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October 14, 2013

Don’t miss a once-in-a-lifetime opportunity

Doctor Who said "In the parallel world everything’s the same just a little bit different". He may well have been describing the two worlds of the international accounting standard setters – the for-profit private sector focused International Accounting Standards Board (IASB) and its public sector twin the International Public Sector Accounting Standards Board (IPSASB).

Currently, the two boards are separately developing the fundamental building blocks that form the foundations of financial reporting. And they are arriving at different decisions about those frameworks. For example, each has a different view on the elements of financial statements. In contrast to the IASB’s framework, the IPSASB’s framework proposes additional elements of financial statements including ‘deferred inflows’ and ‘deferred outflows’. Further, each has attached different meanings to fundamental concepts like presentation and disclosure.

The consequences of different decisions on frameworks are likely to be felt in the development of accounting standards. There is a real risk that each standard setter will develop accounting standards that treat comparable transactions in similar circumstances very differently. This could in turn be an unhelpful contribution to the efforts underway to enhance the credibility of financial statements.

I acknowledge that there is justification for some differences in those frameworks. After all, the purpose of for-profit private sector companies is very different from government departments and other government entities; and the users of public sector financial statements extend beyond the IASB’s focus on resource allocation decisions by capital providers.

Shortly, our colleagues in New Zealand will enter a dimension that may well require them to deal with colliding parallel worlds. The New Zealand accounting standard setter has issued a package of accounting standards that will apply to all New Zealand government entities except Government Business Enterprises (GBEs) from 1 July 2014. Those new standards are largely based on the current standards of the IPSASB which are very similar to IFRS. Different decisions by the IASB and IPSASB about frameworks are likely to increase the differences between IPSAS and IFRS, not narrow them and the consequences are something that New Zealand is currently exploring.

While government activities are typically not-for-profit, its GBEs are very much for-profit. Consequently, the activities of government are mixed. One possible challenge for New Zealand is how its whole-of-government financial statements can report on the activities of government departments and GBEs if the IASB and IPSASB frameworks do in fact require like transactions to be treated differently.

Now is the time for the IASB and IPSASB to work together. To not do so is to miss a once-in-a-lifetime opportunity to rid ourselves of parallel worlds. And if they don’t – I suggest you watch "Doomsday" the 13th and final episode in the 2006 series of Doctor Who.

Alex’s previous blog post

Tone at the top and Integrated Reporting

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