NZ IFRS 18: New rules for aggregation, disaggregation and labelling of line items

• What is meant by SMBA, and how entities will need to approach making this first, critical determination in applying NZ IFRS 18 (click here)
• How the new investing category in profit or loss of an entity with a SMBA differs from entities with that have no SMBA (click here)
• How the new financing category in profit or loss of an entity with a SMBA of providing financing to customers differs from other entities (click here)
• How foreign exchange gains or losses will need to be disaggregated between the three new categories to be presented in an entity’s Statement of Profit or Loss (i.e., operating, investing, financing) (click here)
• Example of how the Statement of Profit or Loss could look like for a typical retail, wholesale, manufacturer, or service business with no SMBA (click here)
• Illustrative examples: Entities that have a SMBA that is asset investment (click here)
• Illustrative examples: Entities that have a SMBA that is providing finance to customers (click here).

In this month’s article, we look at how entities will also need to reassess how they aggregate and disaggregate items under the new requirements of NZ IFRS 18, and how they label these items.

This applies to all aspects of the primary financial statements and the notes, not just to the statement of profit or loss.

What is the role of the primary financial statements and the notes?

The (four) primary financial statements comprise:

1. Statement of profit or loss and other comprehensive income
2. Statement of changes in equity
3. Statement of financial position
4. Statement of cash flows.

The role of the primary financial statements is to provide users with a structured summary of the entity’s assets, liabilities, equity, income, expenses and cash flows.

The role of the notes to the primary financial statements is to provide material information so that users can better understand the line items presented in those primary financial statements.

 

Primary Financial Statements		Notes
↓		↓
Provides a structured summary		Material information about line items in primary financial statements
↓		↓
Aggregated information		Disaggregated information

What if information is not material?

Some NZ IFRS’ specify information to be included in the primary financial statements, or, disclosed in the notes.

However, NZ IFRS 18 clarifies that an entity need not provide this information if it is not material.

This applies even if the standard contains a list of specific requirements, or describes the information as a minimum requirement.

Why aggregate or disaggregate information?

Financial statements result from entities processing large numbers of transactions and other events.

For example, an entity may enter into thousands (or even millions) of transactions with customers and/or suppliers.

These transactions and other events give rise to assets, liabilities, equity, income, expenses and cash flows.

For entities with numerous transactions, it would be impossible to prepare the four primary financial statements without aggregating these transactions into a smaller number of line items.

However, additional information may be required to explain these line items in more detail, and that’s where disaggregation comes in.

Principles for aggregation and disaggregation

NZ IFRS 18, paragraph 41, introduces principles to help entities determine how to aggregate line items in the primary financial statements and how to provide more detailed disaggregated information in the notes.

In a nutshell, items are aggregated based on shared characteristics and disaggregated based on characteristics that are not shared (dissimilar characteristics).

Accordingly, judgement is required to be applied (and supported).

 

	Requirement in Standard	Example
a	To classify and aggregate assets, liabilities, equity, income, expenses or cash flows into items based on shared characteristics​	Presentation of financial assets in the statement of financial position by classification in NZ IFRS 9 Financial Instruments (e.g. amortised cost, fair value through profit or loss, fair value through OCI)
b	To disaggregate items based on characteristics that are not shared in the primary financial statements and in the notes	If an entity presents expenses by nature, disaggregating operating expenses by the nature of those expenses (e.g. presenting wages and benefits separately from depreciation)
c	To aggregate or disaggregate items to present line items  in the primary financial statements that fulfil the role of the primary financial statements in providing useful structured summaries	Applying the aggregation and disaggregation principles in (a) and (b) in order to provide a useful structured summary of information in the primary financial statements
d	To aggregate or disaggregate items to disclose information in the notes that fulfils the role of the notes in providing material information	For assets that are aggregated in the statement of financial position (e.g. financial assets), disclosing a disaggregation by asset class in the notes to the financial statements, considering the requirements of NZ IFRS 18 and NZ IFRS 7 Financial Instruments: Disclosures
e	To ensure that aggregation and disaggregation in the financial statements do not obscure material information	Considering materiality in assessing whether to aggregate otherwise similar items, such as an individually material expected credit loss recorded on a single financial asset vs. expected credit losses recorded on a portfolio of smaller financial assets

Always disaggregate when information is material

NZ IFRS 18, paragraph 42 notes that an entity must always disaggregate items when the resulting information is material, although disaggregation need not always be in the primary financial statements.
That is, it is permitted to instead be present in the note, subject to considering (i.e., it is not a free choice):

1. The role of the primary financial statements and notes,

2. The criteria (requirements) in the above table.

Aggregation and disaggregation of profit or loss items

When assessing whether items of profit or loss should be aggregated or disaggregated (i.e. whether they have characteristics that are shared (similar) or not shared (dissimilar)), entities should consider the following characteristics (refer to NZ IFRS 18, paragraph B78):

• Nature

• Function (role) within the entity’s business activities

• Persistence (including the frequency of the item of income or expense or whether it is recurring or non-recurring)

• Measurement basis

• Measurement uncertainty or outcome uncertainty (or other risks associated with an item)

• Size

• Geographical location or regulatory environment

• Tax effects (for example, if different tax rates apply to items of income or expense)

• Whether the income or expenses arise on initial recognition of a transaction or event or from a subsequent change in estimate relating to the transaction or event.

Examples of income and expenses that might have sufficiently dissimilar characteristics to warrant separate presentation in the primary statements or notes include: Write-downs of inventories (and reversals) Impairment losses for property, plant and equipment (and reversals) Income and expenses from restructurings and reversals of any restructuring provisions Income and expenses from disposals of property, plant and equipment Income and expenses from disposals of investments Income and expenses from litigation settlements Reversals of provisions Non-recurring income and expenses not included in the above.

Aggregation and disaggregation of balance sheet items

When assessing whether balance sheet items should be aggregated or disaggregated (i.e. whether they have characteristics that are shared (similar) or not shared (dissimilar), entities should consider the following characteristics (refer to NZ IFRS 18, paragraph B110):

• Nature
• Function (role) in the entity’s business activities
• Duration and timing of recovery or settlement (including whether the asset or liability is classified as current or non-current or whether its recovery or settlement forms part of the entity’s operating cycle)
• Liquidity
• Measurement basis
• Measurement uncertainty or outcome uncertainty (or other risks associated with an item)
• Size
• Geographical location or regulatory environment
• Type, for example, the type of good, service or customer
• Tax effects – for example, if assets or liabilities have different tax bases
• Restrictions on the use of an asset or on the transferability of a liability.

 

Examples of assets, liabilities and equity that might have sufficiently dissimilar characteristics to warrant separate presentation in the primary statements or notes include: Property, plant and equipment: Disaggregated into classes in accordance with NZ IAS 16 Property, Plant and Equipment Receivables: Disaggregated into Trade receivable (from trade customers), Related party receivables, Prepayments and Other receivable amounts Inventories: Disaggregated into classes in accordance with NZ IAS 2 (i.e., Raw materials, Work in progress, and Finished goods) and then further substantive items where relevant to the entity (i.e., Merchandise, Production supplies, Goods in transit (inwards/outwards)). Trade payables: Disaggregated, applying NZ IAS 7 Statement of Cash Flows, to provide separately the amounts that are part of supplier finance arrangements Provisions: Disaggregated according to their nature, such as, provisions for employee benefits, decommissioning liabilities, or other items Equity capital and reserves: Disaggregated into various classes, such as Share capital, Share premium reserve, and other reserves.

Labelling

NZ IFRS 18 has specific requirements for labelling financial statement items.

For users to understand the composition of items in the primary financial statements and notes, entities must label them in a way that faithfully represents the characteristics of these items.
 

Scenario	How to label?
An item for which information is material is aggregated with other items for which information is also material.	Provide an aggregation to summarise information (for example, property, plant and equipment in the primary financial statements). Disclose information in the notes about each material item (for example, land and buildings, plant and equipment, etc.).
An item for which information is material is aggregated with items for which information is not material.	Use the most appropriate label for the material item (for example, prepayments and other assets). Only need to provide disaggregated information in the notes if the immaterial item obscures the material information.
An item for which information is not material is aggregated with other items for which information is not material.	Various immaterial items are aggregated to complete a list of items (for example, other sundry assets complete the total assets in the balance sheet). Disaggregated information is not required about the immaterial items. However, if the aggregated balance is sufficiently large that users might reasonably question whether it includes information that could be material, further information should be disclosed, for example: Explanation that no items for which information would be material are included in the amount, or Explanation that the amount comprises several items for which information would not be material, with an indication of the nature and amount of the largest item.

 

Using 'other' as a lable

Currently, many entities use the label ‘Other expenses’ to describe residual expenses not classified in one of the other nature or function categories in the statement of profit or loss.

NZ IFRS 18 no longer permits ‘Other’ to be used to describe an item disclosed in the primary financial statements or notes, unless it is immaterial.

An entity can only use ‘Other’ if it cannot find a more informative label.

• If an item for which information is material is aggregated with items for which information is not material, entities should use a label that describes the item for which information is material.  An example of this is using a label such as ‘prepayments and other assets.

• If items for which information is not material are aggregated based on shared similar characteristics, entities should use a label that describes the similar characteristics. An example of this is ‘Other receivables’.

• If items for which information is not material are aggregated with other items that are not material, but which do not share similar characteristics, entities should use a label to describe the dissimilar characteristics. An example of this is ‘Accounting fees, stationery costs and entertainment’.

Why do you need to consider NZ IFRS 18 now?

Transitioning your financial statement presentation from NZ IAS 1 to NZ IFRS 18 is not a simple exercise. NZ IFRS 18 is not just about reclassifying line items. While this may be the result, how and why an entity gets to those reclassifications is challenging because NZ IFRS 18 is a long and complex standard. Addressing the how and why involves entities making judgements regarding specified main business activities and income and expense categories. These judgements must be documented, supportable and evidenced. In addition, system changes will be required to appropriately tag expenses to the five new categories. Entities should, therefore, start their NZ IFRS 18 implementation projects now in order to be ready to retrospectively restate comparatives from 1 January 2026. Our comprehensive In Practice publication will help you on your NZ IFRS 18 implementation journey. For more details, including our "Six steps to a successful adoption of NZ IFRS 18," please refer to our Adopting NZ IFRS 18 page.

Need help

Please contact our Financial Reporting Advisory team for assistance in your entity’s adoption journey of NZ IFRS 18.

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

This article has been based on an article that originally appeared on BDO Australia, read the original article here.