Why you should start preparing now for NZ IFRS 18

In May 2024, the New Zealand Accounting Standards Board published NZ IFRS 18 Presentation and Disclosure in Financial Statements, a new financial statements presentation standard to replace NZ IAS 1 Presentation of Financial Statements. 

NZ IFRS 18 will impact every single Tier 1 and Tier 2 for-profit entity.

If you think that transitioning your financial statement presentation from NZ IAS 1 to NZ IFRS 18 is a simple exercise – think again!

The changes resulting from NZ IFRS 18 are much more substantive than merely rearranging line items in the statement of profit or loss, and implementation of the new standard cannot simply be performed via a spreadsheet exercise when finalising your first NZ IFRS 18 financial statements.

This is because the application of NZ IFRS 18 requires an entity to make certain entity-specific judgements, the outcome of which will have consequential impacts to how the requirements of NZ IFRS 18 are required to be applied, including (but not limited to) whether the entity has one of the specified main business activities (SMBA) defined by NZ IFRS 18 (noting that for Groups, there may be instances where the Group has (does not have) a SMBA that differs from the SMBA from individual group entities).

Further, there will be certain “common” income and expense lines that will now need to be disaggregated and split between the new categories defined by NZ IFRS 18, based on both the above SMBA determinations as well as other entity-specific determinations to be made in applying NZ IFRS 18, including (but not limited to):

  • Government grant income.
  • Foreign exchange gains/losses.
  • Income and expenses related to:
    • Investment property (both measured under the cost model, and fair value model).
    • Joint ventures and associates (where the equity method is NOT used).
    • Cash and cash equivalents.
    • Financial assets and financial liabilities (applying the effective interest rate method).
    • Investments in equity instruments (measured at fair value through profit or loss).
    • Investments in debt instruments (measured at fair value through profit or loss).
    • Derivative instruments.
    • Derecognition and/or modification of financial assets and financial liabilities.
    • Impairment of related party loan receivables.


Accordingly, for Accounting Record purposes (and providing support to Auditors) Management will need to ensure thorough, complete, and accurate documentation is compiled that clearly details how it has approached the adoption of NZ IFRS 18, including support for (and against) the judgements it has made and the consequential impact(s) to various items of income and expense.

In order to comply with NZ IFRS 18, implementation projects may involve some, or all, of the following:

  • Undertaking an initial impact assessment of NZ IFRS 18 to identify where the potential application areas could be, including areas of Management judgement that may need to be made and items of income and expense to be considered further.
  • System changes to properly tag income and expenses to the appropriate income and expense categories in the statement of profit or loss – a complex exercise for diverse groups running multiple financial reporting systems, especially if some entities have specified main business activities and others don’t.
  • A review of how financial information is aggregated, disaggregated and labelled (this could affect both the statement of profit or loss and the statement of financial position).
  • Identifying whether the entity uses management-defined performance measures and developing new systems, processes and controls to produce the new disclosures required in the financial report.
  • Identifying contracts impacted by profit measures and resetting and renegotiating targets based on the new mandatory subtotals – operating profit or loss, and profit before financing and income tax (for entities without specified main business activities). Amongst others, bank covenants and employee KPIs could be affected.

We strongly encourage entities to get started. If you need help, please reach out to our Financial Reporting Advisory team for assistance.

Also, refer to BDO’s most recent In Practice publication (click link here) for further detailed guidance on NZ IFRS 18.

When is NZ IFRS 18 effective?

NZ IFRS 18 is effective for annual periods beginning on or after 1 January 2027.  This means that Tier 1 and Tier 2 for-profit entities have less than two years until the NZ IFRS 18 application date and less than one year from the date from which retrospective restatement applies.

Implementation dates

For the first time, NZ IFRS 18 will apply to annual and half-year reporting periods, assuming a twelve-month financial year, as shown in the table below.


Annual periods
Half-year periods
Annual reporting period beginning on or after 1 January 2027Effective for the first time to the annual reporting period ending:Restatement of the statement of profit or loss for the year ending:Restatement of the opening statement of financial position (due to changes in the levels of aggregation/disaggregation)    Effective for the first time to the half-year reporting period ending:Restatement of the statement of profit or loss for the half-year ending:
1 January31 December 202731 December 20261 January 202630 June 202730 June 2026
1 April31 March 202831 March 20271 April 202630 September 202730 September 2026
1 July30 June 202830 June 20271 July 202631 December 202731 December 2026
1 October30 September 202830 September 20271 October 202631 March 202831 March 2027

  

Retrospective restatement

NZ IFRS 18 must be applied retrospectively. As the changes from NZ IAS 1 primarily affect the statement of profit or loss, profit or loss information will have to be restated for the comparative annual and interim periods. However, NZ IFRS 18 could also affect other primary financial statements such as the statement of financial position, for example, where entities change their level of aggregation and disaggregation.

NZ IFRS 18 contains the same rules as NZ IAS 1 regarding the ‘third balance sheet’, or statement of financial position at the beginning of the preceding period for Tier 1 entities. This is required if an entity retrospectively restates items that have a material effect on the statement of financial position as at the beginning of the comparative period. Although Tier 2 entities do not have to present the ‘third balance sheet’, there are very few other disclosure exemptions for Tier 2 entities contained in NZ IFRS 18. Entities should, therefore, be working towards completing NZ IFRS 18 implementation projects by 31 December 2025 in order to be ready for a 1 January 2026 ‘opening balance sheet’ date.

Transition disclosures

Usually, retrospective restatement caused by initially applying a new NZ IFRS Accounting Standard requires disclosure about the amount of the adjustment for each financial statement line item affected (NZ IAS 8 Basis of Preparation of Financial Statements1, paragraph 28(f)). This disclosure is not required when there is retrospective restatement as a result of first applying NZ IFRS 18.

1: NZ IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors is renamed to NZ IAS 8 Basis of Preparation of Financial Statements as a consequence of NZ IFRS 18

However, in the annual financial statements of the period during which NZ IFRS 18 is first applied (e.g. the year ending 31 December 2027), reconciliations must be disclosed for each line item in the statement of profit or loss in the comparative period to explain and quantify differences between:

  • The restated amounts applying NZ IFRS 18, and
  • The amounts previously presented applying NZ IAS 1.

 Note that there are currently no Tier 2 disclosure exemptions from these reconciliation requirements.

Implications for half-years

When preparing condensed financial statements for a half-year reporting period, NZ IAS 34 Interim Financial Reporting, paragraph 10, requires an entity to ‘look back’ and include headings and subtotals that were shown in the entity’s most recent annual financial statements. This is not possible the first time an entity prepares half-year financial statements applying NZ IFRS 18.

Transition paragraph C4 provides a mandatory exception to circumvent this problem. An entity must instead present each heading and subtotal it expects to use when applying NZ IFRS 18 in the annual financial statements which it will prepare six months later. It will only apply the ‘look back’ approach in paragraph 10 of NZ IAS 34 after it has issued its first set of annual financial statements applying NZ IFRS 18.

Similar transition reconciliations are also disclosed in the half-year accounts for the comparative statement of profit or loss as described above.

What are the key changes in NZ IFRS 18?

 NZ IFRS 18 introduces changes in five areas:

  • Income and expenses will have to be classified into one of five categories – investing, financing, operating, income taxes and discontinued operations. ‘Operating’ is a residual category if income and expenses are not classified into any of the other four categories. Investing and financing categories are defined and are not the same as the categories of activities currently used in the statement of cash flows.
  • Two new mandatory subtotals – operating profit or loss, and profit or loss before financing and income taxes (which is the sub-total of operating profit or loss, and all income and expenses classified as investing).
  • Stricter requirements regarding labelling of items in the financial statements and aggregation and disaggregation.
  • Disclosures about management-defined performance measures.
  • Consequential amendments to other NZ IFRS Accounting Standards as a result of NZ IFRS 18.

As noted above, entities should not underestimate the work involved preparing for the adoption of NZ IFRS 18.

More information

During 2025, Financial Reporting Insights will be taking a deep dive into NZ IFRS 18 in order to demystify some of its complexities. Stay tuned.

In addition, please refer to our publication on this topic.

Need 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.