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• Part I: Discussion Document
• Sector Neutrality

• Corporate Law and Governance

• Financial Reporting Law

• Part I: Reporting Structure

• Part I: Discussion Document
• Summary of Submissions
• Submissions

• New Zealand
• Comment
• Alternative International Standards
  • IPSAS
  • GFS
  • Adapting IFRS
• The Trans-Tasman Perspective
• Question 4 - Sector Neutrality

159. Although the adoption of IFRS is well underway, there are some significant issues that remain a subject of debate. An area of specific concern is in relation to accounting standards for public benefit entities. This is of particular concern to New Zealand and Australia, where the current standards are "sector neutral." In a sector neutral standard-setting environment the same standards apply to all entities regardless of whether there is a profit-motive or not.

New Zealand

160. In the early 1990s public sector accountability was strengthened with the implementation of the Public Finance Act 1989 and the New Zealand government, government departments and Crown entities producing high quality financial statements in compliance with generally accepted accounting practice. Equivalent legislation was also introduced for local authorities and their controlled entities.⁹²

161. In addition to the generally superior reports that are produced, the fact the accounting rules are made by a body independent of the government adds to the integrity and credibility of the statements. Further, as the rules are also followed by the private sector in New Zealand, the comparability and familiarity of the reports that are produced means they are easier to understand, increasing transparency.

162. The move to accounting in accordance with GAAP has also earned New Zealand an international reputation as its experience and expertise grew in dealing with public sector financial reporting issues. New Zealand's reputation as a leading country on public sector financial reporting issues gives it a platform from which to contribute to and influence the development of international standards.

Comment

163. IFRS are designed to apply to the general purpose financial statements of all profit-oriented entities. They are not designed to be applied to the public sector entities.

164. However, it is not open to New Zealand to alter IFRS to suit the New Zealand standpoint and at the same time claim international compliance. One of the fundamental reasons for New Zealand adopting IFRS is the comparability that such standards produce. If New Zealand begins altering standards, the underlying rationale for adopting IFRS will be largely undermined. The possible extreme consequence of this would be international investors bypassing New Zealand as an investment destination. Regardless of the motives for doing so, a country that does not fully conform with IFRS runs a very real risk of being perceived as non-compliant.

165. There are two main options for dealing with these issues. First, New Zealand could adopt an alternative international set of accounting standards relevant to the public sector at the same time as the profit-oriented sector adopts IFRS. Alternatively, New Zealand could adapt IFRS to create a set of standards for public benefit entities based on IFRS with additional material, such as existing New Zealand standards or relevant international standards, sufficient to make the standards relevant to public benefit entities.

166. In order to determine the best approach towards public benefit entity reporting, the different needs of the public benefit sector and the profit-oriented sector need to be established and how these needs can best be managed. New Zealand's experience over the last ten years suggests that standards need to pay particular attention in the following areas:

• Information to meet user needs: Stakeholders providing finance to public benefit entities are predominantly funders and financial supporters rather than investors. These groups are primarily seeking information for accountability purposes rather than information about their return on investment;
• Reporting entity definition: the boundary of the consolidated reporting entity may have distinctive features, particularly where legal instruments of ownership such as shares do not exist and where entities operate under the umbrella of a parent body but have significant independence and autonomy from that parent body;
• Assets: In the public benefit sector assets often represent service potential as much as they do economic benefits. Special consideration needs to be given to the reporting of assets that do not generate cash, where there is little market evidence, and where the provision of an asset or the supply of benefits arising from the asset are provided at non-market rates; and
• Liabilities: Rules established regarding the recognition of liabilities need to consider the situation where public benefit entities have commitments, whether general or specific, that do not arise out of market-style transactions, and how to account for this sort of "non-exchange" transaction.⁹³

167. Many of the above issues are not unique to the public benefit sector, but they may require more emphasis and consideration for the accounting standards to be relevant to public benefit entities and to ensure that the desired level of consistency in reporting by those entities is achieved.

Alternative International Standards

IPSAS

168. The IFAC-PSC has a custom-designed set of standards for the public sector, based on current international accounting standards. These standards are substantially better than the current public sector standards used in most countries and accord with many of the principles of current New Zealand standards.

169. Adopting these standards would mean that New Zealand public sector entities could claim compliance with IPSAS. However, IPSAS are not aimed at the voluntary sector, and therefore standards would need to be implemented for these entities. Further, given the lack of international adoption of IPSAS currently, no major benefit is likely to be derived from international comparability. Finally, the loss of comparability within New Zealand standards is not desirable.

GFS

170. One possibility that has been mooted is the idea of the public sector reporting on a GFS (or GFS-GAAP co-ordinated) basis rather than a GAAP basis.

171. Government Finance Statistics ("GFS") is a system produced by the International Monetary Fund ("IMF"),⁹⁴ designed to produce statistics relating to the financial operations, financial position, and liquidity situation of the general government sector or the public sector in a consistent and systematic manner. GFS focuses on financial transactions such as government spending, lending, taxing and borrowing activities.

172. The main advantage of using GFS at a whole-of-government level is that governments produce statistical reports using GFS for other purposes anyway. Producing two such sets of financial numbers, one for statistical purposes and the other for financial reporting, can be considered unnecessary. Further, GFS is an international system that would enable and promote international comparisons.

173. Although GFS include many financial reporting principles and statements on how to account for various types of item, they are primarily designed to produce statistics to inform economic decision making, in particular, policy decisions, of governments. As a result they are aimed at a government sector level of reporting rather than reporting by a public sector entity. They are therefore only relevant in terms of government wide reporting and not for individual public sector or voluntary sector entities.

174. The use of GFS for public sector financial reports has been criticised,⁹⁵ in particular for its disregard for "paper" losses and gains, since they are not a result of market transactions. Also, as a statistical system, it is more focused on issues of classification than the recognition and measurement concerns of accounting standard setters.⁹⁶ This limits the level of assurance that can be provided on the accuracy of the results reported, either by those reporting or by auditors.

175. An international working party representing several organisations, including the IMF, OECD, IASB and IFAC-PSC, is seeking to harmonise different international government accounting and statistical standards, including GFS and IPSAS. However, as GFS is only applicable for the government sector-wide reports at this stage, and due to possible shortcomings of using a statistical system for financial reporting, the Ministry does not recommend the adoption of a form of GFS for public benefit entity reporting.

Adapting IFRS

176. In this approach, IFRS would be introduced unaltered as the reporting requirements for profit-oriented entities, thereby enabling New Zealand to claim compliance with IFRS. At the same time, additions or amendments would be made to IFRS to address issues of particular relevance to public benefit entities. This alteration of IFRS in this limited context will not create any problems in relation to New Zealand's ability to claim compliance with international standards - New Zealand would not be claiming any form of international compliance in relation to the public benefit entities, and would be fully compliant with regard to profit-oriented entities. Further, this approach should produce a set of standards that are largely applicable to all sectors, with any derogations from this principle readily identifiable. This will encourage transparency and accountability in the manner that already exists in New Zealand.

177. The ASRB has decided on this approach. The current exposure drafts issued by the Financial Reporting Standards Board provide an indication of the standards that are likely to result for comment.

The Trans-Tasman Perspective

178. Australia has a particular focus on creating a separate set of financial reporting requirements through a "harmonisation" of Australian GAAP and GFS, as they face particular challenges in achieving consistency between budget outcomes reported results and audited GAAP-based reported results. Also there is a perceived need for consistent whole-of-government reporting at the State government level. These factors have not impacted the development of financial reporting standards in New Zealand.

179. Owing to the potential issues relating to GFS outlined above, and the inapplicability of the particular Australian policy basis in the New Zealand context, this approach does not appear to have much support in New Zealand, particularly as this may lead to compromised current public sector accountability arrangements. This could be an area where trans-Tasman co-ordination may be more difficult. However, the costs of being different in this area appear to be significantly lower.

⁹²Local Government Amendment Act (No 2) 1989, subsequently replaced by the Local Government Act 2002.

⁹³For example, how to account for the future "liability" of superannuation payments

⁹⁴See International Monetary Fund [Link to External Website], and in particular Government Finance Statistics [Link to the Website of the International Monetary Fund].

⁹⁵See, for example, the CPA Australia Inaugural Neil Walker Memorial Lecture [Link to the Website of CPA Australia] by Dr Ian Ball, Chief Executive Officer of IFAC, 23 October 2002.

⁹⁶See generally "Changing to Accrual Accounting in Central Government" [Link to the Website of The Chartered Institute of Public Finance and Accountancy] by Dr Noel Hepworth, Chairman of the Institute of Public Finance Ltd and the former director of the Chartered Institute of Public Finance and Accountancy, 15 April 2002.