Financial reporting guideAn overview of the New Zealand financial reporting framework

January 2016

In 2016, New Zealand completes its transition to a new financial reporting framework. The new reporting framework sees changes for various types of entities to their statutory preparation, audit and filing requirements. In addition, a new accounting standards framework has been implemented, which determines the accounting standards to be applied by entities with statutory reporting obligations.

The table below highlights key changes in the financial reporting framework in New Zealand applicable to different types of entities for 31 December 2015 year-ends and onwards.

Balance sheet date

31 December 2015 31 March 2016 30 June 2016 and onwards

For-profit company currently applying full NZ IFRS.

No changes.

Please note the requirements of Financial Reporting Act 1993 remain effective for reporting entities under transitional provisions of the Financial Reporting Act 2013 until the applicable provisions in the new Acts become effective. For example, those entities continue to present separate parent financial statements when group financial statements are prepared.

For-profit company currently applying NZ IFRS Diff Rep or old GAAP.

• The Financial Reporting Act 2013 and Financial Markets Conduct Act 2013 become effective.

• Consider whether the entity continues to have a statutory requirement to prepare general purpose financial statements (GPFS).

• If the entity is required to prepare financial statements, consider whether to move to full NZ IFRS (Tier 1 Standards) or NZ IFRS RDR (Tier 2 Standards) this year or wait until next year.*

• Separate parent financial statements are not required when group financial statements are prepared.

• Non-FMC reporting entities are required to file financial statements within 5 months of balance date.

• ► Move to full NZ IFRS (Tier 1 Standards) or NZ IFRS RDR (Tier 2 Standards) if have a statutory requirement to prepare GPFS.

• If no statutory requirement to prepare GPFS, follow the IRD requirements or the NZICA special purpose package for preparing financial statements.

Public sector public benefit entity.

• ►Consider which tier of reporting requirements applies to the entity under the XRB Accounting Standards Framework.

• ►Move to the new PBE Standards.

• Consider if parent financial statements are still required under the applicable legislation applying to the entity. For example, local Councils will continue to be required to prepare parent (Council) financial statements under the Local Government Act.

No changes.

Not-for-profit public benefit entity.

• No mandatory changes to which set of accounting standards applies.

• For registered charities and other entities with statutory reporting requirements, consider whether to early adopt the new accounting standards framework.**

• ► Consider which tier of reporting requirements applies to the entity under the XRB Accounting Standards Framework.

• Move to the new PBE Standards.

• Consider if parent financial statements are still required under the applicable legislation applying to the entity.

** Entities that are currently applying NZ IFRS Diff Rep or old GAAP, and that will continue to have statutory reporting requirements under the Financial Reporting Act 2013, will need to move to either full NZ IFRS or NZ IFRS RDR no later than reporting periods beginning on or after 1 April 2015 (i.e. 31 March 2016 year-ends and onwards).

** Registered charities and other not-for-profit public benefit entities with reporting requirements will need to adopt the new set of PBE Standards no later than annual reporting periods beginning on or after 1 April 2015 (i.e. 31 March 2016 year-ends and onwards). Early adoption is permitted.

New Zealand financial reporting framework

The Financial Reporting Act 2013 (FRA 2013) and Financial Reporting (Amendments to Other Enactments) Acts 2013 introduced changes for various entities, with the key changes impacting on companies, partnerships and registered charities. For companies, the changes resulted in the removal of the statutory requirement for many small and medium-sized companies to prepare general purpose financial reports (GPFR). Conversely, for partnerships, the changes introduced a statutory requirement for large partnerships to prepare GPFR, to align their reporting requirements with large companies. The changes also introduced a statutory requirement for registered charities to prepare GPFR.

For companies and partnerships, these changes are effective for reporting periods beginning on or after 1 April 2014, i.e. from 31 March 2015 year-ends and onwards. The legislative changes for registered charities are effective for periods beginning on or after 1 April 2015. The Financial Reporting Act 1993 (FRA 1993) remains effective for reporting entities until the applicable provisions in the FRA 2013 and consequential amendments to other legislation (such as the Companies Act 1993) become effective.

Parliament has passed into law the Financial Markets Conduct Act 2013 (FMC 2013). The FMC 2013 was amended concurrently with the enactment of the FRA 2013 to establish the definition an “FMC reporting entity” used in the FRA 2013, superseding the use of “issuer”.

The amendments to the FMC 2013 inserted section 451 that contains the following definition of an FMC reporting entity:

(a) Every person who is an issuer of a regulated product.1

(b) Every person who holds a licence under Part 6 of the FMC 2013.2

(c) Every licensed supervisor.

(d) Every listed issuer.3

(e) Every operator of a licensed market.4

(f) Every recipient of money from a conduit issuer.

(g) Every registered bank.

(h) Every licensed insurer.

(i) Every credit union.

(j) Every building society.

(k) Every person that is an FMC reporting entity under clause 27A of Schedule 1 (i.e. an offeror is an FMC reporting entity in prescribed circumstances).

The definition of an FMC reporting entity is not identical to the existing definition of an issuer contained in the FRA 1993 and therefore, certain entities that are not currently issuers may fall into the definition of a FMC reporting entity and vice versa. We advise entities that are unsure of whether they fall into the definition of an FMC reporting entity to seek legal advice.

1. Unless the entity is a company that has fewer than 50 shareholders or fewer than 50 parcels of shares that are voting products and would, but for this section, be an FMC reporting entity by reason only of being an issuer of equity securities that are both voting products and regulated products.

2. Other than an independent trustee of a restricted scheme.3. Does not apply in respect of persons that are listed issuers only in respect of a licensed market or

class of licensed markets.

4. Other than a market licensed under section 315 (overseas-regulated markets) of the FMC 2013.

Statutory reporting framework

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A — A large New Zealand company is not required to prepare either parent or group financial statements if the company is (a) a subsidiary of an New Zealand body corporate (b) group financial statements that comply with NZ GAAP comprising the New Zealand body corporate, New Zealand company and its subsidiaries have been prepared and (c) the company has one or more subsidiaries. A large New Zealand company that is exempt from preparation requirements is also exempt from audit and filing requirements.

B — Can opt out by means of a resolution passed by not less than 95% of the votes of those shareholders entitled to vote and voting on the question.

C — A company that is a wholly-owned subsidiary of a company (or of a large overseas company that carries on business in New Zealand) that has filed audited group financial statements with the Registrar of Companies is not required to have an audit.

The table below highlights statutory reporting requirements for companies, partnership and registered charities.

Entity GPFR requirement Audit requirement Filing requirement

FMC reporting entities. ►√ ► ►√ ► ►√

Large New Zealand companies (with “large” defined as assets greater than $60m or revenue exceeding $30m), with no overseas ownership or less than 25% overseas ownership that are not subsidiaries of a company incorporated overseas.

►√ ►►A ►A, B, C ►X

Large New Zealand companies (with “large” defined as assets greater than $60m or revenue exceeding $30m), with 25% or more overseas ownership that are not subsidiaries of a company incorporated overseas.

►√ ►A ► ►√ A, D ► ►√ A, D

Large New Zealand companies that are subsidiaries of a company incorporated overseas (with “large” defined as assets greater than $20m or revenue exceeding $10m).

►► ►√ A ►√A, C, D ► ►√ A, D

Large overseas companies that carry on business in New Zealand (with “large” defined as assets greater than $20m or revenue exceeding $10m) and for the New Zealand business of an overseas company if large (assets greater than $20m or revenue exceeding $10m).

► ►√ ► ►√ ► ►√ E

Companies with 10 or more shareholders. ►√ ►A, B ►√ ►A, B ►X

Large partnerships, including large limited partnerships (with “large” defined as assets greater than $60m or revenue exceeding $30m).

►√ ►√ ►F ►X

Retirement villages. ►√ ► ►√ ►√ ►

Public entities as defined under the Public Audit Act 2001. ►√ √ ►G

Registered charities under the Charities Act 2005. ►√ ► ►√ ►►H ►√ ►

D — A company with more than 25% overseas ownership (A) is not required to file GPFR and can opt out of an audit by shareholder resolution (see footnote B) if A is a subsidiary of a company that is incorporated in New Zealand (B) and audited group financial statements in relation to a group comprising B, A, and all other subsidiaries of B that comply with generally accepted accounting practice are filed.

E — An overseas company (A) is not required to file GPFR if A is a subsidiary of a company that is incorporated in New Zealand (B) and audited group financial statements of B that comply with generally accepted accounting practice are filed.

F — Can opt out, if within 6 months from the start of an accounting period, a resolution is passed or signed by partners who together have contributed at least 95% of the capital contributions of all the partners.

G — Requirements contained in public sector legislation.

H — Registered charities with total operating expenses $1m or more are required to have an audit performed by a qualified auditor. Registered charities with total operating expenses greater than $500,000 are required to have an audit or review of their financial statements performed by a qualified auditor.

Summary of the new statutory reporting framework

The underlying principle of the new statutory reporting system is to provide information to external users who have a need for an entity’s financial statements but are unable to demand them.

The new statutory framework uses three indicators to drive who should prepare GPFR:

• ► Public accountability (e.g., FMC reporting entities, public sector entities and registered charities).

• Economic significance (i.e., entity size).

• ► Separation of owners/members of the entity and its management.

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Other requirements

• ► Deadlines for preparation, audit and filing (where applicable) requirements for GPFR are:

• ► Four months for all FMC reporting entities.

• ► ►►Five months for other entities (rather than 5 months for preparation plus 20 working days for filing for those required to file under the FRA 1993).

• ► Financial statements for a parent company do not need to be prepared if group financial statements are prepared. However, please note the requirements of FRA 1993 remain effective for some reporting entities under transitional provisions of the FRA 2013 until the applicable provisions in the new Acts become effective. Those entities continue to present separate parent financial statements when group financial statements are prepared.

• ► Retirement village operators are not included in the definition of an FMC reporting entity and therefore do not automatically fall within the top tier of reporting. However, operators still need to prepare GPFR and have an audit.

• ► Friendly societies and branches are required to prepare GPFR unless a majority of the members opt out of compliance by way of a resolution. However, entities with operating expenditure over $30m cannot opt out of preparing GPFR. Additionally, friendly societies and branches that are FMC reporting entities or insurers continue to have financial reporting obligations.

• ► The FMC 2013 requires all credit unions to comply with the financial reporting obligations that apply to FMC reporting entities and other financial market participants.

• ► Legislative requirements for financial statements to give a true and fair view are removed. Instead, the requirements in applicable financial reporting standards (e.g. NZ IAS 1 Presentation of Financial Statements) apply.

• ► For FMC reporting entities, failure to comply with financial reporting obligations may result in an offence for both the company and its directors (rather than just the directors as is currently the case), with a maximum penalty of imprisonment for a term not exceeding 5 years and a fine not exceeding $500,000 (in the case of an individual) or $2.5m (in the case of a body corporate).

The FRA 2013 also provides legislation to empower the External Reporting Board (XRB) to issue financial reporting standards for a wider range of entities, including registered charities.

Exemption and proposed amendments for subsidiaries of New Zealand companies

The preparation requirements of the new statutory reporting framework do not require large1 New Zealand companies, which are subsidiaries of a body corporate (e.g. an association, company, person or government) and themselves hold subsidiaries, to prepare financial statements. However, at present, large1 subsidiaries of those large New Zealand companies, which do not themselves have subsidiaries, are required to prepare individual financial statements.

An amendment has been proposed to remove the requirements for a large company with no subsidiaries to prepare financial statements if it is a subsidiary of a body corporate registered in New Zealand that is required to prepare group financial statements. The amendment is included in the Regulatory Systems Bill 2015. At the time of writing of this Guide, the amendment was not yet enacted.

The Exposure Draft of the Incorporated Societies Bill

The Law Commission commenced a review of the Incorporated Societies Act 1908. It published an issues paper in June 2011 with the main recommendation to replace the 1908 Act with a new Incorporated Societies Act. In response to the issues paper, in November 2015 the Ministry of Business, Innovation & Employment (MBIE) issued the Exposure Draft (ED) of the Incorporated Societies Bill. In addition to other amendments to the 1908 Act, the ED proposed changes to financial reporting. The proposed changes, if finalised as proposed, will require all societies to prepare financial statements in accordance with accounting standards issued by the XRB. There also will be a requirement to lodge them with the Registrar within six months of the end of the society’s financial year. This means that incorporated societies will have the same preparation obligations as registered charities:

• ►Societies with annual operating expenditure $2 million or less in one or both of the two preceding financial years will be able to prepare a performance report in accordance with the XRB’s simple format reporting standards for not-for-profit entities (Tiers 3 or 4).

• ►Societies that do not qualify for Tier 3 or 4 reporting will be required to prepare financial statements in accordance with the more extensive Tier 1 or 2 public benefit entity (PBE) accounting standards.

Comments are due to the MBIE by 30 June 2016. Further information on the ED is available on the MBIE website.

1 “Large” is defined as assets greater than $60m or revenue exceeding $30m.

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The XRB is responsible for setting accounting standards for entities with statutory requirements to prepare GPFR. The XRB has issued a multi-standards framework that requires different sets of accounting standards to be applied by for-profit entities and public benefit entities (PBEs).

Therefore, under the XRB’s multi-standards approach, determining whether an entity is a PBE or a for-profit entity is the first step in establishing the particular financial reporting requirements for any entity that has a statutory requirement to prepare GPFR. The definition of a PBE has not changed, but is now more important to determining an entity’s reporting requirements. PBEs are defined as follows:

“Reporting entities whose primary objective is to provide goods and services for community or social benefit and where any equity has been provided with a view to supporting that primary objective rather than for a financial return to equity holders”.

The accounting standards framework for for-profit entities and PBEs, as applicable for 31 December 2015 year-ends and onwards, is outlined in the tables below. The tables also include references to the applicable EY resources that will provide a relevant set of illustrative financial statements. Additional guidance is also provided, following the tables, to assist in determining the appropriate accounting standards to be applied by for-profit entities and PBEs, including the qualifying criteria and other considerations.

For-profit entities The for-profit accounting standards framework tier structure consisted of four tiers for accounting periods that began before 1 April 2015. For-profit entities fall into Tier 1 by default, but can opt-in to a lower tier if they meet the criteria of that lower tier. Tiers 3 and 4 were temporary and were withdrawn from the accounting standards framework for periods beginning on or after 1 April 2015. Hence, for 31 March 2016 balance dates and onwards, there are only two tiers.

Tier 1 for-profit entities

Tier 1 for-profit entities are required to comply with NZ IFRS in full.

Under the for-profit accounting standards framework tier structure the following for-profit entities are in Tier 1:

• ► “Publicly accountable” entities (see below).

• ► Large for-profit public sector entities (i.e. expenses > $30 million).

An entity is “publicly accountable” if it:

• ► Meets the International Accounting Standards Board (IASB) definition of public accountability.

• Is deemed to be publicly accountable in New Zealand.

Accounting standards framework

Entities Applicable Accounting Standards

Additional Comments Applicable Publication

Tier 1 • ► “Publicly accountable” entities (as defined by IASB, including entities deemed to be publicly accountable*).

• ► Large for-profit public sector entities (i.e. expenses > $30m).

NZ IFRS Now effective. Good Group New Zealand Limited for the year ended 31 December 2015.**

Tier 2 • ► Not “publicly accountable”.

• ► Non-large for-profit public sector entities.

NZ IFRS RDR Adoption now permitted. Good Group New Zealand Limited for the year ended 31 December 2015.**

Tier 3 • ► Entities that qualify for NZ IFRS differential reporting.

NZ IFRS Diff Rep Tiers 3 and 4 were withdrawn from the accounting standards framework for periods beginning on or after 1 April 2015. Either move to Tier 1 or Tier2 or no GPFR requirements.

Castle (International) Differential Reporting Limited for the year ended 31 December 2010.**

Tier 4 • ► Entities that qualify for NZ IFRS differential reporting.

Old GAAP Please contact your local EY representative.

** Refer to the discussion above on Tier 1 for-profit entities for the definition of “publicly accountable”** These publications are available on the FAAS page of the EY website

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Under the IASB definition, an entity is publicly accountable if:

• ► Its debt or equity instruments are traded in a public market or it is in the process of issuing such instruments for trading in a public market (a domestic or foreign stock exchange or an over-the-counter market, including local and regional markets).

• It holds assets in a fiduciary capacity for a broad group of outsides as one of its primary businesses. This is typically the case for banks, credit unions, insurance providers, securities brokers/dealers, mutual funds and investment banks.

An entity is deemed to be publicly accountable in the New Zealand context if it is:

• ► An FMC reporting entity that is considered to have a higher level of public accountability than other FMC reporting entities, specifically:

a) An issuer of equity securities or debt securities under a regulated offer.

b) A manager of registered schemes, but only in respect of financial statements of a scheme or fund.

c) A listed issuer.

d) A registered bank.

e) A licensed insurer.

f) A credit union.

g) A building society.

• ► An entity that is considered to have a higher level of public accountability by a notice issued by the Financial Markets Authority (FMA).

• ► An issuer under the transitional provisions of the FRA 2013.

Tier 2 for-profit entities

The term “Tier 2 for-profit entities” refers to entities that qualify for and elect to apply NZ IFRS with reduced disclosure requirements (NZ IFRS RDR) in the new tier structure.

A for-profit entity may elect to report under NZ IFRS RDR if it is:

• ► Not “publicly accountable” as defined in the new tier structure (see the discussion of Tier 1 for-profit entities above).

• ► In respect of for-profit entities in the public sector, is not large (i.e. expenses ≤$30 million).

In general, NZ IFRS RDR requires less disclosure than NZ IFRS Diff Rep. However, not all the differential reporting concessions are carried over into NZ IFRS RDR. In particular, NZ IFRS RDR requires entities to present a cash flow statement. Also, unlike the existing differential reporting framework, NZ IFRS RDR does not provide any recognition and measurement concessions from full NZ IFRS. Refer to the discussion below on moving from Tier 3 to Tier 1 or 2 for additional differences.

Tier 3 and Tier 4 for-profit entities

For periods beginning on or after 1 April 2015, Tier 3 and Tier 4 were withdrawn from the XRB’s accounting standards framework. Existing Tier 3 and Tier 4 for-profit entities that are required to (or choose to) continue preparing GPFR will need to move to either Tier 1 or 2 of the framework. This means that these entities would need to apply either NZ IFRS in full or NZ IFRS RDR for annual reporting periods beginning on or after 1 April 2015 (i.e., for 31 March 2016 year-ends and onwards).

For Tier 3 for profit entities that are currently using the differential reporting framework under NZ IFRS and that will move to NZ IFRS RDR, there are three main impacts:

• ► Fewer disclosure requirements — NZ IFRS RDR permits significantly less disclosure, compared with both full NZ IFRS and the current differential reporting framework. The key exception is the cash flow statement, which is required under NZ IFRS RDR.

• ► A loss of concessions relating to recognition or measurement — there are some, but not many, recognition and measurement concessions in the current differential reporting framework. For example, qualifying entities are not required to account for deferred tax. NZ IFRS RDR does not provide such concessions and requires the same recognition and measurement requirements as Tier 1 entities. This enables comparability and easy transition between Tier 1 and Tier 2, and minimises consolidation adjustments for groups. While some Tier 2 entities might be concerned about the loss of recognition and measurement concessions, many Tier 2 subsidiaries of Tier 1 parents will be unaffected, since many use the same accounting policies as their parent.

• ► Harmonisation with Australia — NZ IFRS RDR is largely consistent with the RDR framework in Australia. There are only a few differences between NZ IFRS RDR and the Australian RDR framework, to reflect regulatory differences.

Small and medium-sized for-profit entities (SMEs), that are not required to prepare GPFR under the statutory framework, instead need to prepare special purpose financial statements (SPFR) for tax purposes, using minimum standards set by the Inland Revenue Department. Also, guidelines have been issued by the Chartered Accountants Australia and New Zealand for entities preparing SPFR.

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Our latest publication Changing Tack — A new financial reporting framework for public benefit entities (January 2016)1 provides a summary of the financial reporting requirements for PBEs (including not-for-profit PBEs that are applying PBE Standards for the first time), as well as discusses the key differences between PBE Standards and NZ IFRS/old NZ GAAP.

In November 2013, the New Zealand Accounting Standards Board (NZASB) issued simple format reporting standards for Tiers 3 and 4 public sector and not-for-profit PBEs. The suite of simple format reporting standards is effective for Tier 3 and Tier 4 public sector PBEs for periods beginning on or after 1 July 2014, with early adoption not permitted. For Tier 3 and Tier 4 not-for-profit PBEs, the simple format reporting standards are effective for periods beginning on or after 1 April 2015, with early adoption permitted.

1. The publication is available on the FAAS page of the EY website

Public benefit entities A new four set structure of PBEs has been established, with reporting requirements for each of the four tiers.

This includes a new set of PBE Standards to be applied by large and medium-sized (Tier 1 and 2) public sector PBEs. These PBE Standards are effective for periods beginning on or after 1 July 2014.

An enhanced set of PBE Standards was issued in October 2014, containing additional guidance and other enhancements for large and medium-sized (Tier 1 and 2) not-for-profit PBEs.

The enhanced PBE Standards are effective for periods beginning on or after 1 April 2015, with early adoption permitted by not-for-profit PBEs.

Entities Applicable Accounting Standards

Additional Comments Applicable Publication

Tier 1 • “Publicly accountable” entities (as defined by IASB, including entities deemed to be publicly accountable (refer to the definition of “publicly accountable” above).

• ► Large entities (i.e. expenses > $30m).

PBE Standards. Public Sector: Now effective.

Not-for-profit: Effective from 1 April 2015, early adoption permitted.

Good City Council for the year ended 30 June 2016.*

Tier 2 • ► Medium-sized entities (expenses between $30m and $2m) that are not publicly accountable.

PBE Standards with Reduced Disclosure Requirements (PBE Standards RDR).

Good City Council for the year ended 30 June 2016.*

Tier 3 • ► Small entities (expenses ≤ $2m) that are not publicly accountable.

PBE Simple Format Reporting — Accrual accounting.

Public Sector: Now effective.

Not-for-profit: Effective from 1 April 2015, early adoption permitted.

►Please contact your local EY representative.

Tier 4 • ► Micro entities (expenses < $125,000 and permitted by legislation to be in Tier 4) are not publicly accountable.

PBE Simple Format Reporting — Cash accounting.

►Please contact your local EY representative.

* Good City Council for the year ended 30 June 2016 is available on the FAAS page of the EY website

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Tier 1 PBEs

Tier 1 PBEs are required to comply with new PBE Standards in full. The new PBE Standards are based on International Public Sector Accounting Standards (IPSAS).

Under the new tier structure, the following PBEs are in Tier 1:

• ► “Publicly accountable” entities (see the discussion of Tier 1 for-profit entities above).

• ► Large (i.e. expenses > $30 million).

Tier 2 PBEs

The term “Tier 2 PBEs” refers to entities that qualify for and elect to apply PBE Standards with reduced disclosure requirements (PBE Standards RDR) in the new tier structure.

A PBE may elect to report under PBE Standards RDR if it is:

• ► Not “publicly accountable” as defined in the new tier structure (see the discussion of Tier 1 for-profit entities above).

• ► Not large (i.e. expenses ≤$30 million).

For PBEs currently using the differential reporting framework under NZ IFRS PBE and that will be reporting under Tier 2 PBE Standards of the new accounting standards framework, the main impacts include:

• ► Any impacts arising from the move from NZ IFRS to the new PBE Standards.

• ► An overall reduction in disclosure requirements (the key exception is the requirement to prepare a cash flow statement under the PBE Standards RDR).

• ► A loss of recognition and measurement concessions (the current differential reporting framework has some, but not many, recognition and measurement concessions).

Tier 3 PBEs

The term “Tier 3 PBEs” refers to PBEs that quality for and elect to report under Simple Format Reporting Standards — Accrual accounting. These standards include templates and simplified requirements for the financial statements. This should result in reduced compliance costs, especially compared with NZ IFRS. Simple Format Reporting Standards — Accrual accounting is considered a Generally Accepted Accounting Practice (GAAP) framework and thus entities applying it will be complying with GAAP in New Zealand. Tier 3 PBEs are required to prepare accounts on an accrual basis.

A PBE may elect to report under Tier 3 PBE Standards if it:

• Is not “publicly accountable” as defined in the new tier structure (see the discussion of Tier 1 for-profit entities above).

• ► Has total expenses ≤$2 million.

Tier 4 PBEs

The term “Tier 4 PBEs” refers to PBEs that qualify for and elect to report under Simple Format Reporting Standards — Cash accounting. The standards include simplified templates for the financial statements. Tier 4 PBEs are permitted to prepare financial statements on a cash basis. Simple Format Reporting Standards — Cash accounting is a non-GAAP framework.

A PBE may elect to report under Tier 4 PBE Standards if it:

• ► Is permitted by legislation to report in accordance with non-GAAP standards.

• ► Is not “publicly accountable” as defined in the new tier structure (see the discussion of Tier 1 for-profit entities above).

• ► Has operating payments <$125,000.

* Good City Council for the year ended 30 June 2016 is available on the FAAS page of the EY website

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Improving disclosure effectivenessThe terms ’disclosure overload’ and ‘cutting the clutter’ describe a problem in financial reporting that has become a priority issue for standard setters and regulatory bodies. The growth and complexity of financial statement disclosure is also drawing significant attention from financial statement preparers, and most importantly, the users of financial statements.

’Disclosure overload’ — what is it

Although there is no formal definition of the disclosure overload issue, from the different discussions and debates among stakeholders, three common themes have emerged: format/structure; tailoring; and materiality.

When deciding on the format for the financial statements, it is common practice to follow the structure suggested in NZ IAS 1/PBE IPSAS 1. However, as financial statement disclosures have increased in volume as transactions and the requirements of accounting standards become more complex, alternative formats may better communicate the links between different pieces of information and more transparently reflect the financial position, performance and risks of the entity.

Investors, analysts and other users of financial statements often observe that disclosures in the financial statements are boilerplate and generic, and therefore do not provide decision-useful information. Tailoring disclosures to the entity-specific facts and circumstances may not reduce the length of the financial statements, but it should enhance the relevance of the information and, in turn, enhance the usefulness of the financial statements. For example, instead of simply copying disclosures from our illustrative financial statements, entities should customise the disclosures to reflect their own facts and circumstances.

NZ IFRS/PBE Standards set out the minimum disclosure requirements, which, in practice, tend to be applied without consideration of the relevance of the information for a specific entity. If a particular transaction or item is immaterial to the reporting entity, then it is not relevant, in which case, NZ IFRS/PBE Standards allow for non-disclosure. If immaterial information is included in the financial statements, the sheer volume of information can potentially reduce the transparency and usefulness of the financial statements because the material, and thus relevant, information, loses prominence. Applying the concept of materiality requires judgment. The International Accounting Standards Board (IASB) has recently published draft guidance to help management determine whether information is material and should be disclosed in financial statements. The guidance is part of the IASB’s wider initiative to improve disclosures. The NZASB has also issued Explanatory Guide A7: Materiality for Public Benefit Entities, which contains guidance to PBEs in applying materiality to presentation and disclosure when preparing financial reports.

Opportunities to improve the effectiveness of financial statement disclosure

The concept of materiality is key to preparing financial statements under NZ IFRS/PBE Standards. It impacts what information is considered relevant and therefore presented in the financial statements. The application of the concept of materiality requires significant judgement, which is inherently subjective. Currently NZ IFRS/PBE Standards do not explicitly prohibit the provision of immaterial information. As such, this factor together with the disclosure checklist approach encouraged by some auditors, regulators and legal advisors, may have contributed to the problem of disclosure overload.

Some ways to cut clutter in financial statements are:

• ► Removing immaterial disclosures.

• ► Removing irrelevant or insignificant accounting policies.

• ► Avoiding the use of boilerplate text.

• ► Avoiding a ‘disclosure checklist’ mentality.

The materiality assessment is not a bright-line rule exercise. Preparers must apply their best judgement when determining which information to include, and equally what information to exclude on the basis that it is immaterial.

Furthermore, the commonly applied financial statements’ format may be also a possible cause of the perceived disclosure overload problem. Alternative format options may be a way to enhance an entity’s effectiveness in communicating financial information. They allow the users easier access to, and a better understanding of, the financial information contained within the financial statements. Alternative ways to structure and present financial statements disclosures are:

• ► Disclosure of accounting policies together with the relevant quantitative note disclosures.

• ► Order the notes by reference to importance.

• ► Group disclosures by nature.

• ► Tailored, entity-specific disclosures, such as the key sources of estimation uncertainty.

• ► Improve the navigation of the notes by, for example, using colour and symbols to highlight key notes.

• ► Improve the page layout by using two or three columns per page.

• ► Include a specific note that provides a summary of key transactions and events for the period.

It is clear that determining the most appropriate approach is not a ’one size fits all’ exercise. Therefore, each entity needs to consider the specific facts and circumstances, including the specific needs of its primary users, as well as jurisdictional limitations or restrictions.

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EY’s Financial Accounting Advisory Services and Assurance professionals bring together a wealth of accounting knowledge from diverse experiences advising a range of clients across the public, corporate and not-for-profit sectors. We can help your organisation assess how the revised frameworks impact your reporting obligations and assist with the interpretation and implementation of new accounting standards applicable to your organisation.

We can assist with the following steps:

• ► Entity type assessment — a review of the entity’s assessment as a for-profit entity or public benefit entity.

• ► Initial diagnostic phase — this would include a review of current accounting policies and an initial assessment of the impact of new reporting requirements.

• ► Solution development — identify specific areas of focus for the transition, consideration of the impacts on the financial statements and the processes and systems currently in place.

• ► Implementation — assist to create new accounting policies, update financial information and systems and implement the transitional provisions, to help create an opening balance sheet.

• ► Post implementation — monitor and assess the progress of adoption of new standards and ensure financial information produced is in line with the new requirements.

Also we can help your organisation identify opportunities to improve the effectiveness of disclosures, including:

• ► Challenge existing disclosure: structure and content.

• ► Identify unnecessary or boilerplate disclosures.

• ► Provide alternative disclosure options.

• ► Prepare benchmarking analysis: identify relevant benchmarks/peers and perform analysis of existing reporting as compared to benchmarks/peers.

• ► Draft pro-forma revised disclosure framework financial statements.

How we can help youContactsFor more information, please contact your usual EY advisor or a member of the Financial Accounting Advisory Services team:

9New Zealand Financial Reporting Guide 2016 |

Kimberley CrookTel: +64 9 300 7094kimberley.crook@nz.ey.com

Graeme Bennett Tel: +64 9 300 8191graeme.bennett@nz.ey.com

David Pacey Tel: +64 9 308 1084david.pacey@nz.ey.com

Lara Truman Tel: +64 274 899 896lara.truman@nz.ey.com

Alex KnyazevTel: +64 218 53 152alex.knyazev@nz.ey.com

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This communication provides general information which is current at the time of production. The information contained in this communication does not constitute advice and should not be relied on as such. Professional advice should be sought prior to any action being taken in reliance on any of the information. Ernst & Young disclaims all responsibility and liability (including, without limitation, for any direct or indirect or consequential costs, loss or damage or loss of profits) arising from anything done or omitted to be done by any party in reliance, whether wholly or partially, on any of the information. Any party that relies on the information does so at its own risk.

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