New Zealand Framework for Financial Reporting - Essay Example

Critical Assessment of ICAEW Statement Student’s Name Institution Critical Assessment of ICAEW Statement According to the NZ Framework for Financial Reporting (2010), the main aim of a financial reporting framework is to promote efficient and effective allocation of resources available. It provides information about an organization’s performance and the current financial position by analyzing the financial statements. This information is important to the external users to be able to make sound economic decisions[Min10]. It is a requirement by the government, for an organization to prepare, publish and assure the financial statements so as to benefit the external users. The report also shows the extent to which the management is accountable for the resources entrusted to it. The objective of this paper is to determine whether the NZ Framework Financial Reporting provides appropriate principles to support the application of the financial reporting standards. The benefits obtained from information for external users of financial statements must exceed the costs of making it available to them. In the financial standards policy field, cost benefit analysis is used in the standard setting process and also after the standard has been introduced. It depends on the extent upon which professional judgment is applicable to evaluate the importance of individual costs and benefits and to evaluate the net costs or benefit[The10]. The costs and benefits of financial reporting regulation are quite several and difficult, therefore, Cost benefit analysis (CBA) is an important requirement and is also a basis for regulatory decision making. However, it may not be fully perfect because not all costs and benefits can be quantified. A qualitative evaluation may be required instead. The occurrence of costs and benefits may be ambiguous by definition and different weighting and values can be placed on them. On the other hand, CBA is regarded as a regulatory decision making tool that is of higher quality than others. The New Zealand Institute of Chartered Accountants(NZICA) observes that there is a possibility for cost benefit analysis to be guided by the following indicators that is, accountability of the public, the separation of owners and management and size[Min10]. The primary principle is that the main reason for financial reporting is to provide information to external users who have a need for an entity’s financial statements but are unable to demand for them. This principle can only operate up to the point where remuneration of providing the information to external users, exceeds the cost of preparing and publishing the information. Non existence of regulated financial reporting, investors will be at risk of thinking that bad companies are better than they are and not rewarding good companies with cheaper finance in recognition of their lower risk. Moreover, the whole market at large suffers because investors are not certain of the difference between a good and a bad company[Min10]. Therefore, they may become discouraged to invest in that field. NZICA observes that the principle may not be crucial in certain parts of the market and specifically for mature markets and will need to be revisited. This is because access of reliable information may be acquired by the rules of the relevant trading platform. For example, the NZX is always in a good position to ensure suitable financial reporting is highly available in the market. This primary principle may be more useful in some areas than others. For example, in the public sector it may be less important to guide in its operations. Therefore, it would be very important if the community of standard setting would address this issue[Pro07]. The regulatory and decision-making framework for determining tiers of financial reporting should be independent. This means that there should be no government, ministers and political influence in decision making process. It would add credibility and confidentiality to the standard setting process in New Zealand. NZICA’s main problem with MED’s option is that the decision making process would be at a risk of being politicized. The option proposes that the minister should be part of the regulatory decision making process. This involvement may not be suitable as it will lower the independence of the XRB. Non existence of regulatory independence implies that ministers may become more involved in making technical decisions[Min10]. NZICA observes that including the minister in decision making process in matters of technical importance would result to greater lobbying by vested interests. This would also result in unclear decisions that won’t put into account the interests of all other stakeholders. NZICA observes that the principle of independence in regulatory decision making, has gained much support in the OECD countries in the past few years. The OECD states that independence protects regulators from influence of specific interests. OECD also promotes the idea of establishing independent bodies since it improves regulatory efficiency. Specialized regulators have created ‘checks and balances’ to equal the ministry’s powers and other interested individuals. This will lead to high quality regulatory decisions that are characterized by transparency and accountability[Min10]. The three sectors that include for-profit entities, public sector entity and not-for-profit entities should be considered separately. The information needs across the sectors and the cost and benefits of establishing the reporting tiers are likely to differ. An integrated framework should be developed .The criteria used to decide the number of tiers and the ability of each tier is that the benefits to external users should exceed compliance and economic costs. NZICA considers that the responsibility of establishing tiers be assigned to XRB, subject to disallowance by Regulations Review Committee (RRC) of parliament[Pro07]. This option strikes a balance between quality of decision making, cost, accountability and regulatory independence. However, NZICA believes that transactions that occur in similar situations should be accorded the same treatment. This is in line with a principle-based reporting regime. Assurance standards should not be given the force of law according to the NZICA. Giving standards the force of law, hence making non-compliance a criminal offence only means encouraging compliance to their application, in preference to the use of qualified and specialized judgment. As a result this could undermine the advantages that arise from having a principle-base reporting regime. NZICA also considers that having more than one body executing the same standards being inappropriate. Duplication can give rise to excessive costs, uncertainty and coordination issues[Pro07]. NZICA encourages and supports the transfer of its accounting standards development, assurance standards development and approval to the XRB. This improves the quality of standard setting. It will lower the confusion and the sweat needed to coordinate the accounting standard setting activities. It will also facilitate application of audit and assurance standards to all New Zealand audits. Such changes should lead to greater clarity, coordination and independence in standard setting. NZICA supports an orderly transition to the new arrangements. This should occur as early as possible after 2011. However, for new standard setting to work, XRB must be allowed to operate free of political interference. It is important that political interests not be allowed to detract from a strong focus by the XRB on public interest[Pro07]. XRB also needs to follow an appropriate process in effective and efficient consultation and transparency of decision making mechanism. Preparation and publication of financial statements should be considered together. The current regime requires that companies prepare but does not require them to publish or distribute the statements and is a major shortcoming[Min10]. This is because it lowers the ability of effectively monitoring or executing compliance. As a result, it reduces costs for those organizations that do not meet their statutory obligations and lack of equitability for those organizations that do meet theirs. If an entity is required to prepare the financial statements, it should also be required to file and vice versa. Preparation, distribution and assurance of financial statements benefit the external users who would not otherwise access the information they contain. New Zealand Framework for Financial Reporting (2010) provides appropriate principles that promote the application of financial reporting standards. The above rules and principles provide a competitive framework for companies in New Zealand. However, amendment of the rules from time to time is very important to avoid monotony and promote independence of the bodies. NZICA is supportive of the direction of reform for the statutory framework for accounting standards and assurance in New Zealand. Many entities will reduce compliance costs and increase the benefits received by the external users. Therefore, it’s clear that a simple rule can be the most appropriate way to achieve a desired outcome according to ICAEW. References Min10: , (Ministy of Economic Development, 2010), The10: , (The New Zealand Institute of Chartered Accountants, 2010), Pro07: , (Proffessional Accountants in Business Committee, 2007), Read More