NZ IFRS 18 Presentation and Disclosure in Financial Statements is a new financial statements presentation standard that replaces NZ IAS 1 Presentation of Financial Statements. Under NZ IFRS 18, all Tier 1 and Tier 2 for-profit entities will have to change the way they classify expenses in the statement of profit or loss. They will also have to reconsider the level of aggregation and disaggregation of various line items across the financial statements, and this could affect, in particular, the statement of financial position and the statement of profit or loss, including comparatives.
| Transitioning your financial statement presentation from NZ IAS 1 to NZ IFRS 18 is not a simple exercise. NZ IFRS 18 is not just about reclassifying line items. While this may be the result, how and why an entity gets to those reclassifications is challenging because NZ IFRS 18 is a long and complex standard. Addressing the how and why involves entities making judgements regarding specified main business activities and income and expense categories. These judgements must be documented, supportable and evidenced. In addition, system changes will be required to appropriately tag expenses to the five new categories. Entities should, therefore, start their NZ IFRS 18 implementation projects now in order to be ready to retrospectively restate comparatives from 1 January 2026 (for December year end reporters). Our publication will help you on the NZ IFRS 18 implementation journey. |
Where to start on your NZ IFRS 18 implementation project? As all entities will be affected by the new requirement to classify expenses into one of five categories, we recommend you start here. Once you have determined the appropriate category for income and expense items, you will need to amend your financial reporting systems so that each item of income or expense is tagged to the appropriate category. In some cases, income or expenses may need to be dissected and recorded in separate general ledger accounts because part of it relates to one category and part to another.
Under NZ IFRS 18, entities will have to classify their income and expenses into one of five categories:
Income and expenses are generally classified based on the characteristic of the expense (i.e. the type of asset or liability to which the income or expense relates). However, certain exceptions exist for entities with specified main business activities, resulting in certain income and expenses being classified in the operating category that would otherwise have been classified in the investing and/or financing categories.
A specified main business activity is one where the main business activity of the entity is:
This article focuses on the statement of profit or loss for an entity with no specified main business activity. In the future, check out Financial Reporting Insights for what the statement of profit or loss will look like if the entity has specified main business activities. |
While there are five categories for income and expense items, the statement of profit or loss does not include each category directly. Rather, the categories are used to organise the income and expenses into the mandatory sub-totals. You can see how this works in our example statement of profit or loss.
It is important to note that the operating category is a ‘residual category’. This means that items of income and expense are classified as operating unless they meet the criteria to be classified into another category. Entities must first determine whether each item of income and expense may be (or is required to be) classified into one of the other four categories, and if not, they are allocated to the residual operating category.
Income and expenses are classified in the investing category when they relate to certain assets (i.e. specified assets). The table below shows which specified assets generate income and expenses that will be classified in the investing category.
Category | Assets that result in income and expenses are classified in the investing category | Income and expense items included in the investing category |
Investing |
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Some things to note about the types of income and expenses relating to the above assets that are included in the investing category:
The classification requirements for the financing category focus on liabilities, whereas the investing category focuses on assets. Allocating income and expenses associated with liabilities to the financing category depends on whether:
For these types of transactions, the entity receives finance in the form of cash, or an extinguishment of a financial liability, or receives the entity’s own equity instruments. Then, at a later date, the entity will return cash or its own equity instruments. Examples of these liabilities, along with the associated income and expenses include:
Liabilities arising from transactions involving only the raising of finance | Income and expense items included in the financing category |
Debt instrument that will be settled in cash (e.g. debentures, loans, notes, bonds and mortgages) |
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Liability under a supplier finance arrangement when the payable for goods or services is derecognised (i.e. financial liability for the goods or services is discharged and the entity will return cash in exchange) | |
Bond to be settled through delivery of an entity’s shares (i.e. entity receives cash and will return its own equity instruments in exchange) | |
Obligation for an entity to purchase its own equity instruments (i.e. entity receives its own equity instruments and will return cash in exchange). |
These liabilities arise from ‘dual purpose’ transactions. There is a financing element to the transaction when a financial liability is recognised. However, the transaction goes beyond simply raising finance and settling the debt at a later date, with the entity also usually receiving goods and services. Examples of these liabilities, along with the associated income and expense, include:
Liabilities arising from transactions that do not involve only the raising of finance | Rationale for classification (i.e. why the liability does not arise from transactions involving only the raising of finance) | Income and expenses items included in the financing category |
Payables for goods or services to be settled in cash | The entity receives goods or services, not finance | Interest expenses on payables arising from the purchase of goods or services, applying NZ IFRS 9 |
Contract liabilities | The entity receives cash, but will settle the liability by delivering goods or services rather than cash or its own equity instruments | Interest expenses on a contract liability with a significant financing component as specified by NZ IFRS 15 |
Lease liabilities | The entity receives a right-of-use asset, not finance | Interest expenses on a lease liability, applying NZ IFRS 16 |
Defined benefit pension liabilities | The entity receives employee services, not finance | Net interest expense (income) on a net defined benefit liability (asset), applying NZ IAS 19 |
Decommissioning or asset restoration provisions | The entity receives an asset (the increase in the carrying amount of assets), not finance | The increase in the discounted amount of a provision arising from the passage of time and the effect of any change in the discount rate on provisions, applying NZ IAS 37 |
Litigation provisions | The entity does not receive finance |
The above income and expenses will be allocated to the financing category. However, these transactions have another element of income or expense that belongs in the operating category. For example:
In situations where liabilities arise from transactions that do not involve only the raising of finance, NZ IFRS 18 permits the ‘interest’ portion of income and expenses to be classified as financing only if the entity identifies such income and expenses for the purpose of applying other requirements in NZ IFRS Accounting Standards. If NZ IFRS Accounting Standards don’t require separation of the interest portion of a liability from other movements, that whole liability movement is classified in the operating category. Examples of this include cash-settled share-based payments and movements in other employee provisions calculated under NZ IAS 19.
Additional rules apply to hybrid contracts containing a host liability and to gains and losses on derivatives designated as hedging instruments.
Income tax expense and income arising from the application of NZ IAS 12 Income Taxes and any related foreign exchange differences are classified in the income tax category.
Income and expenses from discontinued operations arising from the application of NZ IFRS 5 Non-current Assets Held for Sale and Discontinued Operations are classified in the discontinued operations category.
As noted above, income and expense are classified in the operating category if they don’t belong in any of the other four categories. This residual category includes income and expenses from assets that do not generate a return individually and largely independently of the entity’s other resources (e.g. property, plant and equipment, intangible assets, inventories, receivables, etc.). Examples of typical income and expenses included in the operating category are:
It is important to note that the investing, financing and operating categories for the statement of profit or loss do not have the same meaning as in NZ IAS 7 Statement of Cash Flows and the same items may be classified differently in the two statements.
Entity A operates a factory. During the year, it sells various items of property, plant and equipment.
Classification in the statement of cash flows | Classification in the statement of profit or loss |
Investing activities The cash flows relate to ‘the acquisition and disposal of long-term assets and other investments not included in cash equivalents’ (NZ IAS 7, paragraph 6) | Operating category |
A typical statement of profit or loss may be as follows. This example includes certain subtotals that are not mandatory, but are commonly used by entities, such as gross profit. While there are five categories for income and expense items, the statement of profit or loss does not include each category directly. Rather, the categories are used to organise the income and expenses into the mandatory subtotals.
| Line item |
| Classification | Explanation |
Revenue | XXX | Operating category |
|
Cost of sales | XXX | ||
Gross profit | XXX | ||
Other operating income | XXX | ||
Selling expenses | XXX | ||
Research and development | XXX | ||
General and administrative expenses | XXX | ||
Operating profit | XXX | Mandatory sub-total | Sum of the operating category |
Fair value gains on investments in equity instruments | XXX | Investing category |
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Profit before financing and income taxes | XXX | Mandatory subtotal | Sum of the operating and investing categories |
Interest expense on borrowings and lease liabilities | XXX | Financing category |
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Profit before income taxes | XXX | Additional subtotal |
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Income tax expense | XXX | Income taxes category |
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Profit from continuing operations | XXX | Additional subtotal |
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Loss from discontinued operations | XXX | Discontinued operations category |
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Profit | XXX | Mandatory total | Sum of all categories |
Stay tuned for future Financial Reporting Insights during 2025 as we continue our deep dive into NZ IFRS 18 in order to demystify some of its complexities.
Please also refer to our BDO NZ IFRS 18 hub to learn about NZ IFRS 18, its application areas, and how BDO’s Financial Reporting Advisory specialists can help.
Implementing new accounting standards can be challenging. Reach out to our Financial Reporting Advisory team for help with understanding the latest requirements in NZ IFRS 18.
For more on the above, please contact your local BDO representative.
This article has been based on an article that originally appeared on BDO Australia, read the original article here.