NZ IFRS 18: More than just a new look for your financial statements

NZ IFRS 18: More than just a new look for your financial statements

When a new accounting standard is released, the first question many business owners and directors ask is, “will this change my profit?” In the case of NZ IFRS 18, the answer is generally no. The standard does not significantly change how assets, liabilities, income or expenses are recognised or measured. However, NZ IFRS 18 changes how financial performance is presented and explained, and that is where the real impact lies.

What is NZ IFRS 18 and why does it matter?

Effective for reporting periods beginning on or after 1 January 2027, NZ IFRS 18 replaces NZ IAS 1 and introduces a new framework for presenting information in the financial statements. While that may sound like a technical accounting update, it has practical implications for anyone who relies on financial information to make decisions.

Banks, investors, directors, shareholders and business owners often focus on key profit measures, margins and performance indicators when assessing a business. How those figures are presented can influence the way the business is understood, benchmarked and evaluated. NZ IFRS 18 is intended to improve consistency and transparency so that users can more easily compare financial performance between entities.

A new structure for the statement of profit or loss

One of the most significant changes is the introduction of a more structured statement of profit or loss. Income and expenses will be grouped into defined categories, including operating, investing and financing activities. New mandatory subtotals, such as operating profit and profit before financing and income taxes, will also be required.

For many businesses, implementing these changes will involve more than updating a financial statement template. Management will need to carefully consider the nature of transactions and determine where they fit within the new structure. Areas commonly grouped under headings such as “other income”, “other expenses” or “sundry items” may require closer review, particularly where material amounts or significant judgement are involved.

Management-defined performance measures (MPMs)

Another key change relates to management defined performance measures (MPMs). Many businesses use alternative performance metrics when reporting to boards, lenders, investors or parent companies. Measures such as adjusted EBITDA, underlying profit or normalised earnings can provide valuable insights into how management views performance.

NZ IFRS 18 does not prevent businesses from using these metrics. Instead, it seeks to improve transparency around them. Where a measure meets the definition of an MPM, additional disclosures may be required, including an explanation of why management uses the measure and a reconciliation back to the corresponding IFRS figure.

Greater focus on transparency and meaningful disclosure

In many respects, this is as much a governance issue as it is an accounting one. Stakeholders should be able to clearly understand what adjustments have been made, why they have been made and how those adjustments affect the overall story being told by the financial statements.

The standard also places increased emphasis on aggregation and disaggregation. Financial statements should contain enough detail to provide meaningful information without becoming cluttered or difficult to follow. Overly broad categories can sometimes obscure important trends, while excessive detail can make the accounts harder to understand. NZ IFRS 18 encourages entities to strike the right balance and provide information at a level that is both relevant and useful.

Looking beyond the financial statements

Importantly, the effects of NZ IFRS 18 may extend beyond the annual financial statements. Businesses should also consider the implications for management reporting, board packs, lender reporting, covenant calculations and consolidation processes. Organisations that seek consistency between internal and external reporting will likely need to review several reporting streams rather than focusing solely on year-end financial statements.

Although the mandatory adoption date may seem some distance away, comparative information will be required in the first year of implementation. That means businesses should ideally begin assessing the impact well before their first reporting period under the new standard.

For organisations transitioning from special purpose financial reporting (SPFR) to NZ IFRS, the requirements may be broader, involving changes to accounting policies, systems and disclosures. Read more about transitioning from SPFR to NZ IFRS and how to prepare for the change here.

A practical starting point is to perform a dry run using a recent set of financial statements. Review how the profit and loss statement would look under the new presentation requirements, identify areas requiring judgement, assess existing performance measures and consider whether current systems can efficiently produce the information required.

Ultimately, NZ IFRS 18 should not be viewed as simply another compliance exercise. It presents an opportunity to improve the clarity and usefulness of financial reporting. Better presentation helps stakeholders understand how a business generates earnings, how performance is managed and how results compare over time. In a business environment where transparency and accountability are increasingly important, that is a worthwhile outcome.

Next steps | How Nexia New Zealand can help

At Nexia New Zealand, we are already working with clients to assess the practical implications of emerging IFRS changes, including NZ IFRS 18. Whether you are preparing for your first IFRS financial statements, transitioning to a new standard, or simply want to understand the impact on your reporting and governance processes, our team can help.

Learn more about our Accounting & Technical Services here.

If you would like to discuss how NZ IFRS 18 may affect your business, please reach out to the Nexia Business Advisory and IFRS Reporting team here. Early preparation can make implementation significantly smoother and ensure your financial reporting continues to tell the right story.