Institute of Chartered Accountants of New Zealand
Request for Comment on Discussion Paper
and Exposure Draft ED-103
Prospective Financial Information
Issued by the Financial Reporting Standards Board
Institute of Chartered Accountants of New Zealand
Request for Comment on ED-103 Prospective Financial Information
The Financial Reporting Standards Board (FRSB) of the Institute of Chartered
Accountants of New Zealand (the Institute) has issued for comment this Discussion
Paper relating to Exposure Draft No. 103: Prospective Financial Information
Commenting on the Exposure Draft
The FRSB welcomes comment on the exposure draft. To assist the FRSB in
summarising the views of commentators, answers provided to the discussion
questions would be appreciated. Respondents are strongly encouraged to provide
detailed comment on the issues canvassed in the discussion questions and on any
other aspects of the exposure draft.
Comments should be addressed to:
The Director – Accounting Standards
Institute of Chartered Accountants of New Zealand
PO Box 11342
Comments are due by 16 August 2005
Respondents are requested to indicate on their submission on whose behalf (for
example, own behalf, a group of people or an entity) the submission is being made.
ED-103: Prospective Financial Information
The purpose of this exposure draft is to establish new reporting requirements in
respect of general purpose prospective financial information prepared for external
users. Currently such requirements are included in FRS-29: Prospective Financial
The proposed Standard specifies information to be included in a set of prospective
financial statements and specifies minimum disclosure requirements. The proposed
Standard no longer defines or makes any distinction between the terms forecast and
projection. Instead it emphasises the disclosure of risks and the degree of uncertainty
relating to assumptions in providing useful prospective financial information.
Following due consideration of comments, the FRSB intends to submit the finalised
financial reporting standard to the Accounting Standards Review Board (ASRB) for
approval as a financial reporting standard, in terms of the Financial Reporting Act
The review of FRS-29 was prompted by:
issues arising from an enquiry by the Securities Commission into Vertex Group
Holdings Limited. This enquiry highlighted some uncertainty regarding the
distinction between projections and forecasts. As a result of the issues raised in
this enquiry the review of FRS-29 considered whether it was appropriate to
amend the definitions of projections and forecasts or to remove the distinction;
concerns raised by the Office of the Auditor-General about the appropriateness of
some of the requirements and commentary in FRS-29 for public sector entities –
in particular local authorities – preparing forecast financial statements in
accordance with new legislative requirements.
In addition, the FRSB considered that it was appropriate to review the requirements
of FRS-29 following the issue of New Zealand equivalents to International Financial
Reporting Standards (IFRSs). The proposed Standard is intended to be applied by
entities reporting in accordance with New Zealand equivalents to IFRSs and entities
reporting in accordance with Financial Reporting Standards and Statements of
Standard Accounting Practice.
The proposed Standard carries forward many of the requirements of FRS-29.
However there are some important differences. The proposed Standard:
clarifies the application of the Standard to particular types of published
prospective financial information;
includes discussion of the qualitative characteristics and the implication of these
characteristics for prospective financial information;
removes the distinction between forecasts and projections; and
1 FRS-29 currently has authoritative support (by way of a direction by the Accounting Standards
Review Board (ASRB)). Following an amendment to the Financial Reporting Act, the ARSB now has
authority to approve standards relating to prospective financial information.
has a greater focus on disclosure of the level of uncertainty associated with
prospective financial information.
The following sections address key issues considered in the development of the
proposed Standard. In developing the proposed Standard the FRSB considered a
range of international pronouncements. A list of these pronouncements is included in
the Basis for Conclusions.
The scope of the proposed Standard captures general purpose prospective financial
required to be published by public sector entities;
published by other entities in accordance with securities legislation and
regulations, and any prospective financial information published in conjunction
with such information; and
published in a prospectus, investment statement, advertisement for an offer of
securities or other similar documents.
The Standard is not intended to apply to:
(a) verbal prospective financial information disclosures or earnings guidance
published by a New Zealand Exchange Limited listed issuer;
(b) individual items of prospective financial information such as sales forecasts
published in other reports such as an annual report; or
(c) historical pro-forma statements.
[Refer ED-103 paragraphs 2 to 8, the Basis for Conclusions paragraphs BC7 to
BC-14 and Question 1]
Prospective non-financial information
The FRSB noted that prospective non-financial information was outside the scope of
FRS-29 and considered whether any of the requirements in the proposed Standard
should apply to prospective non-financial information. The FRSB noted that long-
term council community plans are required to include a significant amount of
information which is not financial but needs to be consistent with, and provides the
basis on which, financial information is prepared.
The FRSB decided not to extend the scope of the proposed Standard to prospective
non-financial information. However, application of the proposed Standard to
prospective non-financial information is encouraged (paragraph 5).
The proposed Standard (paragraph 20) also requires that “Prospective financial
information and any accompanying general, narrative or non-financial information
shall be consistent with any current planned courses of action and strategies published
elsewhere by the entity.”
[Refer ED-103 paragraphs 5 and 20]
The proposed Standard states that prospective financial information is expected to
meet the four qualitative characteristics of understandability, relevance, reliability
This requirement was prompted by a review of international guidance, in particular
Prospective Financial Information Guidance for UK Directors issued by the Institute
of Chartered Accountants in England and Wales (2003) (PFI UK).
The disclosure requirements of the proposed Standard are intended to ensure that
prospective financial information produced in accordance with the Standard meets
these qualitative characteristics. For example, the reliability of information is
affected by the level of uncertainty associated with the information. The proposed
Standard therefore requires disclosure of the level of uncertainty and risks associated
[Refer ED-103 paragraphs 9 and 10, the Basis for Conclusions paragraphs BC15 to
BC-22 and Questions 2 and 7]
Projections and forecasts
The previous version of FRS-29 differentiated between forecasts and projections. In
an attempt to remove uncertainty regarding the distinction between these terms and
the appropriate labelling of information based on a mixture of forecasts and
projections the FRSB proposed limited changes to FRS-29 (July 2003) to clarify:
(a) the distinction between a forecast and a projection; and
(b) the position where prospective financial information is part projection and part
These changes were deferred pending this more detailed review. As part of this more
detailed review the FRSB reconsidered the usefulness of the distinction between
forecasts and projections. The matters considered by the FRSB are outlined in the
Basis for Conclusions. Following consideration of these matters the FRSB agreed to
remove the distinction between forecasts and projections and to place more emphasis
on the disclosure of assumptions and the degree of uncertainty associated with
prospective financial information.
[Refer ED-103 Basis for Conclusions paragraphs BC23-BC-27 and Question 3]
The proposed Standard requires that assumptions used in preparing prospective
financial information shall:
(a) be prepared in accordance with the qualitative principles (as discussed above);
(b) be based on best available information and estimates, consistent among
themselves, consistent with the plans of the entity, and be applied consistently;
(c) have a reasonably objective basis.
The requirement that assumptions be based on the best available information and
estimates does not imply that prospective financial information should meet the best-
estimate requirement previously associated with forecasts. Instead the FRSB intends
that entities applying the proposed Standard will have regard to relevant information
available at the time of preparing the prospective financial information and be able to
justify the assumptions used with reference to that information.
The proposed Standard acknowledges that entities in start-up phase that are required
to prepare prospective financial information may have some difficulty in meeting this
requirement. It therefore provides guidance on the types of actions an entity in start-
up phase may take in demonstrating that assumptions have a reasonably objective
Entities that are considering alternative possible scenarios and seeking to provide
information on these alternative scenarios are not precluded from doing so by the
proposed Standard, so long as there are reasonably objective bases for the
assumptions under the alternative possible scenarios.
[Refer ED-103 paragraphs 10 to 17, the Basis for Conclusions paragraphs BC28 to
BC-35 and Question 4]
Form and content of prospective financial statements
The FRSB considered several issues relating to presentation of prospective financial
(a) whether the Standard should encourage or require entities to present a full set of
prospective financial statements;
(b) the level of detail required as a minimum to be shown in prospective financial
(c) whether the Standard should require prospective financial information to be
presented for both a parent entity and a group if the historical financial
information was presented in this manner.
Individual statements vs complete set of statements
In considering this issue the FRSB noted that legislative and regulatory requirements
for different types of entities vary. For example, the Securities Regulations 1983
require only a cash flow statement but many public sector entities are required by
legislation to prepare forecast financial statements.
The FRSB considered that it would be inappropriate for the Standard to require
entities to present more prospective financial information than the minimum
legislative or regulatory requirements and that attempting to do so could be regarded
as onerous and lead to widespread non-compliance.
However, the FRSB considered that any entity preparing prospective financial
information should be encouraged to present a complete set of prospective financial
statements. Where an entity prepares an individual prospective financial statement,
such as a prospective cash flow statement, it shall comply with the requirements in
respect of that statement.
[Refer ED-103 paragraphs 18 to 21 and 23 and the Basis for Conclusions paragraphs
BC37 to BC-39]
Level of disclosure required
The FRSB acknowledged that the disclosures required in historical general purpose
financial statements would be too onerous for prospective financial information.
However, the FRSB also decided that disclosures additional to those currently
required by FRS-29 were appropriate to meet the objective of high quality financial
reporting. For example, the proposed Standard requires more disclosure in respect of
income statements and cash flow statements.
[Refer ED-103 paragraphs 22 to 35, the Basis for Conclusions paragraphs BC37 to
BC-39 and Question 5]
Format of prospective financial information
The FRSB noted that the Office of the Controller and Auditor-General had sought
clarification of the requirements in FRS-29 regarding the format of prospective
financial information. The requirement in FRS-29 to present prospective financial
information in the format expected to be used in the future for reporting historical
information did not specify whether prospective financial information was to be
presented for both a parent entity and a group if the historical financial information
was presented in this manner.
The FRSB considered whether this issue should be specifically addressed in this
Standard. The FRSB noted that the Local Government Act 2002 required forecast
financial statements for the local authority parent entity and allowed for further
forecast financial information. Therefore any requirement to present prospective
financial information for both a parent entity and a group would be more onerous
than that legislation and could create difficulties for local authorities that have
controlling interests in commercial entities such as airports or ports. In view of these
issues the FRSB decided that the Standard would not include specific reporting
format requirements and that the format of prospective financial information should
be influenced by the purpose for which the prospective financial information is
prepared and any applicable legislation.
[Refer ED-103 paragraphs 18 to 35, the Basis for Conclusions paragraph BC39 and
Periods covered by prospective financial information
The proposed Standard requires that, except as otherwise required by legislation or
regulations, the length of the reporting period should be the same as for historical
financial statements (for example, a financial year).
Another issue had been raised in relation to the number of reporting periods for which
prospective financial information should be provided. The Office of the Controller
and Auditor-General had expressed the view that the discussion of the number of
reporting periods covered by prospective financial information in FRS-29 did not
adequately reflect the public sector environment where prospective information for
local authorities is required for a period of 10 years.
The proposed Standard acknowledges that the number of reporting periods covered
by prospective financial information may vary considerably depending on the legal
requirements relating to the reporting of prospective financial information and the
purpose and objective for which the prospective financial information is prepared.
Entities should exercise caution about publishing prospective financial information
for periods beyond that required by legislation or regulation. Entities publishing
prospective financial information, other than those required to publish it by
legislation or regulation, should exercise caution in presenting prospective financial
information for more than one reporting period. The reason for the cautions is the
FRSB’s concern that prospective financial information generally becomes more
unreliable and uncertain as the number of future reporting periods increases.
[Refer ED-103 paragraphs 37 to 39 and the Basis for Conclusions paragraphs BC40
The proposed Standard is intended to apply to prospective pro-forma information
which is published in conjunction with the types of general purpose prospective
financial information set out in paragraph 4. However, it is not intended to apply to
historical pro-forma information.
[Refer Basis for Conclusions paragraphs BC8 and BC31 and Question 8]
A summary of the key differences between FRS-29 and ED-103 is shown in the
ED-103 FRS-29 Comment
In order to meet the needs of FRS-29 did not refer to the four This requirement is intended to
users, general purpose qualitative characteristics. improve the quality of
prospective financial information provided to users.
information is expected to be It is also consistent with the
understandable, relevant, move to specifying principles in
reliable and comparable. Standards.
[paragraphs 9 and 10]
Forecasts and projections
The proposed Standard does not The definition of a forecast The Vertex Group Holdings Ltd
distinguish between forecasts referred to best-estimate enquiry had highlighted
and projections. assumptions. concerns about the difficulty of
differentiating between a
The definition of a projection
forecast and a projection.
referred to hypothetical
assumptions. The FRSB concluded that high
quality disclosure of the degree
FRS-29 did not deal with the
of uncertainty and risks relating
classification of prospective
to prospective financial
financial information based on a
information would provide most
mixture of assumptions.
benefit to users.
[paragraphs 4.1 and 4.2]
The proposed Standard specifies FRS-29 requires that Entities are not required to
a complete set of prospective prospective financial prepare any particular
financial statements but does information include a statement statements. However, the
not require an entity to prepare a of prospective financial proposed Standard specifies
complete set of prospective performance and a statement of minimum disclosures in respect
financial statements. accounting policies. It may of individual prospective
[paragraphs 18, 22 and 23] include other statements. financial statements and these
[paragraph 5.3] minimum disclosures are
generally greater than those
Specifies disclosure Specifies disclosure Many of the disclosure
requirements in relation to requirements including requirements are similar to
assumptions, risks and assumptions, the nature of FRS-29. However, there is a
uncertainties. prospective financial greater focus on disclosure of
[paragraphs 40 to 46] information and the basis of the level of uncertainty
assumptions. associated with prospective
[paragraphs 5.15-5.32] financial information.
The FRSB welcomes comment on ED-103 generally. In particular, it encourages
comments on the following questions by 16 August 2005.
1) The scope of the proposed Standard is set out in paragraph 4. Do you agree with
the proposed scope of the Standard? If not, why not?
2) Do you agree that the four qualitative characteristics should form the basis for
preparation of prospective financial information? If not, why not?
3) Do you agree with the elimination of the definitions of forecast and projection?
If not, why not?
4) Do you agree that it is appropriate to require assumptions to have a reasonably
objective basis? If not, why not?
5) Do you agree with the specific disclosure requirements for each prospective
financial statement? If not, why not?
6) Do you agree with the disclosure requirements in the proposed Standard, other
than those relating to specific prospective financial statements? If not, why not?
7) Do you agree that the proposed disclosure requirements are sufficiently
comprehensive to ensure that prospective financial information meets the four
qualitative characteristics? If not, why not?
8) Do you agree that the proposed Standard adequately addresses situations in
which prospective pro forma information is provided? If not, why not?
9) Are there any regulatory issues or other issues arising in the New Zealand
environment that may affect the implementation of the proposals, particularly
any issues relating to:
a) profit-oriented entities;
b) public benefit entities; or
c) the Privacy Act 1993?
Please provide reasons supporting your response.
10) Do you consider that the proposed Standard is in the best interests of users of
general-purpose financial reports in New Zealand? Please provide reasons
supporting your response.