1. 1-1 Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a New Zealand Financial Accounting 3e by Grant Samkin Slides prepared by Grant Samkin and Annika Schneider An overview of the New Zealand external reporting environment Chapter 1

2. 1-2 Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a New Zealand Financial Accounting 3e by Grant Samkin Slides prepared by Grant Samkin and Annika Schneider Learning objectives Indicate the scope of regulation relating to New Zealand external financial reporting Explain the general functions of the: – Accounting Standards Review Board – Financial Reporting Standards Board – New Zealand Securities Commission – New Zealand Exchange Explain why New Zealand adopted the IASB accounting standards and discuss the IASB’s direct relevance to New Zealand accounting standard-setting

3. 1-3 Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a New Zealand Financial Accounting 3e by Grant Samkin Slides prepared by Grant Samkin and Annika Schneider Learning objectives (cont.) Describe the structure of the IASB Formulate the purpose of conceptual framework projects, define the elements of accounting and recall their respective recognition criteria Explain the implications of New Zealand’s decision to adopt accounting standards issued by the IASB Critically review conceptual frameworks Describe cultural differences and the impact these differences might have on the harmonisation of accounting standards

4. 1-4 Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a New Zealand Financial Accounting 3e by Grant Samkin Slides prepared by Grant Samkin and Annika Schneider Learning objectives (cont.) Describe the use and role of audit reports, and Discuss the fact that the practice of financial accounting is quite heavily regulated within New Zealand and evaluate some of the arguments for and against the regulation of financial accounting

5. 1-5 Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a New Zealand Financial Accounting 3e by Grant Samkin Slides prepared by Grant Samkin and Annika Schneider Financial accounting defined Financial accounting is a process involving the collection and processing of financial information to meet the decision-making needs of parties external to the organisation Financial accounting may be contrasted with management accounting, which: – Focuses on providing information for decision making by parties within the organisation – Is largely unregulated Financial accounting is heavily regulated

6. 1-6 Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a New Zealand Financial Accounting 3e by Grant Samkin Slides prepared by Grant Samkin and Annika Schneider User demand for general- purpose financial reports Users include (the ‘Framework for the Preparation and Presentation of Financial Statements’— 'the NZ Framework' — released by the Accounting Standards Review Board, June 2005): – Present and potential investors – Employees – Lenders – Suppliers and other trade creditors – Customers – Government and its agencies – The public Users lack the power to demand specific information to meet their needs

7. 1-7 Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a New Zealand Financial Accounting 3e by Grant Samkin Slides prepared by Grant Samkin and Annika Schneider General-purpose vs special- purpose reports General-purpose financial reports Comply with the NZ Framework and accounting standards Meet the information needs common to users, who are unable to command the preparation of reports tailored to satisfy, specifically, all their information needs Represent financial statements and supporting notes included within an annual report presented to shareholders at a company’s annual general meeting (Continues)

8. 1-8 Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a New Zealand Financial Accounting 3e by Grant Samkin Slides prepared by Grant Samkin and Annika Schneider General- vs special-purpose reports (cont.) Special-purpose financial reports Designed to meet the needs of a specific group or to satisfy a specific purpose Example: Bank demanding as part of a loan agreement that a borrowing entity provide information about projected cash flows

9. 1-9 Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a New Zealand Financial Accounting 3e by Grant Samkin Slides prepared by Grant Samkin and Annika Schneider Sources of external financial reporting regulation In New Zealand, external financial reporting is regulated by: – Legislation – Accounting standards – The New Zealand Securities Commission – The New Zealand Exchange

10. 1-10 Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a New Zealand Financial Accounting 3e by Grant Samkin Slides prepared by Grant Samkin and Annika Schneider Legislation A number of important pieces of legislation govern financial reporting in New Zealand. These are: – Public Finance Act 1989 – Local Government Act 2002 – Crown Entities Act 2004 – Financial Reporting Act 1993 (FRA) – Companies Act 1993 (Continues)

11. 1-11 Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a New Zealand Financial Accounting 3e by Grant Samkin Slides prepared by Grant Samkin and Annika Schneider Legislation (cont.) Financial Reporting Act 1993 Applies to all reporting entities Details the overall financial reporting framework, including reference to the conceptual framework, the composition of reports, the true and fair view and the fair presentation override Defines the terms 'reporting entity', 'issuer' and 'GAAP' Was reviewed in 2004 in as part of wider company law reforms in response to criticisms an overhaul was needed, as well as the international trend towards IFRS (Continues)

12. 1-12 Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a New Zealand Financial Accounting 3e by Grant Samkin Slides prepared by Grant Samkin and Annika Schneider Legislation (cont.) Companies Act 1993 Applies to all companies (narrower focus than FRA) Details administrative requirements, some disclosure requirements and directors' responsibilities

13. 1-13 Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a New Zealand Financial Accounting 3e by Grant Samkin Slides prepared by Grant Samkin and Annika Schneider Accounting standards Prior to 1993 accounting standard-setting was in the hands of the private sector Share market crash of 1987 prompted review of standard-setting process Report from inquiry recommended that: – Legal backing be given to accounting standards – An Accounting Standards Review Board to approve accounting standards be established – Sanctions be introduced for non-compliance with standards (Continues)

14. 1-14 Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a New Zealand Financial Accounting 3e by Grant Samkin Slides prepared by Grant Samkin and Annika Schneider Accounting standards (cont.) Accounting Standards Review Board (ASRB) Established under the FRA ASRB is constituted as a body corporate under the FRA and is a Crown entity under the Public Finance Act 1989 The Governor-General, on the recommendation of the Minister of Commerce, appoints its members (no fewer than 4 and a maximum of 7) by virtue of their knowledge or experience in law, business, finance, economics or accounting Purpose is to review and, where appropriate, approve financial reporting standards (Continues)

15. 1-15 Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a New Zealand Financial Accounting 3e by Grant Samkin Slides prepared by Grant Samkin and Annika Schneider Accounting standards (cont.) Financial Reporting Standards Board (FRSB) A board of the New Zealand Institute of Chartered Accountants (NZICA) Members appointed by the Council of the Institute on the basis of sector representation and knowledge or experience in accounting FRSB’s objective is the development and maintenance of definitive accounting standards and the provision of guidance in the form of research bulletins or technical practice aids on all aspects of financial reporting FRSB aims continually to improve the quality of general-purpose financial statements and non-financial statements so that users are provided with sound information to enable them to make economic decisions (Continues)

16. 1-16 Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a New Zealand Financial Accounting 3e by Grant Samkin Slides prepared by Grant Samkin and Annika Schneider Accounting standards (cont.) Prior to 1997 accounting standard-setting was undertaken by the FRSB or one of its committees by researching a particular issue In 1997 the FRSB decided that future accounting standards would be developed based on standards issued by the IASC (International Accounting Standards Committee) or the AASB (Australian Accounting Standards Board) These would be modified to ensure that the terminology was sector neutral and that the terminology and format were consistent with other New Zealand pronouncements The decision by the ASRB in 2002 that New Zealand entities would be required to apply IFRSs issued by the IASB did not result in any changes to the accounting standard-setting process. The FRSB remained responsible for the due process in respect of all New Zealand equivalents to IFRSs submitted to the Board for approval

17. 1-17 Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a New Zealand Financial Accounting 3e by Grant Samkin Slides prepared by Grant Samkin and Annika Schneider New Zealand Securities Commission (SC) Established under the Securities Act 1978 It is a statutory corporation, which, in all matters other than funding and the appointment of its members, is expected to act independently of the NZ Government and others The SC prescribes 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 In addition, the SC identifies a number of essential corporate government principles to enhance accountability The SC seeks to strengthen investor confidence in New Zealand’s capital markets

18. 1-18 Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a New Zealand Financial Accounting 3e by Grant Samkin Slides prepared by Grant Samkin and Annika Schneider The New Zealand Exchange (NZX) The 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 New Zealand Exchange Listing Rules can lead to suspension of trading of an entity’s shares

19. 1-19 Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a New Zealand Financial Accounting 3e by Grant Samkin Slides prepared by Grant Samkin and Annika Schneider Process of NZ adopting IFRSs In October 2002, the ASRB announced that from 2007 listed issuers would be required to comply with international financial reporting standards (IFRSs) issued by the IASB The ASRB decision was a direct consequence of the Australian Financial Reporting Council’s (FRC) directive to the Australian Accounting Standards Board to adopt international financial reporting standards (IFRSs) The FRC was influenced by the European Union’s decision to adopt IFRSs by 1 January 2005. (Continues)

20. 1-20 Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a New Zealand Financial Accounting 3e by Grant Samkin Slides prepared by Grant Samkin and Annika Schneider Process of NZ adopting IFRSs (cont.) In NZ, IFRSs turned into New Zealand accounting standards, each bearing a NZ IAS prefix NZ IAS standards have general applicability to not-for- profit and local government sectors—material added by FRSB that describes the scope and applicability to the New Zealand context NZ IAS standards are likely to have fewer options than equivalent IFRS standards NZ IAS standards may require additional disclosure Compliance with NZ IAS means compliance with IFRS (Continues)

21. 1-21 Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a New Zealand Financial Accounting 3e by Grant Samkin Slides prepared by Grant Samkin and Annika Schneider Process of NZ adopting IFRSs (cont.) Reporting entities will be required to prepare financial statements in accordance with IFRSs for accounting periods beginning on or after 1 January 2007, with the option of adoption from 1 January 2005. This means: – Entities that choose early adoption and have a 31 March year end will need to ensure their financial statements for the period ending March 2006 are in accordance with IFRSs – Such entities are also required to ensure that comparative figures for the prior year (ending 31 March 2005) are also calculated in accordance with IFRSs

22. 1-22 Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a New Zealand Financial Accounting 3e by Grant Samkin Slides prepared by Grant Samkin and Annika Schneider Impact of adopting IFRS Significant changes will occur in the following areas: – Intangible assets (research, brand names, mastheads) now expensed and not capitalised – Revaluation of intangible assets greatly restricted, only if there is an active market for assets and associated prices are publicly available – Amortisation of goodwill abolished—replaced by requirement that annual test be undertaken to determine whether value of goodwill is impaired (impairment testing) – Revaluation of property, plant and equipment to be done on asset-by-asset basis and not by class of assets for companies (Continues)

23. 1-23 Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a New Zealand Financial Accounting 3e by Grant Samkin Slides prepared by Grant Samkin and Annika Schneider Impact of adopting IFRS (cont.) – Statement of financial position now balance sheet and statement of financial performance now income statement – Prior period errors—financial statements to be adjusted as if error had not occurred (i.e. opening balances amended retrospectively) – Tests of classifying items as equity vs liability more stringent (i.e. items previously classified equity might now be disclosed as liabilities) – The former accounting standard dealing with taxation SSAP 12 ‘Accounting for Income Tax’ is based on a fundamentally different concept from NZ IAS 12 ‘Income Tax’ (Continues)

24. 1-24 Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a New Zealand Financial Accounting 3e by Grant Samkin Slides prepared by Grant Samkin and Annika Schneider Impact of adopting IFRS (cont.) – FRS-41 ‘Disclosing the Impact of Adopting New Zealand Equivalents to International Financial Reporting Standards’ – This accounting standard requires reporting entities to provide, in advance, an explanation of the impacts adoption of IFRSs will have on their financial statements – FRS-41 requires disclosure regarding:  information in respect of planning for the transition to NZ IFRSs  key differences in accounting policies expected to arise on adoption of NZ IFRSs, and  known or reliably estimable information about the impacts on the financial reports had the financial report been prepared using NZ IFRSs

25. 1-25 Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a New Zealand Financial Accounting 3e by Grant Samkin Slides prepared by Grant Samkin and Annika Schneider International Accounting Standards Board (IASB) IASB comprises 14 individuals (12 full-time, 2 part-time) – Each IASB member has one vote on technical and other matters – Publication of standard, exposure draft or final SIC interpretation requires approval by at least eight board members – Other decisions (e.g. the issue of Draft Statements of Principles or Discussion Papers and agenda decisions) require a simple majority of Board members present at a meeting attended by 50% or more

26. 1-26 Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a New Zealand Financial Accounting 3e by Grant Samkin Slides prepared by Grant Samkin and Annika Schneider International Accounting Standards Board (IASB) Board has full control over technical agenda On publication of a standard, also publishes a ‘Basis for Conclusions’ to explain publicly how conclusions were reached, background information to assist application, and dissenting opinions IASB has an International Financial Reporting Interpretations Committee

27. 1-27 Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a New Zealand Financial Accounting 3e by Grant Samkin Slides prepared by Grant Samkin and Annika Schneider Conceptual Framework (CF) and its relevance to financial reporting Adoption of IFRSs entails adoption of conceptual framework developed by IASB Generally accepted, however, that NZ Conceptual Framework more robust than IASB Framework Prescribes the nature, function and limits of financial accounting and reporting 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

28. 1-28 Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a New Zealand Financial Accounting 3e by Grant Samkin Slides prepared by Grant Samkin and Annika Schneider Conceptual Framework (CF) and its relevance to financial reporting Benefits of the Conceptual Framework: – Accounting standards more consistent – Increased international comparability – Should result in the Boards being more accountable for their decisions – Enhanced process of communication between the Boards and constituents – More economical accounting standard development

29. 1-29 Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a New Zealand Financial Accounting 3e by Grant Samkin Slides prepared by Grant Samkin and Annika Schneider Structure of the NZ Framework Definition of reporting entity Objectives of financial statements Qualitative characteristics of financial information Definition and recognition of elements in the financial statements – Assets – Liabilities – Expenses – Income – Equity

30. 1-30 Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a New Zealand Financial Accounting 3e by Grant Samkin Slides prepared by Grant Samkin and Annika Schneider Implications of convergence with IASB standards New Zealand is embracing IASB standards, therefore the IASB Framework has had to be adopted Some differences between IASB Framework and NZ Statement of Concepts

31. 1-31 Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a New Zealand Financial Accounting 3e by Grant Samkin Slides prepared by Grant Samkin and Annika Schneider Critical review of conceptual frameworks Objective of GPFRs in NZ IAS 1 implies that 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 In determining whether or not an entity is a reporting entity, is the need for information to enable informed ‘resource allocation decisions’ the only or dominant consideration? Economic focus of GPFRs ignores transactions or events not resulting from market transactions or an exchange of property rights (Continues)

32. 1-32 Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a New Zealand Financial Accounting 3e by Grant Samkin Slides prepared by Grant Samkin and Annika Schneider Critical review of conceptual frameworks (cont.) Ignores environmental externalities caused by business Financial statements included within reports reflect only financial performance and do not provide a means of assessing social performance Financial press also generally use financial indicators as a guide to a firm’s success Conceptual frameworks simply codify existing practice Conceptual frameworks have been used as devices to legitimise the existence of the accounting profession

33. 1-33 Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a New Zealand Financial Accounting 3e by Grant Samkin Slides prepared by Grant Samkin and Annika Schneider International cultural differences and the harmonisation of accounting standards Values inherent in accounting subculture influenced by society-wide values Accounting systems cannot be considered to be ‘culture free’ Should different countries with varying cultural values adopt internationally uniform accounting practices?

34. 1-34 Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a New Zealand Financial Accounting 3e by Grant Samkin Slides prepared by Grant Samkin and Annika Schneider Use and role of audit report Provides 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

35. 1-35 Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a New Zealand Financial Accounting 3e by Grant Samkin Slides prepared by Grant Samkin and Annika Schneider All this regulation—is it really necessary? Accounting is fairly heavily regulated in Australia by: – Legislation (Companies Act and FRA) – Accounting standards Opinions on the need for regulation vary and range between the ‘free-market’ perspective and the ‘pro-regulation’ perspective (Continues)

36. 1-36 Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a New Zealand Financial Accounting 3e by Grant Samkin Slides prepared by Grant Samkin and Annika Schneider All this regulation—is it really necessary? (cont.) Free-market perspective on regulation 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 Information is produced to reduce conflict between parties with an interest in the organisation (Continues)

37. 1-37 Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a New Zealand Financial Accounting 3e by Grant Samkin Slides prepared by Grant Samkin and Annika Schneider All this regulation—is it really necessary? (cont.) Free-market perspective on regulation (cont.) Managers argued to be best placed to determine what information should be produced Financial statement audits can also be expected in the absence of regulation Without regulation, entities would still be motivated to disclose both good and bad news – ‘Market for lemons’ perspective (Continues)

38. 1-38 Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a New Zealand Financial Accounting 3e by Grant Samkin Slides prepared by Grant Samkin and Annika Schneider All this regulation—is it really necessary? (cont.) Pro-regulation perspective – Arguments in favour of a ‘free market’ where users are expected to pay for information break down when we consider consumption of ‘free’ or ‘public’ goods – Accounting information is a public good  Once available it can be used and passed on without payment  Parties using without incurring costs are known as ‘free-riders’  In the presence of free-riders true demand is understated (Continues)

39. 1-39 Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a New Zealand Financial Accounting 3e by Grant Samkin Slides prepared by Grant Samkin and Annika Schneider All this regulation—is it really necessary? (cont.) Pro-regulation perspective (cont.) – Regulation required to alleviate the effects of market failure – Arguments that ‘on average’ the market is efficient ignore the rights of individual investors who might lose as a result of relying upon unregulated disclosures – Ability to obtain information might depend on the individual’s control of scarce resources required by the entity

40. 1-40 Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a New Zealand Financial Accounting 3e by Grant Samkin Slides prepared by Grant Samkin and Annika Schneider Summary Purpose of the chapter is to provide an overview of main sources of regulation and guidelines relating to financial reporting in New Zealand Major changes in recent years: – Previously accounting standards developed predominantly in New Zealand – From 2007 New Zealand accounting standards will be those developed by the IASB (Continues)

41. 1-41 Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a New Zealand Financial Accounting 3e by Grant Samkin Slides prepared by Grant Samkin and Annika Schneider Summary (cont.) Other key issues addressed include: – Major sources of external financial reporting regulations – Process of adopting accounting standards issued by IASB – Structure of IASB – Relevance and content of conceptual frameworks – Implications of convergence with IASB standards for our conceptual framework, and a critical review of conceptual frameworks – Significance of cultural differences and harmonisation of accounting standards – Role of audit reports – Whether regulation should be considered necessary in financial reporting