NZ Accounting Standards – at crossroads
In 1972 the Labour Party swept into power on the back of a campaign slogan that said “it’s time for a change.” It was not that the Government of the day was particularly dysfunctional during its term in power; more that things weren’t working as well as they could.
Thirty-seven years on, the same slogan could now be applied to New Zealand’s financial reporting framework and the way standards are made. What has served the country well since the early 1990s is probably no longer appropriate given today’s insatiable needs for good financial reporting. To its credit, the Ministry of Economic Development has signalled that it is fully aware of this and that a discussion paper dealing with this important topic will be issued shortly.
Against this legislative backdrop, the Accounting Standards Review Board (ASRB) recently called for comment on its role and the processes it uses to give accounting standards the force of law. This created an opportunity for the previous Auditor General, Kevin Brady, to respond with a hard-hitting 88 page assessment of what he thought should happen. The essence of his submission was that continuing with the status quo, so far as the public sector was concerned, was not an option.
The ASRB was founded on the overarching principle that there should be a single set of accounting standards for all New Zealand entities, stemming from a sector-neutral conceptual framework. During the 1990’s, when New Zealand was entirely responsible for all aspects of its standard setting, the impression gained from having a single set of standards applying to entities in all sectors of the economy made sense, and worked well.
However, more and more complexity has been introduced into accounting standards for New Zealand to meet an ever increasing set of user needs. For example, what derivatives does the company use, and what value do they have?
In 2001 a significant and notable change was made to New Zealand’s financial reporting landscape when the ASRB determined that recognition and adoption of International Financial Reporting Standards (IFRS) was going to be essential if the financial statements of large New Zealand entities were to have credibility in global capital markets. New Zealand’s innovative response (recognising the benefit of having had a single set of financial reporting standards for almost a decade) was creating the notion of a “public benefit entity” to recognise that the profit and cash flow oriented focus of “pure” IFRS was not suitable for public sector and not-for-profit entities. The amendments that have subsequently been made by New Zealand standard setters has ensured that all sectors of the economy have had standards to address key aspects of accounting.
Using the analogy of a row boat, when the ASRB was first established both oars (private and public) were clearly pulling with the same force. Today, some would argue the large number of new standards and interpretations being issued by the IASB has caused the oars to get out of alignment. For many, the profit-oriented sector is pulling much more vigorously – end result, a boat that is starting to go round in circles.
Add to this, an increasing number of constituents from all sectors are saying they no longer understand the need for all the changes being made to the New Zealand equivalents of IFRS that we currently have so an important crossroad has been reached.
Two options quickly emerge. The first is to press on with the status quo and ask the ASRB to continue to create a single set of sector neutral standards and face the risk of accelerating the frustration and dissatisfaction currently being expressed. The second, and more radical, option is to completely re-engineer the way accounting standards are made and delivered in New Zealand. This would mean jettisoning our current “one-stop” approach and in its place issuing tailor-made standards for three different sectors (ie profit, not-for-profit and public) using terminology and definitions appropriate for each .
We see no future in continuing the status quo, so while the second option will be considerably more difficult and expensive, if dealt with properly the benefits to the country will be the issuance of well tailored standards that will help meet the decision-making needs of the readers of financial statements.
Recommending this course of action then raises the more challenging questions of who should be involved in creating the accounting standards for these sectors in the economy and ultimately who should be paying for their development?
We believe the ASRB should continue to approve all standards for New Zealand, but it should now also play a far more active role in creating standards for New Zealand. The recent “avalanche” of standards and interpretations that have been produced offshore by the International Accounting Standards Board (IASB) and the International Public Sector Accounting Standards Board (IPSASB) have to be dealt with, but in addition to this the ASRB must focus on New Zealand specific financial reporting matters such as how best to satisfy the reporting needs of small and medium-sized enterprises and not-for-profits.
Our candid view is that standard setting is now too important to be left to part time appointments and donated time from individuals who work for organisations who have the financial resources to contribute to standard setting. If the desired goal of higher standards of financial reporting and accountability by entities in the public, profit and not-for-profit sectors in New Zealand is wanted, the Government, supported by the accounting profession, needs to allocate more resources to the process.
It’s time for a change. Hard decisions will need to be made to ensure that the level of investment in New Zealand standard setting is appropriate and that the mechanisms used by New Zealand entities for reporting financial positions, financial performance, efficiency and effectiveness fairly reflect what is happening.
For further information, contact:
Chris Dixon
Grant Thornton
Auckland
T 09 308-2971
E cdixon@gtak.co.nz