31 December 2017 financial reporting

For those Tier 1 and Tier 2 for-profit entities busy with financial reporting for their 31 December 2017 year ends, the good news is that there are only minor changes to accounting standards that could impact financial statements and these are unlikely to have a material impact on measurement and disclosures in the December 2017 financial statements.

This article summarises the main changes. 

Calculation of deferred tax on an indefinite life intangible asset

At its November 2016 meeting, the IFRS Interpretations Committee clarified, for the purpose of calculating deferred tax, how an entity should determine the expected manner of recovery of an intangible asset that has an indefinite useful life. Diversity exists in practice on how entities account for this deferred tax liability (DTL).

As part of the Committee’s analysis of this issue, it noted that the existing guidance in NZ IFRS is clear that the deferred tax on an intangible asset with an indefinite life should be calculated based on how the entity expects to recover the asset, i.e. either through use or through sale.

Simple example

During the current financial year, Company A purchased Company B’s business, including all of its operations, stores and brand names which it intends to use. This transaction meets the definition of a business combination under NZ IFRS 3 Business Combinations.

As part of the purchase price allocation, brand names are assigned a fair value of $500 million.

The carrying amount of the brand name in the books of Company B (acquiree) is NIL.

The tax base of the brand name is NIL if used, and $500 million if sold.

The brand names are considered to have an indefinite life under NZ IFRS 38 Intangible Assets.

Company A has a 31 December 2017 year end.

Company A should recognise a DTL for the brand name because there is no exemption in NZ IAS 12 Income Taxes for recognising DTLs that arise from assessable temporary differences on a business combination. If Company A had not recognised the DTL for the brand name to be recovered through use, then the journal entry to record the deferred tax liability would be (assuming goodwill is not impaired):

     Dr Goodwill $140 million  

Cr Deferred tax liability      $140 million

     28% of ($500 million less NIL tax base)    

However, if Company A intended to hold the business short term, and then sell the business and brand name, it should instead recognise the DTL using the tax base on sale of the asset. The tax base of the brand name will then be $500 million and therefore no deferred tax liability will be recognised.

More cash flow statement disclosures

Disclosure Initiative: Amendments to NZ IAS 7 introduces new disclosures about changes in financial liabilities arising from cash flow and non-cash flow items. December 2017 financial statements will need to disclose a reconciliation of:

  • Cash and non-cash movements in liabilities arising from financing activities
  • Movements in financial assets used to hedge liabilities arising from financing activities (e.g. interest rate swaps used to hedge variable rate borrowings).
     

Non-Cash changes
 

2016

Cash flows

Acquisition

Foreign exchange movement

Fair value changes

2017
 

$ 

$ 

$ 

$ 

$ 

$ 

 Long-term borrowings

22,000 

(1,000) 

- 

- 

- 

21,000 

 Short-term borrowings

10,000 

(500) 

- 

200 

- 

9,700 

 Lease Liabilities

4,000 

(800) 

300 

- 

- 

3,500 

 Assets held to hedge long-term borrowings

(675) 

150 

- 

- 

(25) 

(550) 

 Total liabilities from financing liabilities

35,325 

(2,150) 

300 

200 

(25) 

33,650 

Decluttering

The amendments to NZ IAS 1 Presentation of Financial Statements facilitating the ‘decluttering’ of financial statement disclosures applied to December 2016 financial reports. However, to date we note only limited uptake of the recommendations among our client base.

We strongly recommend clients to undertake this decluttering process. It will save time in future when producing the financial statements and in the audit process, and will result in financial statements that are more useful to investors.

There are simple steps all entities can take to reduce the amount of clutter in financial statements. This four step process, the ‘4 Rs’, is highlighted in the diagram below.

 

Remove

 
  • Remove unnecessary accounting policies
  • Tailor ‘boilerplate’ wording on accounting policies to suit client circumstances
  • Remove redundant disclosures
  • Remove any disclosures duplicated in multiple places
  • Make use of cross references.

↓

 

Reorder
  • Move the accounting policies to the relevant note
  • Move key accounting estimates and judgements to relevant note
  • Move key information to the beginning of the financial statements

↓

 

Re-group
  • Group similar information within the same note
  • Group related notes together
  • Consider introducing sections to the financial statements.

↓

 

Re-emphasise
  • Highlight key changes in the financial statements
  • Emphasise key information
  • Consider use of non-technical language for certain disclosures.

Don’t forget the ‘triple threat’ on the horizon – Three new accounting standards in the next two years

Given we are staring down the barrel of the biggest change to NZ IFRS since its introduction, we should not be complacent. Transition date for the new revenue standard, NZ IFRS 15 Revenue from Contracts with Customers, and the new financial instruments standard NZ IFRS 9 Financial Instruments, is 1 January 2018. To follow shortly thereafter is the new leases standard, NZ IFRS  16 Leases from 1 January 2019, and you may find it more convenient early adopting NZ IFRS 16 so that only one set of transition disclosures is presented next year.

Because many aspects of these standards require system changes from 1 January 2018, the Financial Markets Authority (FMA) is urging directors and management of FMC Reporting Entities to actively engage with each other and with their auditors to ensure readiness for the new standards (read more here).

Uncertain tax positions

The recent release of NZ IFRIC 23 Uncertainty over Income Tax Treatments could also have a significant impact on taxes recognised in your 2019 financial statements, particularly for entities with transfer pricing issues.

Next financial year will see you calculate your current tax liability and deferred tax balances (for 2019 comparative purposes) as if the tax authorities were going to perform a tax audit, and the tax authorities knew all the facts and circumstances about your entity’s tax position.

For more on the above, please contact your local BDO representative.