Accounting standard update

The accounting standard changes that will affect those entities for periods beginning 1 January 2013 onwards have been updated on the XRB website and some key elements are noted below.

Consolidated financial statements

The issue of NZ IFRS 10 Consolidated Financial Statements has replaced those parts of NZ IAS 27 (Separate Financial Statements) which address the requirements of preparing consolidated financial statements.  NZ SIC-12 Consolidation – Special Purpose Entities has also been replaced in its entirety.

NZ IFRS 10 uses control as the basis of consolidation requirement, irrespective of the nature of the investee, which eliminates the risks and rewards approach taken in SIC-12.

IFRS 10 recognises the three elements of control as:

  • Power over the investee; and
  • Exposure, or rights, to variable returns from investment with the investee; and
  • The ability to use power over the investee to affect the amount of the investor’s returns.

NZ IFRS 11 Joint Arrangements supersedes NZ IAS 31 Interests in Joint Ventures and NZ SIC-13 Jointly Controlled Entities – Non-Monetary Contributions by Ventures.  NZ IFRS 11 classifies joint arrangements as either joint operations; which combine the concepts of jointly controlled assets and jointly controlled operations, or joint ventures; which mirror the existing concept of jointly controlled entities.
The distinction between the two is based on the parties’ rights and obligations under the arrangement.  The existence of a separate legal vehicle is no longer the key factor.

NZ IFRS 12 Disclosure of Interests in Other Entities applies to entities that have an interest in subsidiaries, joint arrangements, associates or unconsolidated structured entities.  This standard sets out minimum disclosure requirements to help users of financial statements evaluate the nature of and risks associated with interest in other entities, along with the effects of those interests on the financial statements.

Fair value measurement

NZ IFRS 13 has been issued to establish a framework for measuring fair value where required by other relevant standards.  Fair value is defined as “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date”.

Financial instruments

The mandatory effective date of NZ IFRS 9 Financial Instruments has been deferred to annual periods beginning on or after 1 January 2015.  However, the amendment continues to permit early application.

NZ IFRS 9 will replace NZ IAS 39 Financial Instruments: Recognition and Measurement and entities that choose to early adopt the standard for the period beginning 1 January 2013 or thereafter will need to provide modified disclosures but there will be no need to restate prior periods.

Key changes for financial asset classification and measurement introduced by the new standard include:

  • Debt instruments meeting both a ‘business model’ test and a ‘cash flow characteristics’ test measured at amortised cost
  • Investments in equity instruments can be designated as ‘fair value through other comprehensive income’ with only dividends being recognised in profit or loss
  • All other instruments are measured at fair value with changes recognised in profit or loss.

In terms of financial liabilities:

  • NZ IAS 39 classification categories of amortised cost and fair value through profit and loss are retained
  • Changes in credit risk on liabilities measured at fair value through profit and loss is recognised in other comprehensive income, unless it creates or increases accounting mismatch, and is not recycled to profit and loss
  • The meaning of credit risk is clarified to distinguish between asset-specific and performance credit risk
  • The cost exemption in NZ IAS 39 for derivative liabilities to be settled by delivery of unquoted equity is eliminated.

It is important to note that NZ IFRS requires disclosure of all the updates and new standards that apply to, and materially impact the financial statements of the entity, regardless of whether they have been adopted.

The necessary disclosure should state the nature of the change in accounting policy in compliance with the relevant pronouncement, details of any transitional provisions (where applicable), and the line-by-line analysis of the effect of the change in policy on the financial statements.

Winter 2014

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