Time running out to declutter your financial statements

As part of the New Zealand Accounting Standards Board’s initiative to improve disclosures in financial statements (Disclosure Initiative), amendments have been made to NZ IAS 1 Presentation of Financial Statements which is applicable to Tier 1 and Tier 2 for-profit entities and the equivalent standard for public benefit entities, PBE IPSAS 1 Presentation of Financial Statements. The amendments to these standards facilitate ‘decluttering’ of financial statements by allowing preparers to apply judgement when deciding which mandatory disclosures are relevant to users, and which are not.

The ‘decluttering’ requirements apply to your 31 December 2016 financial statements.

While ‘decluttering’ is not normally associated with half-year financial statements prepared under NZ IAS 34 Interim Financial Reporting, if you are preparing annual financial statements at 31 December 2016, we recommend that you commence this process now.

What do we mean by ‘decluttering’?

The changes to NZ IAS 1 and PBE IPSAS 1 clarify that:

• Notes to the financial statements only need to be included if they are material (even if they form part of a list of black-letter, mandatory disclosures)
• Notes can now be in any order and need not follow the order of the four primary financial statements. For example, notes can now be grouped by operating activities, or by how items are measured (e.g. all items at fair value)
• Statement of financial position categories can be further disaggregated if this is relevant to a user’s understanding of the entity’s financial position (e.g. an entity with significant balances of goodwill and brand names can present each of these separately in the balance sheet to meet the requirement to disclose intangibles)
• Only significant accounting policies need to be disclosed (a laundry list (summary) is no longer required).

Are our financial statements ‘overweight’?

If your financial statements include any of the following features, it is likely that your financial statements are ‘overweight’, and therefore in need of ‘decluttering’:

The ‘Four Rs’ - How do we start the ‘decluttering’ process?

The following step by step approach, which we call ‘the Four Rs’, will help you to start your ‘decluttering’ process.

To summarise, you should:

• Firstly, REMOVE any unnecessary information in the financial statements, including redundant accounting policies, and properly tailor information, particularly for accounting policies and estimates and judgements. Our December 2015 Accounting Alert provides a detailed case study example to demonstrate how easy it is to streamline your accounting policies.
• Secondly, REORDER information in the financial statements. Of companies that adopted these changes early, and ‘decluttered’ their 2015 financial statements, we found that the most useable financial statements moved their accounting policies, and critical accounting estimates and judgements, into the relevant notes.
• Thirdly, RE-GROUP similar information into the same note, and then group related notes together – for instance, include impairment information with the intangible assets that have been impaired during the period.
• Finally, RE-EMPHASISE information by using boxes, colours and other items to highlight key changes in the financial statements that users should be aware of. Companies that have done this already have also tended to use plain English to describe transactions – whether this be for the entire note, or a simple overview at the beginning of a section.

More cash flow statement disclosures to come

For periods beginning on or after 1 January 2017, changes have been made to NZ IAS 7 Statement of Cash Flows to require that you disclose additional information to provide users with information to evaluate changes in liabilities arising from financing activities, including changes arising from cash flows and non-cash flows.

An example of what these disclosures might look like is shown below: