A new PBE Standard on Service Performance Reporting is on the horizon

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1 A new PBE Standard on Service Performance Reporting is on the horizon Joanne Scott, FCA, Senior Project Manager, XRB Judith Pinny, CA, Project Manager, XRB Introduction Service performance reporting (SPR) guidance has been available in New Zealand in a range of guises since 2002 when the FRSB 1 first issued Technical Practice Aid No. 9 Service Performance Reporting (TPA-9). TPA-9 has been developed over the years and was ultimately subsumed into Appendix C of PBE IPSAS 1 Presentation of Financial Statements. However, we haven t had a standard that focuses solely on SPR. The New Zealand Accounting Standards Board (NZASB) has been aware of this gap in its standards and, given the importance of service performance information for public benefit entities (PBEs), has been keen to develop a standard on this topic. In February 2016 the NZASB issued Exposure Draft NZASB Service Performance Reporting (the ED) which proposes requirements for large and medium-sized PBEs Tier 1 and Tier 2 2. The NZASB welcomes comments until submissions close on 29 July This article outlines why the NZASB has issued the ED, challenges faced in developing the proposals, and the issues that it is seeking feedback on. Why the NZASB has issued the ED SPR has been produced for about two decades in New Zealand. Many public sector entities have longstanding legislative requirements to provide service performance information as part of their annual report. Some not-for-profit entities also provide service performance information on a voluntary basis in their annual reports. However, in the absence of a standard on this topic, there has been limited guidance for preparers. Understandably, this has led to wide variations in the quality and type of the service performance information produced. 1 Financial Reporting Standards Board, the predecessor body to the NZASB. 2 Tier 1 and 2 PBEs have expenses in excess of $2million, and/or public accountability (as defined). PBEs with expenses below $2 million and with no public accountability are currently required to report service performance information that complies with the Tier 3 and 4 Simple Format Reporting Standards. More information is available at xrb.govt.nz

2 The proposals in the ED will not change the need for entities to make judgements about what information to report and how to explain the connections between what they do and why they do it. However, the proposals should ensure that entities apply the same principles when making those judgements. The ED proposes a common set of principles and high level requirements for service performance information reported by Tier 1 and 2 PBEs as part of a general purpose financial report (GPFR). In thinking about what users expect from the GPFR of a PBE, the NZASB noted that: PBEs are reporting entities whose primary objective is to provide goods or services for community or social benefit reporting on performance in relation to this primary objective is an important aspect of a PBE s GPFR and for a comprehensive picture of a PBE s performance, it is necessary to have both financial and non-financial information. Key proposals The ED identifies three dimensions of service performance: What did the entity do? Why did the entity do it? What impact did the entity have on its outcomes? The ED proposes that an entity report on each of these dimensions by providing information about: outputs and performance indicators for outputs (i.e. the goods and/or services provided to recipients) outcomes that the entity is seeking to influence, and the links between the entity s outputs and those outcomes and a description of the impact that the entity has had on the outcomes that it is seeking to influence, and performance indicators to support that description. This is illustrated in the following diagram.

3 Diagram 1 What did the entity do? Outputs LINKS Why did the entity do it? Outcomes that the entity seeks to influence What impact did the entity have? Depends on extent to which there is evidence of influence on outcomes The NZASB found it challenging to identify a single set of requirements for a wide range of PBEs. The NZASB was aware of the differences between entities, in what they are trying to achieve and the extent to which they can identify their influence on outcomes. The NZASB opted for a single set of requirements, but acknowledged the differences between entities and the difficulties they might face in providing information on outcomes and impacts. For example, the ED explains that: an entity s accountability will influence what it should report on focusing on outcomes with a shorter time frame or which are more specific (sometimes referred to as intermediate outcomes) can assist in establishing links between outputs and outcomes an entity provides information on its impacts on outcomes based upon the extent to which the entity has evidence of its influence on those outcomes performance indicators for impacts on outcomes are provided where relevant and if an entity can t provide evidence of its impact on outcomes (that satisfies the qualitative characteristics 3 ) it should disclose this fact, instead of reporting on impacts. 3 The qualitative characteristics in the PBE Conceptual Framework are relevance, faithful representation, understandability, timeliness, comparability and verifiability.

4 Appropriate and Meaningful information The ED discusses some of the concepts that underpin GPFR because SPR requires more judgement than many other aspects of financial reporting. It talks about users who rely on GPFR for information that is useful for accountability and decision-making. Application of the qualitative characteristics and consideration of the pervasive constraints of information should result in information that is appropriate and meaningful. The pervasive constraints discussed in the ED are materiality, cost-benefit and the balance between the qualitative characteristics. Appropriate and meaningful information is a new term. The NZASB s intention was to create an overarching phrase, using non-technical language, to help people applying the proposed standard when they are having discussions about what information to include and how much to present. Most accountants will be familiar with the qualitative characteristics and constraints discussed in the PBE Framework. In anticipation of the new PBE Conceptual Framework being issued, the ED uses the qualitative characteristics in that framework. 4 Responding to the PBE environment In developing the ED, the NZASB thought about some of the requirements that apply to financial statements and the challenges that they might pose for PBEs reporting service performance information. For example, financial statements are required to: be for a reporting entity and for a reporting period present information in consistent categories and include comparative information. All of these requirements can pose challenges when reporting service performance information. The ED tries to acknowledge the realities of how PBEs work (which is often collaboratively), outputs and outcomes sought can change over time, and how some entities seek to make a difference over a long period of time. The NZASB considered that it was important that the financial statements and the service performance information line up, so the ED requires that an entity present service performance information for the same reporting entity and reporting period as the financial statements. However, the ED does respond to some of these practical issues by: permitting some cross referencing to other documents (useful for entities that work together and report jointly) acknowledging the need to provide context for current period performance when the entity has a long-term focus and explaining how an entity discloses information about changes in aspects of its SPR. Scope Having developed the proposals in the ED, there was one further challenge for the NZASB deciding which entities should be required to report in accordance with the proposed standard. The ED proposes that it apply to all Tier 1 and Tier 2 not-for-profit PBEs, and to Tier 1 and Tier 2 public sector PBEs that are required by legislation to provide a statement of service performance (by whatever name called). This means that: Tier 1 and Tier 2 public sector PBEs with existing legislative requirements to report 4 The NZASB approved the PBE Conceptual Framework for issue in May 2016 and it is available at xrb.govt.nz

5 service performance information would be required to comply with the proposed standard. All Tier 1 and Tier 2 not-for-profit PBEs would be required to comply with the proposed standard. Public sector PBEs without existing legislative requirements to report service performance information would be encouraged, but not required, to comply with the proposed standard. So why are some public sector PBEs excluded from the scope? In the absence of a standard on SPR, legislative reporting requirements for specific public sector entities have developed over time. Hence, from a legislative perspective, an assessment has already been made on which public sector entities should be required to provide service performance information, and for some other public sector entities, there are various initiatives underway. In contrast, for not-for-profit entities, there are no potential conflicts with existing or planned legislation. 5 PBE IPSAS 1 As a result of the proposals in the ED, the NZASB is also proposing to change the title of PBE IPSAS 1 from Presentation of Financial Statements to Presentation of Financial Reports and to amend that standard so that it is clearer which sections apply to both service performance information and financial statements. The NZASB regards these changes as desirable, but they are not essential. Guidance and Implementation The NZASB intends to develop an Explanatory Guide, which would be non-authoritative. The NZASB envisages a two-year implementation period for the proposed standard. Your feedback is invited The Invitation to Comment sets out the matters on which the NZASB is seeking feedback. These include the: dimensions of service performance identified in the ED and the information to be reported about those dimensions use of the term appropriate and meaningful scope proposals to change the title of PBE IPSAS 1 and refer to service performance information as an integral part of a financial report and type of guidance that the NZASB should develop. 5 The Invitation to Comment and the Basis for Conclusions that accompany the ED explains the matters considered by the NZASB in coming to this position.