3.3 ‘Fair value’ accounting practices conceal the disposal of public assets
Traditionally, accrual accounting has recorded actual transactions, with all transactions recorded at the transaction amount. One perceived shortfall of this historical cost method of accrual accounting is that, over time, the balance sheet becomes meaningless because the value of assets can increase or decrease significantly. The idea of depreciation emerged as an additional accrual to allocate the cost of assets purchased over the period used, but this does not necessarily capture the changes in value of the assets. In some countries, especially the UK, Australia and New Zealand, financial reporting standards have allowed an option for companies to make accrual adjustments that record changes in some asset values. Other countries, such as the United States, reject such valuation adjustments. This asset revaluation practice is controversial and, therefore, remains an option rather than a requirement. Under the IFRS, this option of recording changes in some asset values is called ‘fair value’ accounting.
The creation of SOEs occurred at an early stage (1985–1986) in New Zealand's public sector reforms. An extensive programme of privatization followed, against mounting public opposition that culminated in a changed electoral system. This change took effect from 1996, and all governments since then have been coalitions. This has reduced the pace, if not the general direction, of New Zealand's reforms (Newberry and Pallot, 2005).
One election pledge of the coalition Labour government elected in 1999, and still in power, was that there would be no further privatization. All SOEs of that time have remained state owned, but the transactions engaged in by some of those SOEs, particularly those responsible for crucial infrastructure assets, have come into question. Because the nature of these transactions is not apparent from the audited financial reports, the acceptability of business-style accounting and auditing practices, including the use of fair value accounting, requires thought.