Recently, several important changes have been made to New Zealand equivalents to International Accounting Standards (NZ IAS) to make financial statements clearer, comparable and relevant. Key updates have been made to:
The amendment to NZ IAS 1 emphasises the disclosure of material accounting policies. It requires entities to make material accounting policies prominent and easily accessible within financial statements.
Previously, businesses were only required to disclose their significant accounting policies. The move to releasing material accounting polices was made to reflect the fact that term and its application is described in detail in accounting standards, where the term significant is not.
Transparent disclosure of accounting policies is crucial for stakeholders to comprehend how financial information is prepared and to assess the reliability of financial statements. By explicitly stating material accounting policies, companies provide clarity on significant judgments and assumptions applied in financial reporting, enhancing the overall transparency, trustworthiness and comparability of financial statements for different entities.
Investors and other stakeholders can make more informed decisions when they have a clearer understanding of the underlying principles and methodologies used in financial reporting. It encourages companies to critically evaluate their accounting policies, ensuring they accurately reflect the economic substance of transactions and events.
Businesses are encouraged to review the significant accounting polices previously disclosed to determine how they stack up against the new guidance to disclose material accounting policies.
The revision to NZ IAS 8 addresses the accounting for estimates, emphasising the need for consistency and reliability when estimating uncertain future outcomes. Over time, a change in accounting estimates has become confused with a change in accounting policy.
The amendment replaces the definition for a change in accounting estimate with the definition for an accounting estimate as monetary amounts that are subject to measurement uncertainty.
Estimates play a crucial role in financial reporting, particularly in areas such as fair value measurements, provisions, and impairment assessments. Ensuring the reliability and consistency of estimates turns your financial statements into a tool stakeholders can use to assess the potential impact of uncertainties on an entity's financial position and performance.
The revised standard prompts companies to exercise greater diligence and transparency when making and disclosing estimates. By providing insight into significant judgments and uncertainties, you can mitigate the risk of misinterpretation and enhance stakeholder confidence in the reliability of your financial information. Additionally, it encourages robust internal controls and processes for estimating, monitoring, and disclosing uncertainties, all of which improves risk management practices.
The amendment to NZ IAS 1 focuses on the presentation of current and non-current liabilities, requiring a liability to be classified as current if, among others, the company does not have an unconditional right to defer settlement of the liability for at least twelve months after the reporting period. The amendments to NZ IAS 1 clarify that the right to defer settlement must have substance, and it also discusses the impact of covenants on this assessment.
Clearly presenting your current and non-current liabilities makes your liquidity and solvency position easier to understand. By segregating liabilities based on their maturity, financial statements provide valuable insights into an entity's short-term obligations and its ability to meet them, which helps stakeholders assess liquidity risk and financial health.
The amendments state that at the reporting date, instead of considering covenants that will need to be complied with in the future, when considering the classification of the debt as current or non-current, the entity should disclose information about these covenants in the notes to the financial statements. The standard setter introduced these so investors can understand the risk that such debt could become repayable early and therefore improving the information being provided on the long-term debt.
The revised standard prompts entities to reassess their classification of liabilities, ensuring compliance with the new presentation requirements. By clearly delineating between current and non-current liabilities, businesses enhance the clarity and relevance of financial statements, enabling stakeholders to make more informed assessments of an entity's financial position and performance. It underscores the importance of effective liquidity management and strategic planning to meet short-term obligations and sustain long-term growth.
After a period of relative calm, we are expecting to see a minimum of two new accounting standards over the coming year.
The first, IFRS 18, will impact the representation and disclosures of primary financial statements. Key changes include:
It is important to note that IFRS 18 is subject to consultation before the standard is adopted in New Zealand.
We are also anticipating a new standard outlining disclosure requirements for subsidiary, and potentially other entities, who do not have obligations to produce financial statements. When and how this standard might be applied in New Zealand will be subject to XRB consultation.
