New Zealand Financial Reporting Standards & Accounting Principles

Posted on Jul 11, 2025 in Financial and Accounting Management

Financial Accounting & External Reporting Environment

  • Financial Accounting: A process involving collecting and processing financial information to meet decision-making needs of external parties. It is subject to many regulations, unlike management accounting which focuses on internal users and is largely unregulated.
  • General Purpose Financial Reports (GPFR) / Statements (GPFS): A report that complies with the New Zealand Framework and accounting standards, designed to meet the needs of external users who lack the power to demand specific information.
    • Primary Users: Present and potential investors, lenders, suppliers, and other trade creditors.
    • Other Users: Employees, customers, government and its agencies, the public, etc.
  • Sources of External Financial Reporting Regulation in NZ:
    • Legislation: Comprises Acts of Parliament, Regulations, and Orders in Council. It is the highest law of the land, with non-compliance potentially leading to fines or prison sentences.
      • Examples: Companies Act 1993, Financial Reporting Act 2013, Financial Markets Conduct Act 2013.
      • Financial Reporting Act 2013 (FRA 2013): Applies to all reporting entities, continues the External Reporting Board (XRB), and provides for the issue of financial reporting and auditing standards by XRB.
      • Companies Act 1993: Addresses directors’ responsibilities for accounting records (S194), requires financial statements to follow Generally Accepted Accounting Principles (GAAP) (S203), and mandates audited financial statements (S207) and annual reports within 5 months of balance date (S208).
      • Financial Markets Conduct Act 2013 (FMC 2013): Applies to FMC reporting entities (e.g., Issuers of debt and equity, Banks). Requires proper accounting records for at least 7 years (S455, S458), records to be in English (S457), and general purpose financial statements within 4 months of balance date (S460). Audited financial statements are mandatory (S461D). Non-compliance can lead to imprisonment and/or fines (S461I).
    • External Reporting Board (XRB): Constituted under the FRA 2013 as a Crown entity.
      • Functions: Issues financial reporting standards, auditing and assurance standards, develops strategies for specified standards (including tiers of financial reporting), and provides guidance on accounting policies.
      • Two arms: NZASB (NZ Accounting Standards Board) and NZAuASB (NZ Auditing and Assurances Standards Board). XRB develops and sets Frameworks/accounting standards, including NZ Conceptual Framework, NZ IFRS, NZ IAS, and NZ IPSAS.
    • NZX Listing Rules: Sets uniform trading rules, ethical standards, and listing requirements, adding to legislation and accounting profession rules. Non-compliance can lead to suspension of trading.
  • ‘True and Fair’ View: No fixed definition. Disclosures are considered true and fair if they provide all relevant information and comply with all applicable accounting standards. An audit report provides an independent opinion on the true and fair view, and compliance with the Companies Act 1993, Financial Reporting Act 2013, and accounting standards.

New Zealand External Financial Reporting Environment

  • Accounting Standards Framework (XRB A1 / XRB Framework): Issued by XRB, sets down the accounting standards framework for for-profit and public benefit entities.
    • Based on a Two-sector, multi-tier reporting approach.
    • Establishes financial reporting tiers, criteria for each tier, and applicable standards.
    • For-Profit Entities:
      • Tier 1: Publicly accountable (FMC reporting entities) or large for-profit public sector entities (expenses > $30m). Standards: NZ IAS/NZ IFRS.
      • Tier 2: Non-publicly accountable and non-large for-profit public sector entities electing Tier 2. Standards: NZ IFRS Reduced Disclosure Regime (RDR).
    • Public Benefit Entities (PBEs): Primary objective is to provide goods or services for community or social benefit.
      • Tier structure consists of four tiers.
      • Standards: Public Benefit Entity International Public Sector Accounting Standards (PBE IPSAS).
  • The NZ Conceptual Framework (NZ CF): New Zealand has adopted the IASB Conceptual Framework, known as the NZ Framework.
    • Purpose: Basic document setting objectives and concepts for general purpose financial reporting, assisting preparers, users, auditors, and standard setters.
    • Contents (8 Chapters):
      1. Objective of GPFR: To provide financial information useful to existing and potential investors, lenders, and other creditors in making resource allocation decisions. Key information provided includes economic resources & claims, financial performance (accrual and cash flows), and efficient resource use.
      2. Qualitative Characteristics of Useful Financial Information:
        • Fundamental (Must be present):
          • Relevance: Information capable of making a difference in decisions. Includes predictive value and confirmatory value. Materiality (omission or misstatement can influence decisions) is part of relevance.
          • Faithful Representation: Information must depict the economic phenomenon it purports to depict. Requires completeness, neutrality, and freedom from error. Emphasises substance over form.
        • Enhancing (Improve usefulness): Comparability (and consistency), Verifiability, Timeliness, Understandability.
      3. Financial Statements and Reporting Entity: Financial statements cover financial position, performance, and notes for a specific period, assuming a going concern. A reporting entity can be a single entity, a portion, or multiple entities, not necessarily a legal entity.
      4. Elements of the Financial Statements:
        • Assets: Present economic resource controlled by entity as a result of past events (Right / Potential to produce economic benefits / Control).
        • Liabilities: Present obligation to transfer economic resource as a result of past events.
        • Equity: Residual interest in (net) assets.
        • Income: Increases in assets or decreases in liabilities that result in an increase in equity (other than contributions from equity partners).
        • Expenses: Decreases in assets or increases in liabilities that result in a decrease in equity (other than distributions to equity partners).
      5. Recognition and Derecognition:
        • Recognition: Criteria to determine when or if an element is included in financial statements. Must be probable that future economic benefit will flow and cost can be reliably measured.
        • Derecognition: Removal of all or part of a recognised asset or liability when it no longer meets the definition.
      6. Measurement of the Elements: Criteria for determining how much an element should be recognised. Choices include Historical cost and current value (Fair value, Value in use, Current cost).
      7. Presentation and Disclosure: Communicating information about elements in financial statements.
      8. Concepts of capital and capital maintenance (Not covered in course).
    • Benefits of a Conceptual Framework: Provides a coherent theory for standard setting, requires better accountability from standard setters, improves communication, makes standard development economical, and increases compatibility and comparability of financial reports.

Liabilities, Provisions, Contingent Liabilities & Assets

  • Liability Definition (NZ IAS 37 / NZ Conceptual Framework): “a present obligation of the entity arising from past events, the settlement of which is expected to result in an outflow of resources embodying economic benefits from the entity”.
    • Characteristics (Obligating Events): Present obligation to another entity, arising from a past transaction/event, future sacrifice of economic benefits.
    • Present Obligations: Can be legal (from contract, legislation, law) or constructive (from established pattern of past practices creating an expectation).
  • Recognition of Liabilities: Probable that a sacrifice of economic benefits will be required, and the amount can be measured reliably.
  • Provision Definition (NZ IAS 37 Para 10): “a liability of uncertain timing or amount”. Differs from other liabilities due to uncertainty in time and/or amount of future expenditure.
    • Recognition Criteria for Provisions:
      1. An entity has a present obligation as a result of a past event.
      2. It is probable that an outflow of resources embodying economic benefits will be required to settle the obligation.
      3. A reliable estimate of the amount of the obligation can be made.
      • If conditions not met, no provision is recognised.
    • Measurement of Provisions: The best estimate of expenditure required to settle the obligation at reporting period end.
      • Expected value method: Used when a range of possible outcomes or for large amounts of items (weight each outcome by probability).
      • Most likely outcome: Suitable for a single obligation (e.g., a court case).
    • Typical Provisions: Warranty costs, legal claims, restructuring costs, onerous contracts.
    • Onerous Contract: Contract where unavoidable costs exceed expected economic benefits.
  • Contingent Liabilities (NZ IAS 37):
    • Either: (a) A possible obligation whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly in control of the entity (e.g., loan guarantee).
    • OR: (b) A present obligation that fails the recognition criteria because it’s not probable an outflow will be required or the amount cannot be measured reliably (e.g., legal claim where defence is likely or damages are uncertain).
    • Not recognised in financial statements, but must be disclosed in notes.
    • A contingent liability becomes a provision if the recognition criteria for a liability are subsequently met (i.e., probable outflow and reliable measurement).
  • Contingent Assets (NZ IAS 37 Para 10): “a possible asset that arises from past events and whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the entity”.
    • Entity may receive an inflow of economic benefits.
    • Treatment:
      • Virtually certain: Asset is not contingent and should be recognised, normally as a receivable.
      • Probable: A contingent asset is disclosed.
      • Possible, but not probable: No disclosure required.
    • Cannot be recognised as an asset in the statement of financial position, only disclosed if probable.

Accounting Policies, Estimates, and Errors (NZ IAS 8)

  • Accounting Policies (Para 5): Specific principles, bases, conventions, and practices applied by an entity in preparing and presenting financial statements.
    • Selection: Based on relevant NZ IAS/IFRS, or judgement applying NZ CF concepts.
    • Changing Policies: Permitted only when:
      1. Required by another IFRS (Mandatory), following transitional guidance.
      2. Provides better, more reliable and relevant information (Voluntary).
    • Application: Generally applied retrospectively (as if policy had always been applied).
    • Disclosure (Para 28): Title of NZ IFRS, nature of change, amount of adjustment for current and prior periods.
  • Accounting Estimates (Para 5): Monetary amounts in financial statements that are subject to measurement uncertainty.
    • Examples: Useful lives, residual values, depreciation rates of PPE (NZ IAS 16); NRV (NZ IAS 2); fair value of assets (NZ IFRS 13); warranty obligations (NZ IAS 37).
    • Changes to Estimates: Accounted for prospectively, either in the current period (“catch-up adjustment”) or in current and future periods if affecting both.
    • Disclosure (Para 39): Nature and amount of change affecting current or future periods (unless impracticable to estimate future effect).
  • Errors: Omissions or misstatements in financial statements related to recognition, measurement, presentation, or disclosure.
    • Current period errors found in that period are corrected before financial statements are authorised.
    • Correction of Material Prior Period Errors: Corrected retrospectively in the first set of financial statements authorised after discovery.
      • Restating comparative amounts for prior period(s) presented.
      • If error occurred before earliest prior period, restating opening balances of assets, liabilities, and equity for the earliest prior period presented.
    • Non-material errors are corrected prospectively.
    • Disclosure (Para 49): Nature of error, amount of correction for each affected line item, and amount of correction at beginning of earliest prior period presented.

Events After the Reporting Period (NZ IAS 10)

  • Events After the Reporting Period: An event or circumstance (favourable or unfavourable) or information that has become available between the end of the reporting period and the date the financial statements are authorised for issue.
  • Adjusting Events: Provide additional evidence of conditions existing at balance date or reveal for the first time a condition that existed at balance date.
    • NZ IAS 10 (Para 8) requires adjustments to amounts in financial statements.
    • Examples: Settlement of a legal claim outstanding at balance date, new information revealing building destruction at reporting date, receipt of information that an asset was impaired at reporting date (e.g., customer bankruptcy), discovery of fraud or errors showing financial statements are incorrect, sale of inventories showing NRV was lower than cost.
  • Non-Adjusting Events: Post-balance date event that indicates events or conditions subsequent to balance date.
    • Disclosed if material (likely to affect decision-making) in notes, including nature and estimated financial impact.
    • Examples: Major business combination or disposal, plan to discontinue operation, purchases of major assets, destruction of plant by fire, major restructuring, major ordinary share transactions.
  • NZ IAS 10 and Going Concern Assumption: If, after balance date, there’s an indication that the entity is no longer a going concern, financial statements are no longer prepared on the going concern basis. Professional judgement is needed to determine the impact on going concern.
  • Dividends Proposed After Balance Date (NZ IAS 10 Para 12): If dividends are declared after the reporting period but before authorisation, they shall not be recognised as a liability at the end of the reporting period. Disclosure of the amount is required in the notes.

Revenue Recognition and Measurement (NZ IFRS 15)

  • Income (NZ Framework): Increases in economic benefits during the accounting period in the form of inflows or enhancements of assets or decreases in liabilities that result in an increase in equity, other than contributions from equity partners.
    • Income = Revenue + Gains.
    • Revenue: Arises in the course of ordinary activities.
    • Gains: Meet income definition but may or may not arise from ordinary activities.
  • Income Recognition (NZ Framework Para 5.4(a)): Occurs at the same time as: (i) initial recognition or increase in asset carrying amount, or (ii) derecognition or decrease in liability carrying amount.
  • NZ IFRS 15 – Revenue from Contracts with Customers: Establishes a single, comprehensive framework for revenue recognition, replacing previous standards like NZ IAS 18 and 11. Applied to contracts with “customers”.
  • 5-Step Model for Revenue Recognition (Core Principle: Recognise revenue to depict transfer of goods or services to customers):
    1. Identify the contract with a customer (para. 9): An agreement creating enforceable rights and obligations, approved by parties, identifying rights/payment terms, having commercial substance, and probable collection of consideration.
    2. Identify performance obligations (PO) in the contract (para. 22): A promise to transfer a distinct good or service (or bundle) to the customer.
    3. Determine transaction price (TP) (para. 47): Amount of consideration an entity expects to be entitled to for transferring goods/services. Can be fixed, variable, or include significant financing components or non-cash consideration.
    4. Allocate the TP to the PO (para. 73): Allocate based on their relative stand-alone selling prices (price if sold separately).
    5. Recognise revenue when (or as) an entity satisfies a PO (para. 31): When control of the promised good or service is transferred to the customer.
      • Over time: Control passed over a period (e.g., customer simultaneously receives/consumes benefits, entity creates/enhances asset controlled by customer, created asset has no alternative use and entity has enforceable right to payment).
      • At a point in time: Control transferred at a specific moment.
  • Unearned Revenue: Recorded when payment is received in advance of services/resources being provided. Considered a liability (present obligation to transfer future economic benefits).

Financial Statement Presentation & Disclosure (NZ IFRS 18)

  • NZ IFRS 18: Issued in 2024, mandatorily applicable for periods starting on or after 1 January 2027, replacing IAS 1.
  • Objective of Financial Statements (Para 9): To provide financial information about an entity’s assets, liabilities, equity, income, and expenses for users to assess future net cash inflows and management’s stewardship.
  • Complete Set of Financial Statements (Para 10):
    • Statement of Financial Performance
    • Statement of Financial Position
    • Statement of Changes in Equity
    • Statement of Cash Flows
    • Notes (including comparative information for the preceding period)
  • General Requirements: Clearly identified (name, group/separate, reporting period end date, currency, rounding). Presented at least annually. Consistency of presentation, disclosure, and classification (unless significant change in operations, more relevant info, or IFRS requires change). Comparative information for preceding period must be presented.
  • Main Principles:
    • Aggregation and Disaggregation (Para 41-43): Material similar items presented separately; dissimilar items presented separately unless immaterial.
    • Offsetting (Para 44-45): Assets & liabilities or income & expenses shall not be offset unless required or permitted by an NZ IFRS.
  • Statement of Financial Position (SOFP) / Balance Sheet (Para 96-106):
    • Purpose: Summarises assets, liabilities, and equity at a certain date. Provides info for evaluating capital structure, liquidity, solvency, financial flexibility, and computing ratios.
    • Assets Definition (NZ CF Par. 4.3-4.5): ‘A resource controlled by the entity as a result of past events and from which future economic benefits are expected to flow to the entity’.
      • Characteristics: Potential for future economic benefits, Right, Control.
      • Recognition Criteria: Probable future economic benefit flow, cost/value can be reliably measured. ‘Probable’ usually means > 50%.
      • Current Assets (Para 99): Expected to be realised/sold/consumed in normal operating cycle, held for trading, expected to be realised within 12 months, or cash/cash equivalent.
      • Non-Current Assets (Para 100): All other assets (e.g., PPE, Intangibles, Financial Assets).
    • Liabilities Definition (NZ CF Par. 4.26-4.27): “A present obligation of the entity to transfer an economic resource as a result of past events”.
      • Criteria: Present obligation, obligation to transfer economic resource, present obligation from past events.
      • Recognition Criteria: Probable sacrifice of economic benefits, amount can be measured reliably.
      • Current Liabilities (Para 101): Expected to be settled in normal operating cycle, held for trading, due within 12 months, or no right to defer settlement for at least 12 months.
      • Non-Current Liabilities: All other liabilities.
    • Shareholders’ Equity (NZ CF Par. 4.63-4.67): “The residual interest in the assets of the entity after deducting all liabilities”.
      • Components: Contributed Equity/Share capital, Reserves (e.g., revaluation reserve), Retained earnings (or accumulated losses).
    • Presentation (Para 96, 100): Generally, current and non-current distinction. If liquidity provides more reliable/relevant information, present all assets and liabilities in order of liquidity.
    • Minimum Line Items (Para 103, 104): Includes PPE, investment property, intangible assets, goodwill, financial assets, inventories, receivables, cash, trade payables, provisions, financial liabilities, tax assets/liabilities, non-controlling interests, issued capital and reserves.
  • Statement of Financial Performance / Statement of Comprehensive Income (SOCI) (NZ IFRS 18):
    • Purpose: Reports all transactions and valuation adjustments affecting net assets (other than transactions with owners as owners). Prime source of information about financial performance.
    • Profit/(Loss) = Income – Expenses.
    • An entity may present: (1) A single statement in two sections, OR (2) Two statements (Profit or Loss Statement, Statement of Comprehensive Income).
    • Profit or Loss Section (Para 47): All income and expenses classified into five categories:
      1. Operating category (default, all items not elsewhere)
      2. Investing category (e.g., returns on investments)
      3. Financing category (e.g., interest expense on borrowings, unwinding discount on provisions)
      4. Income taxes
      5. Discontinued operations
    • Totals and Subtotals in Profit or Loss (Para 69): Operating profit or loss, Profit or loss before financing and income taxes, Profit or loss.
    • Classification of Expenses (Para 99-104): By nature (economic resources consumed) or by function (activity to which consumed resource relates). Select most relevant/reliable format (e.g., service provider by nature, manufacturer by function).
    • Other Comprehensive Income (OCI) Section: Changes from non-primary activities not reported in profit or loss.
      • Examples: Changes in revaluation surplus (NZ IAS 16), actuarial gains/losses (NZ IAS 19), foreign operation translation differences (NZ IAS 21), cash flow hedge gains/losses, gains/losses on available-for-sale financial assets (NZ IFRS 9), fair value changes attributable to credit risk on financial liabilities (NZ IFRS 9).
      • Presentation (Para 86): Shows profit or loss, then individual components of OCI, then total comprehensive income.
  • Notes to Financial Statements (NZ IFRS 18 Para 113-116): Additional information not in numbers. Include basis of preparation, accounting policies, information required by IFRS not in primary statements, and other relevant information (e.g., significant events/trends). Must be systematic and cross-referenced.

Statement of Changes in Equity (SOCE)

  • Equity Definition: Assets – Liabilities = Equity (Net Assets). Residual interest in assets after deducting all liabilities.
  • Accounts Comprising Equity:
    1. Share Capital / Contributed Equity: From share transactions (issues, repurchases).
    2. Reserves: Transfers through OCI (e.g., Revaluation reserve, Foreign Currency Translation Reserve, Share Option Reserve, Cash Flow Hedge Reserve).
    3. Retained Earnings (or accumulated losses): From profit/loss, share transactions, dividend distributions.
  • Share Capital: Entitlement to ownership rights. Rights can be varied by constitution. Principal classes: Ordinary shares, Preference shares.
    • Ordinary Shares: Voting rights, entitled to dividends (not assured), usually rank last in winding up.
    • Preference Shares: Preferential treatment over ordinary shares regarding distributions/dividends OR equity distributions on wind up OR both. Some (non-redeemable) are equity, some (redeemable) are not.
  • Accounting for Issue of Share Capital:
    • General Process: Prospectus issued, application money received, share allotments made, shares issued.
    • Journal Entries:
      • Receipt of application money: Dr Bank Trust A/C; Cr Application A/C.
      • Share Allotment (if over-subscribed): Dr Application A/C; Cr Allotment A/C (and refund surplus if applicable).
      • Share Issue: Dr Allotment A/C; Cr Contributed Equity A/C.
      • Transfer cash from Trust to Company bank: Dr Bank A/C; Cr Bank Trust A/C.
    • Shares issued for other than cash: Recorded at fair value of the asset received. Dr Property, Plant & Equipment (etc.); Cr Contributed Equity.
  • Bonus Share Issues: Existing shareholders receive additional shares at no cost, in proportion to holding. Often issued in lieu of cash dividend.
    • Journal Entry: Dr Retained Earnings; Cr Ordinary Share Capital.
  • Share Distributions: Ways companies return capital to shareholders (dividends, share redemption, repurchase/cancellation).
    • Solvency Test (Companies Act 1993 S52): A company must satisfy this before making distributions to protect creditors. Both limbs must be met.
      • Liquidity Test: Ability to pay debts as they fall due in normal course of business.
      • Financial Position Test: Value of assets must be greater than value of liabilities (after distribution).
  • Dividends: Most common distribution, not an expense.
    • Interim Dividend: Declared and paid before full-year earnings determined.
    • Final Dividend: Declared at AGM after financial statements are recorded.
    • Accounting (Interim): Dr Retained Earnings; Cr Bank.
    • Accounting (Final): Dr Retained Earnings; Cr Final Dividend Payable (on declaration); Dr Final Dividend Payable; Cr Bank (on payment).
  • Share Redemptions and Share Repurchases (Buyback):
    • Share Redemption: Shares redeemed and paid to shareholder, then cancelled.
    • Share Repurchase: Company buys back its shares, may cancel or hold as treasury stock.
    • Accounting for Share Repurchase (if cancelled): Dr Share Capital; Dr Retained Earnings (if repurchase price > initial issue price); Cr Cash at Bank.
  • Statement of Changes in Equity (SOCE) (NZ IFRS 18):
    • Minimum Items: Total comprehensive income (attributable to owners/non-controlling interests), reconciliation between beginning and end carrying amount for each equity component.
    • Disclosures Separately: Changes from profit/loss, OCI, transactions with owners (contributions, distributions, changes in ownership).
  • Disclosures (NZ IFRS Para 126, 130): Objectives/policies/processes for managing capital, for each class of share capital: number authorised, issued/fully paid, par value (or no par value statement), reconciliation of shares outstanding.

Statement of Cash Flows (SOCF) (NZ IAS 7)

  • Purpose: Explains movements in cash for a period, reconciling opening and closing cash balances. Assists users in assessing ability to generate cash from operations, meet obligations, pay dividends, obtain finance, improve cash flow projections, and compare profit with operating cash flows.
  • Comparison with other Financial Statements: SOCF is prepared on a cash basis, while SOFP, SOCI, and SOCE are prepared on an accrual basis.
  • Cash and Cash Equivalents:
    • Cash: Cash on hand, cash at bank, demand deposits.
    • Cash Equivalents (NZ IAS 7 Para 7-9): Short-term, highly liquid investments readily convertible to known cash amounts, subject to insignificant risk of value changes (e.g., bank bills, short-term money market deposits).
  • Classification of Cash Flow Activities (NZ IAS 7 Para 10):
    1. Operating Activities: Principal revenue-producing activities and other activities that are not investing or financing activities (i.e., relate to provision of goods and services).
      • Methods: Direct method (major classes of gross cash receipts/payments disclosed – recommended) or Indirect method (profit/loss adjusted for non-cash, deferrals/accruals, investing/financing items).
      • Examples: Receipts from customers, payments to suppliers and employees, operating expenses, income taxes paid. (Interest paid/received and Dividends received can be classified as operating for non-financial institutions).
      • FORMULA for Receipts from customers (Indirect): Ending AR + Bad Debts + Discount Allowed – Beginning AR – Sales = Receipts from Customers (or reverse).
      • FORMULA for Payments to suppliers (Indirect): Ending AP + COGS – Inventory decrease – Beginning AP – Purchases = Payments to Suppliers (or reverse).
    2. Investing Activities: Acquisition and/or disposal of long-term assets (PPE, intangibles) and other investments not included in cash equivalents.
      • Examples: Purchase/sale of PPE, intangibles, other long-term assets, cash receipts from sales of equity/debt instruments of other entities. (Interest received and Dividends received can be classified here).
    3. Financing Activities: Relating to changing the size and/or composition of the financial structure of the entity (equity and borrowings not within cash definition).
      • Examples: Proceeds from issue of shares/borrowings, payments to repurchase/redeem shares, repayment of borrowings. (Dividends paid and Interest paid can be classified here).
  • Interest and Dividends (NZ IAS 7 Para 33, 34): Financial institutions classify as operating. For other entities, interest paid and received, and dividends paid and received can be classified as operating, investing, or financing (must be consistent).
  • Cash Flows from Taxes (NZ IAS 7 Para 35-36): Usually operating (impracticable to identify with individual transactions). If practicable to identify with investing/financing, classify appropriately.
  • Non-Cash Financing and Investing Activities (NZ IAS 7 Para 43): Transactions not resulting in cash flows but affecting recognised assets/liabilities, involving external parties, and relating to financing/investing activities must be disclosed in notes.
    • Examples: Conversions of liabilities to equity, acquisitions by equity issue, acquisitions of assets by assuming related liabilities or finance leases, exchange of non-cash assets/liabilities.

Accounting for Inventories (NZ IAS 2)

  • Inventories in Financial Statements: Appear in Statement of Comprehensive Income (P&L section – Cost of Sales) and Statement of Financial Position (Current Assets).
  • Definition (NZ IAS 2 Para 6): Assets that are: held for sale in the ordinary course of business (Finished goods), in the process of production for such sale (Work in progress), or in the form of materials or supplies to be consumed in production/services (Raw materials).
  • What is Included in Inventory: Goods must have service potential/future economic benefits, controlled by the entity, and result from past event.
    • Goods on Consignment: Legal ownership remains with consignor; not part of agent’s inventory.
    • Goods in Transit: Control passes based on contract terms (FOB shipping point: buyer takes control when shipper takes possession; FOB destination: buyer takes control when goods handed to purchaser).
  • Recognition: Probable future economic benefits from sale/use, and cost can be reliably measured.
  • Initial Measurement: Inventories are initially measured at cost.
    • Components of Cost (NZ IAS 2 Para 10-15):
      1. Costs of purchase: Purchase price, import duties, other taxes, transport/handling costs (less trade discounts, supplier rebates, settlement discounts).
      2. Costs of conversion: Direct labour, systematic allocation of variable/fixed production overheads (absorption costing).
      3. Other costs to bring inventories to present location and condition.
    • Costs Excluded: Abnormal wasted materials, unrelated storage costs, unrelated administrative overheads, selling costs.
  • Subsequent Measurement: Inventories must be measured at the lower of: Cost or Net Realisable Value (NRV).
    • Net Realisable Value (NRV): Estimated selling price – estimated costs of completion – estimated selling costs.
    • Rule (Lower of Cost and NRV):
      • If NRV > Cost: Inventory left at cost (Upward revaluations are not allowed by NZ IAS 2).
      • If NRV < Cost: Write down (e.g., Dr Inventory write-down expense; Cr Inventory).
    • Reversal of Previous Write-downs: Allowed if information indicates value increased, restricted to amount previously written down. (e.g., Dr Inventory; Cr Reversal of Inventory write-down).
    • Generally applied on an item-by-item basis, but grouping of similar items may be appropriate.
  • Costing Methods / Inventory Cost-Flow Assumptions:
    • NZ IAS 2 allows: Specific identification, Weighted-average cost, First-in first-out (FIFO).
    • NZ IAS 2 does not allow: Last-in first-out (LIFO).
    • Specific Identification: For segregated, non-interchangeable items.
    • FIFO (First-In, First-Out): Assumes goods from beginning inventory and earliest purchases are sold first. Ending inventory assumed to be most recent purchases.
    • Weighted-Average Method: Cost of each item determined from weighted-average of similar items purchased/produced. COGS and ending inventory are costed at weighted-average cost.
  • Inventory Systems:
    • Perpetual Inventory System: Inventory ledger account maintained, COGS posted each time an item is sold. Up-to-date information always available.
    • Periodic Inventory System: No inventory account maintained. Inventory determined periodically by stock-take. COGS determined after stock-take.
      • FORMULA for Cost of Sales (Periodic): Opening inv. + purchases – purchase returns – closing inventory = COGS.
  • Disclosure Requirements (NZ IAS 2 Para 36): Accounting policies (cost formulas), total carrying amount, amount expensed, write-downs/reversals (amounts and circumstances), carrying amount pledged as security.

Accounting for Property, Plant & Equipment (NZ IAS 16, 36)

  • Definition of PPE (NZ IAS 16 Para 6): Tangible assets held for use in production/supply of goods/services, for rental to others, or for administrative purposes, and expected to be used for more than one period. (Held for sale are not PPE).
  • Recognition of PPE (NZ IAS 16 Para 7): Recognised only if: probable that future economic benefits will flow to the entity, AND the cost of the item can be measured reliably.
  • Initial Measurement: PPE is recognised initially at ‘cost’.
    • Components of Cost:
      1. Purchase price: Basic cost, non-refundable taxes, import duties. (Basket purchase: remeasure assets to fair values).
      2. Directly attributable costs (Para 17): Costs directly related to bringing asset to present location/condition (e.g., employee benefits, site prep, delivery/handling, installation/assembly, testing costs, professional fees).
      3. Initial estimates of dismantling and removing the item and restoring the site.
  • Subsequent Measurement Models (NZ IAS 16): Entities have a choice of two models:
    1. Cost Model:
      • Cost
      • Less: Accumulated Depreciation
      • Less: Accumulated Impairment provisions
    2. Revaluation Model:
      • Fair Value
      • Less: Subsequent Depreciation
      • Less: Subsequent Impairment provisions
  • Depreciation: The systematic allocation of the depreciable amount of an asset over its useful life. Allocates cost over periods benefits are derived. Depreciation is an expense.
    • Key Elements:
      1. Depreciable amount: Cost of a depreciable asset, less its residual value.
      2. Useful life: Period asset expected to be available for use, or number of production units expected. (Land is not depreciated due to unlimited useful life).
      3. Residual value (Scrap value): Estimated amount entity expects to obtain from disposal at end of useful life, less estimated disposal costs.
      4. Systematic basis.
    • Methods (Para 62): Straight-line, Diminishing-balance, Units-of-production.
      • Straight-line method: Equal depreciation each period. Depreciation expense = (Cost − Residual Value) / Useful life.
      • Diminishing-balance method: Calculated on asset’s opening written-down value (carrying value). Higher expense in early years.
      • Units-of-production method: Based on expected use or output.
    • Review of Rate/Method (Para 51, 61): Residual value and useful life, and depreciation method, must be reviewed at least annually. Accounted for as a change in an accounting estimate in accordance with NZ IAS 8.
  • Revaluation Model (Details):
    • Why revalue: Historical cost may not reflect current values.
    • When allowed: Entities may revalue PPE. If one item revalued, entire class must be revalued. Revaluations must be kept up to date.
    • Fair Value: Must be at fair value (NZ IFRS 13 applies, e.g., market approach).
    • Fair value – Carrying value = Change in Carrying value.
    • Revaluation Increments / Upward Revaluation (Para 39):
      • General Rule: Increase recognised in Other Comprehensive Income (OCI) and accumulated in Revaluation Surplus (equity).
      • Exception: Increase recognised in Profit or Loss to the extent it reverses a previous revaluation decrease of the same asset recognised in P&L.
      • Journal Entries: 1. Dr Accumulated Depreciation; Cr Asset (cost) (Eliminating Acc. Dep.); 2. Dr Asset (Cost); Cr Revaluation Reserve (OCI)/Profit & Loss.
    • Revaluation Decrements / Downward Revaluation (Para 40):
      • General Rule: Decrease recognised in Profit or Loss.
      • Exception: If there was a previous revaluation increase, current year decrease recorded through OCI / Revaluation Reserve up to the balance of that reserve. Any excess decrease recognised in P&L.
      • Journal Entries: 1. Dr Accumulated Depreciation; Cr Asset (cost) (Eliminating Acc. Dep.); 2. Dr P & L (Loss on revaluation)/Revaluation Reserve (OCI); Cr Asset (Cost).
    • Steps to follow in revaluation: 1. Calculate accumulated depreciation to revaluation date (for depreciable assets). 2. Calculate Carrying Value (Cost/FV – Acc Dep). 3. Compare FV and CV (FV-CV). 4. Decide increment/decrement. 5. Decide journal entry (first time or subsequent revaluation).
  • Impairment of Assets (NZ IAS 36): Review carrying amount annually for impairment. Occurs when carrying value exceeds recoverable amount. Applicable to PPE and Intangible assets.
    • Objective: Ensure assets are carried at no more than their recoverable amount.
    • FORMULA for Impairment Loss: Impairment Loss = Carrying value – Recoverable amount.
    • Carrying amount: Amount recorded in accounting records (Cost/FV – Acc Dep – Acc Impairment Losses).
    • Recoverable amount: Higher of an asset’s net selling price and its value in use.
      • Net selling price: Selling price – costs associated with making the sale.
      • Value in use: Present value of future cash flows expected from an asset.
    • Accounting (Cost Model): Dr Impairment loss; Cr Accumulated Impairment Loss.
    • Accounting (Revalued Model): Dr Revaluation Reserve/Impairment loss; Cr Accumulated Impairment Loss (First use Revaluation Reserve balance before hitting P&L).
  • Derecognition (NZ IAS 16 Para 67): Disposal of an asset, or when no future economic benefits are expected from use or disposal.
    • Accounting Treatment for Disposal:
      1. Calculate accumulated depreciation up to disposal date and carrying amount.
      2. Compare consideration received and carrying amount to calculate profit or loss on disposal.
      3. Post journal entry to eliminate cost/revalued amount and accumulated depreciation, record consideration, and record profit or loss.
      • Journal Entry: Dr Cash at bank (if any); Dr Loss on Disposal – P&L (if any); Dr Accumulated Depreciation; Cr Asset; Cr Profit on Disposal – P&L (if any).
  • Disclosures (NZ IAS 16 Para 73, 77): Measurement bases, depreciation methods, useful lives/depreciation rates. If revaluation model used: effective date of revaluation, independent valuer involvement, methods/assumptions for fair value, carrying amount if cost model applied, revaluation surplus changes/restrictions.

Accounting for Intangible Assets (NZ IAS 38, 36)

  • Definition of Intangible Assets (NZ IAS 38): ‘an identifiable, non-monetary asset, without physical substance’.
    • Three Key Characteristics:
      1. Identifiable (separable or arises from contractual/legal rights).
      2. Non-monetary in nature.
      3. Without physical substance.
    • Intangibles must also meet the asset definition (controlled resource from past events, expected future economic benefits). (e.g., highly trained staff do not qualify due to lack of control).
  • Recognition: Must be probable future economic benefits, AND cost can be reliably measured.
  • Initial Measurement: Depends on how acquired:
    • Separate purchase: Purchase Cost + Directly attributable costs (Para 27).
    • Within exchange of assets: Fair value (or carrying amount of asset given up if fair value not possible) (Para 46).
    • Goodwill arising as part of business combination: Fair value at acquisition date (Para 34).
      • FORMULA for Externally purchased goodwill: Consideration paid by Acquirer Co – fair value of Net assets of Acquiree Co.
    • Internally generated intangibles: Generally expensed unless strict criteria met.
      • Internally generated goodwill is prohibited from capitalisation.
      • Research Phase: All research expenditures are to be expensed immediately (Para 54-56, 68).
      • Development Phase: Costs may be capitalised (recognised as an intangible asset) only if all of the following criteria are met (Para 8, 57-64):
        • Technical feasibility; Intention to complete and sell; Ability to use or sell; Existence of a market; Availability of resources; Ability to measure costs reliably.
  • Subsequent Measurement Models: Choice of two models (similar to PPE):
    1. Cost Model:
      • Cost
      • Less: Accumulated Amortisation
      • Less: Accumulated Impairment provisions
    2. Revaluation Model:
      • Fair Value
      • Less: Subsequent Amortisation
      • Less: Subsequent Impairment provisions
    • Revaluation of Intangibles: Only allowed if there is an ‘active market’ (Para 38).
      • Active market characteristics: Homogeneous items traded, willing buyers/sellers normally found, prices publicly available.
      • Only acquired (not internally generated) intangible assets can be subsequently revalued.
  • Amortisation of Intangible Assets: ‘the systematic allocation of the depreciable amount of an intangible asset over its useful life’.
    • Finite Life (Para 97-106): Amortisation principles same as depreciation for PPE. Cost less residual value amortised systematically to P&L. Straight-line commonly used. Residual value usually zero. Amortisation period generally over contract life. Useful life, residual value, and method reviewed annually. Accounting treatment is same as depreciation (Amortisation expenses Dr).
    • Indefinite Life (Para 107-108): No foreseeable limit to period asset generates cash flows. No amortisation charge. Subject to annual impairment tests.
  • Impairment Losses (NZ IAS 36): Impairment loss occurs when recoverable amount is lower than carrying amount.
    • FORMULA for Impairment Loss: Carrying value – Recoverable amount. (Same as for PPE)
    • Accounting: Dr Impairment loss; Cr Accumulated Impairment Loss.
    • Note: Prohibition on revaluing goodwill: If recoverable amount of goodwill is greater than carrying value, no revaluation may be made.
  • Derecognition: Disposal of an intangible asset, or when no future economic benefits are expected. Treatment identical to NZ IAS 16 (PPE disposals).
  • Disclosures (NZ IAS 38 Para 118, 119, 122, 124, 126): For each class of intangibles, distinguish internally generated from other intangibles.

Section 1: Fifteen Multiple Choice Questions (MCQs)

  • Covers all topics: Weeks 1-11
  • Includes calculations and conceptual questions

Key Concepts for Multiple Choice Questions (Week 1)

  • Legislation:
    • Financial Reporting Act 2013 (FRA 2013)
    • Financial Markets Conduct Act 2013 (FMCA 2013)
    • Company’s Act 1993
  • XRB Framework
  • NZ Conceptual Framework (NZ CF)
  • SOCI (NZ IFRS 18) – Information to be presented in SOCI:
    • Operating activities: Income, Expenses, Current Assets & Current Liabilities
    • Investing activities: Non-Current Assets
    • Financing activities: Non-Current Liabilities, Equity
  • Statement of Cash Flows: Review Week 5 materials

Section 2: Five Key Topics & Formulas

1. Statement of Changes in Equity

  • Practice recording equity transactions and preparing SOCE.
  • Review Week 4 materials.

2. Provisions and Contingent Liabilities (NZ IAS 37)

  • Application Criteria Flowchart:
    • Start → Present obligation?
      • No → Do nothing
      • Yes → Possible obligation?
        • No → Probable outflow?
          • Yes → Reliable estimate?
            • Yes → Make a Provision
            • No → Disclose contingent liability
          • No → Remote?
            • No → Disclose contingent liability
            • Yes → Do nothing
  • Treatment:
    • If Provision: Prepare a journal entry
    • If Contingent Liability: Prepare a disclosure note

3. Impairment of Assets (NZ IAS 36)

  • Steps to follow:
    1. Calculate Carrying Value (CV):
      • Carrying Value = Cost/Revalued amount – Acc Dep
    2. Compute Recoverable Value (RV):
      • RV = Higher of Net Selling price and Value in Use
    3. Compare CV and RV:
      • If CV > RV, the asset has been impaired.
    4. Calculate Impairment Loss:
      • Impairment Loss = CV – Recoverable value
    5. Journal Entry:
      • Impairment Loss DR
      • Accumulated Impairment Loss CR

4. Events after Reporting Period (NZ IAS 10)

  • Events after the Reporting Period = Between the end of reporting period and the authorisation date
  • Classification & Treatment:
    • Adjusting events: Conditions existed at the end of reporting period → Adjust (post a journal entry)
    • Non-Adjusting events: Arose after the end of the reporting period → Disclose if material

5. Accounting Estimates / Policies (NZ IAS 8)

  • Accounting Policies: Changes are Retrospective Changes
  • Accounting Estimates: Changes are Prospective Changes
  • Errors:
    • If Material → Retrospective Changes
    • If not material → Prospective Changes

Section 3: Four Key Topics & Formulas

1. Inventories (NZ IAS 2)

  • Measurement Rule: Inventories must be measured at the Lower of cost and NRV
  • Calculations: Value of inventories at year end
  • Journal entries: Write down and reversal of write down

2. Intangible Assets (NZ IAS 38)

  • Initial Measurement: At Cost
  • Subsequent Measurement Options:
    • Cost Model: Calculate amortisation and journal entries
      • Carrying value = (Cost – Accumulated amortisation – Accumulated Impairments)
    • Revaluation Model: Measurement at Fair Value

3. Revenue (NZ IFRS 15)

  • Application of 5-step model: Understand criteria in each step
  • Journal entries

4. PPE (NZ IAS 16)

  • Topics: Purchase of PPE, Depreciation, Revaluation, Disposal
  • PPE Revaluation Steps:
    1. Calculate Carrying Value (CV) at revaluation date:
      • Carrying Value = Cost/Revalued amount – Accumulated Depreciation up to the date of revaluation
    2. Find Revalued amount (Fair Value – FV) given in question
    3. Compute Revaluation Gain/Loss:
      • Revaluation Gain*/(Loss)** = Fair Value - Carrying value
      • If FV > CV, it is a Revaluation Gain/ (Increment)
      • *If FV < CV, it is a Revaluation Loss/ (Decrement)
    4. Write Journal Entries:
      1. To reverse accumulated depreciation (for depreciable assets)
      2. To record revaluation Gain/Loss
  • PPE Disposals Steps:
    1. Calculate Carrying Value (CV) at disposal date:
      • Carrying Value = Cost/Revalued amount – Accumulated Depreciation
    2. Find Sale proceeds (SP) given in question
    3. Compute Loss on disposal / Profit on disposal:
      • Profit on Disposal*/(Loss on Disposal)** = Sale proceeds (SP) - Carrying value (CV)
      • If SP > CV, it is a profit
      • *If SP < CV, it is a Loss
    4. Write relevant journal entries: Derecognise all associated ledger accounts and record profit or loss on disposal