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Adoption Of Int. Financial Reporting Standards

Adoption Of International Financial Reporting Standards – Exposure Drafts Based On Ias 19 And Ias 11

The Financial Reporting Standards Board (FRSB) has released two new Exposure Drafts for public comment.

The release continues the New Zealand accounting profession’s move to adopt International Financial Reporting Standards (IFRS) by 1 January 2007, with voluntary compliance from 1 January 2005.

The two exposure drafts are:

ED NZ IAS 19: Employee Benefits / ED-95: Employee Benefits;

ED NZ IAS 11: Construction Contracts.

ED NZ IAS 19 Employee Benefits prescribes accounting and disclosure for employee benefits. It contains requirements for the recognition, measurement and disclosure of all forms of consideration given by an entity in exchange for services rendered by an employee.

The Standard requires an entity to recognise:

(a) a liability when an employee has provided service in exchange for employee benefits to be paid in the future; and

an expense when the entity consumes the economic benefit arising from service provided by an employee in exchange for employee benefits.

The FRSB has reviewed IAS 19 and proposes to adopt all the requirements of IAS 19 for its New Zealand equivalent, NZ IAS 19, for all reporting entities in New Zealand, whether profit-oriented or public benefit entities.

There is currently no NZ standard corresponding to IAS 19. The FRSB considers that this represents a major gap in New Zealand’s financial reporting standards. The FRSB therefore proposes in ED-95 to adopt all of the requirements of IAS 19 as a New Zealand Financial Reporting Standard applicable to the general purpose financial statements of all reporting entities for periods beginning on or after 1 January 2005.

The requirements of ED-95 are identical to those of the proposed NZ IAS 19 apart from the transitional provisions and the need to consider differential reporting concessions. Thus, if ED-95 is implemented, all New Zealand reporting entities, irrespective of whether they adopt IFRS early from 2005 or wait until 2007, will come to apply IAS 19 from 2005.
International Accounting Standard IAS 11 Construction Contracts prescribes the accounting treatment of revenue and costs associated with construction contracts by the entity that performs construction work.

The New Zealand equivalent to IAS 11 is Financial Reporting Standard FRS-14: Accounting for Construction Contracts.

The requirements of the two Standards are similar. The FRSB has reviewed IAS 11 and proposes to adopt all the requirements of the proposed standard for its New Zealand equivalent, NZ IAS 11, for all reporting entities in New Zealand, whether profit-oriented or public benefit entities.

Currently, under the FRS-14, entities qualifying for differential reporting are permitted to use the completed contract method. ED NZ IAS 11 does not contain any exemptions for specific types of entities. Instead, in most cases, ED NZ IAS 11 will lead to application of the percentage of completion method. Future revised differential reporting exemptions may not provide the measurement exemptions available under FRS-14. Entities currently applying differential reporting exemptions will need to carefully consider the impact of the proposed ED as they may need to fully comply with the measurement requirements of ED NZ IAS 11.

The Exposure Draft and Discussion Paper for each of the proposed standards is available for download free of charge from the Institute of Chartered Accountants’ website at

The closing date for submissions on the Exposure Drafts is 28 February 2004.

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