Part 3: Significant changes since 2009

Improving financial reporting in the public sector.

In this Part, we discuss the significant changes in accounting standards since we reported our concerns in 2009. Figure 6 summarises these changes.

Figure 6
Timeline of significant changes to accounting standards in New Zealand since 2009

Figure 6, Timeline of significant changes to accounting standards in New Zealand since 2009.

External Reporting Board set up in July 2011

On 1 July 2011, the XRB was set up as an independent Crown entity, subject to the Crown Entities Act 2004 and section 22 of the Financial Reporting Act 1993 (now the Financial Reporting Act 2013). The XRB became responsible for setting accounting, auditing, and assurance standards.

The XRB Board comprises members appointed by the Governor-General on the recommendation of the Minister of Commerce. The XRB Board set up two sub-Boards:

  1. the New Zealand Accounting Standards Board,5 which is responsible for setting accounting standards; and
  2. the New Zealand Auditing and Assurance Standards Board, which is responsible for setting auditing and assurance standards.

Setting up the XRB ensured that a body independent of the accounting profession, and not subject to direction by the Government, prepared and set accounting standards. The changes also allowed the XRB to take full responsibility for financial reporting strategy and an active role in recommending changes to the existing accounting standards framework.

An early priority for the XRB was to review the effectiveness of the accounting standards framework. In its then form, the framework posed a significant obstacle to setting suitable accounting standards for much of the public sector.

Proposals for new Accounting Standards Framework agreed in April 2012

Since 2009, the Accounting Standards Review Board and, subsequently, the XRB have prepared a new Accounting Standards Framework.

In April 2012, the then Minister of Commerce approved the XRB's document, Proposals for the New Zealand Accounting Standards Framework. The XRB proposed, and the Minister agreed, that a multi-standards, tiered approach was needed to adequately meet user needs.

A multi-standards, tiered approach helps address two main issues:

  1. Different types of entities operating in different environments are required to apply accounting standards.
  2. The size, significance, complexity, and resources of entities differ. For example, a smaller, less complex entity should be able to present simplified general purpose financial reports without compromising a user's ability to use the information for accountability and/or decision-making purposes.

The proposal was consistent with our view in late 2008. At that time, we were clear in our comments to the then Ministry of Economic Development6 that financial reporting requirements for public entities should reflect the different types of entities in the public sector and their relative level of complexity.

The most significant proposal for the new legislative framework (see paragraphs 3.19-3.24) was to remove most small and medium-sized for-profit entities from the legislative requirement to report in keeping with generally accepted accounting practice. This has significantly reduced the number of reporting entities in the private sector in New Zealand.

When preparing the Accounting Standards Framework, the XRB considered that it was most useful to distinguish between for-profit and public benefit entities, to adequately reflect the different users and the information they need. The XRB split public benefit entities into public sector public benefit entities and not-for-profit public benefit entities because users of financial reports from these two groups need different information.

The new Accounting Standards Framework is a four-tier structure. Different accounting standards apply to each tier. Figure 7 summarises this tiered framework.

Figure 7
Features of the new Accounting Standards Framework

For-profit entitiesPublic benefit entities
EntitiesAccounting standards used by these entities for general purpose financial reportingEntitiesAccounting standards used by these entities for general purpose financial reporting
Tier 1 Have public accountability or are large for-profit public entities (annual expenditure greater than $30 million). NZ IFRS. This is a full suite of for-profit entity accounting standards based on IFRS, with limited modifications for New Zealand's circumstances. Have public accountability or are large entities (annual expenditure greater than $30 million). PBE accounting standards.

This is a full suite of public benefit entity accounting standards largely based on IPSAS, modified for New Zealand's circumstances.
Tier 2 Do not have public accountability and are not large for-profit public entities (annual expenditure less than $30 million). NZ IFRS with fewer disclosures. Do not have public accountability and are not large entities (annual expenditure less than $30 million but greater than $2 million). PBE accounting standards with fewer disclosures.
Tier 3 - - Do not have public accountability, have annual expenditure less than $2 million, and not in Tier 4. A simple format reporting standard, on an accrual basis.
Tier 4 - - Small entities that are permitted by legislation to use cash accounting and have annual operating expenditure less than $125,000. A simple format reporting standard, on a cash basis.

Reporting under the new accounting standards from July 2014

The new accounting standards introduced for public benefit entities are called PBE accounting standards. For larger entities (Tiers 1 and 2), these standards are primarily based on International Public Sector Accounting Standards (IPSAS)modified for New Zealand circumstances. If there is no relevant IPSAS, the standards are usually based on IFRS or Financial Reporting Standards developed in New Zealand.

Although the size of an entity is usually important when determining which tier it fits into, smaller entities that have public accountability are required to report under Tier 1. The term "public accountability" has a technical definition in accounting standards that is narrower than the general meaning of public accountability.7

The PBE accounting standards became mandatory for public sector public benefit entities preparing general purpose financial reports with reporting periods beginning on or after 1 July 2014.

Different accounting standards for public benefit entity reporting in Australia

When preparing the new Accounting Standards Framework, the XRB considered alignment with international accounting standards. This included Australian accounting standards, given the Government's goals for harmonising trans-Tasman for-profit accounting standards to help build a more competitive and productive economy.

Australia does not currently have plans to move from a single set of standards based on IFRS. Therefore, our adopting a multi-standards, tiered approach increases the difference in public benefit entity reporting requirements between the two countries. However, the XRB considered that the benefits of an Accounting Standards Framework that better meets the needs of users in New Zealand outweighed the benefits of harmonising accounting standards for public benefit entities with Australia.

When the new Accounting Standards Framework was adopted, there was a high degree of alignment between IFRS and IPSAS. However, it is expected that the two suites of standards will diverge. This will widen the gap between accounting standards for public benefit entities in Australia and New Zealand.

New State sector and public finance legislation

The State Sector and Public Finance Reform Bill 2013 amended the three main Acts that govern the management of the State sector and the finances of public entities. These Acts are the State Sector Act 1988, the Public Finance Act 1989, and the Crown Entities Act 2004.

The objectives of these reforms were to:

  • help the system function more effectively and efficiently by enabling government departments to work better together, and creating flexibility though mechanisms such as multi-category appropriations;
  • encourage improved service levels and value for money through whole-of-government directions and the creation of the departmental agency organisational model;
  • support meaningful reporting so that Parliament and the public can more easily see what has been achieved; and
  • strengthen leadership at the system, sector, and agency level.

There have also been changes to the Financial Reporting Act 1993 and the Companies Act 1993. In 2013, the Financial Reporting Act 1993 was replaced by the Financial Reporting Act 2013. The reporting requirements for companies are now set out in the Companies Act 1993.

The legislative changes broadly aimed to:

  • provide for the development of strategies for a reporting framework, including a strategy for tiers of financial reporting;
  • reduce compliance costs by removing any requirement for small or medium-sized companies in the private sector to prepare general purpose financial reports;
  • streamline reporting by companies and their subsidiaries by requiring reporting at the group level (instead of at the parent and group level) and reducing the number of subsidiaries that have to prepare separate general purpose financial reports;
  • improve reporting by charities; and
  • standardise the technical detail and wording of reporting requirements in legislation.

Securities' legislation has also been reformed. The Financial Markets Conduct Act 2013 aims to:

  • promote the confidence and informed participation of business, investors, and consumers in the financial markets; and
  • promote and facilitate the development of fair, efficient, and transparent financial markets.

Previously, the conduct of financial markets was primarily under the Securities Act 1978, supplemented by the Securities Markets Act 1988, the Securities Transfer Act 1991, the Superannuation Schemes Act 1989, the Unit Trusts Act 1960, and parts of the KiwiSaver Act 2006. The Financial Markets Conduct Act 2013 and other financial markets legislation replace those Acts.

5: Our Office had a representative on the New Zealand Accounting Standards Board from 2011.

6: The Ministry of Economic Development later combined with other agencies to become the Ministry of Business, Innovation and Employment.

7: The definition of public accountability is included in the XRB A1 Application of the Accounting Standards Framework, which is available on the XRB's website. The definition includes entities that issue debt or equity to the public.