The Impact of IFRS Adoption on Public Sector Financial Statements

Following a sector neutral approach to standard setting for about a decade, New Zealand adopted International Financial Reporting Standards (IFRS) for profit-oriented entities and all other sectors including the public sector, from 2007 with the option to adopt early in 2005. Some studies have examined the impact of IFRS adoption on the accounts of profit-oriented entities and found that this change had a significant impact on assets, liabilities and equity. This study examines the impact of adoption of IFRS on New Zealand public sector entities financial statements. We analyse and compare the reconciliation notes of IFRS and pre-IFRS New Zealand Generally Accepted Accounting Principles (NZ GAAP) reported in the first IFRS annual reports of all New Zealand public sector entities. The results indicate that there have been some significant increases in assets and liabilities, and significant decreases to overall equity in some sub-sectors of the public sector. The primary causes of such changes were recognition of employee entitlements (IAS 19) and recognition of derivative financial instruments (IAS 39) for many public sector entities, as well as remeasurement of deferred taxation for public sector commercial enterprises (IAS 12). In addition, public sector entities made many reclassifications between current and non-current financial statement elements that did not impact on the aggregate balances of the entities balance sheets. In general, the findings of this study are similar to findings of studies that examined the impact of IFRS on private enterprises. The findings of this study contribute to the understanding of the implication of IFRS adoption and might be useful to policy makers and regulators who are currently reviewing the applicability of IFRS to public sectors in Australia and New Zealand and other countries.