Changing tack - A new set of accounting standards ... - Ernst & Young

In 2011, the External ReportingBoard (XRB) decided to moveaway from a single set ofaccounting standards for allentities to a sector-specificstandards approach. Under thisapproach, there would beseparate and, in some cases,different requirements forpublic benefit entities (PBEs).On 28 June 2012, the XRB and itssub-board, the New Zealand AccountingStandards Board (NZASB), issued forcomment a set of forty-one exposuredrafts (EDs) that operationalise thenew accounting standards frameworkfor large and medium-sized public sectorPBEs. The new accounting standardsare based on International PublicSector Accounting Standards (IPSAS)and have been modified as appropriatefor New Zealand circumstances.The exposure drafts include the following:• ED XRB A1 (for-profit and public sectorPBEs update) — second of three revisionsto Standard XRB A1, which is theoverarching standard that sets outthe accounting standards’ framework.This revision of XRB A1 includes thefor-profit entities update issued forcomment in April 2012, andincorporates the following updatefor public sector PBEs:• The new tier structure• The criteria for tiers• The applicable accountingstandards for each tier• EDs for PBE standards (Tier 1 and Tier 2)— new suite of accounting standards to beapplied by Tier 1 and Tier 2 public sectorPBEs. Tier 1 public sector PBEs will applythe PBE standards in full, while Tier 2public sector PBEs will have reduceddisclosure requirements.In this publication, we provide:• A summary of the proposed financialreporting requirements for PBEs• The key differences between PBEstandards and NZ IFRS• Next steps• How Ernst & Young can helpyour organisationSummary of the proposed financialreporting requirements for PBEsThe proposed new suite of accountingstandards will apply to entities that:• Are required to prepare general purposefinancial statements (e.g. by legislation)• Meet the definition of a PBE• Will be in either Tier 1 or Tier 2 of thenew PBE financial reporting frameworkPBEs are defined as entities whose primaryobjective is to provide goods or services forcommunity or social benefit, and whereequity has been provided with a view tosupporting that primary objective, ratherthan for a financial return to equity holders.Examples of PBEs include many entitiesin the public sector (e.g. governmentdepartments, hospitals and schools),along with charities and other not-forprofitentities in the private sector.However, public sector entities that areprofit-oriented (e.g. state-ownedenterprises) will use the accountingstandards applying to for-profit entities,i.e. New Zealand equivalents toInternational Financial ReportingStandards (NZ IFRS).The proposed PBE standards in the currentEDs have been developed primarily withpublic sector entities in mind. Another EDcontaining revisions to the PBE standardsto make them more applicable to registeredcharities and other not-for-profit entitieswill be issued next year (estimated timing isSeptember 2013). However, we are notexpecting that the subsequent revision ofthe PBE standards for not-for-profit entitieswill result in significant changes to thestandards – it’s more likely that anychanges will be in the nature of additionalexamples and application guidance fornot-for-profit entities, rather than majorchanges to the key principles orrequirements of the standards.The diagram below outlines the proposedfinancial reporting framework for PBEs:Tier 1 — largeExpenses > $30m plus‘publicly accountable’entities (e.g. issuers)• PBE standardsTier 2 — mediumExpenses between$2m - $30mThe new PBE standards for Tier 1 andTier 2 public sector PBEs are expectedto be issued by the end of June 2013.These standards are expected to beeffective for financial years beginningon or after 1 July 2014 for public sectorPBEs (i.e. the 2014/15 financial year).The standards, once revised for not-forprofitentities, are expected to be effectivefrom 1 April 2015 (i.e. the 2015/16financial year) for Tier 1 and Tier 2registered charities and other privatesector not-for-profit entities.Key differences betweenPBE standards and NZ IFRSThe exact impact of public sector PBEsmoving from existing standards to PBEstandards will differ from entity to entity.The impact will also depend on theexisting standards applied by the entity(e.g. NZ IFRS in full or with differentialreporting concessions).Public sector PBEs and private sector not-for-profits (NFPs)• PBE standards withreduced disclosuresTier 3 — smallExpenses < $2m andnot in Tier 4• Simple formatreporting• Accrual accountingTier 4 — microExpenses < $40k andpermitted by legislationto be in Tier 4• Simple formatreporting• Cash accountingFor public sector entities and other PBEscurrently reporting under NZ IFRS, themove from NZ IFRS to the new PBEstandards is the most significant changein accounting standards since the initialmove to NZ IFRS. However, most PBEsshould find that there is no need to makemany major changes to their accountingpolicies - because the new PBE standardsare based on IPSAS, which are themselvesbased on IFRS.Nevertheless, there are some potentiallysignificant differences and also a rangeof smaller differences between theproposed PBE standards and NZ IFRS.Therefore, every PBE will need to gothrough a process of identifying relevantdifferences and assessing the impact ontheir financial reporting. That assessmentwill then help to determine what changesmight be needed to accounting processesand information systems.2 Ernst & Young Changing tack Ernst & Young Changing tack3

The table below summarises some of the main differences and potentialimpacts for public sector PBEs transitioning from full NZ IFRS to PBE standards.Proposed standard Key changes Potential impactPBE IPSAS 23 Revenue from Non-ExchangeTransactionsPBE IPSAS 32 Service Concession Arrangements:GrantorPBE IPSAS 1 Presentation of Financial StatementsPBE IPSAS 6 Consolidated and SeparateFinancial StatementsPBE IPSAS 7 Investments in AssociatesPBE IPSAS 8 Interests in Joint VenturesNo equivalent standard under NZ IFRSs.Recognise an asset and revenue only to extentthat liability is not also recognised.Liability recognised only to extent that presentobligations have not been satisfied, and in respectof a transferred asset, only when a transferredasset is subject to a condition (e.g. asset must beconsumed as specified, or returned to owner).Does not permit the recognition of a liability inrespect of a transferred asset that is subject toa restriction.No equivalent standard under NZ IFRSs.Prescribes the accounting for service concessionarrangements by the grantor, a public benefit entity.Changes to the presentation of information infinancial statements, including the line itemswithin those statements.Contains less guidance on accounting for the lossof control/significant influence/joint control of acontrolled entity/associate/joint venture.Requires carrying amount of any retainedinvestment in a financial asset when control/significant influence/joint control is lost to beregarded as the cost on initial measurementof the financial asset.In separate financial statements, investments incontrolled entities, jointly controlled entities andassociates can be accounted for at cost, using theequity method, or as a financial instrument.Losses attributable to minority interest (MI) thatexceed the MI in the controlled entity to be allocatedagainst the majority interest except to extent MI hasa binding obligation and is able to make additionalinvestment to cover losses.No guidance on accounting for a groupreorganisation in separate financial statementsof a new parent.High – Impact will depend on an entity’s previousaccounting policies in respect of revenue fromnon-exchange transactions.May lead to earlier recognition of some nonexchangerevenue or recognition of fewer liabilitiesrelating to transferred assets.Specifically, those entities with revenue from grants,donations, bequests and similar types of incomesuch as tertiary education institutions, registeredcharities and similar entities will need to considerthe financial reporting impact of this standard ontheir organisations.High for affected entities – Difficult to assess impactas there have been relatively few service concessionarrangements to date in New Zealand.Introduction of a new standard could potentiallyhave a significant impact for grantors dependingon how closely an entity’s existing policies are toPBE IPSAS 32.Medium – Entities would have to revert to aseparate presentation of the Statement ofFinancial Performance and Statement of Changesin Equity (that includes the Other ComprehensiveIncome line items of the NZ IAS 1 Statement ofComprehensive Income).Medium - P&L impact on loss of control/significant influence/joint control of acontrolled entity/associate/joint venturemay be measured differently.Measurement on initial recognition as a financialasset of any retained investment when control/significant influence/joint control is lost maybe different.Some investments in associates that are withinthe scope of NZ IAS 28 may not be within thescope of PBE IPSAS 7 and, therefore, would notbe equity accounted.Investments in controlled entities, jointly controlledentities, and associates may be measured differentlyin separate financial statements of an investor.Losses attributable to minority interest would notnecessarily result in the minority interest having adeficit balance.A new parent arising from a group reorganisationwill need to determine the accounting treatment inits separate financial statements.Proposed standard Key changes Potential impactPBE IPSAS 9 RevenuePBE IPSAS 16 Investment PropertyPBE IPSAS 17 Property, Plant and EquipmentPBE IPSAS 20 Related Party DisclosuresPBE IPSAS 26 Impairment of Cash-GeneratingAssetsA number of interpretations which form part ofNZ IFRS have not been incorporated in theproposed PBE standards.Definition of revenue encompasses gainsRevaluations of investment property and property,plant and equipment are required to be undertaken(or reviewed) by an independent valuer, anddisclosures are required regarding the valuationsundertaken by each valuer.Disclosures are required in respect of heritageassets that are not recognised, including anestimate of the value of such assets.General requirements are less detailed than NZ IAS24 to focus on principles underlying related partydisclosures.Exempts all transactions between related partiesthat occur on arm’s length terms and conditions.Definition of key management personnel is moredetailed and may be interpreted as being wider thanthe definition in NZ IAS 24. Additional disclosureson key management personnel remuneration.Indicators for impairment testing differ.Medium to low – Diversity may arise in practicewhere relevant NZ IFRS guidance has not beenincorporated into PBE standards.Revenue amounts reported under PBE standardsmay not be comparable to revenue amountsreported under NZ IFRS (e.g. arising from theinclusion/exclusion of gains within revenue).Low – Many entities previously (or currently)utilised independent valuers and complied withthe valuation disclosure requirements in NZ IAS 16and NZ IAS 40, which were removed in April 2011as a result of the Trans-Tasman Harmonisationamendments.Additional disclosures regarding unrecognisedheritage assets are not expected to have asignificant impact as a number of PBEs alreadymake such disclosures.Medium – The impact on some entities may besignificant.Fewer related party disclosures may be requiredfor some entities.Some entities may have to collect new informationabout their key management personnel anddisclose additional information on key managementpersonnel remuneration.Low – Some assets currently considered to beimpaired may not be impaired under the proposedPBE IPSAS 26.Impairment loss calculations could be different.4 Ernst & Young Changing tack Ernst & Young Changing tack5

Tier 2 disclosure concessionsThe proposed PBE standards for Tier 2public sector PBEs have been developedby taking the proposed PBE standardsand identifying disclosure concessionswithin each draft PBE standard.The proposed disclosure concessionsare largely similar to the disclosureconcessions proposed for Tier 2for-profit entities and do not containany recognition and measurementconcessions. Disclosure concessions aredenoted within the PBE standards by anasterisk (*) next to the paragraph, anda Tier 2 entity would not be required tocomply with these requirements.Overall, there are more disclosureconcessions in the proposed PBEstandards compared with the existingdifferential reporting concessions.However, the disclosure concessionsmay be different from existing differentialreporting concessions. Specifically, someof the disclosure concessions that areavailable under the proposed PBEframework for Tier 2 public sectorPBEs include:• PBE IPSAS 3 Accounting Policies,Changes in Accounting Estimates andErrors – disclosures around accountingstandards issued but not yet effective• PBE IPSAS 6 Consolidated andSeparate Financial Statements —disclosures in separate financialstatements when an entity electsnot to prepare consolidatedfinancial statements• PBE IPSAS 7 Investments in Associates– disclosures around summarisedfinancial information of associates,management judgement surroundingthe determination of significantinfluence, and additional disclosuresaround significant restrictions on theassociate’s ability to make distributionsto the investor• PBE IPSAS 8 Investments in JointVentures — disclosure of aggregatefinancial information when an investorproportionately consolidates a jointlycontrolled entity• PBE IPSAS 16 Investment Property –disclosures regarding specific amountsrecognised in surplus or deficit anddisclosures when an entity measuresinvestment property using thecost model• PBE IPSAS 21 Impairment ofNon-Cash-Generating Assets andED PBE IPSAS 26 Impairment ofCash-Generating Assets — disclosuresaround impairment losses recognisedor reversed during the period and keyassumptions used to determine therecoverable service potential of assets• PBE IPSAS 30 Financial Instruments:Disclosures — disclosures regardingclasses of financial instruments,qualitative and quantitative riskexposures, sensitivity analyses,reconciliations, and fair value• PBE IAS 12 Income Taxes — disclosuresaround income tax items presentedin equity, deferred taxes, andimputation creditsSome of the existing differentialreporting concessions which havebeen removed under the proposedPBE framework for Tier 2 public sectorPBEs include:• Entities will be required to prepare acash flow statement• Entities that are subject to income taxwill be required to account for deferredincome tax6 Ernst & Young Changing tack Character Style (Doc title _Bold) Footers Text Character Style (Doc title _Grey)7

Where to from here?Submissions on this package of publicsector PBE exposure drafts are due by14 December 2012.Exposure drafts for the simple formatreporting standards for Tier 3 andTier 4 PBEs are expected to be issuedfor comment in November 2012.Now that the proposed PBE standards forpublic sector PBEs have been issued, werecommend all PBEs perform an impactassessment and develop a transitionplan. For public sector PBEs, the date oftransition to the new standards (i.e. thedate of the opening balance sheet inthe comparative period) is now less thana year away.Organisations first need to determine whichsector they fall into. For some entities thismay involve revisiting the definition of aPBE to confirm they are not in the for-profitsector. Once an entity has determined it isa PBE (and the status of any subsidiaries),the process of planning for conversionwill need to begin.Although the conversion to PBE standardsfrom NZ IFRS will not be as significant asthe move from old NZ GAAP to NZ IFRS,there are still some differences that entitieswill need to consider, which may potentiallyhave a significant impact on an entity’sfinancial reporting processes, includingits accounting policies, informationsystems, internal controls, and otheroperational aspects.In addition, groups headed by a PBE parentthat has for-profit subsidiaries will need toconsider the implications for groupreporting purposes. Where some entities inthe group continue to report under NZ IFRSwhile the parent reports under the new PBEstandards, it will be necessary to identifyand track differences in accounting policiesthat could result in consolidationadjustments. This issue arises both ontransition to the new PBE standards andon an on-going basis, especially as forprofitsubsidiaries move to new NZ IFRSsahead of equivalent PBE standards beingdeveloped and adopted. The NZASB plansto issue a Consultation Paper on mixedgroups during the comment period for thepublic sector PBE standards (Tiers 1 and 2).The Consultation Paper is expected toinclude the NZASB’s strategy for addressingexisting and future differences betweenPBE standards and NZ IFRS (from a PBEgroup perspective).How we can help youErnst & Young’s Financial AccountingAdvisory Services and Assuranceprofessionals bring together a wealthof accounting knowledge from diverseexperiences advising a range of clientsacross the public, corporate andnot-for-profit sectors. We can help yourorganisation assess how the revisedframework will impact your reportingobligations and assist with theinterpretation and implementationof new accounting standards applicableto your organisation.To help you prepare and plan for thetransition to the new PBE standards,we can assist with the following steps:• Initial diagnostic phase — this wouldinclude a review of current accountingpolicies and an initial assessment of theimpact of the move to the PBE standards• Design and implementation — setting upa timeline, objectives and goals in orderto be prepared for the application of thenew set of standards• Solution development — identify specificareas of focus for the transition,consideration of the impacts on thefinancial statements and the processesand systems currently in place• Implementation — assist to createnew accounting policies, update financialinformation and systems and implementthe transitional provisions, to help createan opening balance sheet• Post implementation — monitor andassess the progress of adoption ofnew standards and ensure financialinformation produced is in line withthe new requirementsIn the table below, we outline in more detail the common issues that PBE entitiesin New Zealand are likely to face when moving to new PBE standards, and indicatehow we can help.IssueGain a general understanding ofthe proposed NZ PBE standardsPerform a preliminary assessmentof the impact of the proposals onthe entity’s financial statementsInterpreting and implementingthe new NZ PBE standardsSelecting suitable accountingpoliciesBenchmarking accounting policydecisions and financial statementdisclosures against peers andothers in the industryAdvise management duringimplementationEnsuring financial statements areprepared in accordance with thenew standardsCommunicating the effect ofchanges in accounting policydecisions or reporting requirementsto the public.How we can help• Design and deliver training sessions for personnelon the accounting implications of new or proposedaccounting standardsPerform pre-implementation impact assessments, including:• Assessing the impact on surplus or deficit of implementingaccounting standards• Assessing the impact on key financial ratios andperformance measures• Identifying new or changed financial statementdisclosure requirements• Assist with the interpretation of the new accounting standards• Assist management in developing an implementation plan• Advise on project management, including timeline, tasks andresource allocation• Help ensure management is aware of the accounting policyoptions available to them under the new standards• Analyse the impact of different accounting policy options onthe organisation• Assist management in selecting suitable accounting policies• Provide observations of how others are approaching newor proposed standards, problems they are identifying andsolutions developed• Assist in the comparison of peers, competitors and industryaccounting policy decisions, disclosures and expected impacton the financial statements• Prepare progress reports and advise on the impact of thenew standards• Review and provide input into accounting manuals thatmanagement will approve• Perform financial statement GAAP compliance reviews• Advise on developing a communication plan• Advise on drafting communications8 Ernst & Young Changing tack Ernst & Young Changing tack9

If you have any queries please contactAucklandKimberley Crookkimberley.crook@nz.ey.comTel: +64 9 300 7094Brent Penrosebrent.penrose@nz.ey.comTel: +64 272 749 739David Paceydavid.pacey@nz.ey.comTel: +64 212 425 716Ravi Kumarravi.kumar@nz.ey.comTel: +64 212 214 717WellingtonMarcus Henrymarcus.henry@nz.ey.comTel: +64 272 480 324Stuart Mutchstuart.mutch@nz.ey.comTel: +64 274 899 378Grant Taylorgrant.taylor@nz.ey.comTel: +64 274 899 410Lara Trumanlara.truman@nz.ey.comTel: +64 274 899 896ChristchurchBruce Loaderbruce.loader@nz.ey.comTel: +64 274 899 98410 Ernst & Young Changing tack Ernst & Young Changing tack11

Ernst & YoungAssurance | Tax | Transactions | AdvisoryAbout Ernst & YoungErnst & Young is a global leader in assurance, tax, transaction and advisory services. Worldwide,our 152,000 people are united by our shared values and an unwavering commitment to quality.We make a difference by helping our people, our clients and our wider communities achievetheir potential.Ernst & Young refers to the global organisation of member firms of Ernst & Young Global Limited,each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited byguarantee, does not provide services to clients. For more information about our organisation,please visit www.ey.com.© 2012 Ernst & Young, New Zealand.All Rights Reserved.SCORE No. NZ00000438.This communication provides general information which is current as at the time of production.The information contained in this communication does not constitute advice and should not be reliedon as such. Professional advice should be sought prior to any action being taken in reliance on any ofthe information. Ernst & Young disclaims all responsibility and liability (including, without limitation, forany direct or indirect or consequential costs, loss or damage or loss of profits) arising from anything doneor omitted to be done by any party in reliance, whether wholly or partially, on any of the information.Any party that relies on the information does so at its own risk.www.ey.com/nzNZ1224542