SPFR reporting entities

Although the CAANZ Special Purpose Financial Reporting Framework for use by For-Profit Entities 2018 has not been updated recently, entities reporting thereunder that have “stepped-up” into NZ IFRS to account for certain transactions, will need to keep abreast of recent changes in that framework.

In particular, NZ IFRS accounting for financial assets has changed significantly as a result of the adoption of NZ IFRS 9 Financial Instruments, which is effective for annual periods beginning on or after 1 January 2018.

If an entity reporting under SPFR has elected to step-up into NZ IFRS to account for its financial assets – for example to measure equity investments at fair value as opposed to cost -  then the changes brought about by NZ IFRS 9 will need to be flowed through as a change to the entity’s accounting policies for SPFR purposes.

There is one area in particular that needs to be addressed as soon as possible, and that is where an entity reporting under SPFR has classified investment assets into the “available-for-sale” (AFS) category under the previous NZ IFRS standard, NZ IAS 39 Financial Instruments: Recognition and Measurement.

As a reminder, under NZ IAS 39  financial assest classified into the AFS category were accounted for at fair value, with the fair value gains and losses being deferred into other comprehensive income. When the assets were disposed of those fair value gains and losses would be recycled to profit or loss. If the assets were considered impaired, the impairment was required to be recognised in profit or loss. In addition, any foreign exchange gains and losses on the financial assets were required to be recognised in profit or loss.

Under NZ IFRS 9, the AFS category no longer exists. Instead investments that were classified as AFS instruments will either need to be accounted for at fair value through profit or loss or (if certain strict criteria are met) at fair value through other comprehensive income (FVOCI).

Please note that FVOCI has very different accounting requirements to the old AFS category.

There are separate, strict requirements for classification of debt instruments versus equity instruments. If these criteria are not met, the financial asset must be classified and measured at fair value through profit or loss.

For debt instruments if classification as FVOCI are met, the accounting requirements are:

  • Interest income is recognised in profit or loss using the effective interest rate method that is applied to financial assets measured at amortised cost;
  • Foreign exchange gains and losses on the amortised cost are recognised in profit or loss;
  • Credit impairment losses/reversals are recognised in profit or loss based on a new, more complicated credit impairment methodology introduced by NZ IFRS 9;
  • Other changes in the carrying amount on remeasurement to fair value are recognised in OCI;
  • The cumulative fair value gain or loss recognised in OCI is recycled from OCI to profit or loss when the related financial asset is derecognised.

For equity instruments if classification as FVOCI are met (see accompanying article in this edition of Accounting Alert), the accounting requirements are:

  • Dividend income is recognised in profit or loss;
  • Foreign exchange gains and losses on the amortised cost are recognised in OCI;
  • Other changes in the carrying amount on remeasurement to fair value are recognised in OCI;
  • The cumulative fair value gain or loss recognised in OCI remains in OCI and is not recycled to profit or loss when the related financial asset is derecognised.

For more on the accounting requirements of NZ IFRS 9, please refer to our publication on IFRS 9 Financial Instruments.

Immediate actions

If you report under CAANZ Special Purpose Financial Reporting Framework for use by For-Profit Entities 2018 and have stepped-up into a NZ IFRS standard to account for a particular transaction type, you will need to determine whether there have been any amendments to the relevant NZ IFRS accounting standard. If there have been any changes, you will need to action a corresponding change in your adopted accounting policy and account for this prospectively as required by CAANZ Special Purpose Financial Reporting Framework for use by For-Profit Entities 2018 Section 8.

You can access the full list of recent changes to NZ IFRSs on the External Reporting Board’s website.

For more on the above, please contact your local BDO representative.