International Financial Reporting Standards Summit
Tue, 15 June 2004
International Financial Reporting Standards Summit New Zealand 2004, Auckland
Minister of Commerce Margaret Wilson outlines the government's views on financial reporting.
Thank you for inviting me to speak here today. I welcome the opportunity to outline the government's views on financial reporting. There are three major areas I would like to discuss today:
I would like to start by outlining the government's views on IFRS, particularly the significant benefits that may flow from adopting IFRS in New Zealand. In particular, I am pleased by the potential to increase foreign direct investment, a key feature of the government's Growth and Innovation Framework.
The introduction of IFRS has also provided a timely opportunity to consider the structure of the Financial Reporting Act. Therefore as a second major issue, I would like to outline the current review of the financial reporting in New Zealand. In addition to the feedback that has emerged from the recent Part I discussion document, I would like to outline some of the issues to be considered in the forthcoming Part II.
Finally, in this current age of international harmonisation, I would like to talk about recent efforts at co-ordination with our closest neighbour and partner in CER, Australia.
International Financial Reporting Standards The Government's Views on IFRS
On 19 December 2002, the Accounting Standards Review Board ("ASRB") announced, after consulting with key parties, including Ministers, that it had decided New Zealand entities should adopt international standards. This will be compulsory for periods starting from 1 January 2007, with the option to adopt for periods starting from 1 January 2005.
This decision is already having significant implications for financial reporting in New Zealand. There seems to be widespread support for the concept of IFRS, particularly among the business community. However, there have been adverse comments how, in general, IFRS may lead to increased volatility in reporting. Observers have also pointed out specific issues in particular standards. As an aside, I would note it is an objective of the government to ensure there is no dilution of New Zealand's excellent reputation for financial reporting. This is, however, an area of law where you are either 100 per cent in or not at all.
Notwithstanding these possible drawbacks, I see the potential benefits as far outweighing the disadvantages. It is these benefits I wish to focus on today. Particularly, the significant opportunities IFRS can provide for New Zealand businesses.
International standards will increase the potential for capital raising by improving the comparability of financial data. International investors will be able to readily comprehend New Zealand financial reports without the need to expend time and effort to understand New Zealand's financial reporting framework. This cross-border comparability facilitates international investment, enabling entities to access global capital at cumulatively lower cost. Such foreign direct investment is a key factor identified in the government's Growth and Innovation Framework.
Benefits also flow from being perceived to comply with international norms and standards. A country seen to have a rigorous set of internationally compliant financial reporting standards is likely to be a more attractive investment destination. Adopting IFRS will ensure New Zealand remains at the forefront of accounting practice and make New Zealand a more attractive investment destination.
The adoption of IFRS is also in accordance with Australia and New Zealand's desire to reduce the obstacles to conducting business on a trans-Tasman basis. Australia will be adopting IFRS from 2005. Even with no other co-ordination work, New Zealand's adoption will be a valuable contribution towards reducing trans-Tasman business costs. I would, however, note that considerably more is planned in this area, and I will discuss this a little later.
Review of the Financial Reporting Act Part I of the Review
The introduction of IFRS has provided a timely opportunity to consider the structure of the Financial Reporting Act. The government is acutely aware of the cost of producing financial reports. In particular, I am keen to ensure the specific requirements of the Act are appropriate for current New Zealand circumstances.
In this context, the findings of the Ministerial Panel on Business Compliance Costs indicated there were four areas of the Financial Reporting Act in need of review. Two of these, the complexity of the legislation, and the costs associated with producing unnecessary financial reports are directly relevant.
The government would like to rationalise the present system and improve the accessibility to the law, as well as making certain the actual substantive requirements are appropriate. The government has therefore directed the Ministry of Economic Development to undertake a review of the Financial Reporting Act 1993. This will ensure reporting requirements are appropriate to modern New Zealand circumstances.
As the first stage of this review, the Ministry of Economic Development released a discussion document on the Financial Reporting Act in mid-March. This document presented the joint recommendations of the ASRB and ICANZ as a starting point for discussion. It is primarily designed to answer the question "who is required to report?"
This proposal set out a new fully-statutory, three tier reporting framework applying to all entities, regardless of legal form and sector. The document was widely distributed, and the Ministry of Economic Development received about 100 submissions. The submissions were, however, far from unanimous in support. A number of themes emerged. One theme was not to be over-broad and impose reporting requirements with little relevance to individual circumstances. For example, charitable entities were concerned at the relevance of producing accounts comparable with the private sector. Other persons were concerned with the lack of specific requirements for those entities that would be classified as tier 2. Finally, some were concerned about divulging commercially-confidential or private information.
Many proposals also found favour among submitters. Small and medium enterprises seemed pleased at the prospect of raised thresholds for reduced reporting requirements. There seemed to be broad support for increasing stakeholder discretion in determining reporting requirements. Perhaps most encouraging were the submissions from persons not previously subject to the Financial Reporting Act. Although it would be difficult to say most were pleased at the prospect, I am extremely heartened by those that indicated they would now take part in the standards setting process. If standards are indeed to apply to all, it is necessary that all have the opportunity to participate properly in determining the requirements that may affect them.
My officials are currently evaluating the proposal in light of these submissions. The review will cover a full range of related issues, and the government will not be making decisions until Part II of the review is complete.
Part II of the Review
For some of you, it seems likely you will be required to report in accordance with international standards regardless of the nuances of the final proposal. In particular, if you are a listed company or a public issuer, it should be no surprise if you find yourself producing IFRS reports. Part II of the review will therefore probably be of more interest to you. At this stage, a discussion document canvassing a variety of issues is scheduled for the third quarter of this year, but I would like to take the opportunity to outline some of the more important potential features.
In light of general trends towards making bodies wielding public power more transparent and accountable, the discussion document will consider the appropriate structure, functions and funding of the bodies involved in financial reporting. In view of the moves towards greater trans-Tasman harmonisation, which I will turn to shortly, the Part II discussion document will particularly consider the functions that comparative Australian bodies perform and whether similar powers are needed here. Such functions may include, for example, the power to grant exemptions from reporting requirements or to make determinations or interpretations on specific matters.
In order for any legal regime to be effective it must be enforced. For many, compliance with the law will depend on the nature and scale of the likely penalties, combined with the likelihood of detection and punishment for breach. Part II of the review will therefore consider the appropriate combination of criminal, civil and administrative remedies appropriate to ensure the financial reporting regime is respected.
The Financial Reporting Act also imposes certain additional requirements on overseas-owned and -incorporated companies. The Ministerial Panel on Business and Compliance Costs identified this as a further issue for attention. Various affected persons have also made their views known both to me and to officials, including in submissions on the Part I discussion document. The forthcoming discussion document will therefore consider the appropriate reporting requirements for overseas companies, balancing the additional reporting requirements with the need to protect New Zealand interests.
A major issue currently the subject of much attention is the question of auditing standards. Audits are a key part of the financial reporting framework, playing a crucial role in the enforcement of accounting standards. In the wake of several high-profile international corporate collapses such as Enron, many countries have modified their legal structures for auditors and auditing standards. The review will therefore consider the appropriate mechanisms for auditing standards oversight for New Zealand.
It is also intended Part II cover a variety of other more minor issues. This may include the use of XBRL, reporting by non-active companies, and the time required for filing reports.
I hope people will take an interest in this important part of the Review, and make submissions where appropriate.
Once the full range of Part I and II issues have been adequately considered, I will make recommendations to Cabinet. At this stage, I anticipate a Bill will be before the House by the middle of next year. Although any changed obligations will not come into force immediately, businesses should expect any amendment to be in place for the 1 January 2007 compulsory adoption of international standards. Once this legislation is in place, it is my intention that New Zealand will have a robust and flexible framework for all stages of financial reporting, from setting standards to the final production of reports.
Joint Trans-Tasman Issues
The final major issue I would like to talk about today is the co-ordination of business law with Australia. Reducing trans-Tasman impediments to doing business is a high priority for the government. In line with CER and the Memorandum of Understanding on the Co-ordination of Business Law, the governments of Australia and New Zealand recently announced the establishment of a joint advisory group on accounting standards. The ultimate potential of this group is a joint Australia-New Zealand institution and only one set of reporting requirements and accounting standards. This would mean firms conducting business on a trans-Tasman basis would not need to produce any additional reports or reformulate their existing accounts.
As steps towards this ultimate goal, the advisory group will provide advice to the two governments relating to:Establishing a single set of trans-Tasman accounting standards within the broader context of both jurisdictions' objective of adopting international accounting standards; and Maximising the influence of Australia and New Zealand in the development of international accounting standards and the international accounting standard setting process. This will include advice relating to: standards setting, in particular how greater co-ordination can be achieved in domestic standard setting processes; policy co-ordination, including the broader policy and legal framework for accounting standards with a view to ensuring that, where appropriate, a consistent approach is taken to the application, monitoring and enforcement of such standards; and the joint institutional arrangements that might be established over time to ensure the objective of a single set of trans-Tasman accounting standards is achieved and maintained effectively and efficiently. I am confident the advisory group will be an important step along the road to reducing barriers to trans-Tasman trade and investment, and provide significant opportunities for businesses to broaden their markets with lower compliance costs. The Advisory Group held its first meeting in May and welcomed the opportunity to progress trans-Tasman reform of accounting standards and I understand will pursue the significant opportunities in this area. I understand that the Chair of the ASRB, Warwick Hunt, will be speaking further about this later today.
I hope I have been able today to outline the government's views on IFRS and the measures currently underway to ensure reporting requirements are appropriate for New Zealand circumstances. Although all change necessarily brings with it some uncertainty, I believe this change brings a whole new range of exciting opportunities. I hope you embrace the potential benefits of international standards as we move into a new era of financial reporting here in New Zealand.