Countdown to adopting NZ IFRS 9, 15, & 16 – Time is running out!
The effective date for NZ IFRS 9 Financial Instruments and NZ IFRS 15 Revenue from Contracts with Customers is fast approaching and transition date has already passed for entities with December, March, and June year ends.
NZ IFRS 9 & 15 key dates for Tier 1 and Tier 2 for-profit entities (as at 30 September 2017)
We caution anyone contemplating delaying NZ IFRS 15 transition to the last moment by utilising the partial retrospective method. This route comes with one major draw-back. In order to give users comparative information, in the year of adoption, those entities electing to apply the partial retrospective method will have to maintain two sets of books:
- One applying NZ IFRS 15, and
- One continuing to apply NZ IAS 18 Revenue and NZ IAS 11 Construction Contracts.
NZ IFRS 9 Financial Instruments
NZ IFRS 9 significantly changes the financial reporting landscape for how entities account for financial instruments.
Entities will need to determine which of the four NZ IFRS 9 categories their financial assets belong to. In a number of instances, the use of amortised cost will be restricted, resulting in both difficulties in measuring an asset’s fair value, and increased earnings volatility.
Financial assets (including trade receivables, intercompany loans, other investments etc.) will also be subject to a new ‘expected loss’ impairment model, which means entities could be recognising impairment losses earlier than under NZ IAS 39 Financial Instruments: Recognition and Measurement. This will likely result in additional losses being recognised on transition, with a positive impact on post adoption reported earnings.
New hedging rules also make it easier for many entities to qualify for hedge accounting, reducing volatility in profit or loss movements from period to period. The relaxed rules could well see entities revisiting their treasury policies.
The challenges of implementing this standard should not be underestimated. One area of complexity is collating historical and forward-looking data for determining expected losses under the new impairment model, particularly in respect of intercompany loans and loans to associates. Another area is documenting hedge relationships. Even though the effectiveness testing requirements are less onerous, entities wishing to apply hedge accounting will need to set up processes and systems to meet the documentation requirements for hedge accounting. The new hedging rules also mean entities may start to issue more exotic hedging products such as swaptions, zero cost collars, etc. This in turn will lead to increased complexity.
NZ IFRS 15 Revenue from Contracts with Customers
The challenge of adopting NZ IFRS 15 cannot be underestimated. The standard will change the pattern of revenue recognition for most entities. In a significant number of cases, adoption of NZ IFRS 15 will result in the recognition of revenue in a pattern that does not correspond to the amount invoiced to the customer.
Changes to processes and systems may be required so that the accounting system can recognise revenue in accordance with NZ IFRS 15 rather than when invoiced to the customer.
The introduction and ongoing compliance with NZ IFRS 15 requires coordination between an entity’s sales team, the accounting team and those responsible for business systems and processes, requiring detailed analysis of sales contracts and any modifications to those contracts.
NZ IFRS 16 Leases
The mandatory adoption of NZ IFRS 16 is one year later than NZ IFRS 9 and 15. However, entities should consider whether to early adopt the standard and have one ‘big bang’ in 2018 to provide a stable reporting platform going forward.
The accounting headlines of applying NZ IFRS 16 are:
- There is no such thing as rental expense
- All leases come on balance sheet/statement of financial position
- An entity’s net current assets will decrease, and
- An entity’s EBITDA will improve.
Again, the implementation challenges should not be underestimated. One area of complexity is determining which contracts contain leases, as the requirements are pervasive and require a review of service contracts to see if they contain assets that are within the scope of NZ IFRS 16.
For contracts that contain leases, companies are required to set up a right-of-use asset register and calculate the lease liability for each leased asset. Systems and processes are required to calculate asset amortisation and the finance costs arising from leased assets.
NZ IFRS 16 key dates for Tier 1 and Tier 2 for-profit entities (as at 30 September 2017)
If you require assistance transitioning to NZ IFRS 9, 15, and 16, please contact your local BDO representative.