Part 6: Financial reporting changes

6.1
In this Part, we highlight changes to financial reporting in New Zealand during the past 12 months, including strategic changes to the financial reporting framework and proposed changes to financial reporting standards. We comment on how these changes are likely to affect entities in the education sector, and we provide some concluding comments.

Strategic changes to New Zealand's financial reporting framework

6.2
Since 1 July 2011, the External Reporting Board (the XRB)³³ has had responsibility for both preparing and issuing financial reporting standards. The XRB determined a proposed strategy for different classes of entities and for tiers of financial reporting within those classes, which it consulted on in September 2011.³⁴ After consultation, the strategy was finalised, and it was approved by the Minister of Commerce on 2 April 2012.

6.3
The strategy establishes what has become known as a "multi-standards approach" to financial reporting. The approach distinguishes three classes of entities:

• for-profit entities in the public and private sectors;
• public benefit entities in the public sector; and
• public benefit entities in the not-for-profit sector.

6.4
The approach also distinguishes different tiers of reporting for classes of entities, with each tier having different financial reporting requirements.

6.5
At the heart of the multi-standards approach is a recognition that financial and non-financial information should meet the information needs of users of general purpose financial reports. In future, those needs are expected to be best met by having financial reporting standards tailored to particular classes of entity and tailored to particular sizes of entity.

6.6
The multi-standards approach is also expected to better align the costs of producing general purpose financial reports with the benefits realised by the users of those reports. For some entities, this should mean that the cost of preparing their general purpose financial reports reduces.

6.7
The XRB has established a transition plan that takes into account proposed legislative changes. That plan aims to have the new financial reporting framework fully operational within the next two to three years.

6.8
The new financial reporting framework will affect the reporting by public sector entities. It will mean that public entities could report under one of six categories, depending on the nature and size of the entities.

6.9
The categories for public benefit entities in the public sector are:

• full reporting (tier 1);
• reduced disclosure reporting (tier 2);
• simple format accrual reporting (tier 3); and
• simple format cash reporting (tier 4).

6.10
The categories for for-profit entities in the public sector are:

• full reporting (tier 1); and
• reduced disclosure reporting (tier 2).

6.11
Entities that are "publicly accountable"³⁵ will report fully (tier 1) regardless of size. This will include all "issuers" (such as entities that issue shares or bonds).³⁶ All other entities will be allocated to a category based on their size and can elect to report in keeping with the requirements that correspond to that category.

6.12
The size criteria for allocating public benefit entities in the public sector to tiers are:

• tier 1 – operating expenditure of more than $30 million;
• tier 2 – operating expenditure between $2 million and $30 million;
• tier 3 – operating expenditure of less than $2 million; and
• tier 4 – only if permitted by legislation and expected to be for very small entities.

6.13
The size criteria for allocating for-profit entities in the public sector to tiers are:

• tier 1 – operating expenditure of more than $30 million; and
• tier 2 – operating expenditure of $30 million or less.

6.14
The education sector consists predominantly of public benefit entities, but there are some for-profit entities. We expect entities in the education sector to be in four of the six different categories. TEIs and any related entities that are public benefit entities are expected to report in keeping with the requirements for public benefit entities in tier 1 or tier 2. Schools and any related entities that are public benefit entities are expected to report in keeping with the requirements for public benefit entities in tier 2 or tier 3. For-profit subsidiaries in the education sector are expected to report in keeping with the requirements for for-profit entities in tier 2.

Proposed changes to New Zealand's financial reporting standards

6.15
The XRB has established a sub-board called the New Zealand Accounting Standards Board (NZASB) and has delegated responsibility to it to develop the financial reporting requirements for the classes of entities and the tiers that the XRB has determined. The NZASB is doing a lot of work to develop the financial reporting standards that will be used when the new financial reporting framework is fully operational.

Public benefit entities

6.16
The new financial reporting framework will result in new standards and requirements for all public benefit entities in the public sector. The NZASB is currently consulting on a new suite of financial reporting standards for public benefit entities in tiers 1 and 2. The new suite of financial reporting standards for public benefit entities is largely based on International Public Sector Accounting Standards (IPSAS) and is proposed to apply for reporting periods beginning on or after 1 July 2014.

6.17
At present, IPSAS are generally aligned to the current financial reporting standards applied by most public benefit entities in the public sector, which are based on International Financial Reporting Standards (IFRS). The alignment is because most IPSAS were developed using IFRS as a starting point. However, over time, we expect the level of alignment to reduce, as the approaches taken by the two international standard-setters diverge.

6.18
Although generally aligned at present, there are a few significant differences and some subtle differences in the proposed new suite of standards. Therefore, as part of the consultation process, we are carefully reviewing the new standards. We expect to provide comments to the NZASB in December 2012 to help it finalise the new suite of standards.

6.19
The NZASB is still working on its proposals for reporting by public benefit entities in the public sector in tiers 3 and 4. We expect the proposals for tier 3 to be consulted on between December 2012 and March 2013.

For-profit entities

6.20
The new financial reporting framework retains the existing suite of financial reporting standards for for-profit entities that are based on IFRS but will change some of the requirements for for-profit entities at tier 2. Currently, smaller for-profit entities can apply a differential reporting regime that includes some different accounting requirements and fewer disclosure requirements. That regime is going to be replaced with a new reduced disclosure reporting regime, which is expected to be published before the end of 2012.

6.21
The reduced disclosure reporting regime for tier 2 for-profit entities will require those entities to follow the same accounting requirements as tier 1 entities but have a lot fewer disclosures than the previous regime. The reduced disclosure reporting regime aligns with the requirements in Australia for smaller for-profit entities.

6.22
Apart from the change to a reduced disclosure reporting regime, for-profit entities will have the usual ongoing changes to deal with as new standards are developed or existing standards revised. In that regard, a number of new standards were issued recently that will need to be applied in the next year or two.

Effect on entities in the education sector

6.23
These changes to financial reporting standards will affect all entities in the education sector to some extent in the next two to three years. We expect schools to be most affected.

6.24
About 40% of schools will, as public benefit entities in tier 2, be able to report with fewer disclosures. The remaining 60% or so will be able to use simple format accrual reporting (because they are in tier 3). For these tier 3 schools, the reporting requirements are expected to be less onerous than the current reporting requirements.

6.25
The split in the financial reporting standards for schools under the new financial reporting framework is significant. Currently, all but the largest of secondary schools report on the same basis, which is at a differential reporting level.

6.26
The Ministry will need to consider the appropriateness of this new regime for schools, including how well the needs of users will be met by following the regime. If the Ministry decides that users' needs would be best served by all schools reporting on the same basis, it could require the 60% of schools that qualify to use simple-format accrual reporting (those in tier 3) to report instead using public benefit entity reduced disclosure reporting (for those in tier 2). This would result in consistent financial reporting throughout the school sector.

Concluding comments

6.27
We support the strategic changes and the broad direction of the proposed financial reporting standards that are starting to take shape. In future, we expect to see greater divergence of financial reporting standards internationally. The expected divergence would have made it increasingly difficult to have one cohesive set of financial reporting standards based on IFRS that were suitable for all entities in New Zealand to apply. Therefore, we consider that the new suite of financial reporting standards for public benefit entities in the public sector will be a more appropriate base from which future changes are made.

6.28
Although supportive of the new suite of financial reporting standards for public benefit entities in the public sector, we do not regard it as a "silver bullet" that resolves all the concerns that have been previously raised about financial reporting. Nevertheless, in our view, the change is necessary, and it provides the best platform for financial reporting by public benefit entities in the public sector in future.

33 The XRB was previously the Accounting Standards Review Board. The previous Board had a narrower role than the XRB.

34 This consultation followed consultation about similar matters carried out by the Accounting Standards Review Board in 2009.

35 As defined in the XRB's exposure draft ED XRB A1 (FP Entities + PS PBEs).

36 As defined in section 4 of the Financial Reporting Act 1993.