3 Legislative Framework

3.1 General statutory and financial reporting requirements

The statutory and financial reporting requirements applicable to companies and issuers [An 'issuer' is essentially any party that has made a public issue of debt or equity securities. Issuers may be companies or entities other than companies, and include unit trusts, authorised life insurers, and all entities listed on the New Zealand Stock Exchange.] are contained in the Financial Reporting Act 1993 and the Companies Act 1993. The Financial Reporting Act establishes the overall financial reporting framework, whereas the Companies Act prescribes the administrative requirements regarding financial reporting by companies.

The Financial Reporting Act applies to all 'entities', as defined in section 2 of the Act. Entities are all 'issuers' and all companies. Issuers and companies are mainly private sector entities, although certain public sector entities such as SOEs, some Crown entities and some local authority trading enterprises (LATEs) are companies and therefore subject to the requirements of both the Financial Reporting Act and Companies Act.

Under section 11 of the Financial Reporting Act the financial statements of all reporting entities are required to comply with Generally Accepted Accounting Practice (GAAP). GAAP is defined in section 3 of the Financial Reporting Act as: compliance with applicable Financial Reporting Standards (FRS).
Where no provision is made in applicable Financial Reporting Standards and where there is no applicable rule of law, compliance with accounting policies that are appropriate to the circumstances of the entity and have authoritative support within the accounting profession in New Zealand.

3.2 Application to local government

Many of the readers of this Guide will be local government employees, so the application of statutory and financial reporting requirements to local government is relevant.

Some LATEs are subject to the requirements of both the Financial Reporting Act and Companies Act, as well as the Local Government Act 1974. For local authorities the Local Government Act, including its amendments, sets out the financial reporting requirements. TLAs are required to prepare annual financial reports in accordance with GAAP [The requirement for TLAs to comply with GAAP is achieved by the Local Government Act defining GAAP consistently with the definition of GAAP under the Financial Reporting Act.] Applicable financial reporting standards (FRSs) are therefore those approved under the Financial Reporting Act.

The most relevant and applicable FRSs for landfill operations are FRS-15 'Provisions, Contingent Liabilities and Contingent Assets', and FRS-3 'Accounting for Property, Plant and Equipment'. These reporting standards were introduced in 2001. FRS-15 applies for reporting periods ending on or after 31 October 2001 and FRS-3 applies for reporting periods on or after 31 March 2002.

FRS-15 in particular is likely to have a significant impact on TLAs. It is intended to improve the consistency of current provisioning practices. Current practice has ranged from over-provisioning to under-provisioning, where there are significant existing obligations that have not been provided for. This latter situation is particularly relevant for TLAs, where it is clear that the sector has many potential and actual environmental obligations such as landfills and other contaminated sites. Consequently, accounting for environmental liabilities under FRS-15 is likely to lead to a significant and sector-wide increase in the number of provisions recognised for environmental restoration.

The following sub-sections briefly outline the effect that these two new FRSs have on accounting for landfills. The information provided draws heavily on a fuller guideline published by the Society of Local Government Managers, [New Zealand Society of Local Government Managers, 2001. This document can be downloaded from the society's website www.solgm.org.nz. Also, note that this guideline contains a hypothetical worked example of accounting for a landfill under these new standards.] which readers should consult for further detail.

3.3 FRS-15: Provisions, contingent liabilities and contingent assets

FRS-15 specifies the rules for recognition, measurement and disclosure of provisions, contingent liabilities and contingent assets. While the standard outlines specific clauses, an interpretation of them in the context of environmental obligations is required. Some of the key interpretation issues are outlined below.

A key clause of FRS-15 requires that:

A provision must be recognised when:

an entity has a present obligation, legal or constructive, as a result of a past event

it is probable that an outflow of resources will be required to settle the obligation

a reliable estimate can be made of the amount of the obligation.

If these conditions are not met, a provision must not be recognised.

Key issues to note relating to obligations are as follows.

A present obligation exists where it is more likely than not, at a balance date, that the entity will be required to settle an obligation created by a past event.
In the context of environmental obligations, a "present obligation" for local authorities is often created by RMA requirements [Often via the required resource consents necessary for landfills and other contaminated sites.]
"Constructive obligations" can be difficult to ascertain for TLAs [For example, in relation to a closed landfill that was not subject to any resource consents.] In some cases they may be construed to exist where a TLA has created an expectation [For example, via public statements or policies, or past actions.]
An obligation can only exist when it arises as a result of past events independent of an entity's future actions: provision cannot be recognised when an obligation will only arise as a result of anticipated future actions.
The standard envisages that it will be very rare for a provision not to be recognised because a reliable estimate cannot be made. Local authorities will have to make assumptions as to the environmental obligations they face, even if these obligations are forecast to occur some way into the future.

A more detailed discussion of these issues and others [Relating to the measurement and disclosure standards.] can be found in New Zealand Society of Local Government Managers (2001).

3.4 FRS-3: Accounting for property, plant and equipment

FRS-3 deals with:

accounting for items of property, plant and equipment under the historical or modified historical cost systems of accounting
accounting for the consumption or loss of economic benefits embodied in items of property, plant and equipment.

Particular issues related to FRS-3 that impact on financial reporting for landfills are as follows.

Closure and post-closure costs that have been recognised as a provision should be added to the cost of establishing the landfill operation and depreciated over the period the future economic benefits are enjoyed. FRS-3 notes that the cost of an item of property, plant and equipment includes the costs of dismantling and removing the asset and restoring the site.
Subsequent expenditure on closure and post-closure costs (after acquisition and development on a landfill) should be capitalised [Paragraph 6.1 of FRS-3 gives guidance in this area.]
It will be necessary to ensure that each component [The main components include land cost, landfill development costs, property, plant and equipment, and closure and post-closure costs.] of a landfill asset is accounted for separately. FRS-3 requires that when the components of an item of property, plant and equipment have different useful lives or provide benefits in different patterns, the cost of the item must be allocated to its components and each component accounted for separately.

This is a brief summary of the ways in which FRS-3 is relevant to the financial reporting of landfills. A fuller analysis can be found in the recent guide published by the New Zealand Society of Local Government Managers (2001).

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