Financial reporting crossroads

Author: Denise Hodgkins and Jamie Schmidt

With the release of the MED's 81-page Statutory Framework for Financial Reporting discussion document on Wednesday, New Zealand finds itself at a financial reporting crossroads.

The time has come for some key decisions to be made about the future of financial reporting in this country. The document emerges amongst the hue and cry that the IFRS framework is too big for many NZ entities, and as criticisms are made about the unsuitability of IFRS for public sector and not-for-profit entities.

In addition, there is also recognition it is time for NZ to line up with other major jurisdictions and ensure the standard-setting functions for both accounting and auditing, resides in an independent body rather than remaining under the profession’s control.

New Zealand’s existing financial reporting regime is an ad hoc set of requirements for different entities that has evolved piecemeal over the last century. Some entities such as incorporated societies are still subject to requirements that have not changed since 1908! The Financial Reporting Act 1993 together with the Companies Act 1993 introduced more comprehensive requirements, but only applied to companies and issuers.

Under the current scheme, there are no reporting requirements specified in legislation for a number of entities such as charities. Standard-setting in New Zealand has also been slightly curious with the Accounting Standards Review Board, a body appointed by the Government, only able to approve rather than actually set accounting standards.

In recognition of this unsatisfactory environment, the MED discussion paper outlines tentative proposals for the future of financial reporting in New Zealand. The 66-page companion discussion paper issued by the ASRB should also be required reading for all those likely to be affected.

If they come into force, the proposals will have some far-reaching consequences and those likely to be impacted include:

• small closely-held companies may find they no longer have any legislative financial reporting requirements;
• large for-profit entities other than companies will be brought within the financial reporting regime; and
• many not-for-profit entities will become subject to financial reporting preparation, audit and filing requirements.

The proposals are confirmation that the “one size fits all” model of sector neutrality is no longer workable in the New Zealand environment. However, IFRS remains in place for those entities who need to be sanctioned by the international standards regime in order to secure their ‘ticket to play’ in the global capital markets. For reasons of clarity and efficiency, this should be done under the IFRS regime, rather than New Zealand equivalents.

Enactment of a new regime along the lines of that put forward in the MED discussion paper would see New Zealand’s approach to financial reporting echo that which is in place in the United Kingdom, and would better align us with the approach to be taken in Australia. The latter comparison is particularly important as the Government continues to push to make it easier to do business between Australia and New Zealand.

The MED’s aim is to produce a financial reporting framework that is “all-encompassing” and considers all entities in the for-profit, public and not-for-profit sectors. Its other objectives include delivering a system that:

• is underpinned by a clear and coherent set of financial reporting principles and indicators
• weighs the benefits of financial reporting against the costs of compliance
• is consistent so similar entities are subject to similar requirements
• is simple and clear; and
• facilitates Australia/New Zealand harmonisation as far as possible to minimise the compliance costs for those entities doing business on both sides of the Tasman.

As well as a number of related issues, the MED paper proposes two major areas of change to financial reporting in NZ. The first is the plan to establish new standard-setting arrangements for accounting and auditing standards under a new External Reporting Board (XRB) – this would replace the existing ASRB.

The second area of focus for the MED is the introduction of a new, more flexible process to determine which entities should have to report and at what level. It also sets out preliminary views on the possible preparation, audit and filing requirements for each “tier” or class of entity.

The ASRB paper examines the tiers of reporting and the potential qualifying criteria, and sets out the nature of the likely reporting requirements that the newly constructed XRB would set for each. The paper also proposes replacing NZ IFRS with:

• IFRS for publicly accountable for-profit entities;
• IFRS for Small and Medium Entities for non-publicly accountable entities or a form of differential reporting; and
• the standards of the International Public Sector Accounting Standards Board for public sector and not-for-profit entities.

This financial reporting review is a significant undertaking and there are challenges to make sure New Zealand “gets it right” for all entities. The papers are open for discussion and a number of questions are set out within them that affected entities should be discussing – they are not a fait accompli and we would encourage you to make your voice heard in the form of a submission which will need to be in by 29 January 2010.

Denise Hodgkins and Jamie Schmidt are partners in the Deloitte Assurance practice.