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