New accounting standard brings significant change to financial reporting

This is the most significant change in financial reporting since New Zealand adopted International Financial Reporting Standards (IFRS) more than 20 years ago. The primary aim of NZ IFRS 18 – to help ensure entities provide relevant information that faithfully represents their assets, liabilities, equity, income and expenses – is a lofty goal indeed. Ultimately it is about improving the communicative ability of financial statements, enabling investors to more easily compare information between entities and make more informed investment decisions.

When was it approved?

The New Zealand Accounting Standards Board (NZASB) issued NZ IFRS 18 on 9 May 2024, closely following the International Accounting Standards Board (IASB) issuing the international equivalent standard in April 2024. As a “standard taker”, New Zealand largely adopts international standards that help ensure international alignment of corporate reporting. The main New Zealand amendments to IFRS 1 were to introduce certain disclosure exemptions for Tier 2 for-profit entities. NZ IFRS 18 applies only to for-profit entities and there are no plans to extend it to public benefit entities at this stage. 

What does it require?

NZ IFRS 18 replaces the existing standard, NZ IAS 1 Presentation of Financial Statements, and focuses on setting disclosure requirements for the profit or loss statement (fondly referred to as the P&L). There are also enhanced disclosure requirements for the other core financial statements, including the statement of financial position and the statement of changes in equity.

New defined subtotals

NZ IFRS 18 introduces new subtotals that must be included in the profit or loss statement: “Operating profit or loss” and “profit before financing and income taxes”. These new subtotals should help investors compare the financial performance of different entities operating within the same industry. While operating profit or loss is already frequently used in financial statements, until now, it has not been defined in financial reporting standards, resulting in different methods being used to calculate it.

New categories for the P&L

NZ IFRS 18 also requires the categories commonly used in the cashflow statement – operating, investing and financing – to be used in the profit or loss statement. All income and expenses items are now required to be classified into one of these categories.

The investing category includes income and expenses from investments (such as rentals from investment properties or dividends received); income and expenses from cash and cash equivalents, and shares of profits or losses from associates and joint ventures.

The financing category must include income and expenses from financing liabilities (such as bank loans and bonds) and interest expenses on all other liabilities (such as lease and superannuation liabilities).

The operating category is the “catch all” category and should include all income and expenses that are not included in either the financing or investing category. The “profit before financing and income taxes” subtotal must include the operating profit or loss plus all income and expenses classified in the investing category.

Requirements for disclosure of entity-specific measures

NZ IFRS 18 introduces requirements relating to the disclosure of entity-specific measures, commonly referred to as management-defined performance measures (MPM), Alternative Performance Measures (APMs) or non-GAAP (generally accepted accounting practices) measures. The disclosure requirements include appropriate explanations to be provided for these measures as well as reconciliations back to the core financial statements.

These requirements largely follow the principles contained within the Financial Market Authority’s (FMA) disclosing non-GAAP financial information guidance. These principles included defining the non-GAAP financial information, reconciling back to the most directly comparable financial information, adopting a consistent approach to presenting non-GAAP information each year and not presenting that information with undue or greater prominence, emphasis or authority than the most directly comparable GAAP financial information.

Explanations and reconciliations are only required to be disclosed for those measures that meet the definition of MPMs, with the measures required to be disclosed in a single note. Entities must also explain why each MPM has been reported and how it is calculated, and disclose any changes to the measures reported (in line with the FMA guidance).

Enhanced requirements on the level of aggregation

NZ IFRS 18 introduces enhanced requirements outlining the level of aggregation required in financial statements. As a result, you will need to reconsider how information is grouped, whether it should be presented in the core financial statements or disclosed in the notes, how items are labelled (particularly items labelled as “other”) and how operating expenses are presented (i.e. by the nature of the expense or by its function). 

These requirements build on the IASB’s disclosure initiatives, such as earlier amendments to IAS 1 (to require material rather than significant accounting policies to be disclosed) and development of the IFRS Practice Statement “Making Materiality Judgements”. These initiatives aimed to “cut the clutter” so that only relevant and useful information is disclosed in financial statements.

When is NZ IFRS 18 effective?

NZ IFRS 18 is effective from 1 January 2027, which may sound like a long time, however the principles can be applied immediately. We encourage you to “front foot” the adoption of NZ IFRS 18 so that you are well-placed to communicate your entity’s financial performance in line with the new requirements. To prepare for the new standard you should:

• Let your teams, including board and senior management, know about the requirements of NZ IFRS 18;
• Consider whether changes to your internal processes and information systems are required to ensure that your financial statements are prepared in line with the new definitions and categories; and
• Consider how the information you report will change as a result of the new requirements and how best to communicate these changes to your stakeholders (including whether any entity-specific measures need to be updated and whether there will be any impact on your non-financial disclosures, including your climate reporting disclosures).

If you need assistance regarding application of any of these changes, our Audit and Assurance teams are happy to help.