New Zealand Institute of Chartered Accountants
                              August 2005




                    Request f...
Request for Comment on ED-104 Proposed Differential Reporting Concessions for the forthcoming
New Zealand Equivalent to IF...
DISCUSSION PAPER
Introduction
The purpose of this exposure draft is to propose differential reporting concessions in respe...
Appendix D which sets out an amended version of IFRS 7 for entities which apply IFRS 7 but do not apply
Amendments to IAS ...
pronouncements and the approval of the Framework for Differential Reporting in June 2005 it was
appropriate to consider di...
NZ IFRS 7                           Amendments to NZ IAS 1
Concessions Proposed ()                  Concessions Proposed ...
Effective date
The FRSB proposes that the differential reporting concessions for the forthcoming NZ IFRS 7 and the
Amendme...
APPENDIX 1 PROPOSED DIFFERENTIAL REPORTING CONCESSIONS
COMPARISON OF NZ IAS 32 AND ED-104

NZ IFRS 7                      ...
NZ IFRS 7                                                            NZ IAS 32         NZ IAS 32       ED-104 ()
(and    ...
NZ IFRS 7                                                          NZ IAS 32         NZ IAS 32       ED-104 ()
(and      ...
APPENDIX 2
SUMMARY OF MAIN CHANGES FROM ED 7

The main changes to the proposals in ED 7 are:
(a)   ED 7 proposed disclosur...
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  1. 1. New Zealand Institute of Chartered Accountants August 2005 Request for Comment on ED-104 Proposed Differential Reporting Concessions for the forthcoming New Zealand Equivalent to IFRS 7 Financial Instruments: Disclosures and Amendments to New Zealand Equivalent to IAS 1 Presentation of Financial Statements—Capital Disclosures Issued by the Financial Reporting Standards Board New Zealand Institute of Chartered Accountants
  2. 2. Request for Comment on ED-104 Proposed Differential Reporting Concessions for the forthcoming New Zealand Equivalent to IFRS 7 Financial Instruments: Disclosures and Amendments to New Zealand Equivalent to IAS 1 Presentation of Financial Statements—Capital Disclosures. Commenting on the Exposure Draft ED-104 proposes differential reporting concessions in respect of the forthcoming New Zealand Equivalent to IFRS 7 Financial Instruments: Disclosures (NZ IFRS 7) and Amendments to New Zealand Equivalent to IAS 1 Presentation of Financial Statements—Capital Disclosures (Amendments to NZ IAS 1). The proposed concessions are shown as marked-up text in the pronouncements. Comments are sought only on the proposed concessions. Comments should be addressed to: The Director – Accounting Standards New Zealand Institute of Chartered Accountants PO Box 11 342 WELLINGTON E-mail: ASD@nzica.com Comments are due by 30 November 2005. It would be appreciated if respondents include a copy of the submissions in electronic form as that allows for the efficient collation and analysis of comments. Submissions will be made available to the public unless otherwise requested. Respondents are requested to indicate on their submission on whose behalf (for example, own behalf, a group of people or an entity) the submission is being made. Summary of Contents Discussion Paper, including Appendices 1 and 2 ED-104  Forthcoming NZ IFRS 7, including Appendices A to D – refer separate contents page in NZ IFRS 7 (proposed differential reporting concessions shown as marked-up text)  Forthcoming Amendments to NZ IAS 1, including Appendix 1 – refer separate contents page in Amendments to NZ IAS 1 (proposed differential reporting concessions shown as marked-up text) 2
  3. 3. DISCUSSION PAPER Introduction The purpose of this exposure draft is to propose differential reporting concessions in respect of the financial instrument disclosures required by the forthcoming NZ IFRS 7 and the capital disclosures required by the forthcoming Amendments to NZ IAS 1. Background The IASB has recently (18 August 2005) issued IFRS 7 Financial Instruments: Disclosures (IFRS 7) and Amendments to IAS 1 Presentation of Financial Statements—Capital Disclosures (Amendments to IAS 1). IFRS 7 and the Amendments to IAS 1 are the final pronouncements resulting from ED 7 Financial Instruments: Disclosures (issued for comment by the IASB and the FRSB in August 2004).1 Proposed adoption in New Zealand The FRSB intends to adopt the requirements of IFRS 7 and the Amendments to IAS 1 (including any consequential amendments resulting from these pronouncements) in New Zealand equivalents to IFRSs. This will lead to NZ IAS 30 Disclosures in the Financial Statements of Banks and Similar Financial Institutions (NZ IAS 30) being withdrawn and the disclosure requirements of NZ IAS 32 Financial Instruments: Disclosure and Presentation (NZ IAS 32) being superseded. The FRSB is continuing its deliberations on whether to include additional New Zealand specific disclosures for financial institutions in the forthcoming NZ IFRS 7. At present, the forthcoming NZ IFRS 7 Financial Instruments: Disclosures (NZ IFRS 7) and Amendments to NZ IAS 1 Presentation of Financial Statements—Capital Disclosures (Amendments to NZ IAS 1) have not been issued by the FRSB, nor have they been approved by the ASRB. Once these pronouncements have been formally issued by the FRSB they will be available, as pending standards, on the Institute’s website (www.nzica.com). IFRS 7 IFRS 7 applies to all risks arising from all financial instruments, except those instruments listed in paragraph 3 of the IFRS. The IFRS applies to all entities, regardless of whether they have few or many financial instruments. However, the extent of disclosure required depends on the extent of the entity’s use of financial instruments and of its exposure to risk. IFRS 7 is a principles-based standard which requires disclosure of: (a) the significance of financial instruments for an entity’s financial position and performance. These disclosures incorporate many of the requirements previously in IAS 32 Financial Instruments: Disclosure and Presentation (IAS 32); and (b) qualitative and quantitative information about exposure to risks arising from financial instruments, including specified minimum disclosures about credit risk, liquidity risk and market risk. The qualitative disclosures describe management’s objectives, policies and processes for managing those risks. The quantitative disclosures provide information about the extent to which the entity is exposed to risk, based on information provided internally to the entity’s key management personnel. Together, these disclosures provide an overview of the entity’s use of financial instruments and the exposures to risks they create. IFRS 7 includes integral application guidance (Appendix B) and non-integral implementation guidance which suggests possible ways to apply some of the disclosure requirements in IFRS 7. It also includes an 1 A summary of the key differences between the proposals ED 7 and the requirements in IFRS 7 and the Amendments to IAS 1 are set out in Appendix 2 to this Discussion Paper. 3
  4. 4. Appendix D which sets out an amended version of IFRS 7 for entities which apply IFRS 7 but do not apply Amendments to IAS 39: Financial Instruments: Recognition and Measurement—The Fair Value Option.2 IFRS 7 supersedes IAS 30 Disclosures in the Financial Statements of Banks and Similar Financial Institutions (IAS 30) and the disclosure requirements of IAS 32 which applied to all entities with certain types of financial instruments. The presentation requirements of IAS 32 remain unchanged. The disclosures in IFRS 7 complement the measurement requirements in IAS 39 Financial Instruments: Recognition and Measurement (IAS 39). IFRS 7 will lead to a broadening of the disclosure requirements applicable to entities with financial instruments. Because the Standard is principles-based, an entity may need to go beyond the minimum specified disclosures in order to satisfy the principles expressed in the Standard. Amendments to IAS 1 In conjunction with IFRS 7, the IASB has also issued Amendments to IAS 1 which require disclosure of: (a) the entity’s objectives, policies and processes for managing capital; (b) quantitative data about what the entity regards as capital; (c) whether the entity has complied with any capital requirements; and (d) if it has not complied, the consequences of such non-compliance. These disclosures were initially proposed in ED 7 but, because they have general relevance and do not relate solely to financial instruments, they have been included in IAS 1. Additional material in forthcoming New Zealand pronouncements As noted above, the proposed adoption of the requirements of IFRS 7 in New Zealand will lead to the withdrawal of NZ IAS 30. Currently NZ IAS 30 requires a number of New Zealand specific additional disclosures. The additional disclosure requirements were included in NZ IAS 30 to maintain the quality and comparability of information for users of these disclosures (for example, the Reserve Bank of New Zealand, credit agencies, and rating agencies). These additional disclosures were based on the requirements of Financial Reporting Standard No. 33: Disclosure of Information by Financial Institutions (FRS-33). The FRSB continuing its deliberations on whether to include additional New Zealand specific disclosures for financial institutions in the forthcoming NZ IFRS 7. Any proposals to require additional disclosures and any differential reporting concessions in respect of these requirements would be exposed for comment in a separate exposure draft. Proposed differential reporting concessions The FRSB did not propose any differential reporting concessions in respect of the proposals in ED 7 as, at the time that ED 7 was issued for comment, the Framework for Differential Reporting for Entities Applying the New Zealand Equivalents to International Financial Reporting Standards Reporting Regime (Framework for Differential Reporting) was still being developed3. Following the finalisation of the IASB 2 This pronouncement is available on the pending standards section of the Institute’s website (www.nzica.com). 3 The FRSB’s general approach to identifying differential reporting concessions in respect of New Zealand equivalents to IFRSs was outlined in ED-98 and the Institute’s submission to the Accounting Standards Review Board seeking approval of the Framework for Differential Reporting (May 2005). The Framework for Differential Reporting (June 2005) represents an interim approach to the development of differential reporting concessions for entities applying New Zealand equivalents to IFRSs. Following completion of the IASB’s project on accounting for small and medium-sized entities (SMEs), New Zealand’s approach to differential reporting will be reviewed. 4
  5. 5. pronouncements and the approval of the Framework for Differential Reporting in June 2005 it was appropriate to consider differential reporting concessions in respect of the requirements in these pronouncements. ED-104 outlines the FRSB’s proposals for differential reporting concessions in respect of the forthcoming NZ IFRS 7 and Amendments to NZ IAS 1. The following table summarises the proposed differential reporting concessions in respect of the disclosure requirements in the forthcoming NZ IFRS 7 and Amendments to NZ IAS 1. The proposed concessions are shown as marked-up text in ED-104. The general approach adopted by the FRSB in proposing these concessions is as follows:  where a disclosure requirement in the forthcoming NZ IFRS 7 is similar to an existing disclosure requirement in NZ IAS 32 for which there is a differential reporting concession, the FRSB has generally proposed to retain the concession. However, the FRSB has not proposed concessions in respect of some of the principles-based requirements in the forthcoming NZ IFRS 7; and  new disclosure requirements have been considered on a case by case basis. A comparison of existing concessions in NZ IAS 32 and proposed concessions in respect of the forthcoming NZ IFRS 7 is outlined in Appendix 1 to this Discussion Paper. No additional differential reporting concessions are proposed in respect of the consequential amendments arising from IFRS 7. The consequential amendments to IFRS 4 (paragraph 39A) will result in an additional disclosure requirement, but this disclosure will be subject to the existing concession in respect of NZ IFRS 4 paragraph 38. Following consideration of respondents’ comments on ED-104 the FRSB proposes to incorporate the differential reporting concessions outlined in ED-104 in the forthcoming NZ IFRS 7 and Amendments to NZ IAS 1. NZ IFRS 7 Amendments to NZ IAS 1 Concessions Proposed ()4 Concessions Proposed () 6 124A 7 124B(a) 8 124B(b) 9 124B(c) 10 124B(d) 11 124B(e) 12 124C 13 124D 14 124E 15 16 17 18 19 20 21 22 23 24 25 26 4 Readers should refer to the wording of proposed concessions in ED-104. A tick in this table may indicate a partial or a full concession. 5
  6. 6. NZ IFRS 7 Amendments to NZ IAS 1 Concessions Proposed () Concessions Proposed () 27 28 29 30 31-42 Impact analysis Impact for financial institutions complying with NZ IAS 30 Currently all financial institutions applying New Zealand equivalents to IFRSs must comply with the industry-specific disclosure requirements in NZ IAS 30. The Framework for Differential Reporting (2005) does not establish any differential reporting concessions in respect of NZ IAS 30. NZ IAS 30 will be superseded by the forthcoming NZ IFRS 7 which is not industry specific. The FRSB has therefore considered it appropriate to identify differential reporting concessions in respect of the disclosures in IFRS 7. Financial institutions that are not issuers may be qualifying entities, which are eligible to apply the proposed differential reporting concessions in the forthcoming NZ IFRS 7.5 The proposed differential reporting concessions represent new concessions for such entities. In reviewing the proposed differential reporting concessions outlined in ED-104, financial institutions should note that the FRSB has not yet completed its deliberations on possible additional disclosures for financial institutions in the forthcoming NZ IFRS 7. Impact for entities complying with the disclosure requirements in NZ IAS 32 IFRS 7 incorporates many of the disclosure requirements previously located in IAS 32. In common with IAS 32 it applies to a broad range of financial instruments. Some disclosures such as concentrations of risk, credit risk, liquidity risk and market risk have been simplified. However, IFRS 7, and the forthcoming NZ IFRS 7, may lead to more disclosure by entities with financial instruments. The Framework for Differential Reporting (2005) established a partial concession in respect of many of the disclosure requirements of NZ IAS 32. ED-104 proposes that the majority of the current NZ IAS 32 differential reporting concessions be retained in the forthcoming NZ IFRS 7. Due to differences between the disclosure requirements in the forthcoming NZ IFRS 7 and the disclosures in NZ IAS 32, the proposed concessions are not identical to the NZ IAS 32 concessions. Impact for entities complying with NZ IAS 1 The forthcoming Amendments to NZ IAS 1 will result in entities making additional capital disclosures. ED-104 proposes to grant partial concessions to qualifying entities in respect of these disclosures. Public benefit entities The proposed concessions are considered appropriate for both profit-oriented and public benefit entities. 5 The criteria for qualifying entities to be eligible for differential reporting concessions are outlined in the Framework for Differential Reporting (2005). Some financial institutions, other than issuers, may be qualifying entities. 6
  7. 7. Effective date The FRSB proposes that the differential reporting concessions for the forthcoming NZ IFRS 7 and the Amendments to NZ IAS 1 be effective for annual accounting periods beginning on or after 1 January 2007. For entities which elect to comply with NZ IFRS 1 First-time Adoption of New Zealand Equivalents to International Financial Reporting Standards for an annual accounting period beginning on or after 1 January 2005 and before 1 January 2007, early adoption is encouraged. Questions The FRSB welcomes comment on the proposed differential reporting concessions in respect of the forthcoming NZ IFRS 7 and Amendments to NZ IAS 1. Comments are sought solely in respect of the proposed differential reporting concessions. No comments are sought in respect of the underlying requirements in these forthcoming pronouncements. In particular the FRSB seeks constituents’ views on the following questions by 30 November 2005. 1) Do you agree with the differential reporting concessions proposed in respect of the forthcoming NZ IFRS 7 and Amendments to NZ IAS 1? If not, please provide reasons supporting your response. 2) Some entities currently required to comply in full with the requirements of NZ IAS 30 may meet the criteria for qualifying entities in the Framework for Differential Reporting (2005) and may therefore be eligible to make use of the differential reporting concessions proposed in respect of the forthcoming NZ IFRS 7. a) Are you aware of any such entities? If so, please identify the entities. b) Do you agree that these entities should be permitted to make use of the proposed differential reporting concessions in the forthcoming NZ IFRS 7? 3) Are there any regulatory issues or other issues arising in the New Zealand environment that may affect the implementation of the proposed differential reporting concessions, particularly any issues relating to: a) profit-oriented entities; b) public benefit entities; or c) the Privacy Act 1993? Please provide reasons supporting your response. 4) Do you consider that the proposed differential reporting concessions are in the best interests of users of general-purpose financial reports of qualifying entities in New Zealand? Please provide reasons supporting your response. 7
  8. 8. APPENDIX 1 PROPOSED DIFFERENTIAL REPORTING CONCESSIONS COMPARISON OF NZ IAS 32 AND ED-104 NZ IFRS 7 NZ IAS 32 NZ IAS 32 ED-104 ()7 (and Compliance Current Proposed Appendix B) 6 required by all differential differential entities reporting reporting concessions concessions Classes of financial instruments 6 An entity shall provide sufficient information to 55 – (B1-B3) permit reconciliation to relevant line items on the balance sheet Significance of financial instruments for financial position and performance 7 Information enabling users to evaluate 60(a) (partial) – significance of financial instruments for an entity’s financial position and performance Balance sheet 8 Disclosure of carrying amounts of categories as 94(e) (partial) – defined in NZ IAS 39 Financial assets and liabilities at fair value through profit and loss 9 Disclosures for loan or receivable at fair value No equivalent – (B4) through profit or loss 10 Disclosure for financial liability designated at fair 94(f) (partial) – (B4) value through profit and loss 11 Disclosure of method used to ascertain the No equivalent – (B4) amount of change due to credit risk for financial assets and liabilities Reclassification 12 Disclosure concerning reclassified financial 94(g) – assets Derecognition 13 Disclosure where assets have been transferred 94(a) – in such a way that they do not qualify for derecognition Collateral 14 Disclosure requirement for financial assets 94(b)  Based on pledged as collateral for liabilities or contingent existing liabilities concession 15 Disclosure where an entity holds collateral 94(c)  Based on which it is permitted to sell or repledge existing concession Allowance account for credit losses 16 Reconciliation of any allowance account for No equivalent  6 No specific concessions are proposed in respect of Appendix B. Where a concession is granted in respect of a requirement in the forthcoming Standard, the concession also applies to the relevant implementation guidance in Appendix B. 7 Readers should refer to the wording of proposed concessions in ED-104. A tick in this table may indicate a partial or a full concession. 8
  9. 9. NZ IFRS 7 NZ IAS 32 NZ IAS 32 ED-104 () (and Compliance Current Proposed Appendix B) required by all differential differential entities reporting reporting concessions concessions credit losses to be disclosed Compound financial instruments with multiple embedded derivatives 17 Disclosure of compound financial instruments 94(d) – with multiple embedded derivative Defaults and breaches 18 Disclosures for loans payable relating to any 94(j) – defaults during the period of principal, interest, sinking fund, or redemption provisions on loan payable 19 Disclosure where the lender was permitted to 95 – demand accelerated payment or the terms of the loan were renegotiated Income statement and equity 20 Disclosure of items of income, expense, gains 94(i) 94(h) – and losses Accounting policies 21 Disclosure of significant accounting policies 60(b) – (B5) 61 Hedge accounting 22 Disclosures for fair value hedges, cash flow 58 – hedges and net investment in a foreign operation 23 Disclosures in respect of cash flow hedges 59  Based on existing concession 24 Disclosure of gains or losses for fair value No equivalent  hedges, ineffectiveness on cash flow hedges and hedges of net investments in foreign operations Fair Value 25 Except as specified in paragraph 28, for each 86  Based on class of financial assets and liabilities, existing disclosure of fair value in a way that permits it to concession be compared with the corresponding carrying amount in the balance sheet 26 In disclosing fair values, an entity shall group 89  Based on financial assets and financial liabilities into existing classes, but shall offset them only to the extent concession that their carrying amounts are offset in the balance sheet 27 Disclosures in relation to the methods and 92(a)  Based on assumptions applied in determining fair values 92(b) existing of financial assets and financial liabilities concession 28 Disclosures where data for valuation not 90  Based on 9
  10. 10. NZ IFRS 7 NZ IAS 32 NZ IAS 32 ED-104 () (and Compliance Current Proposed Appendix B) required by all differential differential entities reporting reporting concessions concessions obtained from observable markets 92(c) existing concession 29 Situations where disclosure of fair value is not 91 Retain required 91A concession 30 Where paragraph 29 applies an entity shall 91  Based on disclose information that enables users to judge existing the extent of possible difference between concession carrying amounts and fair value Nature and extent of risk arising from financial instruments 31 Disclosure of an entity’s financial risk 56  Based on 32 management objectives and policies existing (B6) concession Qualitative disclosures 33 Disclosure to enable users to evaluate nature 57  Based on and extent of risks existing concession Qualitative disclosures 34 Disclosures of summary quantitative information No equivalent  (B7, B8) for each risk arising from financial information based on information provided internally to key management 35 Further information to be disclosed where data No equivalent  is unrepresentative of an entity’s exposure to risk Credit risk 36 For each class of financial assets and other 76  Based on (B9, B10) credit exposures disclosure of information existing regarding an entity’s exposure to credit risk concession 37 Disclosures concerning financial assets that are No equivalent  either past due or impaired 38 Disclosure of collateral and other credit No equivalent  enhancements obtained Liquidity risk 39 Disclosure of a maturity analysis for financial No equivalent  (B11-B16) liabilities and a description of how an entity manages the liquidity risk Market risk 40 Disclosure of a sensitivity analysis for each type No equivalent  (B17-B28) of market risk 42 Where a sensitivity analysis reflects No equivalent  interdependencies an entity is not required to comply with the disclosures in paragraph 42 10
  11. 11. APPENDIX 2 SUMMARY OF MAIN CHANGES FROM ED 7 The main changes to the proposals in ED 7 are: (a) ED 7 proposed disclosure of the amount of change in the fair value of a financial liability designated as at fair value through profit or loss that is not attributable to changes in a benchmark interest rate as a proxy for the amount of change in fair value attributable to changes in the instrument’s credit risk. The IFRS permits entities to determine the amount of change in fair value attributable to changes in the instrument’s credit risk using an alternative method if the entity believes that its alternative method gives more faithful representation. The proxy disclosure has been amended to be the amount of change in fair value that is not attributable to changes in market conditions that give rise to market risk. As a result, entities may exclude factors other than a change in a benchmark interest rate when calculating the proxy. (b) A requirement has been added for disclosures about the difference between the transaction price at initial recognition (used as fair value in accordance with paragraph AG76 of IAS 39) and the results of a valuation technique that will be used for subsequent measurement (c) No disclosure is required of the fair value of collateral pledged as security and other credit enhancements as was proposed in ED 7. (d) The sensitivity analysis requirements have been clarified. (e) The exemption from presenting comparatives has been widened. (f) The capital disclosures are a stand-alone amendment to IAS 1, rather than part of the IFRS. No disclosure is required of whether the entity has complied with capital targets set by management and of the consequences of any non-compliance with those targets. (g) The amendments to IFRS 4 related to IFRS 7 have been modified to reduce systems changes for insurers. 11

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