Appendix 1: Comparing NZ IFRS with previous financial reporting standards for the public sector
The Auditor-General’s views on setting financial reporting standards for the public sector.
A1.1
This Appendix compares NZ IFRS for public benefit entities with financial reporting standards that applied before NZ IFRS (referred to in this Appendix as "previous standards"). The comparison is based on the standards and interpretations in place under NZ IFRS as at 31 March 2009.
A1.2
Interpretations of standards, referred to as NZ SIC and NZ IFRIC, have been linked where possible to the standard to which they primarily relate. NZ SIC are the New Zealand equivalents to interpretations established by the former Standard Interpretations Committee and the NZ IFRIC are the New Zealand equivalents to interpretations established by the International Financial Reporting Interpretations Committee.
A1.3
The comments reflect the judgements my staff and I have made, at a high level, about what has been gained or lost from the adoption of NZ IFRS.
| NZ IFRS standard | Previous standard | Comments |
|---|---|---|
| NZ Framework New Zealand Equivalent to the IASB Framework for the Preparation and Presentation of Financial Statements |
Statement of Concepts for General Purpose Financial Reporting | The NZ Framework includes some paragraphs to reflect the public benefit entity environment. However, the NZ Framework contains less guidance than the previous Statement of Concepts in important areas (for example, contributions by owners). This is a problem for the public sector. |
| NZ IFRS 1 First-time Adoption of New Zealand Equivalents to International Financial Reporting Standards |
No previous standard on this subject | NZ IFRS 1 relates to the transition to NZ IFRS. In general, I am not aware of any concerns with this standard for the public sector. |
| NZ IFRS 2 Share-based Payment (includes interpretations NZ IFRIC 8 and NZ IFRIC 11) |
No previous standard on this subject | NZ IFRS 2 generally does not apply to the public sector, except for listed entities such as Air New Zealand. |
| NZ IFRS 3 (revised) Business Combinations |
FRS-36 Accounting for Acquisitions Resulting in Combinations of Entities or Operations |
NZ IFRS 3 (revised) includes some changes from the previous standard, such as the requirement to value and recognise contingent liabilities acquired, and the prohibition on amortising goodwill. NZ IFRS 3 (revised) includes no changes from IFRS 3 (revised) and includes no guidance for public benefit entities. I am concerned that applying NZ IFRS 3 (revised) in some instances might result in misleading information for people using public benefit entities’ financial statements. This was also the case under FRS-36. |
| NZ IFRS 4 Insurance Contracts |
FRS-34 Life Insurance Business and FRS-35 Financial Reporting of Insurance Activities |
NZ IFRS 4 includes some changes from previous standards. For example, NZ IFRS 4 requires a claims liability to be greater than the mid-point estimate of the liability. The liability is increased by applying a risk margin and is likely to be higher than the amount expected to be paid out in claims. I am concerned that including a risk margin for a public sector insurer may not give appropriate information to people using the financial statements of such insurers. |
| NZ IFRS 5 Non-current Assets Held for Sale and Discontinued Operations |
No previous standard on this subject, but there was some guidance in: FRS-2 Presentation of Financial Reports; FRS-3 Accounting for Property, Plant and Equipment; FRS-9 Information to be Disclosed in Financial Statements; and SSAP-17 Accounting for Investment Properties and Properties Intended for Sale | NZ IFRS 5 consolidates previous guidance, and changes some requirements (for example, assets classified as held for sale are not to be depreciated). However, there are issues specific to the public sector relating to property disposals that have not been included. |
| NZ IFRS 6 Exploration for and Evaluation of Mineral Resources |
No previous standard on this subject | NZ IFRS 6 has limited applicability in the public sector. |
| NZ IFRS 7 Financial Instruments: Disclosures |
FRS-31 Disclosure of Information about Financial Instruments and FRS-33 Disclosure of Information by Financial Institutions |
NZ IFRS 7 is more comprehensive than previous standards. NZ IFRS 7 includes no changes from IFRS 7 for public benefit entities, and therefore all requirements apply to the public sector. I am not aware of any assessment of the value of the new disclosures for people using public benefit entities’ financial statements, but I question the relevance of some of these new disclosures (for example, some of the required disclosures about credit risk). |
| NZ IFRS 8 Operating Segments |
SSAP-23 Financial Reporting for Segments |
NZ IFRS 8 sensibly does not apply to public benefit entities, given that the “management focus” required by NZ IFRS 8 is unlikely to be consistent with the accountability requirements of many public sector entities. |
| NZ IAS 1 Presentation of Financial Statements (includes interpretation NZ SIC 29) |
FRS-2 Presentation of Financial Reports and FRS-9 Information to be Disclosed in Financial Statements |
NZ IAS 1 covers similar areas as previous standards. However, NZ IAS 1 requires more disclosures. One such disclosure is about how an entity manages its “capital”, which is of questionable value to people using most public benefit entities’ financial statements. |
| NZ IAS 2 Inventories |
FRS-4 Accounting for Inventories |
NZ IAS 2 includes no major changes from the previous standard. However, NZ IAS 2 requires more disclosures (for example, the amount of write-down in inventories recognised as an expense). Such disclosures seem reasonable. |
| NZ IAS 7 Cash Flow Statements |
FRS-10 Statement of Cash Flows |
NZ IAS 7 includes no major changes from previous standards. However, NZ IAS 7 contains less guidance about such matters as GST. |
| NZ IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors |
FRS-1 Disclosure of Accounting Policies and FRS-7 Extraordinary Items and Fundamental Errors |
NZ IAS 8 includes some changes from previous standards. NZ IAS 8 requires retrospective adjustments for changes in accounting policy and correction of all material errors. Also, NZ IAS 8 requires more disclosures, including the effects of new standards that have been issued but have yet to be put in place. Some of these disclosures are of questionable value to people using public benefit entities’ financial statements. |
| NZ IAS 10 Events after the Balance Sheet Date (includes interpretation NZ IFRIC 17) |
FRS-5 Events after Balance Date |
NZ IAS 10 includes no major changes from the previous standard. |
| NZ IAS 11 Construction Contracts |
FRS-14 Accounting for Construction Contracts |
NZ IAS 11 includes no major changes from the previous standard. However, NZ IAS 11 contains more guidance and requires more disclosures. |
| NZ IAS 12 Income Taxes (includes interpretations NZ SIC 21 and NZ SIC 25) |
SSAP-12 Accounting for Income Tax |
NZ IAS 12 is unlikely to affect many public benefit entities because most such entities are not subject to income tax. NZ IAS 12 includes a major change in the basis of calculating deferred tax for all tax-paying entities. The biggest effects in the public sector are on tax-paying entities with large infrastructure assets that are revalued. A deferred tax liability is recognised that is well in excess of the present value of any future tax liability that is likely to be assessed. |
| NZ IAS 16 Property, Plant and Equipment |
FRS-3 Accounting for Property, Plant and Equipment |
NZ IAS 16 includes no major changes from previous standards. However, NZ IAS 16 contains less guidance on certain issues (for example, subsequent expenditure, components, and use of indices in a depreciated replacement cost valuation). Much of the material from the previous standard that has not been included in NZ IAS 16 directly affects the public sector. |
| NZ IAS 17 Leases (includes interpretations NZ SIC 15, NZ SIC 27, and NZ IFRIC 4) |
SSAP-18 Accounting for Leases and Hire Purchase Contracts |
NZ IAS 17 includes no major changes from previous standards. However, NZ IAS 17 requires additional disclosures for both lessees and lessors, which seem reasonable. |
| NZ IAS 18 Revenue (includes interpretations NZ SIC 31, NZ IFRIC 13, NZ IFRIC 15, and NZ IFRIC 17) |
No previous standard on this subject | NZ IAS 18 deals only with revenue from exchange transactions; therefore it does not cover many of the revenue transactions in the public sector. NZ IAS 18 is not particularly clear, and is confusing and contradictory between the standard and examples set out in the appendix. The real issue for the public sector is non-exchange revenue, for which there is currently no standard under NZ IFRS. A proposed standard is expected to be issued for comment soon. |
| NZ IAS 19 Employee Benefits (includes interpretation NZ IFRIC 14) |
No previous standard on this subject | NZ IAS 19 introduced the requirement to recognise a liability for sick leave, which required a significant amount of work in the transition to NZ IFRS. The standard is not clear about the calculation of liabilities for some sick leave benefit schemes common in the public sector. It is questionable whether the requirement to recognise a sick leave liability meets the cost-benefit test. Also, NZ IAS 19 requires use of the high-quality corporate bond rate for all entities in discounting long-term employee benefits. (If there is no deep market for corporate bonds, use of the government bond rate is permitted.) The corporate bond rate is not relevant to the public sector. |
| NZ IAS 20 Accounting for Government Grants and Disclosure of Government Assistance (includes interpretation NZ SIC 10) |
No previous standard on this subject | NZ IAS 20 does not apply to public benefit entities. I am pleased about this, given it would otherwise result in misleading financial statements being produced by many public benefit entities. I am of the view that NZ IAS 20 is a poor quality standard, and I support its non-application to public benefit entities. |
| NZ IAS 21 The Effects of Changes in Foreign Exchange Rates (includes interpretation NZ SIC 7) |
FRS-21 Accounting for the Effects of Changes in Foreign Currency Exchange Rates and SSAP-21 Accounting for the Effects of Changes in Foreign Currency Exchange Rates |
NZ IAS 21 includes no major changes from previous standards relating to the translation of transactions in foreign currency. However, there are some changes relating to translation of amounts recorded by foreign entities. In general, I am not aware of any concerns with this standard for the public sector. |
| NZ IAS 23 Borrowing Costs |
No previous standard on this subject, but requirements relating to borrowing costs were included in FRS-3 and FRS-4 | NZ IAS 23 currently includes an option about borrowing costs for public benefit entities. Borrowing costs can be capitalised as part of the cost of a construction project or recognised as an expense. Having the option aligns with the requirements included in previous standards. The option has only recently been reinstated for public benefit entities after protracted correspondence between the Accounting Standards Review Board and me. |
| NZ IAS 24 Related Party Disclosures |
SSAP-22 Related Party Disclosures |
NZ IAS 24 includes more disclosures for related-party transactions, a generally positive requirement in the public sector. However, the exemptions relating to unnecessary disclosures need revision. Exemptions are subject to reconsideration by the Financial Reporting Standards Board. |
| NZ IAS 26 Accounting and Reporting by Retirement Benefit Plans |
FRS-32 Financial Reporting by Superannuation Schemes |
NZ IAS 26 includes no major changes from previous standards. NZ IAS 26 affects very few entities in the public sector. The Financial Reporting Standards Board is currently looking at whether to recommend withdrawing NZ IAS 26. |
| NZ IAS 27 Consolidated and Separate Financial Statements (includes interpretation NZ SIC 12) |
FRS-37 Consolidating Investments in Subsidiaries |
NZ IAS 27 includes less direct guidance on the crucial concept of “control” than was contained in the previous standard. However, public benefit entities are still required to follow relevant paragraphs from FRS-37 to decide if they control another entity. The International Accounting Standards Board proposed a new standard on group financial statements at the end of 2008. The Financial Reporting Standards Board plans to adapt that standard for public benefit entities and remove the requirement for those entities to follow relevant paragraphs from FRS-37. |
| NZ IAS 28 Investments in Associates |
FRS-38 Accounting for Investments in Associates |
NZ IAS 28 has a narrower scope than the previous standard, but provides more flexibility about when equity accounting should apply. |
| NZ IAS 29 Financial Reporting in Hyperinflationary Economies (includes interpretation NZ IFRIC 7) |
No previous standard on this subject | NZ IAS 29 is not expected to be relevant to New Zealand. |
| NZ IAS 31 Interests in Joint Ventures (includes interpretation NZ SIC 13) |
SSAP-25 Accounting for Interests in Joint Ventures and Partnerships |
NZ IAS 31 has a wider scope than the previous standard in that it covers:
|
| NZ IAS 32 Financial Instruments: Presentation (includes interpretation NZ IFRIC 2) |
FRS-31 Disclosure of Information about Financial Instruments FRS-27 Right of Set-off FRS-26 Accounting for Defeasance of Debt and FRS-21 Accounting for the Effects of Changes in Foreign Currency Exchange Rates |
NZ IAS 32 includes some changes from previous standards, particularly about what is a liability and consequently what is recognised as equity. NZ IAS 32 includes no changes from IAS 32 for public benefit entities. As a consequence, the standard is difficult to apply to some transactions commonly found in the public sector (for example, suspensory loans). |
| NZ IAS 33 Earnings per Share |
No previous standard on this subject | NZ IAS 33 has limited applicability in the public sector because it applies only to listed entities such as port companies. |
| NZ IAS 34 Interim Financial Reporting (includes interpretation NZ IFRIC 10) |
FRS-24 Interim Financial Statements |
NZ IAS 34 includes no major changes from the previous standard, but more disclosures are now required. |
| NZ IAS 36 Impairment of Assets |
No previous standard on this subject, but requirements relating to impairment of property, plant, and equipment were included in FRS-3 Accounting for Property, Plant and Equipment |
NZ IAS 36 has a wider scope. The standard has sensibly been amended in relation to non-cash-generating property, plant, and equipment. However, the amendment is not clear for the impairment of some other non-cash-generating assets. |
| NZ IAS 37 Provisions, Contingent Liabilities and Contingent Assets (includes interpretations NZ IFRIC 1, NZ IFRIC 5, and NZ IFRIC 6) |
FRS-15 Provisions, Contingent Liabilities and Contingent Assets |
NZ IAS 37 includes no major changes to the accounting requirements for provisions and contingent liabilities. However, there are changes to requirements for contingent assets. The International Accounting Standards Board has proposed a new standard on non-financial liabilities to replace the standard about provisions, contingent liabilities, and contingent assets. The proposed standard contains significant changes from IAS 37. |
| NZ IAS 38 Intangible Assets (includes interpretation NZ SIC 32) |
FRS-13 Accounting for Research and Development activities and SSAP 3 Accounting for Depreciation Also, there was a previous exposure draft, ED-87 Accounting for Intangible Assets |
NZ IAS 38 broadens the scope from previous standards, which were focused on research and development. NZ IAS 38 requires recognition of intangible assets but only if there is a reliable cost. That requirement can be a problem for public benefit entities receiving intangible assets for nil or a nominal amount. NZ IAS 38 does not address public sector intangible asset issues such as the creation of radio spectrum licences, fishing quota, and emission trading units. |
| NZ IAS 39 Financial Instruments: Recognition and Measurement (includes interpretations NZ IFRIC 9 and NZ IFRIC 16) |
No previous standard covering recognition and measurement of financial instruments | NZ IAS 39 has had a major effect on financial reporting by all reporting entities. The main changes include:
Several important public sector issues (such as suspensory loans, low interest loans, and financial guarantees) are not adequately dealt with by the standard. Also, NZ IAS 39 does not deal with non-contractual instruments (such as tax and fines receivables) that are relevant to the public sector. |
| NZ IAS 40 Investment Property |
SSAP-17 Accounting for Investment Properties and Properties Intended for Sale and FRS-3 Accounting for Property, Plant and Equipment |
NZ IAS 40 includes some changes from previous standards. For example:
|
| NZ IAS 41 Agriculture |
No previous standard on this subject. However, there was a previous exposure draft, ED-90 Agriculture | NZ IAS 41 is a new standard that requires agriculture assets to be revalued annually and for changes in value to be recognised through the income statement. The standard applies mainly to forestry assets in the public sector. I am aware of some cost-benefit concerns with this standard for the public sector. |
| NZ IFRIC 12 Service Concession Arrangements |
No previous standard on this subject | Although NZ IFRIC 12 is labelled as an interpretation, it does not interpret existing NZ IFRS because existing standards do not deal with the subject of accounting for service concession arrangements (also known as public private partnerships). NZ IFRIC 12 sets out general principles relating to service concession arrangements for private sector operators. The interpretation does not specify the accounting by public sector entities responsible for specifying the nature of the service. There is a need for authoritative requirements for public sector entities. |
| FRS-42 Prospective Financial Statements |
FRS-29 Prospective Financial Information |
FRS-42 is a standard created with all entities in mind (that is, the standard is sector neutral). FRS-42 is not part of IFRS standards; nonetheless, it is part of NZ IFRS. |
| FRS-43 Summary Financial Statements |
FRS-39 Summary Financial Reports |
FRS-43 is an improved standard updated for NZ IFRS but largely in line with the previous standard. FRS-43 is not part of IFRS standards; nonetheless, it is part of NZ IFRS. |