Stepping up to adopt NZ IFRS®

Navigating the “step-up” to adopting NZ IFRS®

When “stepping-up” into New Zealand equivalents to International Financial Reporting Standards framework (NZ IFRS) many entities mistakenly assume that the impact with simply be more disclosures (that is, “My accounts will just get longer”).

True… one of the consequences of NZ IFRS is increased disclosures … however this is just the tip of the iceberg.

NZ IFRS is a comprehensive and principle-based accounting framework, that results in both new and amended accounting treatments - compared to those applied previously by an entity in its Special Purpose Financial Statements (SPFS).

Accordingly, the road to a complete and accurate adoption of NZ IFRS is neither straight nor uncluttered. Successful navigation requires you to make deliberate, and informed decisions along the way.

The consequence of failing to do so may ultimately result in materially misstated financial statements, not just in the year of adoption but every year thereafter.

Having materially misstated financial statements has consequential impacts in terms of compromised relationships with regulators and other stakeholders (including the Companies Office, Inland Revenue Department, Banks and financiers, and of course Shareholders), which could in turn erode shareholder value.

The “step-up” to NZ IFRS represents a significant “change” to the business, and like implementing any other significant change within a business the only way to successfully tackle any change is to adequately “plan” for it by:

  • Giving it the respect and attention it deserves.
  • Approaching it as a stepped process to be worked through.
  • Project manage it (by building a Project Steering Committee behind it, assigning key roles and responsibilities, and engaging external experts where required).

Six steps to a successful “step-up” to adopting NZ IFRS

Below we outline the six simple steps that can help to ensure you mitigate any unnecessary speed bumps along the adoption journey (which can be numerous and pervasive when they crop up).

A key part of the process that is relevant across all steps is the need to prepare clear and understandable documentation for Accounting Record and Audit support purposes (if relevant, currently and potentially in the future) – click here for our article detailing documentation.

A key mistake we see in practice is entities jumping (blindly) straight into implementation, without adequately doing their due diligence, information gathering, project planning, and upskilling (that is, first establishing the “what”, and the “how”).

A BDO NZ IFRS Status Check involves an initial investigation and assessment of your entity’s current balances and transactions and recognition and measurement accounting policies, against those that will be required under NZ IFRS to identify the gaps you’ll be required to address.

On completion of an NZ IFRS Status Check, our Report will communicate our findings regarding:

  • Areas of recognition and measurement difference that will require further Management attention.
  • The severity and complexity of these differences.
  • Recommendations as to how Management can approach addressing these in their Project Plan (Step 3 below).

The aim and objective of a BDO NZ IFRS Status Check is to undertake an initial “lift the lid” exercise to ensure that accounting treatments that will require attention as part of the adoption of NZ IFRS can be firstly identified, and then appropriately planned for.

The “step-up” to adopting NZ IFRS is governed by a specific accounting standard, NZ IFRS 1 First-time adoption of New Zealand Equivalents to International Reporting Standards (NZ IFRS 1).

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 “standard” NZ IFRS treatment that would ordinarily apply.

The objective of NZ IFRS 1 is to “build” an NZ IFRS 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.

A BDO NZ IFRS Adoption Assessment involves a review of the areas of NZ IFRS application identified in Step 1, against the numerous adoption exemptions and exceptions provided by NZ IFRS 1.

On completion of an NZ IFRS Adoption Approach assessment, our Report will communicate our findings regarding:

  • Which of the NZ IFRS 1 exemptions and exceptions are relevant, and why (why not),
  • Whether the relevant NZ IFRS 1 exemptions and exceptions provide the entity with choices in adoption-date treatment, and if so the pro’s, con’s consequences of each to be considered
  • Recommendations as to how Management can approach addressing these in their Project Plan (Step 3 below).

The aim and objective of a BDO NZ IFRS Adoption Approach assessment is to assist Management in detailing an accurate, complete, and thorough assessment of the requirements of NZ IFRS 1, and to provide guidance on the requirements and/or options available when adopting NZ IFRS for the first time

Once Step 1 and Step 2 have been completed, you will have a solid grasp and understanding of WHAT will be needing to be addressed, so the next step involves planning HOW this will be executed (keeping in mind the possibility that additional areas may reveal themselves and float to the surface as the project progress and more rocks are kicked over).

Depending on the size of the entity and/or nature and extent of the differences identified, it may be prudent for an entity to formally establish a Project Steering Committee (PSC) to manage and direct the project. Members of a PSC include Senior Management of relevant business areas that will be impacted by the adoption of NZ IFRS (not limited solely to Finance departments, but can include Operations, Legal, Treasury etc.), as well as external IFRS experts.

As with any project, there will be elements that can occur concurrently, and others that are dependent on elements “upstream” having to be completed before hand (think GANTT charts and alike).

Planning for these at the outset, and assigning clear roles, responsibilities, and timelines ensures that there is sufficient oversight and expectation of what needs to be achieved, by when, and in what order – which then mitigates for any “ambulance at the bottom of the cliff” scenario that might arise as deadlines loom.

For entities that are not familiar with Project Management in general, or with projects related to NZ IFRS analysis and application, this step can feel a bit daunting (that you, may be wandering around in dark, in that you don’t know what you don’t know). In which case, reaching out to an IFRS expert that has “been-there-and-done-that” previously will be critical.

For entities that are subject to external audit, we would strongly recommend that you involve your Auditor in this process, to ensure that the Project Plan and the documentation to be produced will meet their expectations come audit time (as there is nothing worse than having done a significant amount of work, only to be told at the end that it is incorrect and/or incomplete for audit purposes).

Irrespective of whether the entity is undertaking (parts of) their NZ IFRS adoption internally or instead utilising IFRS experts, a grounding in the areas of NZ IFRS that are relevant for (or may become relevant to) an entity in terms of its go-forward “business-as-usual” accounting treatments will be necessary.

BDO supports entities in two key ways with upskilling on NZ IFRS:

  • Free publications and eTrainings
  • Customised inhouse trainings for staff

Five steps in, we are finally at where “the rubber hits the road”.

Success at this stage is dependent on the thoroughness of the plan that has been established in Step 3, and completeness of any upskilling in Step 4.

Entities will also need to be considering who is best placed to act as Project Manager (i.e., is it someone within the entity with knowledge of the business, or, is it an external IFRS expert that has previous experience with other adoption projects and knowledge of the specific application areas that are relevant to the entity is more appropriate).

Where an entity has established a Project Steering Committee, the frequency of their meetings and specific judgements, estimates, and decisions to be “steered” at these meetings should also be planned and then implemented.

For entities that are subject to external audit, we would strongly recommend that you provide regular updates to your auditors regarding the progress of the project, as well as flagging any new application areas that are uncovered and invite their input and comment as early as possible to ensure that the project is adjusted to adequately address these.

Once you’ve executed (or even whilst you are executing) your NZ IFRS adoption Project Plan, all that’s left to do is to start preparing your new NZ IFRS compliant financial statements.

However, this task should not be underestimated, even if your entity will be a Tier 2 reporting entity, preparing financial statements in accordance with the Reduced Disclosure Regime (NZ IFR (RDR)).

Areas where Management should expect (and plan for) the biggest change from their previous SPFS will be:

  • Accounting policy wording.
  • Additional quantitative and qualitative notes on material financial statement line items.
  • New primary financial statements (e.g., Cash flow statement).
  • Revisions to previous primary financial statements, such as new items (i.e., Other comprehensive income, reserves in equity etc.), sub-totals, and ordering/layout).
  • Specific disclosures regarding the adoption of NZ IFRS, as required by NZ IFRS 1.

While illustrative examples of NZ IFRS (and NZ IFRS (RDR)) financial statements exist (including BDO’s) entities still need to significantly customise these to ensure only material and relevant disclosures that “tell the entity’s story” are presented.

Published resources

BDO Globally and in New Zealand produces regular and comprehensive publications and training material on all things NZ IFRS, including the initial adoption of NZ IFRS.

Below are links to various NZ IFRS material that you mind find useful:

View all IFRS publications

Your external experts in adopting NZ IFRS

BDO Financial Reporting Advisory are BDO’s dedicated service line that lives and breathes all things accounting-standards-related. With over 30 years combined experience adopting NZ IFRS (and its international equivalents) across multiple jurisdictions, in roles from Project Leader, to external IFRS expert, to the team at the “coal face” executing the adoption analysis and documentation, we bring a wealth of technical and practical expertise to this convoluted area of NZ IFRS.

Contact our team