Chapter 1
An overview of the
New Zealand external
reporting environment
Objectives



Understand the extent of regulation relating
to which New Zealand external financial
reporting is subject.
Be able to explain the general functions of
the Accounting Standards Review Board, the
Financial Reporting Standards Board and the
New Zealand Stock Exchange.
Understand the role of a financial reporting
standard and the process by which it is
developed.
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1-2
Objectives (cont.)


Be able to explain the five elements of
accounting and be aware of the respective
recognition principles.
Be able to explain the objectives and
potential shortcomings of the New Zealand
‘Statement of Concepts for General Purpose
Financial Reporting.
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Objectives (cont.)

Understand the role of the International
Accounting Standards Board and be aware
of the program, currently in place within
New Zealand, to harmonise New Zealand
financial reporting standards with
pronouncements issued by the International
Accounting Standards Board and the
Australian Accounting Standards Board.
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1-4
Financial accounting
defined


Financial accounting is a process involving
the collection and processing of financial
information to assist the decision-making
needs of parties external to the
organisation.
Contrasted with management accounting:
– focuses on providing information for decision
making by parties within the organisation
– largely unregulated.

Financial accounting heavily regulated.
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1-5
User demand for general
purpose financial reports

Users may be defined to include:
–
–
–
–
–
–
–

present and potential investors
employees
lenders
suppliers and other trade creditors
customers
government and its agencies
the public.
Only certain users may have the power to
demand specific information to meet their
needs.
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1-6
Sources of external
financial reporting
regulations



The Accounting Standards Review Board
(ASRB)
The Financial Reporting Standards Board
(FRSB)
The New Zealand Stock Exchange (NZSE)
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Background to NZ
accounting standardsetting process


Until 1993 regulation of accounting
profession was in the hands of the private
sector.
1987 share market collapse led to an inquiry
to review share market law and recommend
changes to ensure the existence of a fair
and efficient market.
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Background to NZ
accounting standardsetting process (cont.)

A number of recommendations made,
including:
– legal backing be given to accounting standards
– an Accounting Standards Review Board be
established to approve accounting standards
– sanctions be put in place for non-compliance
with standards.
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Accounting Standards
Review Board (ASRB)



Financial Reporting Act 1993 (FRA) is the
primary statute governing the establishment
of accounting standards.
ASRB constituted as a body corporate under
the FRA.
Functions of ASRB provided by section 24
of FRA.
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Application of financial
reporting standards


Financial reporting standards approved by
the ASRB normally apply to all financial
statements prepared by all reporting entities
or groups.
However, financial reporting standards may
be expressed to apply to specific classes of
issuers or companies (e.g. by size of the
entity).
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Application of financial
reporting standards (cont.)

‘Financial statements’ means statements
comprising:
– a statement of financial position
– a statement of financial performance (or an
income and expenditure account)
– a cash flow statement
– explanatory notes.
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Application of financial
reporting standards (cont.)


An issuer includes companies that have
allocated securities to the public.
Issuers include:
– entities that have allocated securities to the
public by way of a registered prospectus
– unit trusts
– registered banks.
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Application of financial
reporting standards (cont.)


Small companies are treated as an exempt
category.
Company or issuer is exempt if:
–
–
–
–
total assets did not exceed $450 000
turnover did not exceed $1 000 000
the company was not a subsidiary
the company did not have subsidiaries.
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Framework for differential
reporting



Applies to general purpose financial reports
only.
Under the framework, qualifying entities are
granted full or partial exemption from
complying with certain financial reporting
standards.
The framework’s use is justified on the
grounds that accounting standard overload
and compliance costs are reduced.
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Financial reporting
standards, GAAP and the
true and fair view


GAAP describes the basis on which general
purpose financial reports are normally
prepared.
It encompasses specific rules, practices and
procedures relating to particular
circumstances and broad concepts and
principles of general application.
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Financial reporting
standards, GAAP and the
true and fair view (cont.)

Financial statements comply with GAAP only
if those statements comply with:
– applicable financial reporting standards; or
– where there are no applicable financial reporting
standards or rule of law, with accounting policies
that are appropriate to the circumatances of the
reporting entity and have authoritative support
within the accounting profession in New Zealand.
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Financial reporting
standards, GAAP and the
true and fair view (cont.)



Compliance with GAAP usually means that
financial statements give a true and fair
view of an entity’s financial position,
performance and cash flows.
Financial statements must provide a ‘true
and fair’ view.
No legal definition of ‘true and fair’ view.
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Financial reporting
standards, GAAP and the
true and fair view (cont.)


Two views on ‘true and fair’ view:
– could be met by companies complying
with financial reporting standards when
preparing general purpose financial
reports; or
– could imply more than simply complying
with financial reporting standards.
Financial statements should include all
information of a ‘material’ nature.
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Directors’ responsibilities


Directors of a company are responsible
for the maintenance of accounting
records.
Although not specifically required, a
number of New Zealand companies
include a section in their directors’
reports dealing with directors’
responsibilities.
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Directors’ report


No formal requirement for a directors’
report.
Section 211(1)(a) of Companies Act 1993
requires that every annual report:
–
–
–
–
be in writing
be dated
describe the state of the companies affairs
will not be harmful to the business of the
company or any subsidiary; or
– change during the accounting period in:


the nature of the business
the classes of business in which the company has an
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Directors’ report (cont.)

A number of additional items must be
disclosed, including:
– particulars of entries in the interests register
made during the accounting period
– names of persons holding office as directors at
end of and during the accounting period.
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Financial Reporting
Standards Board (FRSB)



FRSB is a board of ICANZ.
Members are appointed by the Council of
ICANZ.
FRSB is responsible for developing and
revising financial reporting standards,
sources of authoritative support, maintance
of the Statement of Concepts, guidance
notes and technical practice aids.
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Development of a financial
reporting standard

Until 1997, financial reporting standard
projects originated from:
–
–
–
–
–
outcomes of IASC work programs
harmonisation with Australia
issues raised by ICANZ members
responses to changes or new developments
review of changes to existing financial reporting
standards in response to the continued
development of the Statement of Concepts.
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Development of a financial
reporting standard (cont.)


In 1997 the FRSB decided that future
financial reporting standards would be
developed based on those issued by the
IASC or AASB.
A discussion paper would accompany the
exposure draft in which the implications for
New Zealand entities would be outlined.
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Urgent issues group (UIG)


No formal UIG exists in New Zealand.
FRSB directs those seeking clarification on a
financial reporting standard to:
– amendments to standards
– interpretations to standards
– guidance notes.
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New Zealand Stock
Exchange (NZSE)


For entities listed on NZSE there are
additional reporting requirements contained
in Listing Rules.
NZSE can also require compliance with a
particular accounting standard, for example
IAS 33 ‘Earnings Per Share’.
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The Conceptual
Framework (CF)



FRSB is responsible for the maintenance of
the Statement of Concepts.
Framework seeks to define the nature,
subject, purpose and broad content of
general purpose financial reporting.
Argues that Statement of Concepts is not a
CF because a cohesive set of principles to
guide financial reporting has not been
established.
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The Conceptual
Framework (CF) (cont.)

Central goal in establishing CF is general
consensus on:
– scope and objectives of financial reporting
– qualitative characteristics that financial
information should possess
– elements of financial reporting.
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Benefits of Conceptual
Framework





More consistent and logical financial
reporting standard can be developed.
Increased international comparability.
The Boards should be more accountable for
their decisions.
Enhanced process of communication
between the Boards and constituents.
More economical accounting standard
development.
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SC 2 Reporting entity


A reporting entity exists where it is
reasonable to expect the existence of users
dependent on general purpose financial
reports (GPFRs) for information which will
be useful to them.
GPFRs provide information to meet the
needs of external users unable to acquire,
or contract for, special purpose financial
reports.
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SC 3 Objectives of GPFRs

To provide information to assist users in
assessing the reporting entity’s:
– financial and service performance, financial
position and cash flows
– compliance with legislation, regulations, common
law and contractual arrangements; and
– making decisions about providing resources to,
or doing business with, the entity.

Financial reporting has an accountability and
an information or decision-making role.
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SC 4 Qualitative
characteristics


Identifies the characteristics of financial
information necessary to allow users to
make and evaluate decisions about the
allocation of scarce resources.
Primary qualitative characteristics:
– relevance
– reliability
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SC 4 Qualitative
characteristics (cont.)

Information is relevant if it can be used to:
– confirm or correct prior expectations about past
events (feedback value)
– assist in forming, revising or confirming
expectations about the future (predictive value).

Information is reliable when it:
– corresponds with actual underlying transactions
and events (representational faithfulness)
– is capable of independent verification
(verifiability)
– is free from bias (neutrality).
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SC 5 Assumptions
underlying the preparation
of GPFRs

Three basic assumptions underlie GPFRs:
– going-concern assumption
– period reporting assumption
– accrual-basis assumption.

Where assumptions are not appropriate or
have not been used, the alternative
assumptions used must be disclosed.
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SC 6 Influences on
qualitative characteristics

Four significant influences in adopting
particular characteristics:
–
–
–
–
balance between qualitative characteristics
balance between benefit and cost
materiality
Prudence.
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SC 6 Influences on
qualitative characteristics
(cont.)


GPFRs should include all financial
information that satisfies the concepts of
relevance and reliability, to the extent that
such information is material.
Materiality is a matter of professional
judgement although SSAP-6 does provide
guidance on base amounts.
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SC 7 Definition and
recognition of assets

Assets are defined as:
– service potential or future economic benefits
controlled by the entity as a result of past
transactions or other past events.
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Definition and recognition
of assets (cont.)

Three key characteristics of definition:
– there must be service potential or future
economic benefits;
– the reporting entity must control the service
potential or future economic benefits; and
– the transaction or other event giving rise to the
control must have occurred.
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Definition and recognition
of assets (cont.)

An asset shall be recognised in the financial
statements when:
– it is probable that the service potential or future
economic benefits embodied in the asset will
eventuate; and
– it possesses a cost or other value that can be
measured with reliability.

‘probable’ is defined as ‘more likely rather than less
likely’.
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Definition and recognition
of liabilities

Liabilities are defined as:
– future sacrifices of service potential or future
economic benefits that the entity is presently
obliged to make to other entities, as a result of
past transactions or other past events.
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Definition and recognition
of liabilities (cont.)

There are three main characteristics:
– the entity is presently obliged to act or perform
in a certain way
– the action will have adverse financial
consequences for the entity
– a past transaction or other event must have
occurred to create the obligation.
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Definition and recognition
of liabilities (cont.)

Recognition in financial statements again
requires two tests to be met:
– it is probable that the future sacrifice of service
potential or future economic benefits will be
required; and
– the amount of the liability can be measured
reliably.
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Definition and recognition
of liabilities (cont.)

If a liability cannot be measured reliably
but is potentially material it should be
disclosed within the notes to the
accounts.
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Definition and recognition
of expenses


The definition is dependent upon the
definition of assets and liabilities.
Expenses are defined as:
– consumptions or losses of service potential or
future economic benefits in the form of
reductions in assets or increases in liabilities of
the entity, other than those relating to
distributions to the owners, that result in a
decrease in equity during the reporting period.
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Definition and recognition
of expenses (cont.)

Expenses are recognised when:
– it is probable that the consumption or loss of
service potential or future economic benefits
resulting in a reduction in assets and/or increase
in liabilities has occurred; and
– the consumption or loss of economic benefits
can be measured with reliability.
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Definition and recognition
of revenues


Again the definition is dependent on asset
and liability definitions.
Revenues are defined as:
– inflows or other enhancements, or savings in
outflows, of service potential or future economic
benefits in the form of increases in assets or
reductions in liabilities of the entity, other than
those relating to contributions by owners, that
result in an increase in equity during the
reporting period.
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Definition and recognition
of revenues (cont.)

Revenues can be recognised in the financial
statements when:
– it is probable that the inflow or other
enhancement or saving in outflows of service
potential or future economic benefits has
occurred; and
– the inflow or other enhancement or saving in
outflows of service potential or future economic
benefits can be measured with reliability.
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Definition of equity

Equity is defined as:
– the residual interest in the assets of the entity
after deduction of its liabilities.

Directly a function of the definition given to
assets and liabilities.
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Critical review of the
Conceptual Framework
(CF)

Objective of GPFRs in CF implies that
financial reports should be primarily
economic in focus.
– Should social issues be ignored in the annual
report?

An individual's view of business
responsibilities directly impacts on the
perceptions of accountability.
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Critical review of the
CF (cont.)

In determining whether an entity is a
reporting entity, is the need for
information to enable informed ‘resource
allocation decisions’ the only or dominant
thing to consider?
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Critical review of the
CF (cont.)


Economic focus of GPFRs ignores
transactions or events not resulting from
market transactions or an exchange of
property rights.
Ignores environmental externalities caused
by business.
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Critical review of the
CF (cont.)


Financial statements included within reports
only reflect financial performance and do
not provide a means of assessing social
performance.
Financial press also generally uses financial
indicators as a guide to a firm’s success.
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Critical review of the
CF (cont.)


The Conceptual Framework simply codifies
existing practice.
Conceptual frameworks have been used as
devices to legitimise the existence of the
accounting profession.
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Harmonisation of New
Zealand and International
Accounting Standards


Since 1993 ASRB required to liaise with
Accounting Standards Board in Australia to
harmonise New Zealand and Australian
financial reporting standards.
Harmonisation = compatibility but with
some variations.
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The International
Accounting Standards
Committee (IASC)




Established in 1973.
Aims to bring together parties from
throughout the world to develop accounting
standards that apply internationally.
Representatives from over 100 countries.
Replaced by International Accounting
Standards Board (IASB) in April 2001.
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Importance of
International Accounting
Standards



Referred to as indication of possible best
practice when standards being developed by
countries with their own standard-setting
process in place.
Useful guidance when no domestic standard
relates to a particular accounting issue.
Have been directly adopted by countries
which do not have their own accounting
standards.
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Structure of new IASB



Group of trustees responsible for
appointment of IASB members.
IASB has 12 full-time members and 2 parttime members.
Publication of IAS or exposure draft requires
approval by at least 8 Board members.
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Harmonisation with
IASC standards


IAS issued by IASB are deemed to have
authoritative support in New Zealand.
Inconsistencies between NZ financial
reporting standards and IAS (and Australian
accounting standards) are highlighted in
conformity statements included as
appendixes to financial reporting standards.
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New Zealand
representation on the IASB


NZ does not have strong representation
on the IASB.
IAS development process does allow for
New Zealand input.
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Rationale for
harmonisation



If New Zealand retains unique accounting
standards, inflow of foreign investment will
be restricted.
Need for common accounting language to
facilitate investor evaluation of domestic and
foreign corporations.
Avoids costly accounting conversions by
foreign listed companies.
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Implications of
harmonisation


Numerous changes to New Zealand financial
reporting standards in recent years, and still
ongoing.
Numerous new standards to cover issues
not previously addressed by financial
reporting standards.
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PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin
Slides prepared by Grant Samkin
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Perceived benefits of
harmonisation



Improve quality of financial reporting.
Increase comparability of financial reports
prepared in different countries means better
quality information to participants in
international capital markets.
Remove barriers to international capital
flows.
Copyright  2003 McGraw-Hill New Zealand Pty Ltd
PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin
Slides prepared by Grant Samkin
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Perceived benefits of
harmonisation (cont.)


Reducing financial reporting costs for both
New Zealand and foreign multinationals.
Facilitating more meaningful comparisons of
New Zealand and foreign public sector
entities.
Copyright  2003 McGraw-Hill New Zealand Pty Ltd
PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin
Slides prepared by Grant Samkin
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New Zealand adoption of
IFRS


October 2002 ASRB announces that from
2007, listed issuers would be required to
comply with IFRS.
Issuers would be permitted to adopt them
from 2005.
Copyright  2003 McGraw-Hill New Zealand Pty Ltd
PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin
Slides prepared by Grant Samkin
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Recent developments –
financial reporting
structure


November 2002 the FRSB agreed that the
New Zealand financial reporting structure
should be aligned as closely as possible with
the Australian structure.
Based on the ‘reporting entity’ concept.
Copyright  2003 McGraw-Hill New Zealand Pty Ltd
PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin
Slides prepared by Grant Samkin
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Barriers to harmonisation

Perceived barriers to harmonisation:
–
–
–
–

different business environments;
different legal systems;
different cultures; and
different political environments across countries.
Culture is an expression of norms, values
and customs, which reflect typical
behavioural characteristics.
Copyright  2003 McGraw-Hill New Zealand Pty Ltd
PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin
Slides prepared by Grant Samkin
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Culture and harmonisation



Values inherent in accounting sub-culture
influenced by society-wide values.
Accounting systems cannot be considered to
be ‘culture free’.
Should different countries with varying
cultural values adopt internationally uniform
accounting practices?
Copyright  2003 McGraw-Hill New Zealand Pty Ltd
PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin
Slides prepared by Grant Samkin
1-68
Use and role of audit
reports

Provides an independent opinion of the
financial information, regarding:
– true and fair view
– compliance with financial reporting standards.


Helps establish credibility of the financial
information.
Auditor not responsible for preparation of
financial information.
Copyright  2003 McGraw-Hill New Zealand Pty Ltd
PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin
Slides prepared by Grant Samkin
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The need for
regulation

Accounting is fairly heavily regulated in New
Zealand:
– The Financial Reporting Act 1993 and
Companies Act 1993
– Financial reporting standards.

Opinions on the need for regulation vary,
and range between the ‘free-market’
perspective and the ‘pro-regulation’
perspective.
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PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin
Slides prepared by Grant Samkin
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Free-market perspective on
regulation


Demand and supply forces should be
allowed to operate, to generate an optimal
supply of information.
Even in the absence of regulation there are
private economics-based incentives to
provide information.
Copyright  2003 McGraw-Hill New Zealand Pty Ltd
PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin
Slides prepared by Grant Samkin
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Free-market perspective on
regulation (cont.)


Produced to reduce conflict between parties
with an interest in the organisation.
Managers argued to be best placed to
determine what information should be
produced.
Copyright  2003 McGraw-Hill New Zealand Pty Ltd
PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin
Slides prepared by Grant Samkin
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Free-market perspective on
regulation (cont.)


Financial statement audits can also be
expected in the absence of regulation.
If no regulation, entities are still motivated
to disclose both good and bad news.
– ‘market for lemons’ perspective
Copyright  2003 McGraw-Hill New Zealand Pty Ltd
PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin
Slides prepared by Grant Samkin
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Pro-regulation perspective

Arguments in favour of a ‘free market’,
where users are expected to pay for
information break down when
consumption of ‘free’ or ‘public’ goods is
considered.
Copyright  2003 McGraw-Hill New Zealand Pty Ltd
PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin
Slides prepared by Grant Samkin
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Pro-regulation perspective
(cont.)

Accounting information is a public good.
– Once available, it can be used and passed on
without paying.
– Parties using without incurring costs are known
as ‘free-riders’.
– In the presence of free-riders, true demand is
understated.
Copyright  2003 McGraw-Hill New Zealand Pty Ltd
PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin
Slides prepared by Grant Samkin
1-75
Pro-regulation perspective
(cont.)


Regulation required to alleviate the effects
of market failure.
Arguments that ‘on average’ the market is
efficient ignore the rights of individual
investors who may lose as a result of relying
upon unregulated disclosures.
Copyright  2003 McGraw-Hill New Zealand Pty Ltd
PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin
Slides prepared by Grant Samkin
1-76
Pro-regulation perspective
(cont.)

Ability to obtain information may depend
on the individual’s control of scarce
resources required by the entity.
Copyright  2003 McGraw-Hill New Zealand Pty Ltd
PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin
Slides prepared by Grant Samkin
1-77