comprehensive analysis of the adoption of IFRS in New Zealand
http://ilokabenneth.blogspot.com/2019/08/comprehensive-analysis-of-adoption-of.html
Author: Iloka Benneth Chiemelie
Published: 2-July-2018
Published: 2-July-2018
Introduction
Over the years, there have been some tremendous changes on
financial reporting landscape, but this was heavily manifested in 2005 as
companies across the world decided to adopt International Financial Reporting
Standards (IFRS) to serve as the foundation upon which financial statements are
prepared. This actually started in 2002, when the European Union (EU) decided
to approve regulations that all companies listed on the EU stock market (which
was about 8,000 companies as then) are required to adhere to IFRS in the course
of preparing the companies’ consolidated financial statement irrespective of
the jurisdiction where such company maintains its operations (Deloitte, 2014). The benefit attached to this rule
was that adopting the IFRS did have significant influence on producing
high-quality financial reports for companies in the EU (Hibbard, 2012). On the same not, there are also considerable
challenges that come with such adoption and such include its high dependence on
the economic situation of both the company and the country, issues of coherence
of regulatory framework and the infrastructures to consider in relation to the
institutions.
In any case, it is important to point out that when a
company is able to produce high-quality financial statement, it would make the
global investors interested in the information contained in the financial
statement. To make sure that companies are able to produce this desired
high-quality financial statements, the International Accounting Standard Board
(IASB) set a number of high-quality international standards in 2001, with the
central aim of enhancing comparability of financial statement and transparency
(Ahmed et al., 2013). For investors, it will assist them in deciding
on their investment in the global stock market. Standard setter, business and
accounting communities, and accounting professionals across the globe have
actually received the initiative to converge the local accounting standards
with IFRS.
In view of these objectives, studies have also been
conducted in order to determine the quality of accounting information that can
be reflected on the quality of earnings. Study found that in cases where lower
earning management practices were adopted, high earning quality prevailed (Levitt, 1998). For high earning management
practices, what it indicates is that the disclosure financial statement have
been passed through some treatments from the manager in order to ensure that
the interest of the manager is accommodated towards maximizing compensations
and bonuses (Dechow, 1995). As a result of
this, the IABS has made IFRS with the aim of eliminating such permissible
alternative accounting standards and mandating the adoption of accounting
measurements that better reflect a company’s statement of economic position and
performance. In that case, the adoption of IFRS is believed to bring about
significant reduction on the possibility of companies engaging in earnings
management and enhancing the quality of information that is being disclosed (Dimitropoulos, 2013).
Chua et al. (2012) also
performed a research where it was shown that companies that have converged the
IFRS actually increased the quality of their accounting practices, reduced
smoothing of earnings, better timely loss recognition, and decrease the
evidence of earning management. On the contrary, it also comes with an opposite
effect, which is that it limits the managerial discretion and the impact is
that it eliminates the ability of the company to report accounting measure that
offer better reflection of the performance and economic position of the
company, and in cases where these standards are being applied in a lax way, the
management can still engage in smoothing of earnings (Dimitropoulos,
2013).
In view of the above discussions, this paper is designed to
comprehensively analyze the adoption of IFRS in New Zealand. To achieve this
objective, this paper is divided into three sections. The first section is the
introduction, offering insight on the general purpose of the paper. This is
followed by the discussion, providing information about IFRS in New Zealand in
relation to accounting professional bodies, authoritative bodies, and
regulations guiding its implementation and the role that each of these units
play towards successful implementation of the standards. This is followed by
discussions on factors that are hindering or enhancing adoption of IFRS
standard in New Zealand. The final section is the conclusion, providing a
summary of findings from the research as well as the path for further related
studies.
Financial reporting
practices in New Zealand
Although they seem to be a number of professional accounting
bodies in New Zealand, there are two bodies that standout as: Institute of
Public Accountants (IPA), and Chartered Accountants Australia and New Zealand.
They represent the professional bodies that guide the activities of both
accounting students and accounting professionals.
For the Institute of Public Accountants (IPA), it is one of
the legally recognized accounting body in Australia and has over 35,000 members
and students that are working across different industries and practices. It
initially started with the name National Institute of Accountants (NIA) on 2nd
May, 2011. In terms of membership, Chartered Accountants Australia and New
Zealand (CA ANZ) is a bigger body as it represents over 121,418 members in
Australia, New Zealand and other countries across the world.
The third professional body that will be considered in this
case is the Accounting and Finance Association of Australia and New Zealand
(AFAANZ), and it is the premier body representing the interest of accounting
and finance academics and other people that are interests in education and
research of accounting and finance in Australia and New Zealand. This association
was created in 1960, with its present name adopted in 2002 to replace the
original name Accounting Association of Australia and New Zealand (AAANZ) and
the Australian Association of University Teachers in Accounting (AAUTA) (AFAANZ, nd.)
EY (2017) offered an
overview of the financial reporting framework in New Zealand. In this overview,
it was pointed out that the financial reporting framework in New Zealand
consists of two parts: a) the statutory financial reporting framework – which
outline the statutory preparation, audit and filing requires for the different
entities in the country; and b) the accounting standard framework – which
establishing the standards for accounting practices that will be applied by the
entities with statutory reporting obligations.
Figure 1: New Zealand financial reporting framework
Introduction
Over the years, there have been some tremendous changes on
financial reporting landscape, but this was heavily manifested in 2005 as
companies across the world decided to adopt International Financial Reporting
Standards (IFRS) to serve as the foundation upon which financial statements are
prepared. This actually started in 2002, when the European Union (EU) decided
to approve regulations that all companies listed on the EU stock market (which
was about 8,000 companies as then) are required to adhere to IFRS in the course
of preparing the companies’ consolidated financial statement irrespective of
the jurisdiction where such company maintains its operations (Deloitte, 2014). The benefit attached to this rule
was that adopting the IFRS did have significant influence on producing
high-quality financial reports for companies in the EU (Hibbard, 2012). On the same not, there are also considerable
challenges that come with such adoption and such include its high dependence on
the economic situation of both the company and the country, issues of coherence
of regulatory framework and the infrastructures to consider in relation to the
institutions.
In any case, it is important to point out that when a
company is able to produce high-quality financial statement, it would make the
global investors interested in the information contained in the financial
statement. To make sure that companies are able to produce this desired
high-quality financial statements, the International Accounting Standard Board
(IASB) set a number of high-quality international standards in 2001, with the
central aim of enhancing comparability of financial statement and transparency
(Ahmed et al., 2013). For investors, it will assist them in deciding
on their investment in the global stock market. Standard setter, business and
accounting communities, and accounting professionals across the globe have
actually received the initiative to converge the local accounting standards
with IFRS.
In view of these objectives, studies have also been
conducted in order to determine the quality of accounting information that can
be reflected on the quality of earnings. Study found that in cases where lower
earning management practices were adopted, high earning quality prevailed (Levitt, 1998). For high earning management
practices, what it indicates is that the disclosure financial statement have
been passed through some treatments from the manager in order to ensure that
the interest of the manager is accommodated towards maximizing compensations
and bonuses (Dechow, 1995). As a result of
this, the IABS has made IFRS with the aim of eliminating such permissible
alternative accounting standards and mandating the adoption of accounting
measurements that better reflect a company’s statement of economic position and
performance. In that case, the adoption of IFRS is believed to bring about
significant reduction on the possibility of companies engaging in earnings
management and enhancing the quality of information that is being disclosed (Dimitropoulos, 2013).
Chua et al. (2012) also
performed a research where it was shown that companies that have converged the
IFRS actually increased the quality of their accounting practices, reduced
smoothing of earnings, better timely loss recognition, and decrease the
evidence of earning management. On the contrary, it also comes with an opposite
effect, which is that it limits the managerial discretion and the impact is
that it eliminates the ability of the company to report accounting measure that
offer better reflection of the performance and economic position of the
company, and in cases where these standards are being applied in a lax way, the
management can still engage in smoothing of earnings (Dimitropoulos,
2013).
In view of the above discussions, this paper is designed to
comprehensively analyze the adoption of IFRS in New Zealand. To achieve this
objective, this paper is divided into three sections. The first section is the
introduction, offering insight on the general purpose of the paper. This is
followed by the discussion, providing information about IFRS in New Zealand in
relation to accounting professional bodies, authoritative bodies, and
regulations guiding its implementation and the role that each of these units
play towards successful implementation of the standards. This is followed by
discussions on factors that are hindering or enhancing adoption of IFRS
standard in New Zealand. The final section is the conclusion, providing a
summary of findings from the research as well as the path for further related
studies.
Financial reporting
practices in New Zealand
Although they seem to be a number of professional accounting
bodies in New Zealand, there are two bodies that standout as: Institute of
Public Accountants (IPA), and Chartered Accountants Australia and New Zealand.
They represent the professional bodies that guide the activities of both
accounting students and accounting professionals.
For the Institute of Public Accountants (IPA), it is one of
the legally recognized accounting body in Australia and has over 35,000 members
and students that are working across different industries and practices. It
initially started with the name National Institute of Accountants (NIA) on 2nd
May, 2011. In terms of membership, Chartered Accountants Australia and New
Zealand (CA ANZ) is a bigger body as it represents over 121,418 members in
Australia, New Zealand and other countries across the world.
The third professional body that will be considered in this
case is the Accounting and Finance Association of Australia and New Zealand
(AFAANZ), and it is the premier body representing the interest of accounting
and finance academics and other people that are interests in education and
research of accounting and finance in Australia and New Zealand. This association
was created in 1960, with its present name adopted in 2002 to replace the
original name Accounting Association of Australia and New Zealand (AAANZ) and
the Australian Association of University Teachers in Accounting (AAUTA) (AFAANZ, nd.)
EY (2017) offered an
overview of the financial reporting framework in New Zealand. In this overview,
it was pointed out that the financial reporting framework in New Zealand
consists of two parts: a) the statutory financial reporting framework – which
outline the statutory preparation, audit and filing requires for the different
entities in the country; and b) the accounting standard framework – which
establishing the standards for accounting practices that will be applied by the
entities with statutory reporting obligations.
Figure 1: New Zealand financial reporting framework
Source: EY (2017)
The above figure (1) serves as a guide for assisting people
in navigating their way through the financial reporting framework within the
New Zealand jurisdiction. For the
statutory financial reporting framework, the question asked is: does your
entity have a statutory financial reporting obligation? In the course of
answering this question, it sets out the requirement for the entities that are
required to prepare and file audited General Purpose Financial Reports (GPFR),
which can be found in different entities and sectors specific legislations. It
also features the financial reporting obligations, in line with the following
main places of legislation based on the 2013 enactment: the Financial Markets
Conduct Act 2013; the Financial Reporting Act 2013; and the Financial Reporting
(Amendments to Other Enactments) Act 2013 (EY, 2017).
Once the question in the first framework has been answered,
the second framework seeks to outline the accounting standards framework by
asking the question: which accounting standard should your company adopt? That
is to say, when a company has a statutory financial reporting obligation, such
company will need to prepare their GPFR in line with the New Zealand generally
acquired accounting practice (NZ GAAP), as this is the accounting standard
framework that is issued by the External Reporting Board (XRB) (EY, 2017).
The role of
accounting professional bodies, authoritative bodies and regulations on
financial reporting in New Zealand
The central role played by all these bodies and regulations
is to enhance the quality of financial reporting in the country. Followed the
collapse of certain corporations like the Enron in 2001, investors have become
very cautious when making investment decisions, especially when it comes to
information about corporate earnings (Li, 2010).
Corporate earnings, which has served as the main source of information for
investors when it comes to determining the performance of a company eventually
became the main target of window dressing. In line with the explanation offered
by Dechow (1995), the higher quality earning
available in the financial statement of a company offers more information in
relation to the features of the company’s financial performance that is
relevant to a specific decision being made by a specific decision-maker. In
general, the earning quality can be defined as the earning that provides
information about the features in a company’s financial statement that is
useful when it comes to serving as an input in decision making process. In order
to minimize this gap, the IABS created the standard as discussed earlier, and
it has been employed by managers in performing earning management. Therefore,
the bodies and regulations in New Zealand play the main role of making sure
that the financial reporting standards are adhered to by the companies that are
statutory obliged to provide such information to the public, enhancing
accountability and transparency in the process in order to ensure that the
investors are accorded necessary quality ground for decision making.
Adoption of
International Financial Reporting Standards (IFRS) in New Zealand: the
motivators
The first statement that will be made in this section is
that New Zealand is already adopting the IFRS. In order to discuss further on
this, it is important to flashback in history. As far back as 1974, the first
of the new series of accounting standards that was issued by the Society of
Accountants in New Zealand (that is, the SSAP 1 disclosure of Accounting of
Policies) did feature the crest of the International Accounting Standards
Committee (Bradbury, 1998). In any case, it
is important to note that event at this point, the standards did feature some
modifications as well. On the same note, the years that followed saw New
Zealand develop its own agenda for setting standards with respect to accounting
issues.
In 1997, the Federal Reporting Standards Board (FRSB) took
the decision to base its new accounting standards on the standards provided by
the international and Australian accounting boards. These modifications were
made in order to ensure that that there is neutrality and consistent on the
pronouncements being made in New Zealand (Bradbury
and van Zijl, 2006), and as such, it served as the major motivation for
adoption of IFRS in the country till today. A proposal was made by the
Accounting Standards Review Board (ASRB) on the 21st of October
2002, that the listed issuers in New Zealand should adopt the IFRS and this was
followed by the 19th December 2002 announcement that the adoption of
IFRS should be mandatory for the reporting entities in the country for periods
starting from 1st of January 2007. Unlike in the European Union,
Australia and other countries were the adoption was made mandatory start from
2005, the case of New Zealand saw the ASRB allowing for early adoptions for the
period start from 1st January 2005, while mandatory from January 1st
2007 (Bradbury and van Zijl, 2006).
However, even on the 12th of September 2007, an
announcement was made by the ASRB that it will delay the mandatory adoption of
the NZ IFRS for SMEs that have meet certain criteria, until when the government
has reviewed the financial reporting requirement of the SMEs, with the reviewed
scheduled to start from the middle of 2008. In the course of this, a possible
outcome of this review was said to be that numerous entities might not longer
be mandated by law to prepare their financial statement based on the GAAP (Sealy-Fisher, 2007). Thus, the review has
significant implication for the big corporations that run their business in New
Zealand.
Since the announcement was made by the ASRB in 2002, there
have been numerous comments from different angles which include professional
bodies, authors, commercial entities, and accounting firms in relation to the
impact of adopting IFRS (e.g. Dunstan, 2002; Ernst
& Young, 2004).
Factor behind the
adoption of IFRS in New Zealand
The main factor behind the adoption of IFRS in New Zealand
can be traced to the 1992 to 2002, which focused more on addressing the
challenging of maintaining sector neutrality. In the course of the 1990s, there
were remarkable changes on the standard setting process in New Zealand. This
was initiated with the creation of the Accounting Standards Review Board
(ASRB), making it mandatory for entities to adopt accounting standards as the
accounting profession in the country moved a step closer towards eliminating
the control of regulating external financial reporting (Devonport and van Zijl, 2010).
Following the crash of the sharemarket in 1987, there was an
increasing notion that to some extent, the rash itself, or at least rate at which the crash was
recorded in New Zealand; was as a result of poor quality in accounting standards.
The crash was followed by different reviews and eventually brought about the
establishment of the Financial Reporting Act 1993, which paved way for the
creation of the ASRB. The corresponding Australian body served as a close model
for the creation of the ASRB (Devonport and van
Zijl, 2010).
In New Zealand, the board played the primary role of
considering proposed accounting standards for approval with the overall aim of
providing legal backing to such standards. As the accounting profession was undergoing
a critical review of its performance, there were reactions from the public
sector on the demands from the government to ensure higher level of
accountability and credibility in financial reporting. As such, the Treasury
moved to push for the Financial Reporting Act, which would cover for both the
private and public sector. Finally, the Act did provide the financial reporting
in the private and public sector to be regulated under the authority of the
ASRB, and it reinforced the development of standard setting in the Institute (Devonport and van Zijl, 2010).
Therefore, in the early period of 2002, as a result of
increased level of globalization, as well as higher link between Australia and
New Zealand, the establishment of the IFAC Public Sector Committee, IASC being
restructured in order to create the International Accounting Standards Board
(IASB), and the recommendation that the IFRS should be adopted in the European
Union from 2005, the New Zealand committee decided to work in line with the
lead provided by Australia in order to develop a policy statement on
international harmonization as well as convergence of standards. As a result of
this, the Chairs of the ASRB and FRSB in July 2002 made the statement: in the
future, the FRSB will develop a standard for financial reporting based on the
notion that the standards of the International Accounting Standards Board
(IASB) and the Public Sector Committee of the International Federation of
Accountant (PSC) would serve as a reference of the best international practice
and that the board will only depart from such standards in exceptional and rare
cases.
Introduction of the
IFRS in New Zealand: the reason for its adoption
Overall, the reason for the adoption of IFRS in the country
was to maintain sector neutral standards; however, the decision to formally
adopt the IFRS in as the accounting standard in New Zealand did come with
unintended consequences when it comes to maintaining sector neutrality.
In 2002, Australia made the announcement to adopt the IFRS,
and this resulted in ASRB also announcing in 2002 that the reporting entities
in New Zealand would be required to apply the IFRS for the period starting from
January 1 2007, although they also have the option of applying the standards on
a voluntary level from 2005. Prior to arriving at the decision to mandatory
adoption, the ASRB and FRSB did consult with the key interested parties,
however, the reality was that the country had little choice other than to align
its reporting standards with that of Australia. While the consultation did show
that the parties were in support of the adoption, there were still concerned in
relation of the date of adoption, the cost/benefit of the application, and the
feasibility of maintaining sector neutrality. As indicated by the ASRB, the
FRSB would set out immediate measures to develop the cost/benefit structure
when it comes to applying IFRS across different kinds and sizes of organizations
within the New Zealand jurisdiction. On the same note, it did maintain that
there was continued commitment being made towards sector neutral standards (Devonport and van Zijl, 2010).
Prior to its adoption, the different sectors in the New
Zealand economy were adopting different accounting measures and it did come
with a high level of ambiguity. For instance, the standards that were being
adopted in the private sector were not the same with the public sector as it
sector did draft it’s on measures in ways that would sooth them. As a result of
this, managers were easy to apply account smoothing in order to make their
company look good even when they were actually not performing well. The Enron
2001 is a good example of this case and it did call on the need for neutrality
to be employed in the accounting standards of New Zealand most especially
following the aftermath of the 1987 stockmarket crash. The neutrality also made
it possible that the managers wouldn’t be able to smooth their performance in
their financial statement as all companies, irrespective of their sector, were
to adopt the same standards. This was the main motivation for adoption of IFRS
in New Zealand (Devonport and van Zijl, 2010).
Conclusion
For investors, decision making is normally based on the financial
performance of a company. This is because, they might not have the time luxury
to go through historical data of the company in order to better assess them. On
the same note, there is the general believe that a company performing well
today will likely perform better tomorrow and vice versa based on efficient and
effective utilization of resources. Therefore, managers were normally keen on
smoothing their financial performance in order to gear the interest of
investors. This brought about numerous scandals in the corporate setting,
leading to the creation of the IFRS by the IASB. As an innovative country, New
Zealand was among the early adopters of IFRS and the central purpose why it was
adopted was to ensure sector neutrality. Since its adoption, the country has
continued to amend and converge its national accounting standards in line with
the provisions and amendments of the IFRS.
References
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Bradbury, M.
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Location:
Enugu, Nigeria
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