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Chapter 1

Chapter 1. An overview of the New Zealand external reporting environment. Objectives. Understand the extent of regulation relating to which New Zealand external financial reporting is subject.

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Chapter 1

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  1. Chapter 1 An overview of the New Zealand external reporting environment

  2. Objectives • Understand the extent of regulation relating to which New Zealand external financial reporting is subject. • Be able to explain the general functions of the Accounting Standards Review Board, the Financial Reporting Standards Board and the New Zealand Stock Exchange. • Understand the role of a financial reporting standard and the process by which it is developed. Copyright  2003 McGraw-Hill New Zealand Pty Ltd PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin Slides prepared by Grant Samkin

  3. Objectives (cont.) • Be able to explain the five elements of accounting and be aware of the respective recognition principles. • Be able to explain the objectives and potential shortcomings of the New Zealand ‘Statement of Concepts for General Purpose Financial Reporting. Copyright  2003 McGraw-Hill New Zealand Pty Ltd PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin Slides prepared by Grant Samkin

  4. Objectives (cont.) • Understand the role of the International Accounting Standards Board and be aware of the program, currently in place within New Zealand, to harmonise New Zealand financial reporting standards with pronouncements issued by the International Accounting Standards Board and the Australian Accounting Standards Board. Copyright  2003 McGraw-Hill New Zealand Pty Ltd PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin Slides prepared by Grant Samkin

  5. Financial accounting defined • Financial accounting is a process involving the collection and processing of financial information to assist the decision-making needs of parties external to the organisation. • Contrasted with management accounting: • focuses on providing information for decision making by parties within the organisation • largely unregulated. • Financial accounting heavily regulated. Copyright  2003 McGraw-Hill New Zealand Pty Ltd PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin Slides prepared by Grant Samkin

  6. User demand for general purpose financial reports • Users may be defined to include: • present and potential investors • employees • lenders • suppliers and other trade creditors • customers • government and its agencies • the public. • Only certain users may have the power to demand specific information to meet their needs. Copyright  2003 McGraw-Hill New Zealand Pty Ltd PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin Slides prepared by Grant Samkin

  7. Sources of external financial reporting regulations • The Accounting Standards Review Board (ASRB) • The Financial Reporting Standards Board (FRSB) • The New Zealand Stock Exchange (NZSE) Copyright  2003 McGraw-Hill New Zealand Pty Ltd PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin Slides prepared by Grant Samkin

  8. Background to NZ accounting standard-setting process • Until 1993 regulation of accounting profession was in the hands of the private sector. • 1987 share market collapse led to an inquiry to review share market law and recommend changes to ensure the existence of a fair and efficient market. Copyright  2003 McGraw-Hill New Zealand Pty Ltd PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin Slides prepared by Grant Samkin

  9. Background to NZ accounting standard-setting process (cont.) • A number of recommendations made, including: • legal backing be given to accounting standards • an Accounting Standards Review Board be established to approve accounting standards • sanctions be put in place for non-compliance with standards. Copyright  2003 McGraw-Hill New Zealand Pty Ltd PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin Slides prepared by Grant Samkin

  10. Accounting Standards Review Board (ASRB) • Financial Reporting Act 1993 (FRA) is the primary statute governing the establishment of accounting standards. • ASRB constituted as a body corporate under the FRA. • Functions of ASRB provided by section 24 of FRA. Copyright  2003 McGraw-Hill New Zealand Pty Ltd PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin Slides prepared by Grant Samkin

  11. Application of financial reporting standards • Financial reporting standards approved by the ASRB normally apply to all financial statements prepared by all reporting entities or groups. • However, financial reporting standards may be expressed to apply to specific classes of issuers or companies (e.g. by size of the entity). Copyright  2003 McGraw-Hill New Zealand Pty Ltd PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin Slides prepared by Grant Samkin

  12. Application of financial reporting standards (cont.) • ‘Financial statements’ means statements comprising: • a statement of financial position • a statement of financial performance (or an income and expenditure account) • a cash flow statement • explanatory notes. Copyright  2003 McGraw-Hill New Zealand Pty Ltd PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin Slides prepared by Grant Samkin

  13. Application of financial reporting standards (cont.) • An issuer includes companies that have allocated securities to the public. • Issuers include: • entities that have allocated securities to the public by way of a registered prospectus • unit trusts • registered banks. Copyright  2003 McGraw-Hill New Zealand Pty Ltd PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin Slides prepared by Grant Samkin

  14. Application of financial reporting standards (cont.) • Small companies are treated as an exempt category. • Company or issuer is exempt if: • total assets did not exceed $450 000 • turnover did not exceed $1 000 000 • the company was not a subsidiary • the company did not have subsidiaries. Copyright  2003 McGraw-Hill New Zealand Pty Ltd PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin Slides prepared by Grant Samkin

  15. Framework for differential reporting • Applies to general purpose financial reports only. • Under the framework, qualifying entities are granted full or partial exemption from complying with certain financial reporting standards. • The framework’s use is justified on the grounds that accounting standard overload and compliance costs are reduced. Copyright  2003 McGraw-Hill New Zealand Pty Ltd PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin Slides prepared by Grant Samkin

  16. Financial reporting standards, GAAP and the true and fair view • GAAP describes the basis on which general purpose financial reports are normally prepared. • It encompasses specific rules, practices and procedures relating to particular circumstances and broad concepts and principles of general application. Copyright  2003 McGraw-Hill New Zealand Pty Ltd PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin Slides prepared by Grant Samkin

  17. Financial reporting standards, GAAP and the true and fair view (cont.) • Financial statements comply with GAAP only if those statements comply with: • applicable financial reporting standards; or • where there are no applicable financial reporting standards or rule of law, with accounting policies that are appropriate to the circumatances of the reporting entity and have authoritative support within the accounting profession in New Zealand. Copyright  2003 McGraw-Hill New Zealand Pty Ltd PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin Slides prepared by Grant Samkin

  18. Financial reporting standards, GAAP and the true and fair view (cont.) • Compliance with GAAP usually means that financial statements give a true and fair view of an entity’s financial position, performance and cash flows. • Financial statements must provide a ‘true and fair’ view. • No legal definition of ‘true and fair’ view. Copyright  2003 McGraw-Hill New Zealand Pty Ltd PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin Slides prepared by Grant Samkin

  19. Financial reporting standards, GAAP and the true and fair view (cont.) • Two views on ‘true and fair’ view: • could be met by companies complying with financial reporting standards when preparing general purpose financial reports; or • could imply more than simply complying with financial reporting standards. • Financial statements should include all information of a ‘material’ nature. Copyright  2003 McGraw-Hill New Zealand Pty Ltd PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin Slides prepared by Grant Samkin

  20. Directors’ responsibilities • Directors of a company are responsible for the maintenance of accounting records. • Although not specifically required, a number of New Zealand companies include a section in their directors’ reports dealing with directors’ responsibilities. Copyright  2003 McGraw-Hill New Zealand Pty Ltd PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin Slides prepared by Grant Samkin

  21. Directors’ report • No formal requirement for a directors’ report. • Section 211(1)(a) of Companies Act 1993 requires that every annual report: • be in writing • be dated • describe the state of the companies affairs • will not be harmful to the business of the company or any subsidiary; or • change during the accounting period in: • the nature of the business • the classes of business in which the company has an interest Copyright  2003 McGraw-Hill New Zealand Pty Ltd PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin Slides prepared by Grant Samkin

  22. Directors’ report (cont.) • A number of additional items must be disclosed, including: • particulars of entries in the interests register made during the accounting period • names of persons holding office as directors at end of and during the accounting period. Copyright  2003 McGraw-Hill New Zealand Pty Ltd PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin Slides prepared by Grant Samkin

  23. Financial Reporting Standards Board (FRSB) • FRSB is a board of ICANZ. • Members are appointed by the Council of ICANZ. • FRSB is responsible for developing and revising financial reporting standards, sources of authoritative support, maintance of the Statement of Concepts, guidance notes and technical practice aids. Copyright  2003 McGraw-Hill New Zealand Pty Ltd PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin Slides prepared by Grant Samkin

  24. Development of a financial reporting standard • Until 1997, financial reporting standard projects originated from: • outcomes of IASC work programs • harmonisation with Australia • issues raised by ICANZ members • responses to changes or new developments • review of changes to existing financial reporting standards in response to the continued development of the Statement of Concepts. Copyright  2003 McGraw-Hill New Zealand Pty Ltd PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin Slides prepared by Grant Samkin

  25. Development of a financial reporting standard (cont.) • In 1997 the FRSB decided that future financial reporting standards would be developed based on those issued by the IASC or AASB. • A discussion paper would accompany the exposure draft in which the implications for New Zealand entities would be outlined. Copyright  2003 McGraw-Hill New Zealand Pty Ltd PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin Slides prepared by Grant Samkin

  26. Urgent issues group (UIG) • No formal UIG exists in New Zealand. • FRSB directs those seeking clarification on a financial reporting standard to: • amendments to standards • interpretations to standards • guidance notes. Copyright  2003 McGraw-Hill New Zealand Pty Ltd PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin Slides prepared by Grant Samkin

  27. New Zealand Stock Exchange (NZSE) • For entities listed on NZSE there are additional reporting requirements contained in Listing Rules. • NZSE can also require compliance with a particular accounting standard, for example IAS 33 ‘Earnings Per Share’. Copyright  2003 McGraw-Hill New Zealand Pty Ltd PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin Slides prepared by Grant Samkin

  28. The Conceptual Framework (CF) • FRSB is responsible for the maintenance of the Statement of Concepts. • Framework seeks to define the nature, subject, purpose and broad content of general purpose financial reporting. • Argues that Statement of Concepts is not a CF because a cohesive set of principles to guide financial reporting has not been established. Copyright  2003 McGraw-Hill New Zealand Pty Ltd PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin Slides prepared by Grant Samkin

  29. The Conceptual Framework (CF) (cont.) • Central goal in establishing CF is general consensus on: • scope and objectives of financial reporting • qualitative characteristics that financial information should possess • elements of financial reporting. Copyright  2003 McGraw-Hill New Zealand Pty Ltd PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin Slides prepared by Grant Samkin

  30. Benefits of Conceptual Framework • More consistent and logical financial reporting standard can be developed. • Increased international comparability. • The Boards should be more accountable for their decisions. • Enhanced process of communication between the Boards and constituents. • More economical accounting standard development. Copyright  2003 McGraw-Hill New Zealand Pty Ltd PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin Slides prepared by Grant Samkin

  31. SC 2 Reporting entity • A reporting entity exists where it is reasonable to expect the existence of users dependent on general purpose financial reports (GPFRs) for information which will be useful to them. • GPFRs provide information to meet the needs of external users unable to acquire, or contract for, special purpose financial reports. Copyright  2003 McGraw-Hill New Zealand Pty Ltd PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin Slides prepared by Grant Samkin

  32. SC 3 Objectives of GPFRs • To provide information to assist users in assessing the reporting entity’s: • financial and service performance, financial position and cash flows • compliance with legislation, regulations, common law and contractual arrangements; and • making decisions about providing resources to, or doing business with, the entity. • Financial reporting has an accountability and an information or decision-making role. Copyright  2003 McGraw-Hill New Zealand Pty Ltd PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin Slides prepared by Grant Samkin

  33. SC 4 Qualitative characteristics • Identifies the characteristics of financial information necessary to allow users to make and evaluate decisions about the allocation of scarce resources. • Primary qualitative characteristics: • relevance • reliability Copyright  2003 McGraw-Hill New Zealand Pty Ltd PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin Slides prepared by Grant Samkin

  34. SC 4 Qualitative characteristics (cont.) • Information is relevant if it can be used to: • confirm or correct prior expectations about past events (feedback value) • assist in forming, revising or confirming expectations about the future (predictive value). • Information is reliable when it: • corresponds with actual underlying transactions and events (representational faithfulness) • is capable of independent verification (verifiability) • is free from bias (neutrality). Copyright  2003 McGraw-Hill New Zealand Pty Ltd PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin Slides prepared by Grant Samkin

  35. SC 5 Assumptions underlying the preparation of GPFRs • Three basic assumptions underlie GPFRs: • going-concern assumption • period reporting assumption • accrual-basis assumption. • Where assumptions are not appropriate or have not been used, the alternative assumptions used must be disclosed. Copyright  2003 McGraw-Hill New Zealand Pty Ltd PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin Slides prepared by Grant Samkin

  36. SC 6 Influences on qualitative characteristics • Four significant influences in adopting particular characteristics: • balance between qualitative characteristics • balance between benefit and cost • materiality • Prudence. Copyright  2003 McGraw-Hill New Zealand Pty Ltd PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin Slides prepared by Grant Samkin

  37. SC 6 Influences on qualitative characteristics (cont.) • GPFRs should include all financial information that satisfies the concepts of relevance and reliability, to the extent that such information is material. • Materiality is a matter of professional judgement although SSAP-6 does provide guidance on base amounts. Copyright  2003 McGraw-Hill New Zealand Pty Ltd PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin Slides prepared by Grant Samkin

  38. SC 7 Definition and recognition of assets • Assets are defined as: • service potential or future economic benefits controlled by the entity as a result of past transactions or other past events. Copyright  2003 McGraw-Hill New Zealand Pty Ltd PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin Slides prepared by Grant Samkin

  39. Definition and recognition of assets (cont.) • Three key characteristics of definition: • there must be service potential or future economic benefits; • the reporting entity must control the service potential or future economic benefits; and • the transaction or other event giving rise to the control must have occurred. Copyright  2003 McGraw-Hill New Zealand Pty Ltd PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin Slides prepared by Grant Samkin

  40. Definition and recognition of assets (cont.) • An asset shall be recognised in the financial statements when: • it is probable that the service potential or future economic benefits embodied in the asset will eventuate; and • it possesses a cost or other value that can be measured with reliability. • ‘probable’ is defined as ‘more likely rather than less likely’. Copyright  2003 McGraw-Hill New Zealand Pty Ltd PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin Slides prepared by Grant Samkin

  41. Definition and recognition of liabilities • Liabilities are defined as: • future sacrifices of service potential or future economic benefits that the entity is presently obliged to make to other entities, as a result of past transactions or other past events. Copyright  2003 McGraw-Hill New Zealand Pty Ltd PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin Slides prepared by Grant Samkin

  42. Definition and recognition of liabilities (cont.) • There are three main characteristics: • the entity is presently obliged to act or perform in a certain way • the action will have adverse financial consequences for the entity • a past transaction or other event must have occurred to create the obligation. Copyright  2003 McGraw-Hill New Zealand Pty Ltd PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin Slides prepared by Grant Samkin

  43. Definition and recognition of liabilities (cont.) • Recognition in financial statements again requires two tests to be met: • it is probable that the future sacrifice of service potential or future economic benefits will be required; and • the amount of the liability can be measured reliably. Copyright  2003 McGraw-Hill New Zealand Pty Ltd PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin Slides prepared by Grant Samkin

  44. Definition and recognition of liabilities (cont.) • If a liability cannot be measured reliably but is potentially material it should be disclosed within the notes to the accounts. Copyright  2003 McGraw-Hill New Zealand Pty Ltd PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin Slides prepared by Grant Samkin

  45. Definition and recognition of expenses • The definition is dependent upon the definition of assets and liabilities. • Expenses are defined as: • consumptions or losses of service potential or future economic benefits in the form of reductions in assets or increases in liabilities of the entity, other than those relating to distributions to the owners, that result in a decrease in equity during the reporting period. Copyright  2003 McGraw-Hill New Zealand Pty Ltd PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin Slides prepared by Grant Samkin

  46. Definition and recognition of expenses (cont.) • Expenses are recognised when: • it is probable that the consumption or loss of service potential or future economic benefits resulting in a reduction in assets and/or increase in liabilities has occurred; and • the consumption or loss of economic benefits can be measured with reliability. Copyright  2003 McGraw-Hill New Zealand Pty Ltd PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin Slides prepared by Grant Samkin

  47. Definition and recognition of revenues • Again the definition is dependent on asset and liability definitions. • Revenues are defined as: • inflows or other enhancements, or savings in outflows, of service potential or future economic benefits in the form of increases in assets or reductions in liabilities of the entity, other than those relating to contributions by owners, that result in an increase in equity during the reporting period. Copyright  2003 McGraw-Hill New Zealand Pty Ltd PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin Slides prepared by Grant Samkin

  48. Definition and recognition of revenues (cont.) • Revenues can be recognised in the financial statements when: • it is probable that the inflow or other enhancement or saving in outflows of service potential or future economic benefits has occurred; and • the inflow or other enhancement or saving in outflows of service potential or future economic benefits can be measured with reliability. Copyright  2003 McGraw-Hill New Zealand Pty Ltd PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin Slides prepared by Grant Samkin

  49. Definition of equity • Equity is defined as: • the residual interest in the assets of the entity after deduction of its liabilities. • Directly a function of the definition given to assets and liabilities. Copyright  2003 McGraw-Hill New Zealand Pty Ltd PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin Slides prepared by Grant Samkin

  50. Critical review of the Conceptual Framework (CF) • Objective of GPFRs in CF implies that financial reports should be primarily economic in focus. • Should social issues be ignored in the annual report? • An individual's view of business responsibilities directly impacts on the perceptions of accountability. Copyright  2003 McGraw-Hill New Zealand Pty Ltd PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin Slides prepared by Grant Samkin

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