This note outlines the process for adopting New Zealand equivalents to International Financial Reporting Standards (NZ IFRS) for the NZDF.
The Accounting Standards Review Board announced in December 2002 that reporting entities must adopt NZ IFRS for periods beginning after 1 January 2007, with earlier adoption optional. The Minister of Finance announced in 2003 that the Crown will first adopt NZ IFRS for its financial year beginning 1 July 2007. This NZDF Statement of Intent, therefore, recognises IFRS requirements in the Forecast Financial Statements.
The NZDF has conducted a preliminary assessment of the impacts of transitioning to IFRS. The potential areas of impact from adoption of NZ IFRS may change materially as implementation unfolds and new standards are promulgated. Significant items identified to date include:
- The 2007/08 financial statements will require the restatement of 2006/07 comparative figures and the 1 July 2006 opening balance sheet to ensure all information presented in those accounts are prepared on a consistent basis. Treasury gathered this information throughout the 2006/07 financial year in parallel with normal reporting requirements.
- Under current standards, gains or losses on forward exchange contracts are not recognised, as any exposure to gains or losses on these contracts is generally offset by a related loss or gain on the item being hedged. Disclosure is made of the amount of unrealised gains or losses in the Annual Report in the notes to the financial statements. Under IFRS, these contracts will be valued at fair value, with any gains or losses being taken to the statement of financial performance. The NZDF will therefore recognise these contracts at fair value.
- Current standards require foreign currency transactions which are covered by forward exchange contracts to be translated at the exchange rates specified in those contracts. Under IFRS, these transactions will be translated at the spot rate applying at the time of the transaction.
- The valuation of inventories under IFRS involves a new test for inventories held for distribution for public benefit purposes. These are recorded at the lower of cost and current replacement cost. The assessment of current replacement cost will be undertaken using a calculation based on latest purchase price adjusted for inflation and currency movements. Where this estimated replacement cost is materially different from carrying value, an impairment provision will be created to write the inventory down.
- Under IFRS there will be a requirement to actuarially value some employee entitlements, such as sick leave, which are currently not recorded as a liability.
- The definition of property intended for sale is somewhat narrower under IFRS, and may lead to a reduced number of properties in this classification.
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