Home > Reports > Financial Reporting Council: The Use of a Sector Neutral Framework for the Making of Australian Accounting Standards

The FRC is seeking public comment on matters related to standard-setting, especially in relation to the public sector and the other not-for-profit sector. Respondents are particularly requested to provide the reasons for their views, whether supportive or critical of the identified issues. Please refer to the comments page for more information.

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Financial Reporting Council: The Use of a Sector Neutral Framework for the Making of Australian Accounting Standards

Introduction

The Australian Financial Reporting Council (FRC) was established on 1 January 2000 under section 225 of the Australian Securities and Investments Commission Act 1989¹ (ASIC Act) for the purpose of overseeing Australia’s accounting standard setting process.

One of the key functions of the Financial Reporting Council (FRC) is to provide broad oversight of the processes for setting accounting standards in Australia. Specifically, the FRC is responsible for determining the broad strategic direction for the setting of standards to be followed by the Australian Accounting Standards Board (AASB).

The AASB has functions, as set out in section 227 of the ASIC Act, which include:

(a) to develop a conceptual framework, not having the force of an accounting standard, for the purpose of evaluating proposed accounting standards and international standards;

(b) to make accounting standards under section 334 of the Corporations Act for the purposes of the corporations legislation (other than the excluded provisions);

(c) to formulate accounting standards for other purposes; and

(d) to participate in and contribute to the development of a single set of accounting standards for world-wide use.

Previous FRC Directions to the AASB

In accordance with its responsibility to provide broad strategic directions to the AASB on the making of accounting standards, the FRC issued two specific directions in 2002:

• The AASB should work towards the adoption in Australia of accounting standards that are the same as those issued by the IASB - and interpretations issued by the International Financial Reporting Interpretations Committee (IFRIC) - to ensure their applicability to Corporations Act entities for accounting periods beginning on or after 1 January 2005;
• The AASB should pursue as an urgent priority the harmonisation of Government Finance Statistics (GFS) and Generally Accepted Accounting Principles (GAAP) reporting. The objective should be to achieve an Australian accounting standard for a single set of Government reports which are auditable, comparable between jurisdictions, and in which the outcome statements are directly comparable with the relevant budget statements.

No further direction concerning the making of accounting standards has been provided by the FRC since 2002.

Research into Sector Neutral Standards

At the FRC meeting held on 20 September 2004, the FRC agreed to engage a consultant to undertake research work on the appropriateness of a sector neutral approach to the making of accounting standards.

In November 2005, Mr Kevin Simpkins was appointed to undertake research into how adequately a sector neutral approach to the development of accounting standards can meet the information needs of users of financial statements and the public interest more generally. The purpose of the research project was to assist the FRC in considering possible modifications to its strategic direction to the AASB, especially in relation to the public and the other not-for-profit sectors. Parties with a strong interest in the issue of sector neutral standards were invited to register with the FRC Secretariat.

Mr Simpkins was Deputy Controller and Auditor-General of New Zealand for three years until May 2005, having previously held other senior positions in the Office of the Auditor-General, Ernst & Young and the New Zealand Institute of Chartered Accountants, where he was Technical Director. He was a member and Deputy Chair of the Financial Reporting Standards Board until 2002 and a member of the (now) International Public Sector Accounting Standards Board until 2003. Mr Simpkins has a long record of involvement in the not-for-profit sector.

In preparing his report, Mr Simpkins consulted with:

• a range of domestic stakeholders, including the AASB, professional accounting bodies, government departments and private sector organisations;
• overseas and international accounting standard setting and oversight bodies; and
• the FRC itself, principally via a Steering Committee established for the purpose of guiding the research.

Mr Simpkins’ report was tabled at the FRC meeting held in Sydney on 22 June 2006. The FRC agreed to make the report publicly available via the FRC web site.

Matters for consideration

The FRC is seeking public comment on the following matters related to standard-setting, especially in relation to the public sector and the other not-for-profit sector. Respondents are particularly requested to provide the reasons for their views, whether supportive or critical of the identified issues. The matters on which the FRC is seeking comment, which are reproduced in Part 8 of Mr Simpkins’ report, are:

1. In your view, how well are the needs of all users of general purpose financial reports, including users of public sector and other not-for-profit entities in Australia, being met?

2. Will the current approach of the AASB enable the standard-setter to respond to the more challenging environment of the future and ensure the needs of public sector and other not-for-profit users are appropriately met?

3. Do you consider that having a conceptual framework that is applicable and appropriate to all entities is a necessary element in Australian standard-setting for all sectors? What approach to establishing a conceptual framework(s) do you consider appropriate?

4. Different approaches could be used to set standards in Australia. Which approach do you consider the most appropriate:

• to continue to develop a single set of standards;

• to develop two separate sets of standards: one for profit-oriented entities and the other for not-for-profit entities; or

• another approach e.g. three sets of standards (profit-oriented, public sector not-for-profit and other not-for-profit sets) or two sets of standards with other not-for-profit entities being addressed together with profit-oriented entities? (If you prefer this option please describe the approach you prefer)

5. If, in response to Consultation Issue 4, you considered standards different from those applying to the for-profit sector should be developed for one or more sectors please indicate, for each such sector, what the primary base should be for those standards:

• Government Finance Statistics (GFS);

• International Public Sector Accounting Standards (IPSAS); or

• a range of sources, including International Financial Reporting Standards, IPSAS and GFS, depending on the particular issue being considered?

6. If a single set of standards continues to be developed in Australia, do you prefer:

• the current approach of the AASB;

• a matrix approach, retaining specific standards for types of public sector and possibly also other not-for-profit entities while maintaining a general set of topic based standards applicable to all entities; or

• an approach involving a single set of standards but with non-standard level guidance (such as the Statements of Recommended Practice in the United Kingdom) applicable to particular sectors or groups of entities in sectors?

7. Would developing a Statement of User Needs for the public sector and other not-for-profit sectors, based on research, and including an analysis of how any different needs impact financial reporting be useful? If so, please suggest how that Statement of User Needs could be developed and maintained. Do you have any other views on how user input could be enhanced?

8. Do you consider that there is enough clarity on the direction that the AASB is taking in establishing requirements for the public sector and other not-for-profit sector, including identifying the base set or sets of standards which will be adopted?

9. A number of options to enhance the recognition of different environments and issues in sectors have been identified in the Report. Do you consider any of the options, including those relating to board membership, sub-boards or committees, expectations of board members, staffing or explicit board sign-offs would enhance the ability of the standard-setting process to meet user needs?

10. Are there any other matters that you would like to suggest for consideration by the FRC?

Invitation to comment

Comments should be addressed to:

Mr Jorge del Busto
Secretary Financial Reporting Council
c/- The Commonwealth Treasury
Langton Crescent
PARKES ACT 2600

or sent by e-mail to jdelbusto@treasury.gov.au

by no later than Tuesday 31 October 2006.

It will be assumed that submissions are not confidential and may be made publicly available. If you want your submission, or any part of it, to be treated as ‘confidential’, please indicate this clearly. A request made under the Freedom of Information Act 1982 (Cth) for a submission to be made available will be determined in accordance with the Act.

¹ The FRC is continued in existence by section 261 of the Australian Securities and Investments Commission Act 2001 (the ASIC Act)

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A review of the policy of sector-neutral
accounting standard-setting in Australia

A report prepared by Kevin Simpkins, independent consultant, for the Financial Reporting Council pursuant to the Council’s function to provide broad oversight of the processes for setting accounting standards in Australia. (Section 225(1) of the Australian Securities and Investments Commission Act 2001)

Summary

Since its establishment in 2000 as the sole accounting standard-setting body in Australia, the Australian Accounting Standards Board (“AASB”) has adopted a sector-neutral approach to the setting of accounting standards. Pursuant to its responsibility to exercise broad oversight of the processes for setting accounting standards in Australia, the Financial Reporting Council (“FRC”) determined to review whether a sector-neutral approach to accounting standard-setting is able to meet the needs of users and the public interest more generally.

Part 1 of this report explains the role of the FRC, the role of the AASB, and the context in which this review was initiated.

Part 2 of the report describes the approach taken to the review. This involved five phases as follows:

• Phase 1 – Preliminary planning and scoping;
• Phase 2 – Stakeholder liaison and research;
• Phase 3 – Detailed research and analysis (including review and analysis of standard-setting approaches and structures in selected countries and at the international level, as well as a review of existing Australian Accounting Standards and Conceptual Framework documents)
• Phase 4 – Develop findings and evaluate options; and
• Phase 5 – Final report.

Part 2 also clarifies matters which were not subject to review, including the adoption of standards based on international financial reporting standards for profit-oriented entities and issues related to standard-setting for different size entities.

For the purposes of the review, three broad sectors have been considered, namely:

• Profit-oriented entities;
• Public sector not-for-profit entities; and
• Other not-for-profit entities.

Part 3 of the report describes the current approach adopted by the AASB to accounting standard-setting for the three sectors being considered. This approach is referred to in the report as the “sector-neutral” approach to accounting standard-setting. This approach primarily involves development of a single set of standards using the standards of the International Accounting Standards Board (“IASB”) as the “foundation” standards to which material is added to broaden the scope of the standards to those sectors not addressed by the IASB, as well as in relation to other domestic regulatory or other matters.

Part 4 of the report reviews the international accounting standard-setting scene and, in particular, the IASB and the International Public Sector Accounting Standards Board (“IPSASB”). It explores the implications of international developments for Australia concluding that the task for a national standard-setter with responsibility to set standards for all entities in its jurisdiction is becoming increasingly difficult.

Part 5 of the report explores the way in which accounting standards are set for different sectors in four countries – New Zealand, Canada, the United States of America and United Kingdom. In particular the reasons for different requirements in different sectors in each country are discussed as well as how users and their information needs are viewed in relation to different sectors in each country. Current or future developments in standard-setting for different sectors and the strengths and weaknesses of the current approach in each country are considered as well as the relationship between Government Finance Statistics and General Purpose Financial Reporting in each country.

Part 6 reports the views of a selection of Australian stakeholders of accounting standard-setting on issues related to sector-neutrality. While there do not appear to be any issues of concern relating to profit-oriented entities arising from the sector-neutral approach, stakeholders have significant concerns in relation to public sector not-for-profit and other not-for-profit entities. Stakeholders in these sectors emphasised that there are differences between the sectors and that the accounting standard-setting arrangements should respond more to those differences.

Part 7 of the report reviews existing Australian Accounting Standards and Conceptual Framework documents from a sector application perspective. The report identifies a number of issues in relation to the Conceptual Framework documents and concludes that they do not provide a sufficient nor, in some respects, appropriate basis to underpin sector-neutral accounting standards for the future. In relation to Australian Accounting Standards, the report finds that the vast majority of the provisions in current standards apply appropriately and properly to all entities in all sectors. However a number of specific issues are raised from the perspective of both categories of not-for-profit entity. The report concludes that a number of issues remain to be addressed and that the minimalist approach to changes to IFRS is at risk of compromising the credibility of the standard-setting process in the not-for-profit sectors.

Part 8 of the report draws together the earlier work and considers how effective the current approach is in meeting different user needs, explores issues relating to the future of the current approach and identifies and discusses other alternatives to the current approach. The report concludes that there are different users in the different sectors and that they have some different information needs. It concludes that there is, at the very least, potential to significantly enhance the extent to which the needs of users of public sector not-for-profit entities reports are met. It takes a similar view in relation to the other not-for-profit sector.

The issues emerging in the international standard-setting arena are then considered and the challenges for national setters explored. In particular, the difficulty of maintaining a common conceptual framework is discussed. The report concludes that a common conceptual framework will not be possible so long as the reluctance to make changes to IASB documents evident in the recent past in Australia is maintained.

The report identifies and evaluates other options for standard-setting including:

• two or more different sets of standards,
• options for a not-for-profit series of standards as part of a two sets of standards scenario;
• alternative approaches to a single-set of standards;
• the possibility of more than one board; and
• options to enhance the current approach.

The Financial Reporting Council is inviting comments from stakeholders on a series of consultation questions through a consultation paper issued simultaneously with this report. Those questions have been incorporated in Part 8 for the assistance of readers.

Acronyms used in this document

The following acronyms are used in this document.

AASB	Australian Accounting Standards Board
AASB Framework	AASB Framework for the Preparation and Presentation of Financial Statements
ACAG	Australasian Council of Auditors-General
AcSB	Accounting Standards Board (Canada)
AICD	Australian Institute of Company Directors
AIFRS	Australian Equivalents to International Financial Reporting Standards
ASB	Accounting Standards Board (United Kingdom)
ASRB	Accounting Standards Review Board (New Zealand)
Canadian GAAP	Canadian Generally Accepted Accounting Principles
FASAB	Federal Accounting Standards Advisory Board (USA)
FASB	Financial Accounting Standards Board (USA)
FRA	Financial Reporting Act 1993 (New Zealand)
FRC	Financial Reporting Council (Australia)
FRSB	Financial Reporting Standards Board (New Zealand)
FRSSE	Financial Reporting Standard for Smaller Entities (United Kingdom)
GASB	Governmental Accounting Standards Board (USA)
GFS	Government Finance Statistics (of the International Monetary Fund)
HoTARAC	Heads of Treasuries Accounting and Reporting Advisory Committee
IASB	International Accounting Standards Board
IASB Framework	IASB Framework for the Preparation and Presentation of Financial Statements
IASC Foundation	International Accounting Standards Committee Foundation
IAS	International Accounting Standards
ICAA	Institute of Chartered Accountants in Australia
IFRIC	International Financial Reporting Interpretations Committee
IFAC	International Federation of Accountants
IFRS	International Financial Reporting Standards
IPSAS	International Public Sector Accounting Standards
IPSASB	International Public Sector Accounting Standards Board
NIA	National Institute of Accountants (Australia)
NZ Institute	New Zealand Institute of Chartered Accountants
NZ Framework	New Zealand Framework for the Preparation and Presentation of Financial Statements
NZ GAAP	New Zealand Generally Accepted Accounting Practice
ONS	Office for National Statistics (UK)
PBEs	Public Benefit Entities (New Zealand and United Kingdom)
PSAB	Public Sector Accounting Board (Canada)
SEC	Securities and Exchange Commission (USA)
SNA	System of National Accounts
SORP	Statement of Recommended Practice (United Kingdom)
TFHPSA	Task Force on the Harmonisation of Public Sector Accounting
UK GAAP	UK Generally Accepted Accounting Practice
US GAAP	US Generally Accepted Accounting Principles

Part 1 - Introduction

Background

1.1 On 1 January 2000, new accounting standard-setting arrangements came into effect in Australia. These arrangements arise from Part 12 of the Australian Securities and Investments Commission Act 2001 of which one of the main objects is to facilitate the development of accounting standards that require the provision of financial information that:

• Allows users to make and evaluate decisions about allocating scarce resources;
• Assists directors to discharge their obligations in relation to financial reporting;
• Is relevant to assessing performance, financial position, financing and investment;
• Is relevant and reliable;
• Facilitates comparability; and
• Is readily understandable¹.

1.2 The new institutional arrangements involved two key bodies - the Financial Reporting Council (“FRC”) with a function of broad oversight of the processes for setting accounting standards in Australia and the Australian Accounting Standards Board (“AASB”) with responsibility for setting accounting standards for the purposes of the corporations legislation and for other purposes in Australia. These arrangements replaced those under which the AASB worked alongside the Public Sector Accounting Standards Board of the accounting profession. Both boards used the services of the staff of the Australian Accounting Research Foundation and issued separate standards although, on most topics, the standards were substantially the same. The Public Sector Accounting Standards Board ceased to exist when the new arrangements came into effect.

1.3 At the commencement of the new arrangements the AASB adopted a sector-neutral approach to the setting of accounting standards in Australia and it is that approach which is the subject of this review.

The role of the FRC

1.4 The broad function of the FRC in relation to accounting standard-setting is “to provide broad oversight of the processes for setting accounting standards in Australia” ². Its specific functions in relation to accounting standards are:

• Appointing the members of the AASB;
• Approving and monitoring the AASB’s priorities, business plans, budgets and staffing arrangements (including level, structure and composition of staffing);
• Determining the AASB’s broad strategic direction;
• Giving the AASB directions, advice or feedback on matters of general policy and procedures;
• Monitoring the development of international accounting standards and the accounting standards that apply in major international financial centres;
• Furthering the development of a single set of accounting standards for world-wide use with appropriate regard to international developments;
• Promoting the continued adoption of international best practice accounting standards in the Australian accounting standard-setting processes if doing so would be in the best interests of both the private and public sectors in the Australian economy;
• Monitoring:
  • the operation of accounting standards to assess their continued relevance and their effectiveness in achieving their objectives in respect of both the private and public sectors of the Australian economy; and
  • the effectiveness of the consultative arrangements used by the AASB.
• Seeking contributions towards the costs of the Australian accounting standard-setting processes; and
• Monitoring and periodically reviewing the level of funding, and the funding arrangements, for the AASB.³

1.5 The FRC has power to do all things necessary or convenient in connection with the performance of its functions. However, the FRC does not have power to direct the AASB in relation to the development, or making, of a particular standard nor the power to veto a standard made, formulated or recommended by the AASB.⁴

The role of the AASB

1.6 The AASB is now Australia’s sole accounting standard-setter, having the following specific functions:

• To develop a conceptual framework, not having the force of an accounting standard, for the purpose of evaluating proposed accounting standards and international standards;
• To make accounting standards under Section 334 of the Corporations Act for the purposes of the corporations legislation;
• To formulate accounting standards for other purposes; and
• to participate in and contribute to the development of a single set of accounting standards for world-wide use.⁵

1.7 The AASB has power to engage staff and consultants, establish committees, advisory panels and consultative groups and do anything else that is necessary for, or reasonably incidental to, the performance of its functions.⁶

1.8 The AASB is also specifically authorised to formulate an accounting standard by issuing the text of an international standard. The text of the international accounting standard may be modified to the extent necessary to take account of the Australian legal or institutional environment and, in particular, to ensure that any disclosure and transparency provisions in the standard are appropriate to the Australian legal or institutional environment.⁷

1.9 The AASB may make or formulate accounting standards to be of general or limited application. In making and formulating accounting standards the AASB must have regard to the suitability of a proposed standard for different types of entity, may apply different accounting requirements to different types of entity and must ensure there are appropriate accounting standards for each type of entity that must comply with accounting standards.⁸

Strategic directions to the AASB

1.10 In 2002 the FRC issued two significant strategic directions to the AASB. The strategic directions are, in summary, to:

• Work towards adoption in Australia of accounting standards that are the same as those issued by the International Accounting Standards Board (“IASB”);
• Pursue as an urgent priority the harmonisation of Government Finance Statistics (“GFS”) and Generally Accepted Accounting Principles reporting. The objective should be to achieve an Australian accounting standard for a single set of government reports which are auditable, comparable between jurisdictions, and in which the outcome statements are directly comparable with the relevant budget statements.

Sector-neutrality in the context of the strategic directions

1.11 Since 2002, the AASB has pursued the two key strategic directions. In the case of the direction to work towards adoption in Australia of accounting standards that are the same as those of the IASB, a full set of Australian equivalents to International Financial Reporting Standards (“AIFRS”) were gazetted on 15 July 2004 with those standards having application to periods commencing on or after 1 January 2005.

1.12 In relation to the strategic direction concerning GFS, the AASB has concentrated on the General Government Sector⁹ and issued an exposure draft in July 2005.¹⁰

1.13 Seeking to harmonise with GFS while at the same time issuing standards which are the same as those of the IASB, has created new challenges for the AASB. In particular it added complexity to the AASB’s policy of developing sector-neutral standards.

1.14 The policy of setting sector-neutral standards has also come under scrutiny in recent years from a number of academics and other writers. Concerns have also been raised within the public and not-for-profit sectors about the implications of the international standards on which Australian standards are now based having been developed solely for profit-oriented businesses.

1.15 These and other issues led the FRC to determine, in accordance with its role and powers, to review whether a sector-neutral approach to accounting standard-setting is able to meet the needs of users and the public interest more generally. While it is an over-simplification of the issues involved, some have described the review as considering whether, in relation to accounting standards, “one size fits all”.

Part 2 – Approach to the Review

Statement of requirements

2.1 On initiating the review, the FRC set out a Statement of Requirements. This can be found at Appendix 1.

Phases of the review

2.2 Following my appointment to conduct the review for the FRC, an overall plan responsive to the Statement of Requirements was developed. This plan, involving five phases, was endorsed by the FRC, which established a Steering Committee to guide the review.¹¹

2.3 Phase 1 – Preliminary planning and scoping

This phase included an issues based literature review and dialogue with the FRC Steering Committee to confirm the scope of the review, reach agreement on definitional aspects, confirm the preliminary research issues and agree on an overall timetable for the review.

2.4 Phase 2 – Stakeholder liaison and research issues

Phase 2 involved liaison with the AASB to confirm its current approach to developing standards for different sectors and to be informed about any planned future initiatives relevant to the review. This phase also involved liaison with a selected group of stakeholders and user groups through face-to-face meetings or written communication as well as the gathering of views of other stakeholders through additional research. The results of this work are reported in Part 6. At the completion of this phase the preliminary issues to be considered in the review were confirmed in conjunction with the Steering Committee.

2.5 Phase 3 – Detailed research and analysis

This phase comprised two overlapping streams:

• Stream A: Review and Analysis of Standard-setting Approaches and Structures in Selected Countries and at the International Level

  This stream involved research and a survey of the two international standard-setting bodies and those in four selected countries, as well as inquiries in relation to certain specific matters. The results of this work are reported in Parts 4 and 5.

• Stream B: Review of existing Australian Accounting Standards and Conceptual Framework documents

  This stream involved reviewing the Australian Accounting Standards and Conceptual Framework documents at 1 January 2006 from a sector application perspective. The results of this work are reported in Part 7.

2.6 Phase 4 – Develop findings and evaluate options

This phase involved bringing together the various streams of the review to identify issues and options for consideration by the FRC.

2.7 Phase 5 – Final report

This phase represented the preparation of this report for consideration by the FRC and its stakeholders.

Matters not covered by the review

2.8 The following matters were not subject to review:

• The adoption of standards based on International Financial Reporting Standards for profit-oriented entities;
• Developments in the form in which financial information may be made available to users, such as XBRL or similar;
• The appropriateness of accrual accounting for all sectors; and
• Issues related to standard-setting for different size entities.

2.9 While the adoption of standards based on International Financial Reporting Standards for profit-oriented entities has significant implications for a sector-neutral approach to standard-setting, the adoption of these standards themselves for profit-oriented entities represents a firm policy position of the Australian government and FRC and has not been subject to reconsideration.

2.10 There is little doubt that developments in the form in which financial information is made available to users will continue to occur over coming years. While it is possible that these developments will have an impact on the manner in which accounting standards are set, the implications for a sector-neutral accounting standard-setting approach are less clear and have therefore not been covered by the review.

2.11 Preliminary analysis as part of this review identified a number of issues related to the application of accrual accounting in the public sector and the not-for-profit sector. However there was minimal evidence of concern about the adoption of the accrual basis of accounting per se. Furthermore the fact that the two international accounting standard-setting bodies and the International Monetary Fund in its Government Finance Statistics all now use and advocate accrual accounting suggested that it would not be worthwhile to re-examine this issue.

2.12 Consideration was given to exploring issues related to setting standards for different size entities as part of this review.¹² However it was decided to exclude this from the scope of the review because the IASB currently has a project underway on accounting standards for small and medium-sized entities and the Trans-Tasman Accounting Standards Advisory Group has also been considering issues related to size as part of its work on differences between the financial reporting frameworks in Australia and New Zealand.

Definitional and similar matters

2.13 For the purposes of the review a number of definitional and similar matters were agreed. They are described below.

Sectors…

2.14 For the purposes of the review, three broad sectors have been considered, namely:

• Profit-oriented entities;
• Public sector not-for-profit entities; and
• Other not-for-profit entities.

2.15 In the context of the current Australian Accounting Standards, both public sector not-for-profit entities and other not-for-profit entities are referred to as “not-for-profit entities”. A not-for-profit entity is defined in Australian Accounting Standards as “an entity whose principal objective is not the generation of profit”.¹³ A not-for-profit entity can be a single entity or a group of entities comprising the parent entity and each of the entities that it controls.

2.16 Profit-oriented entities in the public sector (referred to in this report as “government business enterprises”) are an important subset of the profit-oriented entities sector.

Sector-neutral approach…

2.17 In its pure form, a sector-neutral approach to accounting standard-setting is one in which standards are developed with regard to, and which establish identical requirements and guidance for like transactions and events for all entities to which the standards apply. Such standards would be based on a single conceptual framework. As far as I am aware, such an approach to accounting standard-setting is not followed in any jurisdiction.

2.18 For the purposes of this review, a “sector-neutral” approach has been taken to mean the approach currently adopted by the AASB. That approach is to base Australian standards, interpretations and conceptual documents on those of the IASB but make such modifications as the AASB considers necessary so that (with a small number of exceptions) each standard and other document may apply to all entities. The current approach is explained more fully in Part 3 of this report.

Australian Accounting Standards…

2.19 The Australian Accounting Standards considered as part of this review are:

• AASB Standards 1 to 7 which are the equivalents of the most recently issued IFRS standards;
• AASB standards 101 to 141 which are the equivalents of the standards issued previously as international accounting standards (“IAS)”;
• AASB standards without international equivalents (comprising AASB 1004, 1023, 1031, 1038, 1039 and 1048); and
• AAS standards which cover specific public sector entities and financial reporting by superannuation plans (AAS 25, 27, 29 and 31).

  The Conceptual Framework documents considered as part of this review are:

• The AASB Framework for the Preparation and Presentation of Financial Statements (“AASB Framework”);
• Statements of Accounting Concepts which have not been withdrawn (SAC 1 and SAC 2).

Selected countries…

2.20 For the purposes of the review, it was agreed to consider international standard-setting arrangements and developments in relation to the International Accounting Standards Board (“IASB”) and the International Federation of Accountants (“IFAC”), and in particular it’s International Public Sector Accounting Standards Board (“IPSASB”).

2.21 Following an analysis of countries which have well developed standard-setting arrangements for all the sectors being examined in this review, it was agreed that New Zealand, Canada, the United States of America and the United Kingdom would be the countries considered. There are structural and other differences in the approaches taken in each of these countries and accordingly they represented an opportunity to compare approaches with the existing Australian sector-neutral approach.

Key Stakeholders…

2.22 The steering committee agreed the following as the stakeholders to be approached to provide views on the current arrangements for standard-setting for the three sectors being examined:

• The professional accounting bodies:
  • CPA Australia;
  • The Institute of Chartered Accountants in Australia (“ICAA”); and
  • The National Institute of Accountants (“NIA”);
• The Heads of Treasuries Accounting and Reporting Advisory Committee (“HoTARAC”);
• The Australian Bureau of Statistics;
• The Australian Institute of Company Directors;
• The Australasian Council of Auditors-General (“ACAG”);
• The Joint Committee of Public Accounts and Audit of the Commonwealth Parliament;
• Selected commentators, including economic commentators; and
• A group of stakeholders representing the not-for-profit sector.¹⁴

Structure of this report

2.23 The core elements of the review are discussed in Parts 3 to 7 of the report. In Part 8 the issues are identified and options evaluated with reference back to the earlier parts where relevant.

2.24 Part 3 describes the current approach adopted by the AASB to accounting standard-setting for the three sectors being considered in this review.

2.25 Part 4 examines the international standard-setting scene in 2006 and the implications this has for the setting of standards for the three sectors in Australia.

2.26 Part 5 examines the approach to accounting standard-setting for the three sectors in the selected countries (New Zealand, Canada, the United States of America and the United Kingdom).

2.27 Part 6 summarises the views of those stakeholders consulted during the course of the review and some other stakeholder views identified from other documented sources.

2.28 Part 7 reports on the review of existing Australian Accounting Standards and Conceptual Framework documents from a sector application perspective.

2.29 Part 8 considers the issues in relation to standard-setting for different sectors in Australia in 2006 and identifies and discusses options which could be considered for the future.

Part 3 - The Australian Accounting Standards Board’s current approach

Description of Approach

3.1 The AASB’s approach to setting standards for different sectors has built on the approaches of predecessor standard-setting boards in Australia and has continued to evolve even during the short period of this review.

3.2 Soon after the establishment of the AASB as a single standard-setting board responsible for all sectors in 2000, it decided to issue one set of standards for all entities as an overriding strategy. Prior to that, there had been two sets of standards, one issued by the former Australian Accounting Standards Board and the other by the Public Sector Accounting Standards Board of the accounting profession. However for more than a decade, those boards had worked together on conceptual documents and proposed standards and the differences between the two sets of standards were not extensive.

3.3 After receiving the July 2002 strategic direction to adopt IFRS for application to reporting periods beginning on or after 1 January 2005, the AASB decided to continue to issue one series of sector-neutral standards, that is, standards applicable to both for profit and not-for-profit entities, including public sector entities.

3.4 Except for standards that are specific to not-for-profit entities or of a purely domestic nature, the AASB uses the standards of the IASB as the “foundation” standards to which it adds material detailing the scope and applicability of the standard in the Australian environment. Additions are made, where necessary, broadening the content to cover those sectors not addressed by the IASB (that is not-for-profit entities) as well as domestic, regulatory or other issues.

3.5 In developing the single set of standards, the AASB also has regard to the standards of the International Public Sector Accounting Standards Board (“IPSASB”) of the IFAC in respect of issues affecting not-for-profit entities. The IPSASB generally uses the standards of the IASB as a basis for its standards and, accordingly, adopting IASB standards simultaneously helps convergence with existing and future International Public Sector Accounting Standards (“IPSAS”).

3.6 To date the AASB has also retained a group of standards which are applicable only to the public sector. These standards overlay the other standards for the public sector entities to which each applies:

• AAS 27 Financial Reporting by Local Governments;
• AAS 29 Financial Reporting by Government Departments; and
• AAS 31 Financial Reporting by Governments.

3.7 Furthermore, in implementing the FRC strategic direction to harmonise the requirements applicable to general purpose financial reports of public sector entities and those applicable to Government Finance Statistics, the AASB has issued an exposure draft (ED142 Financial Reporting of General Government Sectors by Governments). If and when finally approved as a standard, this standard would also be specifically applicable to the public sector environment.

3.8 The approach of the AASB and its Urgent Issues Group (UIG)¹⁵ has also been to issue UIG Interpretations¹⁶ to apply wherever possible to all entities. There are some however that are limited in their application. For example, UIG 1038 Contributions made by Owners to Wholly-Owned Public Sector Entities.

Recent Developments

3.9 Just prior to this review being commenced, the AASB decided that the standards dealing with financial reporting by local governments, government departments and governments (AAS 27, 29 and 31) should be withdrawn, with any issues not adequately addressed in other Australian Accounting Standards being considered and retained where still relevant as part of the withdrawal process. This decision was communicated in a Strategy Paper Australian Accounting Standards and Public Sector Entities which has been updated following consultation and further board consideration.¹⁷

3.10 The AASB has indicated it will retain material currently contained in the three standards where needed. It will generally locate requirements which it considers remain necessary in topic-based standards, rather than industry-based standards as at present. Those topic-based standards will be applicable to all entities for which the topic is pertinent. Where an existing topic-based standard exists, that will be the vehicle to prescribe the additional requirements for not-for-profit public sector entities. Where a topic is substantive but not addressed, or where it is inappropriate for it to be addressed in an existing Australian Accounting Standard, a stand-alone single topic-specific standard will be created. Finally, where disclosure topics are not individually substantive but warrant the authority of a Standard and are not addressed, or it is not appropriate for them to be addressed in existing Australian Accounting Standards, a stand-alone multi-topic-based standard will be developed.

3.11 The AASB has over recent months been reviewing the provisions of the three standards and is expected to publish an exposure draft to outline its recommendations later this year.

3.12 At its February 2006 meeting, the AASB reviewed its strategies and agreed sector-neutrality should remain one of the board’s strategies but should be re-expressed in terms of like transactions being treated in the same manner by all entities. This approach would be described as “transaction-neutrality”. The board also agreed that sector-neutrality should be better explained, in particular, its use as a guiding principle rather than as a constraint. The board agreed that its sector-neutrality strategy would be revised.¹⁸

3.13 In a related decision, the AASB agreed there was a need to consider the AASB Framework for the Preparation and Presentation of Financial Statements in light of the needs of not-for-profit entities and a broad range of constituents. It was noted that the timing of any review would be affected by work currently being done at the IASB and the IPSASB on framework issues.

3.14 While the term “sector-neutral” is widely used in Australia, it is a misnomer. The term “transaction-neutrality” is more accurate and the re-expression of the AASB’s strategy is sensible. However due to widespread use of the term “sector-neutral” and because this review has always been described as a “review of sector-neutral accounting standard-setting”, the term has been retained in this report. As stated in paragraph 2.18 it means the approach currently adopted by the AASB and as described in this Part.

Part 4 – The International Standard-Setting Scene

4.1 The role of national accounting standard-setters such as the AASB is increasingly being influenced by international standard-setting bodies. In this part the international accounting standard-setting environment is considered and, in particular, the IASB and IPSASB. The role and likely future direction of the IASB and IPSASB and the differences in their assessments of the needs of users are also explored below.

4.2 One of the functions of the AASB is “to participate in and contribute to the development of a single set of accounting standards for world-wide use”.¹⁹ Furthermore, the strategic direction given to the AASB by the FRC to adopt IFRS for application to reporting periods beginning on or after 1 January 2005 has made an already close relationship with the IASB of crucial importance to the AASB.

4.3 However the AASB’s responsibilities to set standards for not-for-profit entities, including those in the public sector, means it will also have regard to the work of IPSASB in respect of entities for which that body sets standards. How much regard is a matter of conflicting opinions. In contrast with the profit-oriented entities environment there is limited current pressure for countries like Australia to align their public sector accounting with the standards and other material of IPSASB.²⁰ Some are also concerned about the resources available to IPSASB and therefore its ability to maintain its role. However IPSASB is the only international body currently addressing issues like accounting for non-exchange revenues, accounting for heritage assets, accounting for social policy obligations and similar matters – all of which are significant issues in the public sector context.

4.4 While not considered in this part of the report, it is acknowledged that the International Monetary Fund in some respects also acts as a standard-setter in issuing the Government Finance Statistics Manual guiding the preparation of financial information by governments on a GFS basis.

The IASB

4.5 The IASB is the standard-setting body of the International Accounting Standards Committee Foundation (“IASC Foundation”). The IASC Foundation is a not-for-profit corporation, which was incorporated in the state of Delaware, USA on 6 February 2001.

4.6 The objectives of the IASC Foundation are:

a) to develop, in the public interest, a single set of high quality, understandable and enforceable global accounting standards that require high quality, transparent and comparable information in financial statements and other financial reporting to help participants in the world’s capital markets and other users make economic decisions;

b) to promote the use and rigorous application of those standards;

c) in fulfilling the objectives associated with a) and b), to take account of, as appropriate, the special needs of small and medium sized entities and emerging economies; and

d) to bring about convergence of national accounting standards and International Accounting Standards and International Financial Reporting Standards to high quality solutions.²¹

4.7 While the IASB develops International Financial Reporting Standards²² neither the IASB nor the IASC Foundation has the authority to impose IFRS on any entity. The decision to require the financial statements of particular entities to be presented in compliance with IFRS is a matter for national or regional jurisdictions.

4.8 IFRS are developed for profit-oriented entities. The Preface to International Financial Reporting Standards states in paragraph 9:

…IFRS are designed to apply to the general purpose financial statements and other financial reporting of all profit-oriented entities. Profit-oriented entities include those engaged in commercial, industrial, financial and similar activities, whether organised in corporate or in other forms.

4.9 IFRS are accordingly not developed for not-for-profit entities. As also stated in paragraph 9 of the Preface to International Financial Reporting Standards:

…although IFRS are not designed to apply to not-for-profit activities in the private sector, public sector or government, entities with such activities may find them appropriate. The Public Sector Committee²³ has issued a Guideline²⁴ stating that IFRS are applicable to government business entities. The PSC prepares accounting standards for governments and other public sector entities, based on IFRS.

4.10 It should be noted that the IASB is not precluded by the IASCF Constitution from developing standards for not-for-profit entities including those in the public sector. During the review of the IASC Foundation constitution in 2004/05, the issue was raised by various commentators including the FRC²⁵.

4.11 However the Trustees of the IASC Foundation concluded that it would not be appropriate to specifically add accounting standards for not-for-profit and public sector entities to its objectives.²⁶ In explaining this decision, the Trustees stated that they:

Considered whether the organisation’s objectives should include developing accounting standards for not-for-profit and public sector entities. While the Constitution would not prohibit the preparation of standards for not-for-profit and public sector entities, the Trustees believe that, because of other priorities and resource constraints, focusing on the public sector and not-for-profit entities is impractical at present. The Trustees plan to revisit the question of not-for-profit and public sector accounting in a few years’ time.²⁷

4.12 The IASB has confirmed in response to an information request for the purposes of this review that its current strategy is focused on convergence work, primarily with the Financial Accounting Standards Board (“FASB”) in the United States. While the IASB’s work programme includes a number of other projects that are not part of the convergence programme, resource constraints and the priority accorded to convergence work means that any consideration of sectors other than profit-oriented entities is unlikely in the next five years.

4.13 I discussed these matters directly with the Chairman of the IASB, Sir David Tweedie, and the Director of Technical Activities, Elizabeth Hickey. Sir David advised that while the IASB does not have a policy on sector-neutrality, he personally is very much in favour of a sector-neutral approach to accounting standard-setting internationally in the medium to long term. However he reiterated that resource constraints meant that any consideration of entities other than profit-oriented entities would not occur for a minimum of five years.

The IPSASB

4.14 IFAC is the world-wide organisation for the accountancy profession. Its mission is to serve the public interest, strengthen the global accountancy profession and contribute to the development of strong international economies by establishing and promoting adherence to high quality professional standards, furthering the international convergence of such standards, and speaking out on public interest issues where the profession’s expertise has most relevance.

4.15 The IPSASB is a board of IFAC which develops IPSAS. These standards set out requirements for financial reporting by governments and other not-for-profit public sector entities. These standards apply to general purpose financial statements prepared on the accrual basis of accounting. There is also a single comprehensive standard that applies to the cash basis of accounting.

4.16 As noted in paragraph 4.9 above, IPSAS do not apply to government business enterprises. Government business enterprises apply IFRS issued by the IASB.

4.17 The IPSASB acknowledges the right of governments and national standard-setters to establish accounting standards and guidelines for financial reporting in their jurisdictions. However IPSASB believes that adoption of IPSAS will lead to a significant improvement in the quality of general purpose financial reporting by public sector entities in many jurisdictions. IPSAS are also likely to be of considerable use to jurisdictions that have not yet developed accounting standards for governments and public sector entities. The IPSASB strongly encourages the adoption of IPSAS and the harmonisation of national requirements with IPSAS (refer to paragraphs 25 to 28 of the Preface to International Public Sector Accounting Standards).

4.18 The IPSASB has adopted an approach whereby the requirements of its standards which deal with topics that are dealt with by IFRS differ from their IFRS counterparts only where there is a public sector reason for a difference. This approach has been followed since IPSAS were first developed in 1997. The IPSASB is continuing an ongoing programme of convergence with IFRS. The IPSASB is currently also addressing a number of issues that are public sector specific or of particular significance to not-for-profit public sector entities. These issues include accounting for social policy obligations, accounting for heritage assets, presentation of budget information in Financial Statements and accounting for non-exchange revenues (including taxes and transfers). In relation to each of these topics, it is likely that in due course IPSASB will issue standards which do not have an IASB counterpart.

4.19 It should be noted that the Board of IFAC, in a letter to the IASC Foundation of 11 February 2004, was another of the parties who encouraged the IASB to set international financial reporting standards that could be applied on a global basis to all types of enterprise.²⁸

4.20 In response to a question about whether there are any current developments which would lead to changes in the approach at an international level to establishing reporting requirements for different sectors, IPSASB has drawn attention to the joint project between the IASB and the FASB to revise and converge their respective conceptual frameworks for the preparation and presentation of financial statements. The IPSASB has raised some concerns with the current direction of the revisions and their implications for the public sector. Specifically it has noted that its IFRS convergence programme may be adversely affected, and that differences between public and private sector standards may become more pronounced if the IASB Framework is amended to reflect the proposed revisions and the IFRS are subsequently amended to ensure consistency with the revised framework.

Government Finance Statistics

4.21 The IPSASB has, in recent years, worked actively with the International Taskforce on the Harmonisation of Public Sector Accounting (“TFHPSA”) to identify differences between IPSAS and bases of financial reporting used for statistical purposes and to propose amendments to the next revision of the System of National Accounts (“SNA”) due for issue in 2008.

4.22 The IPSASB has issued ED 28 Disclosure of Financial Information about the General Government Sector²⁹ as a bridge between general purpose financial statements and statistical basis financial statements. This exposure draft followed on from the IPSASB Research Report International Public Sector Accounting Standards (IPSASs) and Statistical Bases of Financial Reporting: An Analysis of Differences and Recommendations for Convergence.

4.23 The IPSASB Research Report explained that the two different bases of financial reporting have different objectives, are focused on different reporting entities and treat some transactions and events differently. However it also notes that the two bases of financial reporting deal with similar transactions and events and have many similarities in the treatment of those transactions and events and, in some cases, have a similar type of report structure. The IPSASB has indicated that in some jurisdictions the disclosure of information about the General Government Sector can support and enhance the decision-making of, and accountability to, users of general purpose financial statements³⁰

4.24 IFAC has advised that whilst specific arrangements have not yet been finalised, it is anticipated that liaison between the accounting and statistical communities through the IPSASB and the successor to the TFHPSA will be maintained, with the objective of ensuring that unintended differences between accounting and statistical bases of financial reporting do not arise. They consider this is in the interests of users and preparers of public sector financial reports.

Users and their information needs – IASB and IPSASB

4.25 Paragraph 9 of the IASB’s Framework for the Preparation and Presentation of Financial Statements (“IASB Framework”) states that the users of financial reports include present and potential investors, employees, lenders, suppliers and other trade creditors, customers, governments and their agencies and the public. The different information needs of these users are discussed.

4.26 The IASB Framework explains that while all the information needs of these users cannot be met by financial reports there are needs which are common to all users. As investors are providers of risk capital to the entity, the provision of financial reports that meet their needs will also meet most of the needs of other users that financial reports can satisfy.

4.27 Users of general purpose financial reports are identified in paragraph 14 of the Preface to International Public Sector Accounting Standards. This gives examples of such users as citizens, voters, their representatives and other members of the public.

4.28 IPSAS 1 Presentation of Financial Statements also identifies users and elaborates on the broad categories identified in the Preface. IPSAS 1 also discusses the needs of those users.³¹

4.29 The need for users to receive information about the financial position, performance and cash flows of an entity is common between the IASB and IPSASB. However IPSASB places a greater emphasis on the demonstration of accountability by the entity as well as on the following:

• Provision of aggregate information useful in evaluating an entity’s performance in terms of service costs, efficiency and accomplishments;
• Indicating whether resources were obtained and used in accordance with the legally adopted budget; and
• Indicating whether resources were obtained and used in accordance with legal and contractual requirements, including financial limits established by appropriate legislative authorities.

4.30 IPSAS 1 also encourages inclusion in financial statements of a comparison with the budgeted amounts for the reporting period, where the financial statements and the budget are on the same basis of accounting. This has been taken further in the recent ED 27: Presentation of Budget Information in Financial Statements.

Implications of the international standard-setting scene for Australia

4.31 Consistent with the first FRC strategic direction, the foundation standards on which Australian accounting standards are being based are IFRS. Those standards are developed with regard only to profit-oriented entities.

4.32 As discussed in the preceding section, the IPSASB considers that there are a different set of users of public sector financial reports and that the information needs of those users differ in some important respects from the users identified by the IASB. These users and their different information needs are not considered by the IASB and this suggests that the needs of some other users need to be considered by the AASB in seeking to adapt IFRS to apply to public sector entities.

4.33 For some years there has been, in the minds of some, an expectation that there would be a trend towards sector-neutral standards internationally under IASB leadership.³² It is clear from the comments of the IASB Chairman that this will not occur in the next five years.

4.34 A decision to move in this direction would need to be accompanied by significant changes in the membership and staffing of the IASB and in its processes as well as perhaps also in the Trustees of the IASC Foundation (a point made in the FRC letters which commented on the IASC Foundation Constitution Review – see paragraph 4.10). It seems highly unlikely that the extent of change necessary to enable the IASB to develop standards for not-for-profit entities, whether or not including public sector entities, could occur in anything less than a decade and, in all probability, far longer.

4.35 I note also the reservations expressed by IPSASB in relation to the apparent direction of the conceptual framework project being pursued by the IASB and FASB (see paragraph 4.20). It is anticipated that the first due process document in that project will be issued at the end of June 2006 and will comprise Preliminary Views on a new Objective for General Purpose Financial Reporting as well as new Qualitative Characteristics of such financial reporting.

4.36 A number of national standard-setters are monitoring the work of the IASB and FASB³³ and are noting that, from the perspective of the IASB, the new conceptual framework material is more specifically targeted towards profit-oriented entities than the existing Framework. This will create significant challenges for those standard-setters (such as the AASB) developing standards and other documents based on IFRS for a broader range of entities.

4.37 The IPSASB has itself recently decided to initiate a conceptual framework project, something it has considered on a number of occasions but previously decided against pursuing. It seems highly likely that any IPSASB framework will differ in a number of important respects from that emerging from the IASB/FASB project. This will raise a significant strategic issue for the AASB and other standard-setters who have a broader mandate than profit-oriented entities only.

4.38 Another implication for national standard-setters with broad mandates from the international standard-setting environment arises from the likelihood of increasing differences between the standards of the two international bodies. A topical example will illustrate this. Following a lengthy development process, IPSASB has recently issued an exposure draft on accounting for non-exchange transactions. This is a crucial topic for both public sector and other not-for-profit entities because revenue of these entities is primarily not earned in exchange transactions. IASB has a standard dealing with Revenue which is written in an exchange transaction context and IPSASB has an equivalent of the IASB standard³⁴ expressly limited to exchange transactions. A review of IPSASB’s exposure draft has highlighted the difficulty in demarcation between the different types of revenue transaction. It is not uncommon for transactions to include both exchange and non-exchange components and ensuring the appropriate accounting treatments apply is not easy. The IASB also has a standard on accounting for government grants³⁵ which is outdated and widely viewed as needing urgent revision. However the IASB has recently deferred work on this standard. It seems likely that a significant difference will emerge between the provisions applying to profit-oriented and public sector not-for-profit entities internationally. While Australia already has a sectoral difference on this topic, international differences seem likely to create new challenges for the AASB.

4.39 Another issue for national standard-setters with broad mandates is emerging from the work of the International Financial Reporting Interpretations Committee (“IFRIC”). That committee has been considering issues related to service concessions (aspects of public private partnership arrangements). However it is addressing those issues only from the perspective of the private sector partner. This creates a risk that the treatment by public sector participants in these arrangements may not be consistent with those prescribed for the profit-oriented participants. A further concern is that the accounting treatment required by IFRIC may not be the most appropriate treatment if the accounting on the “other side” of the transaction has not been fully considered. Standard-setters with responsibility for all participants in these arrangements may not be able to ignore the “other side” of the arrangements.

4.40 The developments described above are contributing to make the task of a national standard-setter with responsibility to set standards for all entities in its jurisdiction increasingly difficult.

Part 5 – Standard-setting Approaches and Structures in Selected Countries

5.1 In this part the way in which accounting standards are set for different sectors in four countries is examined and where standard-setting may be heading in those countries. The information reported here has been based on material provided by representatives of the relevant bodies in the countries concerned. None of the views reported are official positions of the standard-setting bodies – official positions are only determined after extensive due process and deliberations.

New Zealand

5.2 New Zealand is a close neighbour of Australia and there have traditionally been close ties between the two countries. The Closer Economic Relations (CER) Framework has been in place between the two countries since 1983. In the context of this Framework, the Australian Treasurer and the New Zealand Minister of Finance announced on 30 January 2004 the formation of the Trans-Tasman Accounting Standards Advisory Group.

5.3 The overriding role of the Trans-Tasman Accounting Standards Advisory Group is to advise the respective governments and accounting standard-setters on ways to reduce business costs and improve efficiency through identifying inconsistencies in the accounting standard-setting frameworks and assisting the move to a single approach to accounting standard-setting to apply in both jurisdictions.³⁶

Standard-setting bodies

5.4 New Zealand has two accounting standards bodies – the Accounting Standards Review Board (“ASRB”) and the Financial Reporting Standards Board (”FRSB”).

5.5 The ASRB was established and is empowered under the Financial Reporting Act 1993 (“FRA”). The primary role of the ASRB is to review and, if it thinks fit, approve financial reporting standards which are submitted to it, for application to the financial statements required to be prepared by reporting entities³⁷, groups, local authorities, council controlled organisations, state-sector bodies and other entities in accordance with the FRA, the Local Government Act 2002, the Public Finance Act 1989 or any other enactment that requires the person to comply with the FRA as if that person were a reporting entity.

5.6 The FRSB is a national committee of the New Zealand Institute of Chartered Accountants (“NZ Institute”). The Executive Board of the NZ Institute approves the Constitution and appoints the members of the FRSB.

5.7 The FRSB develops financial reporting requirements for reporting entities in the profit-oriented sector, the public sector and the other not-for-profit sector. The FRSB develops standards, including undertaking a due process, and submits proposed standards (and other pronouncements) to the ASRB for approval.

5.8 Section 25 of the FRA provides that the NZ Institute (in practice the FRSB) or any other organisation or person may, from time to time, submit financial reporting standards, or amendments to financial reporting standards, to the ASRB for approval. To date, all standards approved by the ASRB have been submitted to it by the FRSB.

Reporting requirements for different sectors

5.9 Most profit-oriented entities in New Zealand operate as companies. Companies are subject to the requirements of the FRA which requires them to prepare financial statements within specified time periods.

5.10 Except for exempt companies, all companies and other issuers of securities under the Securities Act 1978 must comply with generally accepted accounting practice in preparing their financial statements. Compliance with generally accepted accounting practice (“NZ GAAP”) requires that entities:

• Comply with financial reporting standards approved by the ASRB; and
• Where there is no applicable financial reporting standard or rule of law, follow accounting policies that are appropriate to the circumstances of the reporting entity and have authoritative support within the accounting profession in New Zealand.

5.11 Exempt companies are a category of small stand-alone company which have less onerous reporting obligations. As size is not a focus of this review, exempt company requirements are not discussed further.

5.12 Profit-oriented entities in the public sector are almost all either state-owned enterprises or council controlled trading organisations.³⁸ These entities are required by the State-Owned Enterprises Act 1986 and the Local Government Act 2002 to comply with NZ GAAP (as defined above).

5.13 Public sector not-for-profit entities include the Government of New Zealand, government departments, crown entities, local authorities and council controlled organisations which do not trade. All of these entities are required by the Public Finance Act 1989 or Local Government Act 2002 to comply with NZ GAAP.

5.14 There are other types of organisation with particular characteristics whose own Acts require them to comply with the FRA as if they were reporting entities under that Act.

5.15 The statutory reporting responsibilities of not-for-profit entities in the private sector are less clear. A Charities Commission was recently established under the Charities Act 2005 and while that body has indicated that it will require financial information to be provided to it and made available to the public, it has not as yet specified the form of that reporting.

5.16 Not-for-profit entities which are not charities may be established under a range of other Acts including the Incorporated Societies Act 1908 and the Industrial and Provident Societies Act 1908. These statutes include specific reporting requirements, without any obligation to comply with NZ GAAP.

5.17 It is appropriate also to note that where there are no specific legislative requirements relating to financial reporting of not-for-profit entities, the NZ Institute requires its members who are involved in, or have responsibility for the preparation or presentation of general purpose financial reports, to take all reasonable steps within their power to ensure that NZ GAAP is complied with.³⁹

How are standards set for different sectors?

5.18 Since 1992, New Zealand has followed a policy of issuing a single set of standards which have been applicable to all entities.

5.19 As part of the decision to adopt IFRS in New Zealand, the ASRB decided that there should continue to be one set of standards for application by all entities. However it was recognised that as IFRS are developed for application only by profit-oriented entities, it would be necessary to introduce some additional or modified requirements to enable broader application of the standards.

5.20 The ASRB set out in its Release 8 (paragraph 27) the guidelines to be observed in adapting an IFRS for issue as a New Zealand IFRS. These guidelines are:

• The disclosure requirements of the IFRS cannot be reduced for profit-oriented entities;
• Additional disclosure requirements can be added for all entities;
• Recognition and measurement requirements in an IFRS cannot be amended for profit-oriented entities;
• Recognition and measurement requirements can be amended for public benefit entities, with a rebuttable presumption that amendments are based on existing IPSAS or existing FRS⁴⁰ as applicable;
• Guidance materials may be added based on the same principles as applying to the addition of recognition and measurement requirements as outlined above; and
• Where an IFRS contains alternative permissible treatments, the ASRB may determine that only one option can be applied to be able to comply with NZ GAAP.

5.21 Where New Zealand equivalents to IFRS contain additional requirements for the purpose of meeting NZ GAAP, these are clearly identifiable within the text and distinguishable from the IFRS on which the New Zealand equivalent has been based. In practical terms this has been done, in a similar way to that adopted in Australia, by inclusion of “NZ” paragraphs in shaded boxes.

5.22 As part of its implementation of the ASRB’s guidelines, the FRSB has introduced the term “public benefit entities” (“PBEs”). These are entities whose primary objective is to provide goods or services for a community or a social benefit and where any equity has been provided with a view to supporting that primary objective rather than for the financial return to equity shareholders. The FRSB has recently issued guidance to assist in the determination of which entities are in fact PBEs. In general terms, PBEs are the equivalent of “not-for-profit entities” in Australian Accounting Standards.⁴¹

5.23 The development of financial reporting requirements for PBEs is still evolving. However the most common approach is to include additional requirements, alternative requirements or exemptions from requirements in a shaded box within a particular standard. The text specifies whether the requirements apply to PBEs, all entities or all entities qualifying for differential reporting.⁴²

5.24 Other approaches that the FRSB has advised it is likely to consider in establishing requirements for different sectors include:

• Development of standards applicable only to a particular sector. For example, this is a possibility that may be considered in the context of developing financial reporting requirements applicable to PBEs for accounting for revenue from non-exchange transactions; and
• Development of guidance applicable only to a particular sector. Such guidance may be in the form of application guidance attached to a particular standard or it may be a separate pronouncement, for example guidance on financial reporting by other not-for-profit entities.⁴³

Reasons for different requirements

5.25 The approach of the FRSB is to focus on the nature of the transactions or events and users’ information needs in respect of those transactions and events. There are frequently no differences in the requirements between the sectors.

5.26 However, in some cases, New Zealand equivalents to IFRS do include different requirements for different sectors. The general reason for these differences arises from the fact that IFRS are developed solely from a profit-oriented perspective. IFRS therefore do not necessarily:

• Consider transactions in other sectors; or
• Consider transactions from the point of view of other sectors.

5.27 In 2005, the FRSB established a PBE Working Group⁴⁴ to assist in consideration of financial reporting issues affecting PBEs. The following criteria have been established by the FRSB to guide the work of the PBE Working Group and, in particular, to assist in identifying circumstances where additional guidance or reporting requirements may be necessary or where different reporting requirements may be appropriate for PBEs:

• Where following an international accounting standard will represent an inappropriate loss of accountability to stakeholders;
• Where the IASB has not dealt with a particular issue or has only addressed an issue in a perfunctory manner and the issue is particularly relevant to PBEs. (For example, inventory that an entity intends to distribute at no charge, donated assets, impairment of non-cash generating assets, social policy obligations);
• Where compliance with a particular standard would be inappropriate in New Zealand because of other regulatory requirements. (For example, service performance reporting requirements negating the need for segment reporting, financial year definitions in statute overriding the IFRS conventions regarding subsidiaries harmonisation of reporting dates with parents); and
• Where, subject to a rebuttable presumption that overall costs for complying with standards will not differ between profit-oriented entities and PBEs, the costs of complying with a particular treatment exceed the benefits to stakeholders of doing so. (For example, related party transactions conducted at arms length between government entities, individual asset revaluations, and the requirement to disclose the historical cost of revalued assets).

5.28 While neither the ASRB nor FRSB has published a strategy or policy on sector-neutrality, the general approach of both boards is that there will be a presumption of common requirements unless there are reasons that that is inappropriate (as evidenced in ASRB Release 8 and the New Zealand Preface).

Users and their information needs

5.29 The identification of users and discussion of their core information needs is found in the New Zealand equivalent to the IASB Framework for the Preparation and Presentation of Financial Statements (“NZ Framework”). The users identified are the same as those in the IASB Framework (and in fact the AASB Framework) namely investors, employees, lenders, suppliers and other trade creditors, customers, governments and their agencies and the public. However the NZ Framework (paragraph 9.1) also identifies additional users and outlines their information needs. The additional users are funders or financial supporters (for example, tax payers and donors) and elected or appointed representatives.

5.30 Funders or financial supporters provide a source of cash and/or resources that does not generate a direct return and is not provided in exchange for direct benefits. Funders and financial supporters are interested in the quality of the goods and services produced and whether the goods and services were produced in accordance with relevant contracts or agreements. They are also interested in information about the continuance of an entity, such as its sustainability, flexibility and vulnerability.

5.31 Elected or appointed representatives such as members of parliament and local authority councillors represent their respective constituencies. These users use financial information to assess an entity’s actual achievement against its formal objectives and targets and hold entities accountable for their performance. They are likely to use financial statements in conjunction with non-financial information.

Mechanisms to ensure different user needs are taken account of

5.32 The FRA requires the Minister to appoint ASRB members who have a background in at least one of business, accounting, finance, economics or law. In addition the Crown Entities Act 2004 (the ASRB is a crown entity under New Zealand legislation) requires that an appointee must have appropriate knowledge, skills and experience for the position and the Minister must take into account the desirability of promoting diversity in the membership of the board. The Crown Entities Act criteria are not to be read as being limited by the FRA criteria.⁴⁵ As noted earlier, members of the FRSB are appointed by the Institute’s Board. In making appointments to the FRSB, the Board places primary emphasis on the professional qualities of appointees. However the Board is also mindful that the quality of the FRSB functions may be served best by ensuring that those skills and qualities are drawn from as wide a range of users, preparers and auditors of financial reports and from different sectors as is reasonably practical. The Board has set a guide for determining the composition of the FRSB.

5.33 At the present time, the guide for determining the composition of the FRSB is that:

a) Not more than half shall be members of the NZ Institute in public practice;

b) Not less than two shall be employed in management or industry;

c) Not less than two shall be employed in the public sector; and

d) Not less than one shall be an academic.⁴⁶

5.34 The ASRB requires all persons or organisations submitting standards to it for approval⁴⁷ to consult with persons or organisations likely to be affected by the proposed standard, or representatives of such persons or organisations, and will, if it thinks fit, consult with any such person or organisation itself. The ASRB considers that its role is primarily to ensure that the needs of different users have been considered during the process rather than that it itself will consider the needs of different users.

5.35 The FRSB uses other mechanisms to increase the likelihood that the needs of different users are taken account of appropriately. These mechanisms include:

• Working groups with relevant sector participation (for example the PBE Working Group established recently);
• Observers from both the IASB and the IPSASB attending and participating at FRSB meetings; and
• Consultation with relevant sector groups where necessary.

5.36 The PBE Working Group includes representatives from central government, local government, public sector auditors, not-for-profit entities, Big 4 accounting firms, independent advisors and academia.

5.37 The FRSB is also considering how its processes and interaction with constituents could be improved to ensure views of the various constituent groups are considered during the development of financial reporting standards in New Zealand.⁴⁸ Possible approaches could include:

• Actively targeting constituents likely to be affected by proposed new or revised standards;
• Holding round-table discussions with constituents to solicit feedback on proposed new and revised standards;
• Educating constituents on the likely impact of proposed new and revised standards, on the role of the ASRB and FRSB, and how to contribute to standard-setting; and
• Building relationships with relevant industry and professional groups.

Current or future developments in standard-setting for different sectors

5.38 The New Zealand Government is currently reviewing the FRA. This review may affect which entities are required to prepare general purpose financial reports. Specifically, officials have been asked to report to the Minister of Finance on financial reporting by charities registered under the Charities Act 2005 by 30 November 2006.

5.39 The Charities Commission is considering what financial reporting requirements charities will be required to comply with for the purposes of registering as a charity in New Zealand over the next 18 months. No requirements have been specified at the time of this report. A Task Force commissioned by the NZ Institute has just released a Report which raises a number of issues relating to financial reporting by not-for-profit entities, including an Appendix detailing the issues the Task Force considers need to be addressed.⁴⁹

5.40 The ASRB and FRSB advise that the IASB/FASB Conceptual Framework project may have implications for New Zealand. Given the responsibilities of the ASRB and FRSB to develop financial reporting requirements for public sector entities and other not-for-profit entities as well as profit-oriented entities, the implications of the project will need careful consideration.

Strengths and weaknesses of the current approach

5.41 The ASRB and FRSB have advised a number of strengths and weaknesses of the current approach to establishing reporting requirements for different sectors in New Zealand.

5.42 The strengths of the current approach are considered to include:

• Maintenance of a single body of standards means that similar transactions are accounted for in a similar manner regardless of the sector in which they occur therefore providing more relevant, reliable and consistent information to users;
• The approach is efficient in the sense that duplication is avoided by having only one standard-setting infrastructure;
• More robust standards are developed because they are developed and tested against a wider range of transactions and events;
• There is cross-sector fertilisation of ideas;
• The profile of the importance of good financial reporting has been raised in all sectors;
• The approach avoids or minimises unnecessary differences in financial reporting requirements developing between the sectors⁵⁰;
• All entities have a “one stop shop” for financial reporting standards as do auditors who are more easily able to undertake audits across all sectors; and
• The similarities with the approach of the AASB contributes to Trans-Tasman harmonisation.

5.43 On the other hand, the weaknesses in the current system are considered to include:

• There are situations where because IFRS are developed only with profit-oriented entities in mind, IFRS requirements for certain sectors may not be appropriate. This means that additional or alternative guidance or requirements need to be developed;
• There is a perception that standards based on IFRS lack relevance for PBEs;
• There is a tendency towards minimal change in the standards because of the risks of offending the ability of profit-oriented sector entities from asserting compliance with IFRS. In some cases it could be argued that this may result in less than optimal reporting requirements for all reporting entities.

Government Finance Statistics in New Zealand

5.44 The ASRB and FRSB have advised that there is a limited relationship between general purpose financial reporting and the GFS system in New Zealand. It is generally accepted in New Zealand that the information provided under GAAP and the GFS system are prepared for different purposes.

5.45 In addition in New Zealand the Government prepares prospective financial statements (consistent with its budget) using the same accounting policies as are adopted in its general purpose financial report. This differs from other jurisdictions where governments sometimes adopt GFS as the basis for preparation of their budgets.

5.46 The ASRB and FRSB are monitoring the IPSASB and AASB projects in relation to GFS and the General Government Sector.

Canada

Standard-setting bodies

5.47 Canada has two accounting standard-setting boards – the Accounting Standards Board (“AcSB”) and the Public Sector Accounting Board (“PSAB”).

5.48 The AcSB is responsible to develop Canadian generally accepted accounting principles (“Canadian GAAP”) for profit-oriented enterprises and not-for-profit organisations in the private sector.

5.49 The PSAB is responsible for setting accounting standards for the public sector in Canada. The PSAB has decided that:

• government business enterprises should follow Canadian GAAP as established by the AcSB; and
• government not-for-profit organisations that have an equivalent in the private sector should comply with not-for-profit standards as set by the AcSB but that their financial statements must be restated for consolidation in the government’s consolidated financial statements.⁵¹

Reporting requirements for different sectors

5.50 In excess of 120 separate federal and provincial laws (primarily corporation and securities legislation) mandate the use of Canadian GAAP for financial reporting by corporations and not-for-profit organisations. Moreover, they define Canadian GAAP as the standards issued by the AcSB and as included in the Canadian Institute of Chartered Accountants’ Handbook. The securities legislation in Ontario and the Canadian Business Corporations Act allow corporations that are SEC registrants to file and issue their statements in accordance with US GAAP.

5.51 The governments of British Columbia and territories of Nunavut and Yukon are required to follow GAAP set by the PSAB. Other governments are not so required but the extent of voluntary compliance is reported as outstanding. The Auditors-General of the provinces have agreed that they will require compliance with GAAP set by PSAB before issuing a “clean” audit opinion. The provincial governments of Ontario, Manitoba (a rural Act only), Saskatchewan, Alberta and British Columbia require municipalities in their provinces to follow GAAP set by the PSAB. It is anticipated that the remaining provinces will follow this trend by 2007.

5.52 There is some confusion in respect of the reporting requirements for First Nations, the Canadian aboriginal people. A government department prescribes financial reporting requirements for grants and contributions made to them. However there is some uncertainty as to the standards that First Nations should follow. A PSAB commissioned study is expected to resolve this in the next year or so.

How are standards set for different sectors?

5.53 As noted above, Canadian GAAP for profit-oriented enterprises and not-for-profit organisations in the private sector is set by the AcSB. While the base standards are developed for profit-oriented entities, modifications or additions are made for not-for-profit organisations where this is considered appropriate. There are a number of standards that deal with unique characteristics of not-for-profit organisations.

5.54 The PSAB develops and publishes a separate set of standards for public sector entities.

5.55 It should be noted that both Canadian boards are supported by staff of the Canadian Institute of Chartered Accountants with all staff reporting to the Vice-President, Standards. Accordingly there is a degree of coordination amongst the staff, although the boards themselves have to date operated substantially independently.

Reasons for different requirements

5.56 The underlying reason for differences in the requirements for different sectors is the view that there are a number of differences between governments, profit-oriented enterprises and other not-for-profits and that one set of standards does not necessarily fit all sectors.

5.57 The PSAB has set out the unique characteristics of government in Appendix A to Section PS 1100 financial statement objectives – federal, provincial and territorial governments. Some of these characteristics are that:

• Government’s goal is to provide services and redistribute resources, not make a profit;
• Most government tangible capital assets are different in nature than those held by business;
• Government capital spending may not focus on maximising financial return because government objectives are broader;
• The principal source of revenue for governments is taxation;
• Governments operate in a non-competitive environment;
• A government’s budget portrays public policy, establishes estimates of revenue, expenditure and financing requirements and is an important part of the government accountability cycle; and
• Governments are held to a higher standard of accountability than a business or a not-for-profit organisation.

5.58 While neither of the Canadian boards has set out a strategy or policy on sector-neutrality, their policy is implicit in the structural arrangements which are in place.

Users and their information needs

5.59 The AcSB have identified the users of financial reports of profit-oriented enterprises as present and potential debt and equity investors and their advisors, creditors and others who do not have internal access to entity information. Because it is not practical to expect financial statements to satisfy the many and varied information needs of all external users of information about an entity, the AcSB’s objective of financial statements focuses primarily on the information needs of investors and creditors.

5.60 In the case of not-for-profit organisations, the AcSB has identified members, contributors, creditors and others who do not have internal access to entity information as the users. The primary focus is on members, contributors and creditors.

5.61 Investors and creditors of profit-oriented enterprises are interested, for the purpose of making resource allocation decisions, in predicting the ability of the entity to earn income and generate cash flows in the future to meet its obligations and to generate a return on investments.

5.62 Members, contributors and creditors of not-for-profit organisations are interested, for the purpose of making resource allocation decisions, in the entity’s cost of service and how that cost was funded and in predicting the ability of the entity to meet its obligations and achieve its service delivery objectives.

5.63 Investors, members and contributors also require information about how the management of an entity has discharged its stewardship responsibility to those who have provided resources to the entity. This information is especially important in the not-for-profit sector where resources are often contributed for specific purposes and management is accountable for the appropriate utilisation of such resources.⁵²

5.64 The PSAB has identified the users of government financial statements as the public, legislators, investors and analysts.

5.65 Legislatures and governments are accountable to the public, who provide the revenues and resources necessary for government operations, who receive government services and who are the beneficial owners of the public money and property for which legislatures and governments are responsible.

5.66 As elected representatives of the public, legislatures are primary users of government financial statements. Legislatures grant authority to the government to administer public resources and financial affairs and hold the government accountable for its financial administration.

5.67 Investors in government securities and enterprises provide financial resources and government has an interest in providing information to them which is useful to them in evaluating its ability to finance its activities and to meet its liabilities and contractual obligations. Economic and financial analysts serve legislatures and investors and other interested parties using financial statements and other information to analyse and evaluate financial issues.⁵³

Mechanisms to ensure different user needs are taken account of

5.68 The needs of different users are primarily addressed by having separate boards with members who are familiar with both the needs and requirements in the particular sectors.

5.69 In the case of the not-for-profit entities subject to the standards of the AcSB, a Not-for-profit Organisations Advisory Committee has been established which normally meets 3 to 4 times a year. A designated staff member has responsibility for the work of the committee. The mission of this committee is to serve the interests of the public and the profession by providing input to the standard-setting process concerning financial reporting by not-for-profit organisations. Specifically its responsibilities are:

• To advise the AcSB and its staff on actual or potential problems relating to financial reporting by not-for-profit organisations and recommend new projects when warranted;
• To review project proposals to identify whether a new project is likely to pose particular problems for not-for-profit organisations and to suggest ways of dealing with any issues;
• To provide advice to the AcSB during the development of discussion papers, statements of principle and exposure drafts from a not-for-profit perspective;
• To assist in the development of guidance for not-for-profit organisations in implementing accounting standards;
• To act as an expert resource for the AcSB and its staff in dealing with specific accounting issues having implications for not-for-profit organisation; and
• To assist the AcSB in keeping the users, preparers and auditors/reviewers of the financial information about not-for-profit organisations informed about the Board’s activities and, in particular, making known proposed final standards potentially having a significant effect on not-for-profit organisations and the rationale for the requirements of those standards.

Current or future developments in standard-setting for different sectors

5.70 While there are no changes proposed to the current Canadian structure and no other changes being contemplated specifically related to the different sectors, a recent significant decision of the AcSB may have downstream consequences.

5.71 The AcSB adopted a new strategic plan on 4 January 2006: Accounting Standards in Canada: New Directions. The AcSB will pursue separate strategies for each of three major categories of reporting entities - publicly accountable enterprises, non-publicly accountable enterprises and not-for-profit organisations. The AcSB considers that “one size does not necessary fit all”.⁵⁴ It considers each category of entity deserves a strategy that specifically addresses the particular needs of the users of financial statements of entities in that category, even though the outcomes of some of the strategies may be the same or similar for all categories.

5.72 In relation to publicly accountable enterprises, the strategy is to converge Canadian GAAP with IFRS over a transitional period of approximately five years. Publicly accountable enterprises are public companies plus some other classes of enterprise that have relatively large or diverse classes of financial statement user.⁵⁵

5.73 In relation to non-publicly accountable enterprises, the AcSB will undertake a comprehensive examination of the needs of the users of these enterprises’ financial statements, and then determine and implement the most appropriate financial reporting model to meet those needs. Non-publicly accountable enterprises are all profit-oriented entities that are not publicly accountable⁵⁶.

5.74 Not-for-profit organisations will continue to apply those elements of Canadian GAAP for profit-oriented enterprises that are applicable also to their circumstances. The AcSB will consult with the not-for-profit sector to determine whether all not-for profit organisations should base their accounting on the standards for publicly accountable enterprises, or whether the approach applied to non-publicly accountable enterprises should also be applied to some not-for-profit organisations.

5.75 The AcSB has said in its published strategic plan that:

“Trying to be “all things to all people” in a single set of accounting standards might result in serving no-one adequately. Accordingly the AcSB will consider the need for separate bases of financial reporting for the major categories of reporting entities. The categories reflect the characteristics of the users and the uses of financial statements in each sector. The AcSB believes that by focusing on the particular needs of the sector for which each basis of financial reporting is designed, the result will be financial information that is more useful and cost-effective to that sector.”⁵⁷

5.76 The AcSB also reports that one of the principal concerns of respondents to its proposals when published in 2005 was that essentially the same transaction, event or circumstance might be treated differently in the financial statements of different entities.⁵⁸ The AcSB notes that the comparability of financial information is significant only when the information is relevant to financial statement users. Consistent reporting by all entities of irrelevant information is of no benefit to the users of financial statements and therefore does not enhance financial reporting. The issue is determining which pieces of information are useful to the users of all entities’ financial statements, and which are useful only to the users of some entities’ financial statements. Differing cost/benefit tradeoffs for different types of entities also enter into consideration of which requirements ought to apply to which entities.⁵⁹

5.77 The AcSB has also noted that some significant types of not-for-profit organisations fall within the public sector, and that the PSAB has currently directed them to apply the AcSB standards.⁶⁰ The AcSB has stated that it will take some steps to improve the consistency of its own standards applicable to not-for-profit organisations with the standards set by the PSAB, as well as coordinating activities with the PSAB on issues affecting public sector not-for-profit organisations.⁶¹

5.78 The AcSB believes that when the transactions, events or circumstances to be accounted for by not-for-profit organisations are essentially the same as transactions, events or circumstances to be accounted for by profit-oriented enterprises, the same standards should apply to all reporting entities. However it may be necessary for the AcSB to provide application guidance that is specific to not-for-profit organisations to ensure appropriate application of standards to them. When the transactions, events or circumstances to be accounted for by not-for-profit organisations are unique to that sector, the AcSB may need to provide standards specifically for that sector. The number of such unique transactions, events and circumstances is expected to be limited.⁶²

5.79 When the AcSB incorporates IFRS into Canadian GAAP, it will add any necessary application guidance for the specific circumstances of not-for-profit organisations as well as addressing the unique transactions, events and circumstances of not-for-profit organisations. In supplementing IFRS in this way, the AcSB has indicated it will look to corresponding standards developed in other countries that have adopted IFRS and applied similar standard-setting approaches to not-for-profit organisations.⁶³

5.80 In discussions with the Chairman of the AcSB and the Vice President, Standards of the CICA in March 2006, both acknowledged that the not-for-profit sector had not been given a high priority in Canada over many years. Both consider greater attention is needed to not-for-profit organisation’s issues.

5.81 It was also noted that there had been discussion in Canada about whether not-for-profit requirements would be better addressed if considered together with those for public sector entities by the PSAB. However there is no active proposal to make any change along these lines.

5.82 Finally the PSAB plans to reconsider its current position that government business enterprises and government not-for-profit organisations that have an equivalent in the private sector should follow standards set by the AcSB.⁶⁴

Strengths and weaknesses of the current approach

5.83 The major strength of the current structure is considered to be that the standards are set by those who have knowledge of the issues relevant to the different types of entity and are affected by them. In the Canadian environment that is considered of paramount importance, because the standard-setting boards derive a degree of acceptance from it that would not exist otherwise.

5.84 The main weakness is considered to be the tendency of the boards to “go their different ways” sometimes for unsupportable reasons. However it is considered easier to mitigate that weakness than to compensate for the lack of acceptance by the wider financial reporting community.

5.85 The existence of two separate boards is acknowledged to arise primarily from historical events and stimuli. Specifically, in 1980, the AcSB’s reluctance to include governments within the scope of the CICA Handbook requirements led to the creation of a separate board to concentrate on governments.

Government Finance Statistics in Canada

5.86 The PSAB has considered the relationship between GAAP and GFS and concluded that the national accounts are so fundamentally different, particularly in relation to their objectives, as to make it pointless to attempt to harmonise the two.

5.87 The GFS/GAAP harmonisation debate, to the extent there has been any, has taken place at the federal level in Canada. A federal department is responsible for developing the national accounts. Provincial governments do not generally get involved in the preparation of GFS other than completing statistical returns for Statistics Canada.

United States of America

Standard-setting Bodies

5.88 There are three standard-setting bodies in the United States of America (USA) – the Financial Accounting Standards Board (“FASB”), the Governmental Accounting Standards Board (”GASB”) and the Federal Accounting Standards Advisory Board (”FASAB”).

5.89 The FASB promulgates generally accepted accounting principles (“US GAAP”) for all nongovernmental entities in the USA, including nongovernmental not-for-profit organisations. The GASB promulgates GAAP for all state and local government entities in the USA, including Native American Tribes and governmental not-for-profit organisations. The FASAB promulgates GAAP for the federal government.

Reporting Requirements for Different Sectors

5.90 The Securities and Exchange Commission (“SEC”) has statutory authority to establish financial accounting and reporting standards for publicly-held companies. However, since 1973 when the FASB was established the SEC has designated the FASB as the private sector organisation responsible for establishing standards for financial accounting and reporting. Those standards govern the preparation of financial reports of all publicly-held companies. Non-public companies and not-for-profit organisations are not statutorily required to prepare financial statements in accordance with US GAAP. However should those entities choose to prepare GAAP financial statements, the existing auditing standards define the sources of established accounting principles that are generally accepted in the USA as the accounting standards issued by the FASB and its predecessors or designees.

5.91 Many state and local governments are required by state statutes to prepare financial statements in conformity with GASB standards. Should those governments that are not statutorily required to apply GASB standards choose to prepare GAAP financial statements, the existing auditing standards define the sources of established accounting principles that are generally accepted in the USA as the accounting standards issued by the GASB and its predecessors or designees.

5.92 Agencies in the executive branch of the federal government are required to follow FASAB standards. The requirement to follow FASAB standards comes from a number of sources. The Director of the Office of Management and Budget, a FASAB sponsor, has directed executive agencies to follow FASAB standards in OMB Circular A-136. In addition, Section 3511(a) of the title 31, United States Code, states that executive agencies are required to follow accounting standards prescribed by the Comptroller General, another of FASAB’s sponsors. Some other federal government organisations also voluntarily follow FASAB standards.

5.93 There are a number of other sources of reporting requirements established in the USA. For example there are various reporting requirements imposed on federal reporting entities by laws and regulations. These cover matters such as budget execution, strategic planning, performance etc. In relation to publicly-held companies, while the FASB is the designated standard-setting body, the SEC and its staff may, and occasionally do, issue guidance interpreting the application of FASB standards. That guidance only applies to publicly-held companies. Furthermore the FASB established an Emerging Issues Task Force in 1984 that provides guidance within the framework of existing authoritative literature. Both the FASB and GASB clear limited guidance issued by the American Institute of Certified Public Accountants.

How are standards set for different sectors

5.94 Most accounting standards issued by the FASB apply to both business entities and non-governmental not-for-profit organisations. In some circumstances specific pronouncements explicitly exempt not-for-profit organisations from application or the subject matter precludes such applicability. Separate standards are issued, however, for transactions that predominantly fall within one sector (such as the accounting for contributions made) or when the reporting requirements differ significantly between sectors (for example, the FASB issued a separate standard for preparation of financial statements by non-governmental not-for-profit organisations).

5.95 Similarly a single set of standards establishes reporting requirements for all entities under the GASB jurisdiction. However GASB Statement #20, Accounting and Financial Reporting for Proprietary Funds and Other Governmental Entities that use Proprietary Fund Accounting, allows “business-type activities” (a broader group than government business enterprises) the option to apply new FASB standards that do not conflict with or contradict GASB standards. The goal of this standard is to enhance industry comparability, but not at the expense of overall state and local government public sector comparability. As GASB standards have expanded to cover a broader range of transactions and other events, the application of this provision has become more limited. A few entities have selected this alternative – primarily hospitals and electric utilities.

5.96 A single set of standards applies to all those entities under the jurisdiction of the FASAB.

Reasons for different requirements

5.97 The reason for different requirements across the three standard-setting bodies is the view that the different groups of entities are significantly different from one another. Specifically the GASB believes that all governmental entities are fundamentally different to for-profit entities in the private sector. Those differences result in different information needs of stakeholders, including information needed by those users to assess public accountability and make political, social and economic decisions.

5.98 In establishing different requirements for not-for-profit organisations compared with business entities, FASB considers there are three major characteristics that distinguish not-for-profit organisations and provide a basis for different accounting and reporting requirements. Those are:

• Receipts of significant amounts of resources from resource providers who do not expect to receive either a repayment or economic benefits proportionate to resources provided;
• Operating purposes that are primarily other than to provide goods or