Financial Accounting Financial Accounting is a process involving collection and processing of financial information to meet the decision- making needs of parties external to the organisation Distinguished from Management Accounting which provides financial information for those within the organisation Financial Accounting is heavily regulated Largely unregulated

3 Sources of regulation In New Zealand, external financial reporting is regulated by: Legislation Financial Reporting Standards (NZIFRS and NZIAS) Financial Markets Authority (FMA) - replacing The New Zealand Securities Commission The New Zealand Exchange

4 Legislation A number of important pieces of legislation govern financial reporting in New Zealand. These are: Public Finance Act 1989 Companies Act 1993 Financial Reporting Act 1993 (FRA) Local Government Act 2002 Crown Entities Act 2004 Financial Reporting Amendment Act 2006 (FRAA) Financial Reporting Amendment Act 2011 (FRAA)

5 Companies Act 1993 Applies to all companies (narrower focus than FRA) Details: administrative requirements, some disclosure requirements and directors' responsibilities

Financial Reporting Act 1993 This Act and its subsequent amendments (in 2006 and 2011) represents key legislation for financial reporting in NZ It applies to all reporting entities It details the overall reporting framework including: reference to the conceptual framework the composition of reports the true and fair view the fair presentation override It defines terms: Reporting Entity, Issuer, GAAP

A Reporting Entity Special Purpose Financial reports Designed to meet the needs of a special group or to satisfy a specific purpose (eg cashflow reports for bank as part of a loan agreement) Reporting Entities must Prepare General Purpose Financial reports (GPFR) These reports must comply with the NZ Framework, NZIFRS & NZIAS All companies, other than exempt companies Persons that are deemed to be reporting entities by statue Issuers Users of financial information (eg investors or creditors) Need reliable reports To make financial decisions

Annual reports… Companies present financial statements and supporting notes within an annual report - presented to shareholders at a company’s annual general meeting Part of the annual report is the audit report, providing an independent opinion of the financial information regarding: True and fair view Compliance with the Companies Act 1993 and Financial Reporting Act 1993 Compliance with accounting standards Helps establish credibility of the financial information Auditor not responsible for preparation of financial information 8

9 Financial Reporting Standards Financial reporting standards in New Zealand are the New Zealand equivalents to International Financial Reporting Standards (NZ IFRS) IFRS is designed for General Purpose Financial Statements (GPFS) although Special Purpose Financial Statements (SPFS) can use them IFRS are developed by the International Accounting Standards Board (IASB) NZ IFRS are the responsibility of the External Reporting Board (XRB), an independent Crown Entity, established in June 2011 under the Crown Entities Act 2004

The Responsibilities of the XRB The functions of the XRB are prescribed by the Financial Reporting Act 1993 (and the 2011 amendments to this Act)functions of the XRB developing and implementing an overall strategy for financial reporting standards and auditing and assurance standards preparing and issuing accounting standards preparing and issuing auditing and assurance standards liaising with national and international organisations that exercise functions that correspond with, or are similar to, those conferred on the XRB.

External Reporting Board NZ Auditing and Assurance Standards Board (NZAuASB) NZ Accounting Standards Board (NZASB) These sub-boards have the responsibility for development, approval and promulgation of accounting standards and auditing and assurance standards for application in NZ

12 NZ Framework – a conceptual framework Based on the IASB framework, the NZ Framework is an essential component of financial reporting

The NZ Framework Prescribes Nature Function Limits for financial accounting and reporting Provides agreement on Scope and Objectives Qualitative Characteristics Elements of financial reporting and financial information

Objective of financial statements Paragraph OB2 of the Conceptual Framework outlines the objective Key objectives: Financial statements should reflect the perspective of the entity The key users of financial statements are capital providers 14

Assumptions It is assumed that organisations are a going concern; and Financial statements are prepared on an accrual basis 15

16 Qualitative Characteristics Faithful Representation Comparability Relevance Timeliness Enhancing Qualitative Charatcteristics Understandability Materiality Refer Picker pp 8-9, sect and Verifiability Fundamental Qualitative Characteristics

17 Constraints and True & Fair Constraints on useful financial reporting Timeliness Balance between Benefit and Cost Balance between Qualitative Characteristics True and Fair View/Fair Presentation Financial statements present the financial position, performance and changes in financial position of an entity fairly

Defining Elements Assets (para 4.4a) Controlled Past events Future economic benefits flow to entity Liabilities (para 4.4b) Present obligation Past events Outflow embodying future economic benefits Equity (para 4.4c) Residual interest from (assets – liabilities) 18

Defining Elements Assets Liabilities Equity Past Event Present Control Future Economic Benefit flow into entity Past Event Present Obligation Future outflow of Economic Benefit Residual interest from (assets – liabilities) Equity = Assets - Liabilities (para 4.4a) (para 4.4b) (para 4.4c)

Defining Elements (cont) Income (para 4.25a) Increases in economic benefits through inflows or enhancements of assets or Decreases in liabilities resulting in equity increases Expenses (para 4.25b) Decreases in economic benefits through outflows or depletion of assets or Incurrence of liabilities resulting in equity decreases 20

Recognition Criteria When a transaction has met the definition criteria and before it can be recorded in the financial statements the following two conditions must apply: There must be probable future economic benefit flow The cost or value must be able to be measured reliably + NZ Framework para 4.38 Picker, p13, sect 1.6

Measurement Measurement involves assigning monetary amounts where elements are recognised and reported Measurement bases include (paras 4.54 – 4.56) Historical cost Current cost Realisable (settlement) value Present value Consider the measurement of inventory at the ‘lower of cost or net realisable value’ 22

Capital maintenance Capital Concepts (para 4.57) Financial Physical Should be based on the needs of the users Capital maintenance concept provides the point of reference by which profit is measured Refer to Picker p15, section 1.8 of Picker (prescribed text) 23

For-Profit Entities or Public Benefits Entities? Tier 1 = Default Prepare General Purpose Financial reports (GPFR) and fully comply with Generally Accepted Accounting Practice (GAAP) e.g. NZ Framework, NZIFRS & NZIAS Tier 2 = No public accountability - Report under NZ IFRS RDR (Reduced Disclosure Regime) Tiers 3 & 4 = Accrual/Cash Accounting For-profit entities (not PBEs) Public benefits entities (PBEs) A Reporting Entity Accounting Standards Framework

Other regulators… Financial Markets Authority (now doing the work of the former NZ Securities Commission) Seeks to strengthen investor confidence in New Zealand’s capital markets Included in its work is prescribing disclosure requirements in relation to the information contained in prospectuses for securities offered to the public in NZ and is able to enforce these requirements The New Zealand Exchange (NZX) Sets uniform trading rules, ethical standards and listing requirements These are additional reporting requirements over and above those provided by the accounting profession and legislation Failure to comply with the NZX Listing Rules can lead to suspension of trading of an entity’s shares 25