Chapter 1 An overview of the New Zealand external reporting environment

Copyright  2003 McGraw-Hill New Zealand Pty Ltd PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin Slides prepared by Grant Samkin 1-2 Objectives Understand the extent of regulation relating to which New Zealand external financial reporting is subject. Understand the extent of regulation relating to which New Zealand external financial reporting is subject. Be able to explain the general functions of the Accounting Standards Review Board, the Financial Reporting Standards Board and the New Zealand Stock Exchange. Be able to explain the general functions of the Accounting Standards Review Board, the Financial Reporting Standards Board and the New Zealand Stock Exchange. Understand the role of a financial reporting standard and the process by which it is developed. Understand the role of a financial reporting standard and the process by which it is developed.

Copyright  2003 McGraw-Hill New Zealand Pty Ltd PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin Slides prepared by Grant Samkin 1-3 Objectives (cont.) Be able to explain the five elements of accounting and be aware of the respective recognition principles. Be able to explain the five elements of accounting and be aware of the respective recognition principles. Be able to explain the objectives and potential shortcomings of the New Zealand ‘Statement of Concepts for General Purpose Financial Reporting. Be able to explain the objectives and potential shortcomings of the New Zealand ‘Statement of Concepts for General Purpose Financial Reporting.

Copyright  2003 McGraw-Hill New Zealand Pty Ltd PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin Slides prepared by Grant Samkin 1-4 Objectives (cont.) Understand the role of the International Accounting Standards Board and be aware of the program, currently in place within New Zealand, to harmonise New Zealand financial reporting standards with pronouncements issued by the International Accounting Standards Board and the Australian Accounting Standards Board. Understand the role of the International Accounting Standards Board and be aware of the program, currently in place within New Zealand, to harmonise New Zealand financial reporting standards with pronouncements issued by the International Accounting Standards Board and the Australian Accounting Standards Board.

Copyright  2003 McGraw-Hill New Zealand Pty Ltd PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin Slides prepared by Grant Samkin 1-5 Financial accounting defined Financial accounting is a process involving the collection and processing of financial information to assist the decision-making needs of parties external to the organisation. Financial accounting is a process involving the collection and processing of financial information to assist the decision-making needs of parties external to the organisation. Contrasted with management accounting: Contrasted with management accounting: –focuses on providing information for decision making by parties within the organisation –largely unregulated. Financial accounting heavily regulated. Financial accounting heavily regulated.

Copyright  2003 McGraw-Hill New Zealand Pty Ltd PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin Slides prepared by Grant Samkin 1-6 User demand for general purpose financial reports Users may be defined to include: Users may be defined to include: –present and potential investors –employees –lenders –suppliers and other trade creditors –customers –government and its agencies –the public. Only certain users may have the power to demand specific information to meet their needs. Only certain users may have the power to demand specific information to meet their needs.

Copyright  2003 McGraw-Hill New Zealand Pty Ltd PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin Slides prepared by Grant Samkin 1-7 Sources of external financial reporting regulations The Accounting Standards Review Board (ASRB) The Accounting Standards Review Board (ASRB) The Financial Reporting Standards Board (FRSB) The Financial Reporting Standards Board (FRSB) The New Zealand Stock Exchange (NZSE) The New Zealand Stock Exchange (NZSE)

Copyright  2003 McGraw-Hill New Zealand Pty Ltd PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin Slides prepared by Grant Samkin 1-8 Background to NZ accounting standard- setting process Until 1993 regulation of accounting profession was in the hands of the private sector. Until 1993 regulation of accounting profession was in the hands of the private sector share market collapse led to an inquiry to review share market law and recommend changes to ensure the existence of a fair and efficient market share market collapse led to an inquiry to review share market law and recommend changes to ensure the existence of a fair and efficient market.

Copyright  2003 McGraw-Hill New Zealand Pty Ltd PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin Slides prepared by Grant Samkin 1-9 Background to NZ accounting standard- setting process (cont.) A number of recommendations made, including: A number of recommendations made, including: –legal backing be given to accounting standards –an Accounting Standards Review Board be established to approve accounting standards –sanctions be put in place for non-compliance with standards.

Copyright  2003 McGraw-Hill New Zealand Pty Ltd PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin Slides prepared by Grant Samkin 1-10 Accounting Standards Review Board (ASRB) Financial Reporting Act 1993 (FRA) is the primary statute governing the establishment of accounting standards. Financial Reporting Act 1993 (FRA) is the primary statute governing the establishment of accounting standards. ASRB constituted as a body corporate under the FRA. ASRB constituted as a body corporate under the FRA. Functions of ASRB provided by section 24 Functions of ASRB provided by section 24 of FRA.

Copyright  2003 McGraw-Hill New Zealand Pty Ltd PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin Slides prepared by Grant Samkin 1-11 Application of financial reporting standards Financial reporting standards approved by the ASRB normally apply to all financial statements prepared by all reporting entities or groups. Financial reporting standards approved by the ASRB normally apply to all financial statements prepared by all reporting entities or groups. However, financial reporting standards may be expressed to apply to specific classes of issuers or companies (e.g. by size of the entity). However, financial reporting standards may be expressed to apply to specific classes of issuers or companies (e.g. by size of the entity).

Copyright  2003 McGraw-Hill New Zealand Pty Ltd PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin Slides prepared by Grant Samkin 1-12 Application of financial reporting standards (cont.) ‘Financial statements’ means statements comprising: ‘Financial statements’ means statements comprising: –a statement of financial position –a statement of financial performance (or an income and expenditure account) –a cash flow statement –explanatory notes.

Copyright  2003 McGraw-Hill New Zealand Pty Ltd PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin Slides prepared by Grant Samkin 1-13 Application of financial reporting standards (cont.) An issuer includes companies that have allocated securities to the public. An issuer includes companies that have allocated securities to the public. Issuers include : Issuers include : –entities that have allocated securities to the public by way of a registered prospectus –unit trusts –registered banks.

Copyright  2003 McGraw-Hill New Zealand Pty Ltd PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin Slides prepared by Grant Samkin 1-14 Application of financial reporting standards (cont.) Small companies are treated as an exempt category. Small companies are treated as an exempt category. Company or issuer is exempt if: Company or issuer is exempt if: –total assets did not exceed $ –turnover did not exceed $ –the company was not a subsidiary –the company did not have subsidiaries.

Copyright  2003 McGraw-Hill New Zealand Pty Ltd PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin Slides prepared by Grant Samkin 1-15 Framework for differential reporting Applies to general purpose financial reports only. Applies to general purpose financial reports only. Under the framework, qualifying entities are granted full or partial exemption from complying with certain financial reporting standards. Under the framework, qualifying entities are granted full or partial exemption from complying with certain financial reporting standards. The framework’s use is justified on the grounds that accounting standard overload and compliance costs are reduced. The framework’s use is justified on the grounds that accounting standard overload and compliance costs are reduced.

Copyright  2003 McGraw-Hill New Zealand Pty Ltd PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin Slides prepared by Grant Samkin 1-16 Financial reporting standards, GAAP and the true and fair view GAAP describes the basis on which general purpose financial reports are normally prepared. GAAP describes the basis on which general purpose financial reports are normally prepared. It encompasses specific rules, practices and procedures relating to particular circumstances and broad concepts and principles of general application. It encompasses specific rules, practices and procedures relating to particular circumstances and broad concepts and principles of general application.

Copyright  2003 McGraw-Hill New Zealand Pty Ltd PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin Slides prepared by Grant Samkin 1-17 Financial reporting standards, GAAP and the true and fair view (cont.) Financial statements comply with GAAP only if those statements comply with: Financial statements comply with GAAP only if those statements comply with: –applicable financial reporting standards; or –where there are no applicable financial reporting standards or rule of law, with accounting policies that are appropriate to the circumatances of the reporting entity and have authoritative support within the accounting profession in New Zealand.

Copyright  2003 McGraw-Hill New Zealand Pty Ltd PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin Slides prepared by Grant Samkin 1-18 Financial reporting standards, GAAP and the true and fair view (cont.) Compliance with GAAP usually means that financial statements give a true and fair view of an entity’s financial position, performance and cash flows. Compliance with GAAP usually means that financial statements give a true and fair view of an entity’s financial position, performance and cash flows. Financial statements must provide a ‘true and fair’ view. Financial statements must provide a ‘true and fair’ view. No legal definition of ‘true and fair’ view. No legal definition of ‘true and fair’ view.

Copyright  2003 McGraw-Hill New Zealand Pty Ltd PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin Slides prepared by Grant Samkin 1-19 Financial reporting standards, GAAP and the true and fair view (cont.) Two views on ‘true and fair’ view: Two views on ‘true and fair’ view: –could be met by companies complying with financial reporting standards when preparing general purpose financial reports; or –could imply more than simply complying with financial reporting standards. Financial statements should include all information of a ‘material’ nature. Financial statements should include all information of a ‘material’ nature.

Copyright  2003 McGraw-Hill New Zealand Pty Ltd PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin Slides prepared by Grant Samkin 1-20 Directors’ responsibilities Directors of a company are responsible for the maintenance of accounting records. Directors of a company are responsible for the maintenance of accounting records. Although not specifically required, a number of New Zealand companies include a section in their directors’ reports dealing with directors’ responsibilities. Although not specifically required, a number of New Zealand companies include a section in their directors’ reports dealing with directors’ responsibilities.

Copyright  2003 McGraw-Hill New Zealand Pty Ltd PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin Slides prepared by Grant Samkin 1-21 Directors’ report No formal requirement for a directors’ report. No formal requirement for a directors’ report. Section 211(1)(a) of Companies Act 1993 requires that every annual report: Section 211(1)(a) of Companies Act 1993 requires that every annual report: –be in writing –be dated –describe the state of the companies affairs –will not be harmful to the business of the company or any subsidiary; or –change during the accounting period in: the nature of the business the nature of the business the classes of business in which the company has an interest the classes of business in which the company has an interest

Copyright  2003 McGraw-Hill New Zealand Pty Ltd PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin Slides prepared by Grant Samkin 1-22 Directors’ report (cont.) A number of additional items must be disclosed, including : A number of additional items must be disclosed, including : –particulars of entries in the interests register made during the accounting period –names of persons holding office as directors at end of and during the accounting period.

Copyright  2003 McGraw-Hill New Zealand Pty Ltd PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin Slides prepared by Grant Samkin 1-23 Financial Reporting Standards Board (FRSB) FRSB is a board of ICANZ. FRSB is a board of ICANZ. Members are appointed by the Council of ICANZ. Members are appointed by the Council of ICANZ. FRSB is responsible for developing and revising financial reporting standards, sources of authoritative support, maintance of the Statement of Concepts, guidance notes and technical practice aids. FRSB is responsible for developing and revising financial reporting standards, sources of authoritative support, maintance of the Statement of Concepts, guidance notes and technical practice aids.

Copyright  2003 McGraw-Hill New Zealand Pty Ltd PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin Slides prepared by Grant Samkin 1-24 Development of a financial reporting standard Until 1997, financial reporting standard projects originated from: Until 1997, financial reporting standard projects originated from: –outcomes of IASC work programs –harmonisation with Australia –issues raised by ICANZ members –responses to changes or new developments –review of changes to existing financial reporting standards in response to the continued development of the Statement of Concepts.

Copyright  2003 McGraw-Hill New Zealand Pty Ltd PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin Slides prepared by Grant Samkin 1-25 Development of a financial reporting standard (cont.) In 1997 the FRSB decided that future financial reporting standards would be developed based on those issued by the IASC or AASB. In 1997 the FRSB decided that future financial reporting standards would be developed based on those issued by the IASC or AASB. A discussion paper would accompany the exposure draft in which the implications for New Zealand entities would be outlined. A discussion paper would accompany the exposure draft in which the implications for New Zealand entities would be outlined.

Copyright  2003 McGraw-Hill New Zealand Pty Ltd PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin Slides prepared by Grant Samkin 1-26 Urgent issues group (UIG) No formal UIG exists in New Zealand. No formal UIG exists in New Zealand. FRSB directs those seeking clarification on a financial reporting standard to: FRSB directs those seeking clarification on a financial reporting standard to: –amendments to standards –interpretations to standards –guidance notes.

Copyright  2003 McGraw-Hill New Zealand Pty Ltd PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin Slides prepared by Grant Samkin 1-27 New Zealand Stock Exchange (NZSE) For entities listed on NZSE there are additional reporting requirements contained in Listing Rules. For entities listed on NZSE there are additional reporting requirements contained in Listing Rules. NZSE can also require compliance with a particular accounting standard, for example IAS 33 ‘Earnings Per Share’. NZSE can also require compliance with a particular accounting standard, for example IAS 33 ‘Earnings Per Share’.

Copyright  2003 McGraw-Hill New Zealand Pty Ltd PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin Slides prepared by Grant Samkin 1-28 The Conceptual Framework (CF) FRSB is responsible for the maintenance of the Statement of Concepts. FRSB is responsible for the maintenance of the Statement of Concepts. Framework seeks to define the nature, subject, purpose and broad content of general purpose financial reporting. Framework seeks to define the nature, subject, purpose and broad content of general purpose financial reporting. Argues that Statement of Concepts is not a CF because a cohesive set of principles to guide financial reporting has not been established. Argues that Statement of Concepts is not a CF because a cohesive set of principles to guide financial reporting has not been established.

Copyright  2003 McGraw-Hill New Zealand Pty Ltd PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin Slides prepared by Grant Samkin 1-29 The Conceptual Framework (CF) (cont.) Central goal in establishing CF is general consensus on: Central goal in establishing CF is general consensus on: –scope and objectives of financial reporting –qualitative characteristics that financial information should possess –elements of financial reporting.

Copyright  2003 McGraw-Hill New Zealand Pty Ltd PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin Slides prepared by Grant Samkin 1-30 Benefits of Conceptual Framework More consistent and logical financial reporting standard can be developed. More consistent and logical financial reporting standard can be developed. Increased international comparability. Increased international comparability. The Boards should be more accountable for their decisions. The Boards should be more accountable for their decisions. Enhanced process of communication between the Boards and constituents. Enhanced process of communication between the Boards and constituents. More economical accounting standard development. More economical accounting standard development.

Copyright  2003 McGraw-Hill New Zealand Pty Ltd PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin Slides prepared by Grant Samkin 1-31 SC 2 Reporting entity A reporting entity exists where it is reasonable to expect the existence of users dependent on general purpose financial reports (GPFRs) for information which will be useful to them. A reporting entity exists where it is reasonable to expect the existence of users dependent on general purpose financial reports (GPFRs) for information which will be useful to them. GPFRs provide information to meet the needs of external users unable to acquire, or contract for, special purpose financial reports. GPFRs provide information to meet the needs of external users unable to acquire, or contract for, special purpose financial reports.

Copyright  2003 McGraw-Hill New Zealand Pty Ltd PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin Slides prepared by Grant Samkin 1-32 SC 3 Objectives of GPFRs To provide information to assist users in assessing the reporting entity’s: To provide information to assist users in assessing the reporting entity’s: –financial and service performance, financial position and cash flows –compliance with legislation, regulations, common law and contractual arrangements; and –making decisions about providing resources to, or doing business with, the entity. Financial reporting has an accountability and an information or decision-making role. Financial reporting has an accountability and an information or decision-making role.

Copyright  2003 McGraw-Hill New Zealand Pty Ltd PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin Slides prepared by Grant Samkin 1-33 SC 4 Qualitative characteristics Identifies the characteristics of financial information necessary to allow users to make and evaluate decisions about the allocation of scarce resources. Identifies the characteristics of financial information necessary to allow users to make and evaluate decisions about the allocation of scarce resources. Primary qualitative characteristics: Primary qualitative characteristics: –relevance –reliability

Copyright  2003 McGraw-Hill New Zealand Pty Ltd PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin Slides prepared by Grant Samkin 1-34 SC 4 Qualitative characteristics (cont.) Information is relevant if it can be used to: Information is relevant if it can be used to: –confirm or correct prior expectations about past events (feedback value) –assist in forming, revising or confirming expectations about the future (predictive value). Information is reliable when it: Information is reliable when it: –corresponds with actual underlying transactions and events (representational faithfulness) –is capable of independent verification (verifiability) –is free from bias (neutrality).

Copyright  2003 McGraw-Hill New Zealand Pty Ltd PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin Slides prepared by Grant Samkin 1-35 SC 5 Assumptions underlying the preparation of GPFRs Three basic assumptions underlie GPFRs: Three basic assumptions underlie GPFRs: –going-concern assumption –period reporting assumption –accrual-basis assumption. Where assumptions are not appropriate or have not been used, the alternative assumptions used must be disclosed. Where assumptions are not appropriate or have not been used, the alternative assumptions used must be disclosed.

Copyright  2003 McGraw-Hill New Zealand Pty Ltd PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin Slides prepared by Grant Samkin 1-36 SC 6 Influences on qualitative characteristics Four significant influences in adopting particular characteristics: Four significant influences in adopting particular characteristics: –balance between qualitative characteristics –balance between benefit and cost –materiality –Prudence.

Copyright  2003 McGraw-Hill New Zealand Pty Ltd PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin Slides prepared by Grant Samkin 1-37 SC 6 Influences on qualitative characteristics (cont.) GPFRs should include all financial information that satisfies the concepts of relevance and reliability, to the extent that such information is material. GPFRs should include all financial information that satisfies the concepts of relevance and reliability, to the extent that such information is material. Materiality is a matter of professional judgement although SSAP-6 does provide guidance on base amounts. Materiality is a matter of professional judgement although SSAP-6 does provide guidance on base amounts.

Copyright  2003 McGraw-Hill New Zealand Pty Ltd PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin Slides prepared by Grant Samkin 1-38 SC 7 Definition and recognition of assets Assets are defined as: Assets are defined as: –service potential or future economic benefits controlled by the entity as a result of past transactions or other past events.

Copyright  2003 McGraw-Hill New Zealand Pty Ltd PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin Slides prepared by Grant Samkin 1-39 Definition and recognition of assets (cont.) Three key characteristics of definition: Three key characteristics of definition: –there must be service potential or future economic benefits; –the reporting entity must control the service potential or future economic benefits; and –the transaction or other event giving rise to the control must have occurred.

Copyright  2003 McGraw-Hill New Zealand Pty Ltd PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin Slides prepared by Grant Samkin 1-40 Definition and recognition of assets (cont.) An asset shall be recognised in the financial statements when: An asset shall be recognised in the financial statements when: –it is probable that the service potential or future economic benefits embodied in the asset will eventuate; and –it possesses a cost or other value that can be measured with reliability. ‘probable’ is defined as ‘more likely rather than less likely’. ‘probable’ is defined as ‘more likely rather than less likely’.

Copyright  2003 McGraw-Hill New Zealand Pty Ltd PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin Slides prepared by Grant Samkin 1-41 Definition and recognition of liabilities Liabilities are defined as : Liabilities are defined as : –future sacrifices of service potential or future economic benefits that the entity is presently obliged to make to other entities, as a result of past transactions or other past events.

Copyright  2003 McGraw-Hill New Zealand Pty Ltd PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin Slides prepared by Grant Samkin 1-42 Definition and recognition of liabilities (cont.) There are three main characteristics: There are three main characteristics: –the entity is presently obliged to act or perform in a certain way –the action will have adverse financial consequences for the entity –a past transaction or other event must have occurred to create the obligation.

Copyright  2003 McGraw-Hill New Zealand Pty Ltd PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin Slides prepared by Grant Samkin 1-43 Definition and recognition of liabilities (cont.) Recognition in financial statements again requires two tests to be met: Recognition in financial statements again requires two tests to be met: –it is probable that the future sacrifice of service potential or future economic benefits will be required; and –the amount of the liability can be measured reliably.

Copyright  2003 McGraw-Hill New Zealand Pty Ltd PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin Slides prepared by Grant Samkin 1-44 Definition and recognition of liabilities (cont.) If a liability cannot be measured reliably but is potentially material it should be disclosed within the notes to the accounts. If a liability cannot be measured reliably but is potentially material it should be disclosed within the notes to the accounts.

Copyright  2003 McGraw-Hill New Zealand Pty Ltd PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin Slides prepared by Grant Samkin 1-45 Definition and recognition of expenses The definition is dependent upon the definition of assets and liabilities. The definition is dependent upon the definition of assets and liabilities. Expenses are defined as: Expenses are defined as: –consumptions or losses of service potential or future economic benefits in the form of reductions in assets or increases in liabilities of the entity, other than those relating to distributions to the owners, that result in a decrease in equity during the reporting period.

Copyright  2003 McGraw-Hill New Zealand Pty Ltd PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin Slides prepared by Grant Samkin 1-46 Definition and recognition of expenses (cont.) Expenses are recognised when: Expenses are recognised when: –it is probable that the consumption or loss of service potential or future economic benefits resulting in a reduction in assets and/or increase in liabilities has occurred; and –the consumption or loss of economic benefits can be measured with reliability.

Copyright  2003 McGraw-Hill New Zealand Pty Ltd PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin Slides prepared by Grant Samkin 1-47 Definition and recognition of revenues Again the definition is dependent on asset and liability definitions. Again the definition is dependent on asset and liability definitions. Revenues are defined as: Revenues are defined as: –inflows or other enhancements, or savings in outflows, of service potential or future economic benefits in the form of increases in assets or reductions in liabilities of the entity, other than those relating to contributions by owners, that result in an increase in equity during the reporting period.

Copyright  2003 McGraw-Hill New Zealand Pty Ltd PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin Slides prepared by Grant Samkin 1-48 Definition and recognition of revenues (cont.) Revenues can be recognised in the financial statements when: Revenues can be recognised in the financial statements when: –it is probable that the inflow or other enhancement or saving in outflows of service potential or future economic benefits has occurred; and –the inflow or other enhancement or saving in outflows of service potential or future economic benefits can be measured with reliability.

Copyright  2003 McGraw-Hill New Zealand Pty Ltd PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin Slides prepared by Grant Samkin 1-49 Definition of equity Equity is defined as: Equity is defined as: –the residual interest in the assets of the entity after deduction of its liabilities. Directly a function of the definition given to assets and liabilities. Directly a function of the definition given to assets and liabilities.

Copyright  2003 McGraw-Hill New Zealand Pty Ltd PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin Slides prepared by Grant Samkin 1-50 Critical review of the Conceptual Framework (CF) Objective of GPFRs in CF implies that financial reports should be primarily economic in focus. Objective of GPFRs in CF implies that financial reports should be primarily economic in focus. –Should social issues be ignored in the annual report? An individual's view of business responsibilities directly impacts on the perceptions of accountability. An individual's view of business responsibilities directly impacts on the perceptions of accountability.

Copyright  2003 McGraw-Hill New Zealand Pty Ltd PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin Slides prepared by Grant Samkin 1-51 Critical review of the CF (cont.) In determining whether an entity is a reporting entity, is the need for information to enable informed ‘resource allocation decisions’ the only or dominant thing to consider? In determining whether an entity is a reporting entity, is the need for information to enable informed ‘resource allocation decisions’ the only or dominant thing to consider?

Copyright  2003 McGraw-Hill New Zealand Pty Ltd PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin Slides prepared by Grant Samkin 1-52 Critical review of the CF (cont.) Economic focus of GPFRs ignores transactions or events not resulting from market transactions or an exchange of property rights. Economic focus of GPFRs ignores transactions or events not resulting from market transactions or an exchange of property rights. Ignores environmental externalities caused by business. Ignores environmental externalities caused by business.

Copyright  2003 McGraw-Hill New Zealand Pty Ltd PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin Slides prepared by Grant Samkin 1-53 Critical review of the CF (cont.) Financial statements included within reports only reflect financial performance and do not provide a means of assessing social performance. Financial statements included within reports only reflect financial performance and do not provide a means of assessing social performance. Financial press also generally uses financial indicators as a guide to a firm’s success. Financial press also generally uses financial indicators as a guide to a firm’s success.

Copyright  2003 McGraw-Hill New Zealand Pty Ltd PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin Slides prepared by Grant Samkin 1-54 Critical review of the CF (cont.) The Conceptual Framework simply codifies existing practice. The Conceptual Framework simply codifies existing practice. Conceptual frameworks have been used as devices to legitimise the existence of the accounting profession. Conceptual frameworks have been used as devices to legitimise the existence of the accounting profession.

Copyright  2003 McGraw-Hill New Zealand Pty Ltd PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin Slides prepared by Grant Samkin 1-55 Harmonisation of New Zealand and International Accounting Standards Since 1993 ASRB required to liaise with Accounting Standards Board in Australia to harmonise New Zealand and Australian financial reporting standards. Since 1993 ASRB required to liaise with Accounting Standards Board in Australia to harmonise New Zealand and Australian financial reporting standards. Harmonisation = compatibility but with some variations. Harmonisation = compatibility but with some variations.

Copyright  2003 McGraw-Hill New Zealand Pty Ltd PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin Slides prepared by Grant Samkin 1-56 The International Accounting Standards Committee (IASC) Established in Established in Aims to bring together parties from throughout the world to develop accounting standards that apply internationally. Aims to bring together parties from throughout the world to develop accounting standards that apply internationally. Representatives from over 100 countries. Representatives from over 100 countries. Replaced by International Accounting Standards Board (IASB) in April Replaced by International Accounting Standards Board (IASB) in April 2001.

Copyright  2003 McGraw-Hill New Zealand Pty Ltd PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin Slides prepared by Grant Samkin 1-57 Importance of International Accounting Standards Referred to as indication of possible best practice when standards being developed by countries with their own standard-setting process in place. Referred to as indication of possible best practice when standards being developed by countries with their own standard-setting process in place. Useful guidance when no domestic standard relates to a particular accounting issue. Useful guidance when no domestic standard relates to a particular accounting issue. Have been directly adopted by countries which do not have their own accounting standards. Have been directly adopted by countries which do not have their own accounting standards.

Copyright  2003 McGraw-Hill New Zealand Pty Ltd PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin Slides prepared by Grant Samkin 1-58 Structure of new IASB Group of trustees responsible for appointment of IASB members. Group of trustees responsible for appointment of IASB members. IASB has 12 full-time members and 2 part- time members. IASB has 12 full-time members and 2 part- time members. Publication of IAS or exposure draft requires approval by at least 8 Board members. Publication of IAS or exposure draft requires approval by at least 8 Board members.

Copyright  2003 McGraw-Hill New Zealand Pty Ltd PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin Slides prepared by Grant Samkin 1-59 Harmonisation with IASC standards IAS issued by IASB are deemed to have authoritative support in New Zealand. IAS issued by IASB are deemed to have authoritative support in New Zealand. Inconsistencies between NZ financial reporting standards and IAS (and Australian accounting standards) are highlighted in conformity statements included as appendixes to financial reporting standards. Inconsistencies between NZ financial reporting standards and IAS (and Australian accounting standards) are highlighted in conformity statements included as appendixes to financial reporting standards.

Copyright  2003 McGraw-Hill New Zealand Pty Ltd PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin Slides prepared by Grant Samkin 1-60 New Zealand representation on the IASB NZ does not have strong representation on the IASB. NZ does not have strong representation on the IASB. IAS development process does allow for New Zealand input. IAS development process does allow for New Zealand input.

Copyright  2003 McGraw-Hill New Zealand Pty Ltd PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin Slides prepared by Grant Samkin 1-61 Rationale for harmonisation If New Zealand retains unique accounting standards, inflow of foreign investment will be restricted. If New Zealand retains unique accounting standards, inflow of foreign investment will be restricted. Need for common accounting language to facilitate investor evaluation of domestic and foreign corporations. Need for common accounting language to facilitate investor evaluation of domestic and foreign corporations. Avoids costly accounting conversions by foreign listed companies. Avoids costly accounting conversions by foreign listed companies.

Copyright  2003 McGraw-Hill New Zealand Pty Ltd PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin Slides prepared by Grant Samkin 1-62 Implications of harmonisation Numerous changes to New Zealand financial reporting standards in recent years, and still ongoing. Numerous changes to New Zealand financial reporting standards in recent years, and still ongoing. Numerous new standards to cover issues not previously addressed by financial reporting standards. Numerous new standards to cover issues not previously addressed by financial reporting standards.

Copyright  2003 McGraw-Hill New Zealand Pty Ltd PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin Slides prepared by Grant Samkin 1-63 Perceived benefits of harmonisation Improve quality of financial reporting. Improve quality of financial reporting. Increase comparability of financial reports prepared in different countries means better quality information to participants in international capital markets. Increase comparability of financial reports prepared in different countries means better quality information to participants in international capital markets. Remove barriers to international capital flows. Remove barriers to international capital flows.

Copyright  2003 McGraw-Hill New Zealand Pty Ltd PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin Slides prepared by Grant Samkin 1-64 Perceived benefits of harmonisation (cont.) Reducing financial reporting costs for both New Zealand and foreign multinationals. Reducing financial reporting costs for both New Zealand and foreign multinationals. Facilitating more meaningful comparisons of New Zealand and foreign public sector entities. Facilitating more meaningful comparisons of New Zealand and foreign public sector entities.

Copyright  2003 McGraw-Hill New Zealand Pty Ltd PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin Slides prepared by Grant Samkin 1-65 New Zealand adoption of IFRS October 2002 ASRB announces that from 2007, listed issuers would be required to comply with IFRS. October 2002 ASRB announces that from 2007, listed issuers would be required to comply with IFRS. Issuers would be permitted to adopt them from Issuers would be permitted to adopt them from 2005.

Copyright  2003 McGraw-Hill New Zealand Pty Ltd PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin Slides prepared by Grant Samkin 1-66 Recent developments – financial reporting structure November 2002 the FRSB agreed that the New Zealand financial reporting structure should be aligned as closely as possible with the Australian structure. November 2002 the FRSB agreed that the New Zealand financial reporting structure should be aligned as closely as possible with the Australian structure. Based on the ‘reporting entity’ concept. Based on the ‘reporting entity’ concept.

Copyright  2003 McGraw-Hill New Zealand Pty Ltd PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin Slides prepared by Grant Samkin 1-67 Barriers to harmonisation Perceived barriers to harmonisation: Perceived barriers to harmonisation: –different business environments; –different legal systems; –different cultures; and –different political environments across countries. Culture is an expression of norms, values and customs, which reflect typical behavioural characteristics. Culture is an expression of norms, values and customs, which reflect typical behavioural characteristics.

Copyright  2003 McGraw-Hill New Zealand Pty Ltd PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin Slides prepared by Grant Samkin 1-68 Culture and harmonisation Values inherent in accounting sub-culture influenced by society-wide values. Values inherent in accounting sub-culture influenced by society-wide values. Accounting systems cannot be considered to be ‘culture free’. Accounting systems cannot be considered to be ‘culture free’. Should different countries with varying cultural values adopt internationally uniform accounting practices? Should different countries with varying cultural values adopt internationally uniform accounting practices?

Copyright  2003 McGraw-Hill New Zealand Pty Ltd PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin Slides prepared by Grant Samkin 1-69 Use and role of audit reports Provides an independent opinion of the financial information, regarding: Provides an independent opinion of the financial information, regarding: –true and fair view –compliance with financial reporting standards. Helps establish credibility of the financial information. Helps establish credibility of the financial information. Auditor not responsible for preparation of financial information. Auditor not responsible for preparation of financial information.

Copyright  2003 McGraw-Hill New Zealand Pty Ltd PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin Slides prepared by Grant Samkin 1-70 The need for regulation Accounting is fairly heavily regulated in New Zealand: Accounting is fairly heavily regulated in New Zealand: –The Financial Reporting Act 1993 and Companies Act 1993 –Financial reporting standards. Opinions on the need for regulation vary, and range between the ‘free-market’ perspective and the ‘pro-regulation’ perspective. Opinions on the need for regulation vary, and range between the ‘free-market’ perspective and the ‘pro-regulation’ perspective.

Copyright  2003 McGraw-Hill New Zealand Pty Ltd PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin Slides prepared by Grant Samkin 1-71 Free-market perspective on regulation Demand and supply forces should be allowed to operate, to generate an optimal supply of information. Demand and supply forces should be allowed to operate, to generate an optimal supply of information. Even in the absence of regulation there are private economics-based incentives to provide information. Even in the absence of regulation there are private economics-based incentives to provide information.

Copyright  2003 McGraw-Hill New Zealand Pty Ltd PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin Slides prepared by Grant Samkin 1-72 Free-market perspective on regulation (cont.) Produced to reduce conflict between parties with an interest in the organisation. Produced to reduce conflict between parties with an interest in the organisation. Managers argued to be best placed to determine what information should be produced. Managers argued to be best placed to determine what information should be produced.

Copyright  2003 McGraw-Hill New Zealand Pty Ltd PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin Slides prepared by Grant Samkin 1-73 Free-market perspective on regulation (cont.) Financial statement audits can also be expected in the absence of regulation. Financial statement audits can also be expected in the absence of regulation. If no regulation, entities are still motivated to disclose both good and bad news. If no regulation, entities are still motivated to disclose both good and bad news. –‘market for lemons’ perspective

Copyright  2003 McGraw-Hill New Zealand Pty Ltd PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin Slides prepared by Grant Samkin 1-74 Pro-regulation perspective Arguments in favour of a ‘free market’, where users are expected to pay for information break down when consumption of ‘free’ or ‘public’ goods is considered. Arguments in favour of a ‘free market’, where users are expected to pay for information break down when consumption of ‘free’ or ‘public’ goods is considered.

Copyright  2003 McGraw-Hill New Zealand Pty Ltd PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin Slides prepared by Grant Samkin 1-75 Pro-regulation perspective (cont.) Accounting information is a public good. Accounting information is a public good. –Once available, it can be used and passed on without paying. –Parties using without incurring costs are known as ‘free-riders’. –In the presence of free-riders, true demand is understated.

Copyright  2003 McGraw-Hill New Zealand Pty Ltd PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin Slides prepared by Grant Samkin 1-76 Pro-regulation perspective (cont.) Regulation required to alleviate the effects of market failure. Regulation required to alleviate the effects of market failure. Arguments that ‘on average’ the market is efficient ignore the rights of individual investors who may lose as a result of relying upon unregulated disclosures. Arguments that ‘on average’ the market is efficient ignore the rights of individual investors who may lose as a result of relying upon unregulated disclosures.

Copyright  2003 McGraw-Hill New Zealand Pty Ltd PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin Slides prepared by Grant Samkin 1-77 Pro-regulation perspective (cont.) Ability to obtain information may depend on the individual’s control of scarce resources required by the entity. Ability to obtain information may depend on the individual’s control of scarce resources required by the entity.