Adopting International Financial Reporting Standards

1
Adopting International Financial Reporting
Standards implications for New Zealand
preparers of financial reports

• Dr Grant Samkin

2
Adoption of IFRS in New Zealand

• Disclosure of information in financial statements
• Reasons for poor disclosure
• Justification for non-disclosure of financial
  information

3
Adoption of IFRS in New Zealand

• Catalyst for change was July 2002 decision of the
  Financial Reporting Council
• October 2002 ASRB recommended to Government that
  from 2007 listed issuers should comply with IFRS
• How ASRB justified its change of direction

4
Adoption of IFRS in New Zealand
Improve quality of reporting in NZ
Potential benefits of harmonisation
Facilitate comparison of NZ and foreign public
sector reporting entities
Increase comparability of reports prepared in
different countries
Remove barriers to international capital flows
Reduce reporting cost for multi-national companies
5
NZ Reporting Framework
6
NZ Reporting Framework

• NZ Framework
• NZ Preface
• Framework for Differential Reporting
• NZ IAS 1 Presentation of Financial Statements
• NZ IAS 8 Accounting policies, changes in
  Accounting Estimates and Errors

7
NZ Reporting Framework

• Sets out concepts that underlie the preparation
  and presentation of financial statements
• Purpose of NZ Framework?

• NZ Framework
• NZ Preface
• Framework for
• Diff. Report.
• NZ IAS 1
• NZ IAS 8

8
NZ Reporting Framework

• Describes
• Objectives and role of FRSB
• Members responsibilities
• Fair presentation
• GAAP
• NZ Equivalents to IFRS
• Scope and authority of NZ equivalents to IFRS and
  FRS
• Authoritative support
• Due process.

• NZ Framework
• NZ Preface
• Framework for
• Diff. Report.
• NZ IAS 1
• NZ IAS 8

9
NZ Reporting Framework

• Describes
• Objectives and role of FRSB
• Members responsibilities
• Fair presentation
• GAAP
• NZ Equivalents to IFRS
• Scope and authority of NZ equivalents to IFRS and
  FRS
• Authoritative support
• Due process.

• NZ Framework
• NZ Preface
• Framework for
• Diff. Report.
• NZ IAS 1
• NZ IAS 8

• Confirmity with GAAP means
• Compliance with all NZ IFRS and FRS
• Where there is no NZ IFRS or FRS and item not
  subject to legislation, policies that are
• Appropriate to the circumstances of entity
• Have authoritative support within the accounting
  profession in NZ

10
NZ Reporting Framework

• Describes
• Objectives and role of FRSB
• Members responsibilities
• Fair presentation
• GAAP
• NZ Equivalents to IFRS
• Scope and authority of NZ equivalents to IFRS and
  FRS
• Authoritative support
• Due process.

• NZ Framework
• NZ Preface
• Framework for
• Diff. Report.
• NZ IAS 1
• NZ IAS 8

11
NZ Reporting Framework

• NZ Framework
• NZ Preface
• Framework for
• Diff. Report.
• NZ IAS 1
• NZ IAS 8

• Forms part of GAAP for the purposes of the
  Financial Reporting Act 1993
• Sets out concessions available under the
  reporting regime to qualifying entities required
  to prepare general urpose financial reports that
  comply with GAAP
• Applies to general purpose financial statements
  and not special purpose financial statements
• Use is justified on the grounds that by limiting
  application of framework to small or closely held
  companies, accounting standards overload or
  compliance costs are reduced

12
NZ Reporting Framework

• NZ Framework
• NZ Preface
• Framework for
• Differential Reporting
• NZ IAS 1
• NZ IAS 8

• NZ IAS 1 establishes a framework for information
  to be presented or displayed in financial
  statements
• Deals with disclosure of accounting policies

13
NZ Reporting Framework

• NZ Framework
• NZ Preface
• Framework for
• Differential Reporting
• NZ IAS 1
• NZ IAS 8

• Deals with the selection of accounting policies
  considered most appropriate to an entity
• Details that information to be disclosed where a
  change in accounting policy occurs

14
Financial reporting structure

• Adoption of IFRS resulted in new financial
  reporting structure being proposed
• All entities in private and public sector would
  be included subject to cost/benefit threshold
• Reporting entity concept considered appropriate
  for NZ
• Difficulties associated with identified and
  measuring costs/benefits means proxies are used
  to categories entities

15
Financial reporting structure

• Tier 1 and Tier 2 covers reporting entities while
  Tier 3 covers non-reporting entities
• Proxies cover a number of dimensions
• Issuer
• Power to levy taxes or rates
• Responsibility to report
• Size

16
Table 1 Costs and benefits used to categorise
entities
17
Figure 1 Financial reporting structure
Issuer under legislation or entity that has the
coercive power to tax, rate or levy to obtain
public funds?
YES
NO
YES
Does the entitys parent or ultimate controlling
entity have the coercive power to tax, rate or
levy?
NO
YES
Is the entity large as defined?
YES
Does the entity have reporting responsibilities?
NO
YES
Is the entity large as defined?
NO
Have those owners requested full New Zealand GAAP
(IFRS) financial statements?
Have owners, who in total hold more than 5 of
the voting rights, requested that the financial
statements comply with New Zealand GAAP (IFRS)?
Tier 1 Reporting entity full New Zealand GAAP
(IFRS)
YES
YES
No
NO
Tier 3 Not a reporting entity
Tier 2 Reporting entity differential
disclosure concessions
18
Effects of adopting IFRS

• Balance sheet oriented, fair value model
• Emphasis is on measuring the fair value of a
  reporting entitys assets and liabilities
• Impact on financial reporting

19
Effects of adopting IFRS

• Transparent and comparable data
• Implications for debt conventants and other legal
  requirements
• Volatility in earnings
• Performance related pay

20
Case studies

• Warehouse Group Limited
• Carter Holt Harvey Limited
• Watercare Services Limited

21
Warehouse Group Limited

• Established a project in 2004 to plan for the
  transition to IFRS
• Decided against early adoption of IFRS
• Reduce risk of inconsistent application of IFRS
• Allow time for increased shareholder and analyst
  understanding of resulting earnings volatility
• Identified required accounting policy changes

22
Warehouse Group Limited
23
Carter Holt Harvey

• Adopting IFRS from 1 January 2005
• Financial statements at 31 December 2005
  presented under IFRS. Comparative figures
  restated
• In 2004 financial statements detailed the impact
  that adoption of IFRS would have on Equity, Total
  Liabilities and Total Assets

24
(No Transcript)
25
Watercare Services Limited

• Adopting NZ IFRS from financial year ending 30
  June 2005
• Established a workgroup to manage the transition
• Impact of adopting NZ IFRS significant

26
Watercare Services Limited

• Income statement adjustments
• Interest expense increased by 2,458,000
• Decrements in the write down of individual assets
  to income statement 2,871,000
• Deferred tax adjustments on revaluation deficits
  and interest 137,000

NZ IAS 16 differs from FRS-3 in that the NZ
equivalent accounting standard requires
individual assets to be revalued. Compare this to
FRS-3 which required classes of assets to be
revalued
27
Watercare Services Limited

• Statement of changes in equity adjustments
• Deficits on revaluations 79,664,000
• Reduction in revaluation reserves 305,947,000
  due to deferred tax adjustments

28
Watercare Services Limited

• Balance sheet adjustments
• Deferred tax liability increased by 274,484,000
• Accrued interest increased 527,000

29
Future implications

• Significant changes to existing accounting
  standards are being and will continue to be made
• Business combinations
• Provisions contingent liabilities and contingent
  assets
• Projects currently being undertaken by IASB will
  impact future accounting syllabi
• Performance reporting
• Conceptual framework project