Part 10: Financial reporting changes

10.1
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 central government entities, and we provide some concluding comments.

Strategic changes to New Zealand's financial reporting framework

10.2
Since 1 July 2011, the XRB³⁵ 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 2011.³⁶ After consultation, the strategy was finalised and approved by the Minister of Commerce on 2 April 2012.

10.3
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.

10.4
The approach also distinguishes different tiers of reporting for classes of entities, with each tier having different financial reporting requirements.

10.5
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 and particular sizes of entity.

10.6
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.

10.7
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.

10.8
The new financial reporting framework will affect how public sector entities report. It will mean that public entities could report under one of six categories, depending on the nature and size of the entities.

10.9
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).

10.10
The categories for for-profit entities in the public sector are:

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

10.11
There are also two temporary categories for for-profit entities, which will be removed once changes are made to financial reporting legislation. The temporary categories are:

• differential reporting (tier 3); and
• old standards, referred to as "old GAAP" (tier 4).

10.12
Entities that are "publicly accountable"³⁷ will report fully (tier 1) regardless of size. This will include all "issuers".³⁸ 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.

10.13
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.

10.14
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.

10.15
Central government entities include public benefit entities and for-profit entities. Therefore, we expect central government entities to be in at least five of the six different categories. For example, government departments and Crown entities are expected to report in keeping with public benefit entities tier 1 or tier 2. Entities such as some smaller schools and fish and game councils will be eligible to report in keeping with public benefit entities tier 3. State-owned enterprises and any other central government entities that are for-profit entities are expected to report in keeping with for-profit entities tier 1 or 2, depending on whether they are "publicly accountable" and their size.

Proposed changes to New Zealand's financial reporting standards

10.16
The XRB has established a sub-board called the New Zealand Accounting Standards Board (NZASB). The XRB has delegated responsibility to NZASB to develop the financial reporting requirements for the classes of entities and the tiers that the XRB has determined. At present, the NZASB is doing a lot of work to prepare the financial reporting standards that will be used when the new financial reporting framework is fully operational.

Public benefit entities

10.17
The new financial reporting framework will result in new standards and requirements being put in place for all public benefit entities in the public sector. The NZASB has recently consulted 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.

10.18
At present, IPSAS are generally aligned to the current financial reporting standards applied by most public benefit entities in the public sector, which, in turn, 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 because the approaches taken by the two international standard-setters diverge.

10.19
Although generally aligned at present, there are a few significant differences and a number of more subtle differences in the proposed new suite of standards. Therefore, as part of the recent consultation process, we carefully reviewed the proposed new standards and we provided comments to NZASB to help it finalise the new suite of standards.

10.20
NZASB is currently consulting on its proposals for reporting by public benefit entities in the public sector in tiers 3 and 4. We expect to provide comments to NZASB on the proposals for tiers 3 and 4 shortly.

For-profit entities

10.21
The new financial reporting framework retains the existing suite of financial reporting standards for for-profit entities that are based on IFRS but changes some of the requirements for for-profit entities at tier 2. For many years, smaller for-profit entities could apply a differential reporting regime that included some different accounting requirements and fewer disclosure requirements. That regime was replaced with a new reduced disclosure reporting regime at the end of 2012.

10.22
The reduced disclosure reporting regime for tier 2 for-profit entities requires those entities to follow the same accounting requirements as tier 1 entities but has a lot fewer disclosures than the previous regime. The reduced disclosure reporting regime aligns with the requirements in Australia for smaller for-profit entities.

10.23
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.

10.24
Appendix 3 contains a guide to the new financial reporting standards framework for entities in the public sector.

Effect on central government entities

10.25
In the next two to three years, the changes to financial reporting standards referred to above will affect all central government entities to some extent. Although many central government entities will qualify to report as public benefit entities tier 2 or tier 3, and others as for-profit entities tier 2, some central government entities may be required to provide more detailed information than that reported under those tiers for the purpose of producing consolidated financial statements, such as the Government's financial statements.

Concluding comments

10.26
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 the international financial reporting standards. 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 application by all entities in New Zealand. We therefore 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.

10.27
Although we support 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 various concerns that have been previously raised about financial reporting. Nevertheless, in our view, the change is necessary, and it provides the best platform for future financial reporting by public benefit entities in the public sector.

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

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

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

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