IFRS Financial Reporting

The goal of any listing process is to maximise entity value from the get-go, and thereafter.

Entity value is ultimately underpinned by the story that the numbers tell, both about the present and the future outlook.

Accordingly, maximising entity value becomes challenging when prospective investors have uncertainty or doubt about the numbers they are being presented – that is, whether the numbers are perceived to be accurate, understandable, and ultimately compliant with financial reporting standards.

The financial reporting standards applicable to (would be) listed entities are comprehensive, detailed, and largely principle-based (at times requiring significant judgement, estimation, and consideration of specific facts and circumstances).

In addition, the associated disclosure and presentation requirements require consideration as to what information is (and is not) materially relevant to the end users, whilst still achieving financial statements that present transparent and unobscured information.

Accordingly, the application of financial reporting standards requires both:

(i) A complete and active working knowledge of the financial reporting standards, as well as

(ii) Practical experience in applying the financial reporting standards to various “real life” transactions.

This is where BDO’s IFRS Advisory team is able to provide invaluable assistance as part of an IPO and Direct Listing Services offering.

What are the common missteps we see entities making?

Because publicly available financial statements become open to much wider, focused, and specialised scrutiny, that act of stepping up into financial reporting standards required by listed entities (NZ IFRS) will often require an entity to revisit certain areas that may have been overlooked or deemed immaterial in the past.

This may be the case even for entities that have previous applied the reduced-disclosure versions of these financial reporting standards (NZ IFRS (RDR)), and/or have been previously audited.

In general, the primary misstep we see entities frequently making is not undertaking a systematic assessment to ensure that their “house is in order” and up to the standards required for a publicly listed entity.

This can create problems when issues are only identified, and then quickly need to be resolved, towards the end of the listing process when fixed and unmoveable deadlines are looming.

For example, some of the common areas we see entities having to react to at short notice are:

(i) Failing to (reapply) NZ IFRS 1	When an entity applies NZ IFRS for the first time, there is a specific financial reporting standard that must be applied (NZ IFRS 1). This is even the case if an entity has previously been applying NZ IFRS (RDR).
(ii) Failing to revisit previous accounting treatments	Particularly for those entities that have not previously applied NZ IFRS (RDR) – as the accounting treatment for leases, revenue, financial instruments, and more complex transactions, can be significantly different and therefore require retrospective restatement. For those entities that have previously applied NZ IFRS (RDR), not revisiting complex transactions where judgements on materiality may not necessarily remain appropriate in a listed environment.
(iii) Failing to address the accounting treatments of transactions related to the listing.	In particular: Pre-listing corporate (re)structuring. Treatment of listing cost. Employee Share Options Schemes (ESOPs) and/or Convertible Loans that either are: (a) modified as a result of; or, (b) have exercise terms contingent to; the listing.
(iv) Failing to prepare adequate documentation	All entities have a legal requirement to keep adequate accounting records that support the preparation, and any necessary audit of, the entity’s financial statements. Items (i) – (iii) above are examples of instances when an entity may need prepare explanatory position papers, and memos, that clearly detail how Management have assessed these transactions in such a way that is clear that the analysis undertaken, and resulting conclusion, was thorough, accurate, complete, and compliant with the relevant financial reporting standard(s).
(v) Failing to prepare appropriate Prospective Financial Statements	Entities may have to provide Prospective Financial Statements as part of their Prospectus or Offer Documents. These must be prepared in accordance with a separate, specific financial reporting standard (FRS-42), which may require specific expertise to navigate.
(vi) Failing to prepare appropriate Interim Financial Statements	Depending on when in an entity’s reporting period it intends to list, an entity may have to provide Interim Financial Statements as part of their Prospectus or Offer Documents. These must be prepared in accordance with a separate, specific financial reporting standard (NZ IAS 34), which may require specific expertise to navigate.
(vii) Failing to prepare appropriate Annual Financial Statements	These must be prepared in accordance with a specific disclosure and presentation requirements of each individual NZ IFRS that is applicable to the entity, which may require specific expertise to navigate. Also, incorrectly applying materiality judgement calls can result in both over and/or under disclosure of specific areas.
(viii) Failing to proactively engage with Regulators.	At certain times, there may be instances where clarification is required with respect to an entity’s financial statement preparation requirements as part of the listing process. In these cases, proactive and positive engagement with Regulators is crucial.

Contact us to discuss how BDO can assist you with your IPO or Direct Listing journey.