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, 45B and 45BA).
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). A list of current approved standards, and the framework for financial reporting in New Zealand, can be found on the XRB website (www.xrb.govt.nz).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.
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.
Under current NZ GAAP, departmental financial statements must include:
- a reference to the Public Finance Act 1989 and any other legislation establishing financial reporting requirements;
- 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
- 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.
2.3.2 Objectives of general purpose financial reporting
The NZ Framework (paragraphs 12 to NZ 14.2) discusses the objectives of general purpose financial statements and non-financial statements or supplementary information that accompanies financial statements. These objectives include:
- providing information about the financial position, performance and changes in financial position of an entity that is useful to a wide range of users in making economic decisions;
- showing the results of the stewardship of management, or the accountability of management for the resources entrusted to it; and
- assessing the reporting entity's compliance with legislation, regulations, common law and contractual arrangements.
