Part 5: Changes to annual reports and financial reporting

Local government: Results of the 2011/12 audits.

5.1
In this Part, we highlight imminent changes to the content of local authorities' annual reports and changes to financial reporting during the past 12 months, including strategic changes to the financial reporting framework and proposed changes to financial reporting standards. We discuss how these changes are likely to affect local authorities and make concluding comments.

Imminent changes to the content of annual reports

5.2
The 2012/13 annual reports are the first to include information required by the TAFM amendments.

5.3
In 2012, the Act was amended again, as part of the reform of local government. This will also have some effect on local authorities' 2012/13 annual reports.

5.4
From 2012/13, annual reports must include:

  • a funding impact statement15 for each group of activities compared to what was budgeted in the long-term plan, and a funding impact statement for the whole of the local authority compared to the previous financial year, which must be presented in the format set out in the Local Government (Financial Reporting) Regulations 2011;
  • for each group of activities, a statement comparing budgeted capital expenditure with the amount spent to meet additional demand, improve services, and replace assets;
  • for each group of activities, a statement about internal borrowing, including amounts borrowed and repaid during the year and interest paid;
  • information about the purpose and activities of each reserve fund set aside by the local authority, and financial information about each fund; and
  • a report on the number of employees and their annual pay.

Strategic changes to the financial reporting framework

5.5
Since 1 July 2011, the External Reporting Board (XRB)16 has been responsible for preparing and setting standards for financial reporting. The XRB worked out a proposed strategy for different classes of entities and for tiers of financial reporting within those classes, which it consulted on in September 2011.17 On 2 April 2012, the Minister of Commerce approved the finalised strategy.

5.6
The strategy includes 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.

5.7
The approach distinguishes different tiers of reporting for classes of entities, with each tier having different financial reporting requirements.

5.8
The multi-standards approach recognises that financial and non-financial information should meet the needs of people who use general purpose financial reports. Those needs are expected to be best met by financial reporting standards being tailored to particular classes and sizes of public entity.

5.9
The multi-standards approach is expected to better align the cost of producing general purpose financial reports and the benefits for people who use those reports. For some public entities, this should make it easier and cheaper to prepare their general purpose financial reports.

5.10
The XRB has prepared a transition plan that takes into account proposed changes to the law and aims to have a fully operational new financial reporting framework within the next two to three years.

5.11
The new financial reporting framework will affect how public entities report. Depending on their nature and size, public entities could report under one of six categories.

5.12
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).

5.13
The categories for for-profit entities in the public sector are:

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

5.14
There are two temporary categories for for-profit entities, which will be removed when changes are made to financial reporting laws. The temporary categories are:

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

5.15
Entities that are "publicly accountable" will report fully (tier 1) regardless of size.18 This will include all "issuers".19 All other entities will be allocated to a category based on their size, and can choose to report in keeping with the requirements for that category.

5.16
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 (expected to be for small entities).

5.17
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.

5.18
Local government consists of public benefit entities and for-profit entities. We expect some local government entities to report in at least five of the six different categories. Local authorities are expected to report in keeping with public benefit entities tier 1 or tier 2. CCOs and any related entities that are public benefit entities are expected to report in keeping with public benefit entities tier 1, tier 2, or tier 3, depending on their size. Council-controlled trading organisations and any other local government entities that are for-profit entities are expected to report in keeping with for-profit entities tier 1 or tier 2, depending on whether or not they are "publicly accountable" and on their size.

Proposed changes to financial reporting standards

5.19
The XRB has set up a sub-board called the New Zealand Accounting Standards Board (NZASB) that is responsible for preparing the financial reporting requirements for certain classes of entities and tiers. The NZASB is preparing the financial reporting standards that will be used when the new financial reporting framework is fully operational.

Public benefit entities

5.20
The new financial reporting framework will result in new standards and requirements for all public benefit entities in the public sector. The NZASB has recently consulted on new financial reporting standards for public benefit entities in tiers 1 and 2. The new financial reporting standards for public benefit entities are based largely on International Public Sector Accounting Standards (IPSAS). It is proposed that they apply for reporting periods beginning on or after 1 July 2014.

5.21
At present, IPSAS are generally in line with the financial reporting standards that most public benefit entities in the public sector use. The standards are based on International Financial Reporting Standards (IFRS). However, over time, we expect IPSAS and IFRS to diverge because the approaches of the two international bodies20 that set those standards are diverging.

5.22
There are a few significant differences and some subtle differences in the proposed standards for tiers 1 and 2. Therefore, as part of the recent consultation process, we carefully reviewed the proposed new standards and provided comments to the NZASB to help it to finalise the new standards.

5.23
The NZASB is currently consulting on proposals for reporting by public benefit entities in the public sector in tiers 3 and 4. We expect to provide comments to the NZASB on its proposals shortly.

For-profit entities

5.24
The new financial reporting framework retains the 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 different accounting requirements and fewer disclosure requirements. At the end of 2012, that regime was replaced with a new reduced disclosure reporting regime.

5.25
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 fewer disclosures than the previous regime. The reduced disclosure reporting regime is in line with the requirements in Australia for smaller for-profit entities.

5.26
Apart from the change to a reduced disclosure reporting regime, for-profit entities will have the usual ongoing changes to deal with as standards are introduced or revised. Some new standards will need to be applied in the next year or two.

5.27
Appendix 1 contains a guide to the new financial reporting framework for public entities.

Effect on local government entities

5.28
The changes to Part 3 of Schedule 10 of the Act, including information required by the Local Government (Financial Reporting) Regulations referred to in paragraph 5.4, will affect all local authorities because the changes add to reporting requirements. Further, local authorities will need to revise some comparative information from previous years to meet new presentation requirements.

5.29
The changes to financial reporting standards will affect all local government entities in the next two to three years. We expect the changes to affect smaller local authorities most.

5.30
Financial reporting requirements are expected to become less demanding for smaller local authorities that qualify as tier 2 public benefit entities.

5.31
Although council-controlled trading organisations and other for-profit entities that qualify for the for-profit tier 2 will have fewer disclosure requirements, they are expected to have one or two stricter accounting requirements, which will be in line with tier 1. The requirement likely to have the greatest effect is accounting for taxation.

Our concluding comments about changes to annual reports and financial reporting

5.32
Although changes to the content of annual reports add to local authorities' reporting obligations, the changes described in this Part are expected to provide useful accountability information to ratepayers and other users of local authorities' financial statements. We will work with local authorities to ensure that they follow the new reporting requirements appropriately.

5.33
We support the strategic changes and the broad direction of the proposed financial reporting standards that are starting to take shape. We expect to see greater divergence of financial reporting standards internationally, which would have made it increasingly difficult to have one IFRS-based set of financial reporting standards suitable for applying by all public entities. Therefore, we consider that the new financial reporting standards for public benefit entities in the public sector will be a more appropriate base to make future changes.

5.34
Although we support the new financial reporting standards for public benefit entities in the public sector, they are not a "silver bullet" that resolves all the concerns that have been raised about financial reporting. However, in our view, the change is necessary, and it provides the best platform for financial reporting by public benefit entities in the public sector.

15: The Funding Impact Statement shows the amount of funds from each funding source and how the funds are/were applied.

16: The XRB was previously the Accounting Standards Review Board, which had a narrower role.

17: This consulting followed similar consulting that the Accounting Standards Review Board carried out in 2009.

18: "Publicly accountable" entities are defined in the XRB's exposure draft ED XRB A1.

19: "Issuers" are defined in section 4 of the Financial Reporting Act 1993.

20: The international bodies are the International Public Sector Accounting Standards Board, which sets IPSAS, and the International Accounting Standards Board, which sets IFRS.

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