Public Benefit Entities Face Substantial Changes to Accounting for Financial Instruments

For financial reporting periods beginning on or after 1 January 2022, PBE IPSAS 41 Financial Instruments (“PBE IPSAS 41”) replaces PBE IPSAS 29 Financial Instruments: Recognition and Measurement (“PBE IPSAS 29”). Earlier adoption of PBE IPSAS 41 is permitted.

PBE IPSAS 41 introduces substantial changes to the manner in which financial instruments are accounted for by public benefit entities and aligns public benefit entity accounting for financial instruments with the requirements applied by for-profit entities. 

The primary differences between PBE IPSAS 41 and PBE IPSAS 29 relate to the classification of financial assets and the impairment of financial assets.


The classification of financial assets

PBE IPSAS 29 classifies financial assets into four categories – financial assets at fair value through surplus or deficit (carried at fair value, with value changes recognised in surplus or deficit), loans and receivables (carried at amortised cost), held to maturity (carried at amortised cost) and available for sale (carried at fair value, with value changes recognised in other comprehensive revenue and expense and impairment losses recognised in surplus or deficit).  Classification is dependent on the characteristics of an instrument and management’s intentions in relation to the instrument.  The default classification is available for sale.

In contrast, the default position in PBE IPSAS 41 is to carry financial assets at fair value through surplus or deficit.  Some financial assets are permitted to be carried at fair value through other comprehensive revenue and expense, or at amortised cost, but only if specific criteria are met.  Those criteria relate to:

  • The cash flow characteristics of the financial asset (and specifically whether those cash flows constitute solely payments of principal and interest)
  • The management model under which the financial asset is held. 

The adoption of PBE IPSAS 41 may result in more financial assets being carried at fair value through surplus or deficit, which would increase surplus or deficit volatility. 


The impairment of financial assets

Under PBE IPSAS 29, impairment is determined using an “incurred loss” model.  Under this model, impairment losses are recognised only if there is objective evidence of impairment as a result of a past event that occurred subsequent to initial recognition - expected losses as a result of future events, no matter how likely, are not recognised. 

In contrast, PBE IPSAS 41 determines impairment using an “expected loss” model, which is a three stage model that recognises impairment on the basis of expectations about future loss events. 

The change from the PBE IPSAS 29 incurred loss model to the PBE IPSAS 41 expected loss model will result in earlier impairment recognition and, in many instances, the recognition of greater levels of impairment. 

We will provide more detailed information on PBE IPSAS 41 requirements in coming editions of Accounting Alert.


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


This publication has been carefully prepared, but is general commentary only. This publication is not legal or financial advice and should not be relied upon as such. The information in this publication is subject to change at any time and therefore we give no assurance or warranty that the information is current when read. The publication cannot be relied upon to cover any specific situation and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please contact the BDO member firms in New Zealand to discuss these matters in the context of your particular circumstances.
BDO New Zealand and each BDO member firm in New Zealand, their partners and/or directors, employees and agents do not give any warranty as to the accuracy, reliability or completeness of information contained in this article nor do they accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information in this publication or for any decision based on it, except in so far as any liability under statute cannot be excluded. Read full Disclaimer.