Public Sector Standard Setting

Looking ahead
We are at an interesting point in public sector and standard setting history
• Performance reporting needs a genuine “outcomesâ€? boost if it is to progress
• We have embarked on the IASB harmonisation path
• How will the “public benefitâ€? entities fare with this?
• How ready or able are we all to cope with the change?
• Will IFAC PSC be able to sustain momentum?
• Will IFAC PSC be able to produce a standard that Governments will agree to in respect of e.g. social policy obligations and non-reciprocal transfers but at the same time maintain GAAP credibility?
• Significant change in the legislation affecting local government.

{sidebar id=1}  I will seek to reflect on some of these issues during my presentation today. This paper provides some further background to the topics I am covering.

FRS-36 to 38
FRS-36: Accounting for acquisitions resulting in combinations of entities or operations
FRS-37: Accounting for investments in subsidiaries
FRS-38: Accounting for investments in associates

Issues
• Which entities should consolidate?
• Is consolidation required when the subsidiaries don’t seem material?

Overview of disclosure requirements

To view the table download PDF

FRS-3
Most public sector entities have worked through the application issues associated with FRS-3. The issues that the Audit Office is currently facing at the moment relate to:
• Revaluations
• Heritage assets e.g. collections.International harmonisation

Refer Appendix One for details of the harmonisation process.

IFAC PSC
The Public Sector Committee (PSC) focuses on the accounting, auditing, and financial reporting needs of national, regional and local governments, related governmental agencies, and the constituencies they serve. It addresses these needs by issuing and promoting benchmark guidance, conducting educational and research programs, and facilitating the exchange of information among accountants and those that work in the public sector or rely on its work.

For further information go to http://www.ifac.org/PublicSector/

The IFAC is working to produce a full set of International Public Sector Accounting Standards (IPSASs). These standards set out the requirements for financial reporting by governments and others in public sector organizations. Related guidance is provided in the form of explanatory and other material.

Public Sector Standards Project
The Standards Project is a multi-year initiative with the objective of improving financial reporting in the public sector by developing a series of prescriptive standards and some associated descriptive guidance on existing government practices. Improved financial reporting will contribute to better decision making, financial management and accountability by governments.

The Standards (IPSASs) are based largely on the International Accounting Standards (IASs) developed by the International Accounting Standards Committee (IASC).

PSC Steering Committee
There are two committees that are working to produce Invitations to Comment (ITC) in their respective areas:
• PSC Steering Committee - Social Policy Obligations Arising From Non-Exchange Transactions
• PSC Steering Committee - Non-Exchange Revenue APPENDIX ONE
EXTRACTS FROM THE ICANZ WEB PAGE AS OF JULY 2003

Process For Adoption Of IFRS
The Accounting Standards Review Board (ASRB) has decided that New Zealand reporting entities should apply international financial reporting standards (IFRS) in general purpose financial reporting on periods beginning on or after 1 January 2007 (or, from 1 January 2005).

ASRB/FRSB Proposed Financial Reporting Structure
The FRSB developed for consideration by the ASRB a new financial reporting structure which is intended to operationalise the reporting entity concept. The FRSB's proposed structure was reviewed by the ASRB, and in turn proposed to the Ministry of Economic Development (MED).

The general approach in the structure, as proposed by the FRSB/ASRB, is similar to that currently followed in Australia and it is intended to replace the relevant requirements of the Financial Reporting Act 1993 on exempt companies and also the ICANZ Framework for Differential Reporting. The structure proposed by the ASRB/FRSB would extend legal requirements on financial reporting to a wider set of entities — in particular, partnerships, charities, and trusts. However, because of the higher thresholds fewer entities would be expected to be subject to legal requirements than is currently the case.

Government to determine final financial reporting structure
The final financial reporting structure is yet to be determined by government. The MED is considering the structure proposed by the ASRB/FRSB and is expected to issue around late August a discussion paper seeking public comment on a proposed revised structure.

The question of which entities are reporting entities is unlikely to be resolved before late 2003. However, preparation for early adoption of IFRS cannot wait for resolution of this question and therefore the issue of exposure drafts of new standards will have to proceed while the scope of application of the standards is still uncertain, at least at the margins.

One Set of Standards
The ASRB has decided that there should continue to be one set of standards for application by all reporting entities.

However, IFRS are developed for application by profit-oriented entities and, therefore, in order for IFRS also to be applied by public benefit entities it will be necessary in the case of some of the IFRSs to introduce additional requirements on measurement and recognition applicable to just public benefit entities.
Furthermore, it may be appropriate to add disclosure requirements, and these could in some cases be applicable to all reporting entities.

Thus, the intended overall effect of introducing additional requirements is to make the resulting standards more relevant and appropriate to New Zealand reporting entities, in particular, public benefit entities.

Exposure Drafts
To determine the need for and content of any additional requirements, the FRSB will review the existing IFRSs and prepare an exposure draft (ED) of each IFRS for comment. Each ED will contain the IFRS including, in marked-up form, any additional requirements, and also provide a summary comparison of the IFRS and corresponding requirements under current New Zealand financial reporting standards (FRS). Each ED will also discuss any reporting issues on which the FRSB has written to the IASB requesting revision of the requirements relating to those issues. The question of differential reporting concessions will not be addressed in EDs until the financial reporting structure is finalised. EDs will be published on the Institute's website and be open for a two month comment period.

EDs will request comment to the FRSB on
(i) The proposed additional requirements, if any, and also on the need for any further additional requirements (making particular reference to public benefit reporting entities),
(ii) Any regulatory issues or other factors specific to the New Zealand economic and legal environment that could affect implementation of the IFRS, and
(iii) issues relating to the Privacy Act 1993.

The process described above on issuing EDs of existing IFRSs will also be applied to IASB exposure drafts of new or revised IFRSs. However, interested parties will have opportunity to make comments to both the IASB and FRSB on the IASB's draft and to the FRSB on the proposed additional requirements and other matters. The exposure period for these drafts is likely to be three months.

The IASB is currently revising almost all of the IASs and has still to complete development of the new IFRSs beyond IFRS 1. The sequence of publication of EDs will therefore, at least in part, be determined by the sequence in which the IASB's work nears completion and the content of IFRS thus begins to look reasonably certain.

Approval
Following review of the comments received in response to an ED, the FRSB will submit the IFRS, augmented by any additional requirements, to the ASRB for approval in the same way as currently applies to a proposed FRS developed by the FRSB.

Approved IFRS will be referred to as NZ IFRS. Individual approved IFRSs will be referred to as NZ IAS, NZ SIC, NZ IFRS, or NZ IFRIC as appropriate and will have the same numbering as the IFRS. Thus, for example, IAS 10 and IFRS 1, when approved, will become NZ IAS 10 and NZ IFRS 1.

Where a profit-oriented reporting entity, from 2007 (or 2005), prepares its financial report in compliance with NZ IFRS, the financial report simultaneously complies with IFRS. However, where a public benefit reporting entity prepares its financial report in compliances with NZ IFRS, the financial report simultaneously complies with IFRS only if the additional requirements (if any) on measurement and recognition are not applicable to the entity. If additional requirements on measurement and recognition are applicable to the public benefit entity, then compliance with NZ IFRS does not result in simultaneous compliance with IFRS. We expect that this situation will not be permanent as we expect that the IASB will extend the scope of its standards to include public benefit entities. However, while this may occur in the medium term future it will not take place in the short term future.

Application Date
NZ IFRSs will apply to reporting periods beginning on or after 1 January 2007. However, reporting entities electing to adopt IFRS for reporting periods beginning on or after 1 January 2005, will apply the standards early.

Adoption of IFRS from 2005
Reporting entities adopting IFRS from 2005 are required to apply the following standards:
i. NZ IASs, based on the revised IASs, and
ii. NZ IFRS 1 First-time Adoption of International Financial Reporting Standards and other new NZ IFRSs that are applicable from 2005.

It is expected that the IASB's revision of IASs and development of the new IFRSs will be completed by March 2004 and that these standards will have been reviewed, gone through due process and been approved as NZ IFRS by the ASRB by June 2004.

The IASB expects to also complete in 2004 (or early 2005) IFRS dealing with:
• Business combination procedures (including accounting for non-controlling interests),
• Performance reporting,
• Post-employment benefits,
• Revenue and liabilities,
• Consolidations (including special purpose entities),
• Segment reporting, and
• Financial institutions (deposit taking, lending, and securities activities).

These IFRSs are expected to have an application date some time after 2005. It is expected that these standards will be approved by the ASRB shortly after their issue by the IASB and reporting entities adopting IFRS from 2005 may elect to adopt early either individual standards or subsets of standards from this set.

Adoption of IFRS from 2007
Reporting entities adopting IFRS from 2007 will apply NZ IFRS then on issue and in effect.

However, until 2007, these entities will continue to apply FRS currently on issue. Over the years to 2007, some of the standards in this set will be revised, for example, FRS 21 Accounting for the Effects of Changes in Foreign Currency Exchange Rates and SSAP 21 Accounting for the Effects of Changes in Foreign Currency Exchange Rates will be replaced by a new FRS based on the proposed improved version of IAS 21 The Effects of Changes in Foreign Exchange Rates. The set of standards will also be supplemented by a certain number of new FRSs on topics not presently covered by a FRS, such as recognition and measurement of financial instruments, and share-based payment. Where these revised or new standards have an application date prior to 2007, they will be applicable to all reporting entities (whether or not they are early adopters) from their respective application dates.

First-time Application
When a reporting entity first applies IFRS, whether from 2007 or early from 2005, it must apply NZ IFRS 1 First-time Adoption of International Financial Reporting Standards. The key principle underlying first time adoption is that the entity's accounting policies must comply with each IFRS applicable to the entity and effective at the reporting date, and IFRS must be applied throughout all periods presented in the financial statements and in the opening IFRS statement of financial position.

For example, a New Zealand reporting entity with a 31 March balance date electing to adopt IFRS for periods beginning on or after 1 January 2005, would first issue annual IFRS financial statements for the period ending 31 March 2006 and include (as a minimum) comparatives for the year ending 31 March 2005. In preparing these financial statements the entity must apply the IFRS, effective for periods ending on 31 March 2006, in preparing (i) the opening statement of financial position as at 1 April 2004, and (ii) the financial statements for the year ending 31 March 2006 and the comparatives for the year ending 31 March 2005, and (iii) each interim financial report, for example a half year report for the 6 months ending 30 September 2005 including comparatives for the six months ending 30 September 2004.

1. A detailed discussion of the FRSB/ASRB proposal is provided in the paper The proposed new financial reporting structure by Liz Hickey and Tony van Zijl (Chartered Accountants Journal, May 2003, pp 54-55).
2. Public benefit entities are reporting entities whose primary objective is to provide goods or services for the community or social benefit and where any equity has been provided with a view to supporting that primary objective rather than for a financial return to equity holders.