Financial Accounting
Financial Accounting is a process involving collection and
processing of financial information to meet the decisionmaking needs of parties external to the organisation
Financial Accounting is heavily regulated
Distinguished from Management
Accounting which provides
financial information for those
within the organisation
Largely
unregulated
Sources of regulation
In New Zealand, external financial reporting is
regulated by:
 Legislation
 Financial Reporting Standards (NZIFRS and
NZIAS)
 Financial Markets Authority (FMA) - replacing
The New Zealand Securities Commission
 The New Zealand Exchange
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Legislation
 A number of important pieces of legislation govern
financial reporting in New Zealand. These are:
 Public Finance Act 1989
 Companies Act 1993
 Financial Reporting Act 1993 (FRA)
 Local Government Act 2002
 Crown Entities Act 2004
 Financial Reporting Amendment Act 2006 (FRAA)
 Financial Reporting Amendment Act 2011 (FRAA)
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Companies Act 1993
 Applies to all companies (narrower focus
than FRA)
 Details:

administrative requirements,
 some disclosure requirements and
 directors' responsibilities
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Financial Reporting Act 1993
This Act and its subsequent amendments (in 2006 and
2011) represents key legislation for financial reporting in NZ
It applies to all
reporting entities
It details the overall
reporting framework
including:
reference to the conceptual
framework
the composition of reports
the true and fair view
the fair presentation override
It defines terms:
Reporting Entity, Issuer, GAAP
A Reporting Entity
All companies, other than
exempt companies
Reporting
Entities must
Users of financial
information (eg
investors or creditors)
Special Purpose
Financial reports
Persons that are deemed
to be reporting entities by
statue
Issuers
Prepare General Purpose Financial
reports (GPFR)
These reports must comply with the
NZ Framework, NZIFRS & NZIAS
Need reliable
reports
To make financial
decisions
Designed to meet the needs of a special
group or to satisfy a specific purpose (eg
cashflow reports for bank as part of a loan
agreement)
Annual reports…
 Companies present financial statements and supporting
notes within an annual report - presented to shareholders
at a company’s annual general meeting
 Part of the annual report is the audit report, providing 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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Financial Reporting Standards
 Financial reporting standards in New Zealand are
the New Zealand equivalents to International
Financial Reporting Standards (NZ IFRS)
 IFRS is designed for General Purpose Financial
Statements (GPFS) although Special Purpose Financial
Statements (SPFS) can use them
 IFRS are developed by the International Accounting
Standards Board (IASB)
 NZ IFRS are the responsibility of the External Reporting
Board (XRB), an independent Crown Entity, established
in June 2011 under the Crown Entities Act 2004
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The Responsibilities of the XRB
The functions of the XRB are prescribed by the Financial
Reporting Act 1993 (and the 2011 amendments to this
Act)
 developing and implementing an overall strategy for
financial reporting standards and auditing and assurance
standards
 preparing and issuing accounting standards
 preparing and issuing auditing and assurance standards
 liaising with national and international organisations that
exercise functions that correspond with, or are similar to,
those conferred on the XRB.
External Reporting Board
NZ Auditing and
Assurance Standards
Board (NZAuASB)
NZ Accounting
Standards Board
(NZASB)
These sub-boards have the responsibility for development,
approval and promulgation of accounting standards and
auditing and assurance standards for application in NZ
NZ Framework –
a conceptual framework
Based on the IASB framework, the NZ
Framework is an essential component of
financial reporting
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The NZ Framework
Nature
Prescribes
Function
Limits
for financial accounting
and reporting
Scope and
Objectives
Provides
agreement
on
Qualitative
Characteristics
Elements
of financial reporting and
financial information
Objective of financial statements
 Paragraph OB2 of the Conceptual Framework
outlines the objective
 Key objectives:
 Financial statements should reflect the perspective of
the entity
 The key users of financial statements are capital
providers
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Assumptions
 It is assumed that organisations are a going
concern; and
 Financial statements are prepared on an accrual
basis
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Qualitative Characteristics
Fundamental
Qualitative
Characteristics
Relevance
Faithful
Representation
Materiality
Enhancing
Qualitative
Charatcteristics
Understandability
Verifiability
Timeliness
Comparability
Refer Picker pp 8-9, sect 1.3.1 and
1.3.2
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Constraints and True & Fair
Constraints on useful financial reporting
 Timeliness
 Balance between Benefit and Cost
 Balance between Qualitative Characteristics
True and Fair View/Fair Presentation
 Financial statements present the financial
position, performance and changes in financial
position of an entity fairly
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Defining Elements
 Assets (para 4.4a)
 Controlled
 Past events
 Future economic benefits flow to entity
 Liabilities (para 4.4b)
 Present obligation
 Past events
 Outflow embodying future economic benefits
 Equity (para 4.4c)
 Residual interest from (assets – liabilities)
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Defining Elements
Past Event
Assets
(para 4.4a)
Liabilities
(para 4.4b)
Present Control
Future Economic Benefit flow into entity
Past Event
Present Obligation
Future outflow of Economic Benefit
Equity
(para 4.4c)
Residual interest from (assets – liabilities)
Equity = Assets - Liabilities
Defining Elements (cont)
 Income (para 4.25a)
 Increases in economic benefits through inflows or
enhancements of assets or
 Decreases in liabilities resulting in equity increases
 Expenses (para 4.25b)
 Decreases in economic benefits through outflows or
depletion of assets or
 Incurrence of liabilities resulting in equity decreases
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Recognition Criteria
When a transaction has met the definition criteria
and before it can be recorded in the financial
statements the following two conditions must apply:
There must be
probable future
economic benefit flow
NZ Framework para 4.38
Picker, p13, sect 1.6
+
The cost or value must
be able to be
measured reliably
Measurement
 Measurement involves assigning monetary
amounts where elements are recognised and
reported
 Measurement bases include (paras 4.54 – 4.56)
 Historical cost
 Current cost
 Realisable (settlement) value
 Present value
Consider the measurement of inventory at the ‘lower
of cost or net realisable value’
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Capital maintenance
 Capital Concepts (para 4.57)
 Financial
 Physical
 Should be based on the needs of the users
 Capital maintenance concept provides the point
of reference by which profit is measured
Refer to Picker p15, section 1.8 of Picker (prescribed text)
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Accounting Standards
Framework
A Reporting Entity
For-Profit Entities
or Public Benefits
Entities?
Public benefits
entities (PBEs)
For-profit entities
(not PBEs)
Tier 1 = Default
•
Prepare General Purpose Financial reports (GPFR) and fully comply with
Generally Accepted Accounting Practice (GAAP) e.g. NZ Framework, NZIFRS &
NZIAS
Tier 2 = No public accountability - Report under NZ IFRS RDR (Reduced
Disclosure Regime)
Tiers 3 & 4 = Accrual/Cash Accounting
Other regulators…
 Financial Markets Authority (now doing the work of the
former NZ Securities Commission)
 Seeks to strengthen investor confidence in New Zealand’s capital
markets
 Included in its work is prescribing disclosure requirements in
relation to the information contained in prospectuses for securities
offered to the public in NZ and is able to enforce these
requirements
 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 the NZX Listing Rules can lead to
suspension of trading of an entity’s shares
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