When accounting for financial instruments, for-profit entities currently apply NZ IAS 39 Financial Instruments: Recognition and Measurement (“NZ IAS 39”), while public benefit entities (“PBEs”) apply the PBE Standard PBE IPSAS 29 Financial Instruments: Recognition and Measurement (“PBE IPSAS 29”).
PBE IPSAS 29 requirements are essentially identical to those of NZ IAS 39, which means that for-profit entities and PBEs currently classify financial assets and liabilities into essentially identical categories and account for them in the same manner. In addition, hedge accounting requirements under PBE IPSAS 29 mirror those under NZ IAS 39. The essentially identical nature of the two standards means that entities within mixed groups (groups that consist of both for-profit entities and PBEs) all account for the recognition and measurement of financial instruments in the same manner.
For annual reporting periods beginning on or after 1 January 2018, for-profit entities will apply NZ IFRS 9 Financial Instruments (“NZ IFRS 9”) to the recognition and measurement of their financial instruments. NZ IFRS 9 differs significantly from NZ IAS 39 and PBE IPSAS 29 in a number of areas, by introducing:
- A new model for the classification and measurement of financial assets
- A single, forward-looking, expected loss, impairment model
- A substantially reformed approach to hedge accounting.
Once for-profit entities have adopted NZ IFRS 9, the preparation of group financial statements for mixed groups will become more difficult, due to the differences in the way in which financial instruments will be accounted for.
PBE Standards are based on International Public Sector Accounting Standards (“IPSAS”). The International Public Sector Accounting Standards Board (“IPSASB”) intends to develop an IPSAS based on IFRS 9 (which is the international version of NZ IFRS 9). Ordinarily, the New Zealand Accounting Standards Board (“NZASB”) would wait for the completion of an IPSASB project before updating PBE Standards. However, the expected completion date of the IPSASB’s financial instruments project is after the effective date of NZ IFRS 9 in the for-profit sector.
The NZASB has decided that there would be advantages to allowing PBEs to report under the requirements of NZ IFRS 9 at the same time as for-profit entities are required to adopt NZ IFRS 9. As a result of that decision, the NZASB has released an exposure draft, ED NZASB 2016-7 PBE IFRS 9 Financial Instruments (“the Exposure Draft”). The Exposure Draft is essentially identical to NZ IFRS 9, with some minor amendments:
- To mirror the modifications that the IPSASB made to IAS 39 (which is the international version of NZ IAS 39) when it developed IPSAS 29 (which is the IPSASB standard on which PBE IPSAS 29 is based)
- To ensure the coherence of the suite of PBE Standards.
The NZASB is proposing that a final standard based on the Exposure Draft would be effective for periods beginning on or after 1 January 2021. This would allow PBEs to continue applying PBE IPSAS 29 if they wanted to, but would allow PBEs that want to do so to early adopt a standard that is essentially identical to NZ IFRS 9.
The NZASB will continue to monitor the IPSASB’s financial instruments project, with a view to adopting any final standard that it develops.
The NZASB is seeking comments on the Exposure Draft by 30 September 2016. Information on making a submission is available here.
For more on the above, please contact your local BDO representative.
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