In brief - PwC

In brief
Knowledge | Experience | Insight
November 2012
In this issue
XRB and NZASB issued
exposure drafts of the
PBE standards for public
sector PBEs.
We outline the key features of
these EDs.
Public sector PBE accounting standards –
focus on local authorities
On 28 June 2012 the External Reporting Board (XRB) and the
New Zealand Accounting Standards Board (NZASB) issued
exposure drafts (EDs) together with an invitation to comment on
the PBE standards for public sector PBEs (PBE Standards). Also
issued was ED XRB A1 revising Standard XRB A1 to give effect
to the PBE Standards.
Why are things changing?
In 2011 the Accounting Standards Review Board (ASRB) (now superseded by the
XRB) made the decision to move to a multi standard framework. This decision was
primarily driven by considering the information needs of users. The Board concluded
that the ability of the single standard option to adequately meet user-needs across all
sectors was limited and that greater benefit for users would result from a multistandards
approach, with different sets of standards for for-profit and public benefit
entities. The Board concluded that IFRS is increasingly less suitable as a base for
public sector accounting standards and that a move to standards based on IPSAS
(International Public Sector Accounting Standards) was appropriate.
PwC Insight
Although there will be new accounting standards applicable to public benefit entities
(PBEs), the definition of a PBE will not change. Therefore, there should be no need
for reassessment and changes in classification for entities which are currently PBE’s.
Going forward, ensuring the initial classification of entities as either for-profit, or as
PBEs, is correct will become even more crucial as it is likely the accounting for each
will be more divergent in the future.
Who is this relevant for?
These EDs are relevant for PBEs which will fall into Tier 1 or 2 of the new framework
(local government, schools etc). In March 2012 the XRB confirmed that the
accounting standards framework for PBEs will consist of 4 tiers.

The EDs issued will apply to
Tier 1 and 2 public sector
entities only. However, the
expected NFP revisions are
unlikely to change the
substance of the standards,
therefore it is important that
Tier 1 and 2 NFPs also
consider these EDs.
Public sector PBEs are those
which are public entities as
defined by the Public Audit
Act 2001. NFP PBEs are all
other PBEs
The proposed application
date for the PBE standards is
1 July 2014, with
comparatives required for
the earliest period presented.
Tier Tier Criteria Accounting Standards
Tier 1
Tier 2
Tier 3
Tier 4
Publicly accountable PBEs (as defined in
the for-profit framework)
All entities >$30 million expenses
All entities >$2 million expenses and
≤$30 million expenses
All entities ≤$2 million expenses which
are not in Tier 4
Entities allowed to use cash accounting
and which elected to be in Tier 4
Full PBE Accounting
Standards
PBE Accounting Standards
- Reduced Disclosure
Regime (RDR)
PBE Simple Format
Reporting – Accrual basis
PBE Simple Format
Reporting – Cash basis
These latest EDs released by the XRB are the IPSAS-based standards that will apply
to public sector entities in Tiers 1 and 2. Revisions to tailor the PBE standards to
make them more applicable to not-for profits (NFPs) are expected to be released in an
ED in mid-2013, however, these are likely to consist mainly of language and example
amendments. The substance of the PBE Standards is unlikely to change significantly
and therefore these PBE EDs are also important for Tier 1 and 2 NFP entities. An ED
detailing the simple format reporting for Tiers 3 and 4 is expected by the end of the
year.
PwC Insight
Tier 1 entities include those that are publicly accountable. Under the current financial
reporting framework, local authorities are always publicly accountable due to their
coercive power to tax, rate or levy to obtain public funds. This prevents local
authorities from being able to apply differential reporting concessions. Under the new
framework the definition of publicly accountable, which will result in entities falling
into Tier 1, does not include a requirement for an entity to have a coercive power to
tax, rate or levy to obtain public finds. The definition will be based on the IASB
definition of public accountability (essentially issuers), as well as some entities which
are deemed to be public accountable such as banks and superannuation schemes.
This means some local authorities may fall into Tier 2, or even Tier 3, if their expenses
are less than $30m. Those in Tier 2 will be able to apply RDR rather than the full PBE
Standards.
What has been issued?
The XRB has issued 41 EDs comprising:
ED XRB A1 (For-Profit Entities plus Public Sector PBE Update); and
40 ED’s comprising the suite of 39 proposed PBE Standards and a PBE
framework
ED XRB A1
ED XRB A1 is the second stage of development of Standard XRB A1. The first stage
established the suites of accounting standards to be followed by the four tiers of forprofit
entities. The amendments in this ED set out the PBE tier structure, the
accounting standards that apply to the tiers and guidelines for moving between tiers.
It also sets out the proposed application date of the PBE Standards within the other
EDs, being annual reporting periods beginning on or after 1 July 2014 with early
adoption prohibited. This would mean that comparatives prepared in accordance with
PBE Standards would need to be presented for 2013/14 financial year (which will be
different standards to what the financial statements for that year were prepared
under).
PwC In brief Page 2

Conceptual framework
The XRB has issued a PBE framework ED to accompany the PBE Standard EDs. The
International Public Sector Accounting Standards Board (IPSASB) does not currently
have a framework for the IPSAS standards, but is working on developing this as a
priority. The XRB felt that a conceptual framework is an essential part of an
accounting standards framework. Therefore it has provided one based on Part B of
the current NZ Framework which applies to PBEs (with minor modifications) as an
interim measure.
PBE Standards
The PBE EDs have been based on IPSAS standards. A number of non-substantive
changes have been made to tailor the language of the IPSAS standards to be more
applicable to public sector and NFP PBEs. There are also a small number of
substantive modifications to reflect the New Zealand context and regulatory
environment. A comparison of the proposed PBE Standard to the original IPSAS is
included at the end of each PBE ED. Where the XRB considered that a topic
important in the New Zealand context was not covered by an IPSAS, the relevant
standard from NZ IFRS has been included with modifications as appropriate for the
PBE environment. Such standards include the NZ IFRS standards on business
combinations, insurance contracts, non-current assets held for sale and discontinued
operations, income taxes, interim financial reporting, prospective financial
statements and summary financial statements.
RDR
The PBE EDs include the reduced disclosure regime for Tier 2 entities (i.e. small local
authorities with less than $30m of expenses). There are no recognition or
measurement differences, but disclosures which may be omitted by Tier 2 entities are
highlighted by an asterix (*) within the PBE EDs.
What are the key differences?
At this point in time, IPSAS (which the proposed PBE standards are based on) and
IFRS are reasonably aligned.
However, there are some differences and these have flowed through into the proposed
PBE Standards. Some of the key differences or likely impacts of PBE standard
adoption from full NZ IFRS highlighted in the XRB’s invitation to comment are:
The PBE EDs propose a standard on revenue from non-exchange transactions
and a standard on service concession arrangements from a grantor’s
perspective, neither of which are addressed by specific standards under NZ
IFRS. The impact of these will depend on how closely aligned affected
entities’ accounting policies for these types of transactions are to the
proposed standards.
The PBE EDs would not require a Statement of Comprehensive Income; only
an Income Statement and Statement of Changes in Equity/Net Assets. This
would have a presentation impact only.
The profit or loss on the loss of control, joint control or significant influence
may be measured differently under the PBE EDs.
Scope differences in the proposed associates standard may result in
investments which are treated as associates under NZ IFRS not being
considered associates under the PBE EDs, and therefore not being equity
accounted.
PwC In brief Page 3

Valuations of investment property and PPE would be required to be
undertaken or reviewed by an independent valuer, with disclosures made
regarding these valuations. We would not expect this to have a significant
impact as, until recently, this was also an NZ IFRS requirement. The
measurements objective, being fair value, would remain unchanged.
Under the proposed PPE standard, disclosures would be required in respect
of heritage assets that are not recognised including a description of these
assets and an estimate of their value. Local authorities are likely to be one of
the main entities impacted by this change.
The related party definition in the proposed standard contains differences at
the detailed level, particularly in relation to key management personnel. This
could impact generally on the disclosures entities would be required to make,
and could require new information to be collected about key management
personnel.
The PBE EDs propose two impairment standards – one for cash-generating
assets and one for non-cash generating assets. Under the cash-generating
asset ED some assets currently considered to be impaired under NZ IFRS
may not be impaired due to there being more scope exclusions in the PBE
proposals. Under the non-cash generating asset ED, some non-cash
generating assets not previously assessed as being impaired may in the future
be impaired due to a wider scope for these assets in the PBE proposals than in
NZ IFRS.
The XRB is aware of
constituent concerns about
mixed groups, and has
released an ED to try and
address some of these
concerns with a comment
period that ends on
21 December 2012.
The PBE EDs propose some clarifications on the treatment of concessionary
loans granted and received, as well as some additional disclosure
requirements.
What about mixed groups?
Local authorities are particularly likely to have to deal with the issue of mixed groups.
These are groups where there is PBE parent, but there are for-profit subsidiaries, or
for local authorities, CCO’s, within the group. This means that the for-profit CCO’s
will be preparing financial statements using different accounting standards to the
parent local authority into which they have to be consolidated.
The XRB is aware of constituent concerns about mixed groups and in the PBE
Standards EDs Invitation to Comment noted that it proposed to release a consultation
paper during the comment period for the PBE Standards EDs which would:
Propose guidance on the application of the phrase ‘like transactions and other
events in similar circumstances’ as an explanation for different accounting
policies resulting from differing requirements in NZ IFRS and PBE Standards
(the IPSAS EDs include the principle that consolidated financial statements
should be based on uniform accounting policies for like transactions and
other events in similar circumstances);
Review current differences between the PBE EDs and NZ IFRS and identify
transactions where restatement is likely to be necessary, where restatement is
less likely to be required and where professional judgement would need to be
applied; and
Identify the options that are available to the XRB in considering future
differences between PBE Standards and NZ IFRS.
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To achieve this, the XRB released in September ED 2012-4 Framework: Public
Benefit Entities – Mixed Groups (together with an invitation to comment). This ED
contains the following proposals:
The addition of an Appendix to the proposed PBE IPSAS 6 Consolidated and
Separate Financial Statements providing guidance on the application of the
proposed standard to mixed groups; and
The development of an Explanatory Guide identifying the XRB’s proposed
approach when the IASB issues a new or amended standard prior to the views
of the IPSASB on that standard being known.
Is there guidance on transition?
Of the 39 PBE Standard EDs released, 2 cover transition to the PBE Standards. One
details transition requirements if an entity has previously applied NZ IFRS and the
other details transition requirements for entities other than those previously applying
NZ IFRS.
Entities previously applying NZ IFRS
For those entities currently applying NZ IFRS, the proposal is that entities will be
required to keep the same recognition and measurement policies applied under PBE
Standards as under NZ IFRS, unless these policies do not comply with PBE Standard
requirements. This proposal is designed to limit the ability of entities to change an
option they have selected under NZ IFRS when they transition. However, this would
not limit the ability of an entity to change an accounting policy in the ordinary course
of business where it would meet the requirements set out in the PBE accounting
policy ED (the proposed standard equivalent to NZ IAS 8 Accounting Policies,
Changes in Accounting Estimates and Errors.)
The transitional provisions propose that any restatements of balances or additional
disclosures required as a result of transition occur at the beginning of the earliest
comparative period i.e. at the beginning of the 2013/14 financial year. A third balance
sheet would not be required to be disclosed for entities that previously applied NZ
IFRS.
Where necessary, the transitional provisions include transition guidance specific to
individual proposed PBE Standards.
PwC Insight
Transition to the proposed PBE Standards should be reasonably straightforward for
those entities currently applying full NZ IFRS. Many of the recognition and
measurement requirements within the proposed PBE Standards are the same as NZ
IFRS. Even if an entity currently applying full NZ IFRS would fall into Tier 2, the
recognition and measurement requirements would be the same as for Tier 1, there
would just be significantly less disclosure required.
A bigger impact of transition would be likely to be felt by those entities currently
reporting under NZ IFRS differential reporting (NZ IFRS diff rep), whether they
would fall into Tier 1 or Tier 2. This is because NZ IFRS diff rep has different
recognition, measurement and presentation requirements to full NZ IFRS. Therefore
on transition to the proposed standards entities that currently report under NZ IFRS
diff rep would have to prepare a cash flow statement for the first time, would not be
able to account for income tax on a taxes payable method and would not be able to
apply tax depreciation rates to their PPE.
PwC In brief Page 5

Entities not previously applying NZ IFRS
For those entities which have not previously
been applying NZ IFRS, the transition
proposal includes all the relevant
requirements and guidance in NZ IFRS 1 First
Time Adoption of New Zealand Equivalents to
International Financial Reporting Standards
to ensure that the full range of transactions
and balances of entities transitioning to PBE
Standards would be addressed. For these
entities, a third balance sheet would need to be
disclosed.
What should I do now?
There is no immediate change required in
relation to the preparation of financial
statements. The accounting standards
currently being applied will not change until 1
July 2014. In addition, the NZ IFRS standards
which are currently being applied by PBEs are
‘frozen’ as at 1 July 2011, meaning that PBEs
cannot adopt new and amended NZ IFRS’s
such as NZ IFRS 10,11, 12 and 13.
The PBE EDs have the potential to impact
entities in a variety of different ways. It is
important to understand what the proposed
changes are and how they could impact your
organisation. The invitation to comment is a
useful starting point to get an overview of the
If you wish to discuss these or any other
NZ IFRS related matter, please contact
your usual PwC contact or one of the
following specialists:
Michele Embling,
Partner, Auckland
michele.j.embling@nz.pwc.com
Mike Schubert
Partner, Auckland
mike.s.schubert@nz.pwc.com
Stephen Hogg
Director, Auckland
stephen.c.hogg@nz.pwc.com
Lyn Hunt
Director, Auckland
lyn.c.hunt@nz.pwc.com
Karen Shires
Partner, Wellington
Karen.f.shires@nz.pwc.com
Robert Harris
Partner, Christchurch
harris.r@nz.pwc.com
XRB’s approach, what’s changing, potential impacts, and what particular issues the
XRB have highlighted for comment. In addition, each PBE ED includes an impact
statement at the start which highlights the key differences in that ED to the equivalent
NZ IFRS standard, and what the likely impact of these differences might be (the
invitation to comment also includes a copy of these in the appendix).
All the EDs (including ED XRB A1), invitations to comment and how to submit
comments and submissions can be found here:
http://xrb.govt.nz/Site/Accounting_Standards/Exposure_Drafts/Public_Sector_PBE.aspx
The comment period on these EDs is open until 14 December 2012. The XRB is
happy to take submissions in whichever form is easiest.
Disclaimer: This publication has been prepared for general guidance on matters of interest only, and does not constitute
professional advice. It does not take into account any objectives, financial situation or needs of any recipient; any recipient
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