2 Principles for the development of accounting policies for external financial reporting

2.1  Introduction

This section provides guidance on the way in which the Crown and its departments must set their accounting policies for external financial reporting. Accounting policies are those broad concepts, rules and procedures that underlie the preparation and presentation of the financial statements of all entities.

When developing their accounting policies for external financial reporting, the Crown and its departments must comply with the requirements of the Act.

2.2  Legislative requirements

The Act requires that both forecast and annual financial statements of the Government and its departments must be prepared in accordance with generally accepted accounting practice (sections 26H, 27, 41 and 45B).

2.3  New Zealand generally accepted accounting practice

New Zealand generally accepted accounting practice for the financial statements of the Government and its departments is defined by section 2 of the Act. It is defined in the first instance as approved financial reporting standards as far as such standards apply to the Crown. An approved financial reporting standard is one that has been approved by the External Reporting Board (XRB).

The XRB approves:

1. New Zealand equivalents to International Financial Reporting Standards (NZ IFRSs) comprising New Zealand equivalents to:
   1. International Financial Reporting Standards;
   2. International Accounting Standards; and
   3. International Interpretations (IFRICs and SICs); and
2. Financial Reporting Standards (FRSs).

Consequently, where there is an approved New Zealand financial reporting standard that prescribes the accounting treatment for a particular accounting issue, the Crown's and departments' accounting policies for external financial reporting in relation to that particular accounting issue must comply with that financial reporting standard, unless that standard does not apply to the Crown or its departments.

In the absence of an applicable approved New Zealand financial reporting standard, and the absence of an applicable rule of law, the Act provides that generally accepted accounting practice means accounting policies that are appropriate in relation to the Crown and have authoritative support within the accounting profession in New Zealand.

NZ IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors (NZ IAS 8) (paragraphs 10 to 12) provides guidance on developing accounting policies in the absence of a particular standard or an interpretation of a standard that specifically applies to a transaction, other event or condition. NZ IAS 8 requires that management use judgement in developing and applying an accounting policy that results in information that is relevant to the economic decision-making needs of users and reliable; it specifies what reliability means in the context of the financial statements. It also requires that management refer to and consider the applicability of the following sources of guidance, in descending order:

1. the requirements and guidance in standards, and interpretations dealing with similar and related issues; and
2. the definitions, recognition criteria and measurement concepts for assets, liabilities, income and expenses in the New Zealand Equivalent to the IASB Framework for the Preparation and Presentation of Financial Statements (NZ Framework).

In making this judgement management may also consider the most recent pronouncements of other standard-setting bodies that use a similar conceptual framework to develop accounting standards, other accounting literature, and accepted industry practices, to the extent these do not conflict with the sources described above.

The NZ Preface to NZ IFRSs (paragraph 38) explains that it is a matter of professional judgement in the circumstances of the entity as to which other sources of authoritative support should be considered, and how conflicts between other sources of authoritative support should be resolved in determining generally accepted accounting practice.

The NZ Preface (paragraph 39) gives examples of sources of authoritative support. Technical Practice Aids issued by the FRSB are an example of pronouncements of a recognised standard setting body and therefore are a source of guidance that may be used in developing and applying accounting policies. Other examples of pronouncements of standard-setting bodies include:

1. International Public Sector Accounting Standards (IPSASs) issued by the International Public Sector Accounting Standards Board (IPSASB) of the International Federation of Accountants (IFAC);
2. financial reporting standards issued by the Australian Accounting Standards Board (AASB); and
3. financial reporting standards issued by well-recognised bodies with the authority to promulgate financial reporting standards in jurisdictions such as Canada, the United Kingdom and the United States of America.

When developing accounting policies for accounting issues that are not covered by an applicable approved New Zealand financial reporting standard, the Crown and departments must exercise appropriate professional judgment in applying the requirements of NZ IAS 8, in determining the relative importance of sources of authoritative support and in resolving conflicts between different sources of authoritative support.

In such circumstances the Crown and its departments must ensure that the policy that is developed is consistent with the New Zealand Equivalent to the IASB Framework for the Preparation and Presentation of Financial Statements. Any such policy must:

• meet the objectives of general purpose financial reporting;
• be prepared with due regard to the assumptions that underlie general purpose financial reports;
• have the required qualitative characteristics of general purpose (external) financial reports; and
• adhere to the definitions of, and recognition criteria for, all financial elements.

New Zealand generally accepted accounting practice includes NZ IFRSs and any domestic Financial Reporting Standards that have been approved as financial reporting standards by the XRB. These standards apply after an entity makes an explicit statement of compliance with NZ IFRSs for the first time. The Crown applied NZ IFRSs in the forecast financial statements published in the 2007 budget, and has applied them in financial statements prepared for periods beginning on or after 1 July 2007.

2.3.1  Asserting compliance with NZ GAAP

The financial statements of the Government and of each department must include an assertion of compliance with NZ GAAP. NZ IAS 1 paragraph NZ 15.1 requires that an entity shall disclose in the notes:

1. the statutory base, if any, under which the financial statements are prepared;
2. whether, for the purposes of complying with Generally Accepted Accounting Practice in New Zealand (NZ GAAP), it is a profit-oriented or public benefit entity;
3. if, for the purposes of complying with NZ GAAP, it is a qualifying entity and has applied differential reporting concessions. In accordance with NZ IAS 8, such an entity shall disclose the criteria which establish the entity as a qualifying entity for differential reporting and the extent to which the entity has applied available differential reporting concessions; and
4. a statement that the financial statements have been prepared in accordance with NZ GAAP, together with a description of the financial reporting standards applied by the entity.

Departmental financial statements must therefore include:

1. a reference to the Public Finance Act 1989 and any other legislation establishing financial reporting requirements;
2. a statement that for the purposes of complying with NZ GAAP it is a public benefit entity. All departments will be public benefit entities, although some components of departments may be profit-oriented; and
3. a statement that the financial statements have been prepared in accordance with NZ GAAP and that they comply with NZ IFRSs, and other applicable Financial Reporting Standards, as appropriate for public benefit entities.