The Financial Reporting Standards-Setting Framework
11. IFRS are made by the London-based International Accounting Standards Board (IASB). The IASB is committed to developing a single set of high quality, understandable and enforceable global accounting standards for use by large profit-seeking companies. About 100 countries have either adopted IFRS or are in the process of doing so.1 Notable exceptions are the United States and Japan. However, the IASB has convergence projects with both countries.
12. The New Zealand financial reporting framework is provided by the FRA together with 60-odd statutes that cross-refer to the FRA.2 Together they identify:
- The entities that are required to produce financial reports; and
- The entities that are required to have those financial statements audited and made public.
13. The FRA constitutes the ASRB as an independent crown entity, and its main function is to approve financial reporting standards. Under the scheme of the FRA, the NZICA or any other organisation may submit draft standards to the ASRB for approval. In practice, the FRSB is the only body that does so. Approved standards have the force of law.
14. The New Zealand standards-setting process crucially relies on the willingness of the accountancy profession to make the major contribution. Members of the FRSB receive no remuneration. The analytical work in support of the FRSB is carried out by NZICA staff and contractors. The ASRB has no premises or staff, and administrative support services have been provided at discounted rates by all of the "Big Four" accounting firms at one time or another. The adoption of IFRS has also heightened the need for the ASRB and FRSB to liaise with the IASB. The ASRB has that role mainly at the oversight and strategy level, while the FRSB liaises mainly at the technical level.
The Financial Reporting Framework
15. There is a three-tiered structure for financial reporting in New Zealand. The top tier comprises issuers, entities that are funded by taxation, rates and levies and some large private companies. They must prepare financial statements in compliance with full New Zealand standards (i.e. NZIFRS from 2007 onwards). Most of the top tier entities must also have those statements audited and filed. The middle tier, called the Framework for Differential Reporting (FDR), provides exemptions from the full standards3 for certain medium-sized and small entities that do not have public accountability. The bottom tier, called the Exempt Companies System (ECS), applies only to small closely-held companies. ECS companies are only required to complete simple fill-in-the-box type forms, with no mandatory audit or filing requirements.
16. The FRA also requires all overseas-incorporated and owned companies to file audited financial statements, regardless of their size. In addition, all companies are required to keep proper accounting records, including a requirement that those records will at any time enable the financial position of the company to be determined with reasonable accuracy.
17. This reporting framework is fundamentally different to the two-tier system operating in Australia. Australia imposes reporting requirements on a wider range of entities than New Zealand. However, Australia does not impose preparation requirements on entities that are not reporting entities. The TransTasman Accounting Standards Advisory Group, which was established in early 2004 as a part of the Single Economic Market initiative, has decided to explore the opportunities for reducing or eliminating the differences. Work will commence in early 2006.
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