The Big News!

The Accounting Standards Review Board (ASRB) has announced the deferral of NZ IFRS implementation for some New Zealand companies. In short; they can keep applying the accounting standards they’ve been applying in the past rather than face the increased complexity of adopting NZ IFRS if they don’t want to.

This deferral is a major change to the previous mandatory requirement for all companies in New Zealand, other than exempt companies, to adopt International Financial Reporting Standards for accounting periods beginning on or after 1 January 2007.

Instead those companies that the deferral applies to will be able to continue to apply the previous generally accepted accounting practice they have been reporting under. i.e. the previous Financial Reporting Standards that they have been reporting under.

This decision has been made because a government review of the financial reporting requirements applying to small and medium-sized companies under the Financial Reporting Act 1993 will be commencing in mid-2008. This review will be driven by the Ministry of Economic Development.

Application

The companies that this applies to are those that:

1. are not issuers as defined by the Financial Reporting Act 1993;

2. are not currently required to file their financial statements with the Registrar of Companies under s19 of the Financial Reporting Act 1993 being:
an overseas company or a subsidiary of an overseas company; or
large and 25% of its voting power is held by overseas shareholders (entities or individuals).

3. are not considered large as defined by s19A of the Financial Reporting Standard which is essentially the same as the New Zealand Institute of Chartered Accountant’s framework for differential reporting. i.e. 2 out of three of:
annual turnover under $20m:
total assets under $10m;
less than 50 employees

Reaction

This news is expected to be received with a considerable sigh of relief from a large number of smaller New Zealand companies and their accounting advisors.

While there is general support for the move to adopt IFRS in New Zealand, there has also been widespread concern that for many small entities that the costs of compliance far outweigh the benefits. We understand this was the feedback that New Zealand’s Financial Standards Review Board (FRSB) received during their recent roadshow of public forums.

The forums were to consider the IASB’s proposed IFRS for SMEs and to gain New Zealand reaction to this possible new set of accounting standards specifically written to better suit the needs of the SME sector. As a result of this feedback the FRSB and others have pushed the ASRB to re-consider this mandatory introduction of NZ IFRS over all entities in New Zealand.

Another strong factor in this decision has been the potential for trans-tasman harmonisation of financial reporting requirements. One issue that the MED’s 2008 review may consider is whether New Zealand should adopt a similar financial reporting regime as currently exists in Australia for small and medium-sized companies.

Under the Australian Corporations Act 2001, small proprietary companies are not required to prepare financial statements, unless directed to do so. One possible outcome of the review could be that many small and medium-sized companies would no longer have a legislative requirement to prepare GAAP-compliant financial statements.

While most will welcome this news, this author is aware of some disgruntlement from some companies and their professional advisors.

This disgruntlement is from some of those who have already invested time and money in beginning to transition their financial statements to NZ IFRS in time for mandatory implementation. Most of these entities and their advisors see little benefit in the transition to NZ IFRS and with choice would not have done so.

However being professional in their approach, concerned to be able to adopt in time, and not breach the law they have started this process already. Now due to this deferral they discover that they didn’t have to incur this cost.

Hence there is some frustration that the ASRB and MED took so long to consider this situation and announce a deferral, and a feeling that it should have been considered at the time of the initial announcement of the mandatory adoption of NZ IFRS.

This feeling is perhaps summed up in a client’s recent comments to me: “NZ IFRS is quite appropriate for New Zealand listed companies. However it’s darn frustrating that in the rush by the ASRB to be seen to be leading the world in putting in NZ IFRS that they’ve totally ignored the requirements and reality of most New Zealand companies.

Most of our companies in New Zealand are SME’s yet all the focus has just been on the top end of town. And now I get stung by an unnecessary cost and hassle by being diligent!”

However this deferral news, which effectively retains the status quo for many companies and their accountants, is expected on the whole to be welcomed.

Stopping for a cup of tea

It does need to be realised that the deferral is just that though. It is in effect taking a breather from applying IFRS to all companies in New Zealand.

The deferral will then allow more time for the MED to further review the Financial Reporting Act 1993 which is the primary umbrella financial reporting legislation in NZ that specifies what entities need to comply with generally accepted accounting practice.

Given that generally accepted accounting practice equates to NZ IFRS from 1 January 2007 a legislative amendment regarding who has to apply it is probably a sensible long term solution.

For a country like New Zealand, this discussion around how best to serve the needs of the SME community and users of their financial statements is particularly important. Features unique to New Zealand that cause this are:

A larger number of SMEs in our economy compared to many other economies;

Compared to most other countries a very large number of NZ entities required by legislation to comply with generally accepted accounting practice i.e. all companies other than exempt companies

An historical environment where the majority of entities, even ones not required to follow generally accepted accounting practice have prepared financial statements that do comply with generally accepted accounting practice. Largely caused by an ethical requirement on NZ Chartered Accountants to try to encourage this adherence;

An economy used to a model of a single set of accounting standards with the application of a differential reporting exemption framework to help ensure that the cost benefit equation is not out of balance.

These features do make us unique and their impacts and the cost vs benefit equation of IFRS adoption in New Zealand for smaller entities should not be underestimated; a point that has now been recognised and finally been acted upon by the FSRB, ASRB, & MED.

There is some disappointment in possibly moving away from a model in New Zealand that (apart from exempt companies) has attempted to have a single set of accounting standards with differential reporting exemptions to allow these to still provide an appropriate cost benefit balance.

However there has also been the realisation that the current differential reporting under NZ IFRS, which only essentially allows some limited disclosure exemptions, no longer really goes far enough to ensure an appropriate cost benefit balance for SMEs.

We understand that the MED’s review of the financial reporting requirements applying to small and medium-sized companies under the Financial Reporting Act 1993 will be commencing in mid-2008.

It is however unclear though how long it will take for this review to conclude and result in revised financial reporting legislation. Also to be taken into account is that 2008 is an election year in New Zealand which tends to slow such reviews and legislative change.

Some Implications

While the news will be met in the main with relief and satisfaction that common sense appears to have prevailed, the situation going forward does still pose some interesting challenges, especially if it remains for any length of time before new legislation is enacted:

The potential challenge of training accountants in two set of accounting standards.

Related to the above point is the concern that this may create two classes of accountants in New Zealand i.e. those skilled and experienced in NZ IFRS and those in a lesser standard. Which category would you want to be in for your career prospects? Hence concerns about the succession model for smaller Chartered Accounting firms.

Potential for increased market confusion around accounting results from different accounting standards being followed.

The ease or not of growing companies to be able to graduate from one set of accounting standards to another.

Disclosure in the financial statements regarding compliance with what accounting standards will take on increased importance.

Auditors will need to take special care surrounding what accounting framework they are referring to in their audit reports.

If the situation of old GAAP and NZ IFRS is maintained for any period of time what will be the situation with regard to changes and updates to be made to old GAAP? Will these be made given that the standard setters are now focused on NZ IFRS? Does the FRSB have the resourcing to maintain two sets of financial standards?

NZ will be subject to harmonisation influence from Australia. If they decide on a different path regarding their standards then that could pose some interesting challenges for NZ.

A likely possible longer term future for New Zealand could be NZ IFRS for large and public accountability entities, the IASB’s proposed IFRS for SMEs for the next level down (With application criteria here being interesting) if the IASB’s proposed IFRS for SMEs accounting standards receives international acceptance, and possibly something really simple or nothing at all for the real small entities.

If this happens, and especially if it is adopted in Australia, and it is considered appropriate for New Zealand, then legislative amendment will be needed.

Summary

In the short term this deferral from mandatory adoption of NZ IFRS appears to be a great common sense result for New Zealand which will be appreciated by most smaller and middle-market companies, and other small non-publicly entities who voluntarily choose to adopt generally accepted accounting practice.

The official press releases are available from:
www.asrb.co.nz (under latest releases)
www.nzica.com

View other news articles related to: NZ IFRS