Here at BDO IFRS Advisory, we have recently been noticing an increase in the number of entities who are transitioning into general purpose financial reporting under either New Zealand equivalents to International Financial Reporting Standards (NZ IFRS) or New Zealand equivalents to International Financial Reporting Standards Reduced Disclosure Regime (NZ IFRS (RDR)) (being the only accounting frameworks in New Zealand that represents New Zealand Generally Accepted Accounting Principles (NZ GAAP)).
There are various reasons that an entity might now decide to (or be required to) step-up from special purpose financial reporting (SPFR) into NZ IFRS or NZ IFRS (RDR), including (but not limited to):
- Statutory requirements requiring financial statements to be prepared in accordance with NZ GAAP (i.e. exceeding the revenue, asset, shareholder thresholds under the financial reporting legislation applicable to the entity).
- The entity’s lenders (i.e. Banks) requiring the entity to provide financial statements prepared in accordance with NZ GAAP.
- New investors requiring changes to the entity’s Constitution, Founding documents, and/or Shareholders Agreements, and inserting clauses now requiring financial statements prepared in accordance with NZ GAAP.
- The entity is looking for potential sale, listing, or additional investment opportunities where the preparation of NZ IFRS or NZ IFRS (RDR) financial statements will be required and/or will facilitate the process.
- The entity’s Directors and/or Audit Committee believes the preparation of financial statements in accordance with NZ GAAP represents best business practice and/or corporate governance.
- To ensure higher industry comparability across borders and reduce time and effort in preparing multiple financial statements to meet the group reporting requirements.
Irrespective of the reason WHY an entity steps-up into NZ IFRS or NZ IFRS (RDR) (NZ GAAP) reporting, HOW the step-up is required to be done remains the same.
Unsurprisingly, the first accounting standard in the suite of NZ IFRSs, NZ IFRS 1 First-time adoption of New Zealand Equivalents to International Reporting Standards (NZ IFRS 1), prescribes these requirements.
NZ IFRS 1 is a detail-heavy standard and provides various mandatory and optional accounting treatments for balances and transactions that can differ slightly from the “normal” accounting treatments prescribed in the individual NZ IFRSs that ordinarily apply.
The objective of NZ IFRS 1 is to “build” an NZ IFRS or NZ IFRS (RDR)-compliant opening balance sheet, being the starting point from which the application of the rest of the suite of NZ IFRSs are subsequently applied to going forward.
This Cheat Sheet has been produced as a high-level summary of key points for entities to be aware of when adopting NZ IFRS and applying NZ IFRS 1 (based on NZ IFRS’ in effect as at the time of publishing - November 2020).
The layout of this Cheat Sheet is formatted to be used as quick checklist to assist entities in highlighting the various application areas of NZ IFRS 1 which may require specific attention.
Need assistance with your adoption of NZ IFRS or NZ IFRS (RDR)?
BDO IFRS Advisory is a dedicated service line available to assist entities in adopting NZ IFRS or NZ IFRS (RDR). Further details are provided on the following page for your information.
The date that NZ IFRS or NZ IFRS (RDR) is adopted, and NZ IFRS 1 is applied
The date that NZ IFRS or NZ IFRS (RDR) is adopted (date of transition to NZ IFRS or NZ IFRS (RDR)) is the beginning of the earliest comparative period to be presented in the first NZ IFRS or NZ IFRS (RDR) compliant financial statements.
For example, if an entity is planning to adopt NZ IFRS or NZ IFRS (RDR) for its 31 March 2021 annual financial statements, these financial statements will include (at a minimum) one year of comparatives (i.e. for the 31 March 2020 year).
Accordingly, the date of transition to NZ IFRS or NZ IFRS (RDR) will be 1 April 2019.
It is from this date, 1 April 2019, that NZ IFRS 1 is applied.
As you can see, this translates into an “involved”, backwards-looking process for an entity, requiring:
- An opening NZ IFRS or NZ IFRS (RDR) balance sheet to be compiled in accordance with NZ IFRS 1 as at 1 April 2019.
- Transactions for the comparative year (to 30 March 2020) being (re)processed in accordance with NZ IFRS or NZ IFRS (RDR).
- Transactions for the current year (to 30 March 2021) being (re)processed in accordance with NZ IFRS or NZ IFRS (RDR).
For the 30 March 2021 financial statements, an entity will present the following balance sheets:
- Tier 1 (full NZ IFRS): As at (i) 1 April 2019, (ii) 31 March 2020, and (iii) 31 March 2021.
- Tier 2 (NZ IFRS (RDR)): As at (ii) 31 March 2020, and (iii) 31 March 2021.
Retrospective application of NZ IFRS or NZ IFRS (RDR)– requirements and exemptions
NZ IFRS 1 starts from the position that individual NZ IFRSs are applied on a fully retrospective basis (i.e. as if the entity had always applied NZ IFRS’s.
NZ IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors does not apply to the changes in accounting policies that are made on adopting of NZ IFRS’s in its first NZ IFRS financial statements.
From there, certain exceptions and exemptions to general principle of retrospective application of NZ IFRS’s at the date of transition for specific areas.
Listed below are the (i) Mandatory exceptions, and (ii) Optional exemptions (that are very specific in nature).
- Accounting estimates
- Previous derecognition of financial assets and financial liabilities
- Hedge accounting and derivatives
- Non-controlling interest treatment
- Financial instruments: Classification and measurement
- Financial assets: Impairment
- Financial liabilities: Embedded derivatives
- Government loans
- Business combinations
- Share-based payment transactions
- Insurance contracts
- Deemed cost of non-current assets
- Cumulative translation differences
- Investments in subsidiaries, joint ventures and associates
- Assets and liabilities of subsidiaries, associates and joint ventures
- Compound financial instruments (liability portion settled)
- Designation of previously recognised financial instruments
- Fair value measurement of financial assets or financial liabilities at initial recognition
- Decommissioning liabilities
- Service concession financial assets or intangible assets
- Borrowing costs
- Extinguishing financial liabilities with equity instruments
- Severe hyperinflation
- Joint arrangements
- Stripping costs in the production phase of a surface mine
- Designation of contracts to buy or sell a non-financial item
- Foreign currency transactions and advance consideration
Details of the various mandatory exemptions are provided in the checklist that can be downloaded by filling in the form at the bottom of this page..
Mandatory exceptions and Optional exemptions to be applied at the date of transition to NZ IFRS or NZ IFRS (RDR)
Details of the various optional exemptions are provided in the checklist that can be downloaded by filling in the form at the bottom of this page..
Your go-forward requirements
While it is unlikely that all of the above mandatory and optional exemptions will be relevant and applicable to an entity, it is likely that a number of significant “generic” areas of accounting will need to be considered by almost all entities transitioning to NZ IFRS or NZ IFRS (RDR), including (but not limited to) addressing the treatment of:
- Past business combinations.
- Lease accounting as lessee, and
- Revenue accounting.
In addition to working through the requirements to transition into NZ IFRS or NZ IFRS (RDR), the next step in the process will be for an entity to identify and address the various different recognition, measurement, and presentation requirements that the individual NZ IFRSs will impose on an entity going forward in their subsequent day-to-day accounting treatment (i.e. those that differ from what an entity has been applying prior to adopting NZ IFRS or NZ IFRS (RDR)).
These will be highlighted in our next Cheat Sheet (including a separate Cheat Sheet for those entities stepping up from the Special Purpose Financial Reporting framework as issued from Chartered Accountants Australia and New Zealand (CAANZ)).
It would be an understatement to say that there is a potentially a high risk for the transition to NZ IFRS or NZ IFRS (RDR) to be done incorrectly and/or incompletely where care is not taken in working through the transition to NZ IFRS or NZ IFRS (RDR).
With that in mind, for certain entities, partnering with or formally engaging with an NZ IFRS expert to assist in analysing and documenting the entity’s transition to NZ IFRS or NZ IFRS (RDR) will be a serious consideration.
BDO IFRS Advisory
Members of BDO’s IFRS Advisory department come ready with real life experience in applying IFRS and are therefore well placed to provide entities with the expertise and assistance they require.
For more information as to how BDO Accounting Advisory Services might assist with your entity in navigating this and other areas of IFRS application, please contact James Lindsay at BDO Accounting Advisory Services and visit our webpage.
For those entities still working through their adoption of the new lease accounting standard (NZ IFRS 16), visit our dedicated Adopting NZ IFRS 16 webpage for more information and resources on NZ IFRS 16.
This publication has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The publication cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please contact your respective BDO member firm to discuss these matters in the context of your particular circumstances.