Abstract:
In its May 2010 Budget, the New Zealand Government disallowed depreciation deductions for buildings with an expected life of 50 years or more. This reduced the tax base of buildings to zero and created an enormous taxable temporary difference between the carrying amount of the buildings in the financial statements and the corresponding zero tax base. The New Zealand Equivalent to International Accounting Standard 12: Income Taxes (NZ IAS 12) required recognition of the tax effect of the taxable temporary difference as a deferred tax liability and a deferred tax expense in the financial statements that followed the 2010 Budget. The combined adverse effect on the 2010 financial performance of New Zealand listed companies was estimated at $1 billion, and this was described as “a serious understatement of the performance of corporate New Zealand” that is likely to be “misunderstood and misreported”, “misleading investors”, and damaging the credibility of the accounting profession. Lobbying against the International Accounting Standards Board (IASB) resulted in a prompt amendment to NZ IAS 12 that provided relief for companies where there is a rebuttable presumption that the buildings were held for sale, but not for companies where the buildings were held for use. This article provides a New Zealand example of the lobbying of the standard-setting process, not dissimilar to other interventions in the standard-setting process in the United States and the United Kingdom. These interventions led Horngren to describe “the setting of accounting standards is as much a product of political action as of flawless logic or empirical findings.” However, in this New Zealand example, the lobbying arose not because of vested interest or adverse economic consequences but because the accounting standard prescribed a procedure that produced nonsensical results that did not portray a “true and fair” view of the financial results.