s success.



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Critical review of Critical review of the CF (cont.)the CF (cont.) The Conceptual Framework simply The Conceptual Framework simply

codifies existing practice.codifies existing practice. Conceptual frameworks have been Conceptual frameworks have been

used as devices to legitimise the used as devices to legitimise the existence of the accounting profession.existence of the accounting profession.



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Harmonisation of New Harmonisation of New Zealand and Zealand and International International Accounting StandardsAccounting Standards Since 1993 ASRB required to liaise Since 1993 ASRB required to liaise

with Accounting Standards Board in with Accounting Standards Board in Australia to harmonise New Zealand Australia to harmonise New Zealand and Australian financial reporting and Australian financial reporting standards.standards.

Harmonisation = compatibility but with Harmonisation = compatibility but with some variations.some variations.



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The International The International Accounting Standards Accounting Standards Committee (IASC)Committee (IASC)

Established in 1973.Established in 1973. Aims to bring together parties from Aims to bring together parties from

throughout the world to develop throughout the world to develop accounting standards that apply accounting standards that apply internationally.internationally.

Representatives from over 100 Representatives from over 100 countries.countries.

Replaced by International Accounting Replaced by International Accounting Standards Board (IASB) in April 2001.Standards Board (IASB) in April 2001.



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Importance of Importance of International International Accounting StandardsAccounting Standards

Referred to as indication of possible Referred to as indication of possible best practice when standards being best practice when standards being developed by countries with their own developed by countries with their own standard-setting process in place.standard-setting process in place.

Useful guidance when no domestic Useful guidance when no domestic standard relates to a particular standard relates to a particular accounting issue.accounting issue.

Have been directly adopted by Have been directly adopted by countries which do not have their own countries which do not have their own accounting standards.accounting standards.



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Structure of new IASBStructure of new IASB

Group of trustees responsible for Group of trustees responsible for appointment of IASB members.appointment of IASB members.

IASB has 12 full-time members and 2 IASB has 12 full-time members and 2 part-time members.part-time members.

Publication of IAS or exposure draft Publication of IAS or exposure draft requires approval by at least 8 Board requires approval by at least 8 Board members.members.



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Harmonisation with Harmonisation with IASC standardsIASC standards

IAS issued by IASB are deemed to have IAS issued by IASB are deemed to have authoritative support in New Zealand.authoritative support in New Zealand.

Inconsistencies between NZ financial Inconsistencies between NZ financial reporting standards and IAS (and reporting standards and IAS (and Australian accounting standards) are Australian accounting standards) are highlighted in conformity statements highlighted in conformity statements included as appendixes to financial included as appendixes to financial reporting standards.reporting standards.



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New Zealand New Zealand representation on the representation on the IASBIASB NZ does not have strong NZ does not have strong

representation on the IASB.representation on the IASB. IAS development process does allow IAS development process does allow

for New Zealand input.for New Zealand input.



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Rationale for Rationale for harmonisationharmonisation

If New Zealand retains unique If New Zealand retains unique accounting standards, inflow of foreign accounting standards, inflow of foreign investment will be restricted.investment will be restricted.

Need for common accounting Need for common accounting language to facilitate investor language to facilitate investor evaluation of domestic and foreign evaluation of domestic and foreign corporations.corporations.

Avoids costly accounting conversions Avoids costly accounting conversions by foreign listed companies.by foreign listed companies.



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Implications of Implications of harmonisationharmonisation

Numerous changes to New Zealand Numerous changes to New Zealand financial reporting standards in recent financial reporting standards in recent years, and still ongoing.years, and still ongoing.

Numerous new standards to cover Numerous new standards to cover issues not previously addressed by issues not previously addressed by financial reporting standards.financial reporting standards.



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Perceived benefits of Perceived benefits of harmonisationharmonisation

Improve quality of financial reporting.Improve quality of financial reporting. Increase comparability of financial Increase comparability of financial

reports prepared in different countries reports prepared in different countries means better quality information to means better quality information to participants in international capital participants in international capital markets.markets.

Remove barriers to international Remove barriers to international capital flows.capital flows.



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Perceived benefits of Perceived benefits of harmonisation (cont.)harmonisation (cont.)

Reducing financial reporting costs for Reducing financial reporting costs for both New Zealand and foreign both New Zealand and foreign multinationals.multinationals.

Facilitating more meaningful Facilitating more meaningful comparisons of New Zealand and comparisons of New Zealand and foreign public sector entities.foreign public sector entities.



1-1-6565

New Zealand adoption New Zealand adoption of IFRSof IFRS

October 2002 ASRB announces that October 2002 ASRB announces that from 2007, listed issuers would be from 2007, listed issuers would be required to comply with IFRS.required to comply with IFRS.

Issuers would be permitted to adopt Issuers would be permitted to adopt them from 2005.them from 2005.



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Recent developments – Recent developments – financial reporting financial reporting structurestructure November 2002 the FRSB agreed that November 2002 the FRSB agreed that

the New Zealand financial reporting the New Zealand financial reporting structure should be aligned as closely structure should be aligned as closely as possible with the Australian as possible with the Australian structure.structure.

Based on the ‘reporting entity’ Based on the ‘reporting entity’ concept.concept.



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Barriers to Barriers to harmonisationharmonisation

Perceived barriers to harmonisation:Perceived barriers to harmonisation:– different business environments;different business environments;– different legal systems;different legal systems;– different cultures; anddifferent cultures; and– different political environments across different political environments across

countries.countries. Culture is an expression of norms, Culture is an expression of norms,

values and customs, which reflect values and customs, which reflect typical behavioural characteristics.typical behavioural characteristics.



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Culture and Culture and harmonisationharmonisation

Values inherent in accounting sub-Values inherent in accounting sub-culture influenced by society-wide culture influenced by society-wide values.values.

Accounting systems cannot be Accounting systems cannot be considered to be ‘culture free’.considered to be ‘culture free’.

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



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Use and role of audit Use and role of audit reportsreports

Provides an independent opinion of the Provides an independent opinion of the financial information, regarding:financial information, regarding:– true and fair viewtrue and fair view– compliance with financial reporting compliance with financial reporting

standards.standards. Helps establish credibility of the Helps establish credibility of the

financial information.financial information. Auditor not responsible for preparation Auditor not responsible for preparation

of financial information.of financial information.



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The need for The need for regulationregulation Accounting is fairly heavily regulated Accounting is fairly heavily regulated

in New Zealand:in New Zealand:– The The Financial Reporting Act 1993Financial Reporting Act 1993 and and

Companies Act 1993Companies Act 1993– Financial reporting standards.Financial reporting standards.

Opinions on the need for regulation Opinions on the need for regulation vary, and range between the ‘free-vary, and range between the ‘free-market’ perspective and the ‘pro-market’ perspective and the ‘pro-regulation’ perspective.regulation’ perspective.



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Free-market perspective Free-market perspective on regulationon regulation

Demand and supply forces should be Demand and supply forces should be allowed to operate, to generate an allowed to operate, to generate an optimal supply of information.optimal supply of information.

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



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Free-market perspective Free-market perspective on regulation (cont.)on regulation (cont.)

Produced to reduce conflict between Produced to reduce conflict between parties with an interest in the parties with an interest in the organisation.organisation.

Managers argued to be best placed to Managers argued to be best placed to determine what information should be determine what information should be produced.produced.



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Free-market perspective Free-market perspective on regulation (cont.)on regulation (cont.)

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

If no regulation, entities are still If no regulation, entities are still motivated to disclose both good and motivated to disclose both good and bad news.bad news.– ‘‘market for lemons’ perspectivemarket for lemons’ perspective



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Pro-regulation Pro-regulation perspectiveperspective

Arguments in favour of a ‘free Arguments in favour of a ‘free market’, where users are expected market’, where users are expected to pay for information break down to pay for information break down when consumption of ‘free’ or when consumption of ‘free’ or ‘public’ goods is considered.‘public’ goods is considered.



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Pro-regulation Pro-regulation perspective (cont.)perspective (cont.)

Accounting information is a public Accounting information is a public good.good.– Once available, it can be used and passed Once available, it can be used and passed

on without paying.on without paying.– Parties using without incurring costs are Parties using without incurring costs are

known as ‘free-riders’.known as ‘free-riders’.– In the presence of free-riders, true In the presence of free-riders, true

demand is understated.demand is understated.



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Regulation required to alleviate the Regulation required to alleviate the effects of market failure.effects of market failure.

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



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

Chapter 1 An overview of the New Zealand external reporting environment.

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