Avoid common disclosure mistakes in your financial reports

During the 31 March 2024 and the 30 June 2024 reporting seasons, we have identified some common disclosure mistakes worth avoiding when preparing your next annual financial report. These issues mainly apply equally to For-profit and Public Benefit Entity (PBE) reporters.

Read on to learn from these mistakes and ensure your financial reports are accurate and compliant.
 

Why focus on disclosures?

Regulators tend to focus on disclosures when conducting reviews. It is therefore important for entities to be mindful of avoiding common disclosure mistakes, and ensuring their financial reports are internally consistent.
 

Common disclosure mistakes

Common disclosure mistakes that apply to all entities: Those that only apply to listed entities, include:

Rounding in financial statements

A common error we have noted is that entities are not including a rounding policy note when merely rounding to the nearest dollar. Both NZ IAS 1 Presentation of Financial Statements (NZ IAS 1.51) and PBE IPSAS 1 Presentation of Financial Statements for PBEs (PBE IPSAS 1.63) require an entity to disclose the level of rounding being applied in presenting amounts in the financial report.

Primary statements

We identified a variety of common disclosure mistakes in the four primary financial statements: the statement of profit or loss and other comprehensive income (PBEs: statement of comprehensive revenue and expense), the statement of financial position, the statement of cash flows and the statement of changes in equity (PBEs: statement of changes in net assets/equity). These are discussed in more detail below.

Statement of profit or loss and other comprehensive income (PBEs: statement of comprehensive revenue and expense)

Common disclosure mistakes included (note this is not an exhaustive list):

For-profit entities
  • Incorrectly identifying income items as revenue. Revenue is income arising in the course of an entity’s ordinary activities, e.g. if an entity earns interest that is not within its ordinary activities, it is income, not revenue. Income incorporates revenue, not the other way around.
  • Share-based payment expense not identified as being an employee expense (where applicable)
  • Aggregation of income/expense items without any further detail provided in the notes, particularly where aggregated amounts are material
  • Not showing the split of profit and other comprehensive income between members and non-controlling interests, when there are non-wholly owned subsidiaries.
PBEs
  • Incorrectly identifying exchange revenue as non-exchange revenue and vice versa
  • Not presenting interest revenue separately on face of surplus or deficit.
  • Aggregation of income/expense items without any further detail provided in the notes, particularly where aggregated amounts are material

Statement of financial position

Instead of presenting assets and liabilities in the statement of financial position as current or non-current, entities can use the liquidity basis if this provides information that is reliable and more relevant.
  • However, all assets and liabilities must be presented in order of liquidity. We have noted instances where this was not followed.  
  • In addition, if a line item includes both current and non-current items, the entity must provide detail of the current vs non-current split in the notes. We have noted instances where this disclosure was overlooked.

Statement of cash flows

Common disclosure mistakes related to:
  • Inappropriately showing items as cash equivalents. Cash equivalents comprise amounts only if they are used for cash management purposes - long-term term deposits and certain restricted cash items are not cash equivalents
  • Not identifying non-cash financing and investing activities as required by NZ IAS 7.43 and PBE IPSAS 2.54
  • Not separately identifying foreign exchange movements on cash held in foreign currencies.

Statement of changes in equity (PBEs: statement of changes in net assets/equity)

Common disclosure mistakes related to adjustments, reserves disclosure and treasury shares.
  • Adjustments to prior year balances of retained earnings (PBEs: accumulated revenue and expense) and reserves resulting from changes in accounting policies or restatements of errors must be shown in the statement of changes in equity (PBEs: statement of changes in net assets/equity) as follows:
Balance as reported in prior financial statements
Details of the adjustment
The adjusted balance.


Whether the restated balance is reported as the opening balance at the beginning of the comparative period, or the beginning of the current period, will depend on the reason for the restatement. Full retrospective restatement is required for prior period errors, so restatements occur at the beginning of the comparative period. However, when changing accounting policies, full restatement is required unless the new or amended standard permits a modified retrospective approach.

  • We also noted instances where entities group all reserves together in the statement of changes in equity (PBEs: statement of changes in net assets/equity) but then fail to provide further details in the notes of movements in reserves balances, as required by NZ IAS 1.106(d) and 106A (PBEs: PBE IPSAS 1.118 and .119).
  • Lastly, we noted incorrect accounting for treasury shares, which should be shown as a deduction in equity (usually recorded in a separate treasure shares reserve). 

Discontinued operations

Being able to identify an operation as a discontinued operation is a privilege because it enables entities to separate out the results of the discontinued operation in the statement of profit or loss and other comprehensive income (PBEs: statement of comprehensive revenue and expense). In many cases, this separation makes the results of continuing operations look better, so it is imperative that:
  • Operations meet the definition of a discontinued operation
  • Discontinued operations are not identified too early or too late
  • Operations are not identified as discontinued if they are to be abandoned (the results and cash flows of the disposal group can only be separately presented as discontinued operations at the date on which it ceases to be used).

Material accounting policy information (For-profits entities)

For years ending 31 December 2023 onwards, only material accounting policy information should be disclosed. However, we noted many instances where immaterial accounting policies have been retained, adding unnecessary volume to the financial statements and more information is not always useful to readers of the accounts. Common mistakes included keeping accounting policies where:
  • The accounting is described in the standards, and no judgement is required to develop an accounting policy applying the hierarchy in NZ IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors (i.e. wording copied straight out of the relevant standards)
  • Significant judgements or assumptions were made in applying the accounting policy, but these had already been disclosed as required by NZ IAS 1.122-125, thereby duplicating policy information
  • The accounting is not complex
  • The accounting policy is not relevant to the entity as they either do not have the asset/liability or their holding is immaterial.
Entities that have not undertaken a culling exercise should prioritise efforts as it takes some time to decide which accounting policies are material and which are not. Our article provides guidance to assist you.  

 

Significant estimates and judgements

Regulators continue to focus financial reporting surveillance efforts on the disclosure of significant estimates and judgements, including assumptions used and sensitivities. It is common to see boilerplate disclosures here, covering a broad range of topics that require estimates and judgements, many of which are not material (for example, the method of calculating long service leave provisions).

Entities should remove immaterial disclosures and focus on ensuring that sufficient information is provided regarding significant judgements and assumptions affecting estimates (including quantifying key assumptions).  

 

Tax disclosures

Common disclosure deficiencies identified in the tax note relate to:
  • The reconciliation from operating profit to the tax expense recognised in profit or loss:
    • Material reconciling items are not adequately explained or do not make sense
    • An incorrect tax rate is used
  • The tax expense in profit or loss does not equal the sum of the current income tax expense, the movements in deferred tax assets and liabilities recognised in profit or loss, and over/under provisions from prior periods
  • Deferred tax liabilities not recognised in cases where the ‘initial recognition exception’ criteria and the exception for investments in subsidiaries, branches, associates and interests in joint arrangements did not apply
  • Unrecognised deferred tax assets not separately quantified and disclosed for temporary differences and tax losses
  • Lack of disclosure about:
    • The basis on which unrecognised deferred tax assets can be realised (for example, the entity will generate sufficient taxable profits in future)
    • The aggregate amount of unrecognised temporary differences for investments in subsidiaries, branches, associates and interests in joint arrangements
    • Why deferred tax assets were recognised, including the nature of evidence supporting recognition, when the entity has suffered a loss in either the current or prior year in the tax jurisdiction to which the deferred tax asset relates
  • Offsetting deferred tax assets and liabilities or current tax assets and liabilities relating to different tax jurisdictions, or if not allowed by the tax authority.

Listed entities

Segment information

Segment disclosures should be ‘through the eyes of management’. Information provided or considered by the chief operating decision maker (CODM), therefore, drives how segments are identified, as well as the information disclosed.

Regulators will look at detail contained in Chairperson’s Reports and /or Directors’ Reports for the period to see how the entity analyses its results and financial position and compares this to the segment reporting note. If there are discrepancies between the ‘segments’ referred to in the Chairperson’s Reports and /or Directors’ Reports and the segment note, this is a red flag. Also, if non-IFRS measures are used in Chairperson’s Reports and/or Directors’ Reports, this is likely because they are provided to the CODM, so we expect to see similar non-IFRS measures shown in the segment note.

A common mistake in segment reporting is referring to the corporate head office as a segment. It is rare that ‘corporate’ is a separate segment. Rather, this column merely represents the reconciliation between the aggregate of all segments, and amounts shown in the statutory financial statements. Presenting reconciling items in one column makes it difficult to show material reconciling items separately, and additional footnotes may be needed to highlight these items.

Another one is failing to disclose the judgements made by management in applying the criteria in NZ IFRS 8.12 to aggregate several operating segments into one reporting segment. This includes a brief description of the operating segments that have been aggregated in this way, and the economic indicators that have been assessed in determining that the aggregated operating segments share similar economic characteristics.

Lastly, entities often fail to include entity-wide disclosures about products and services, geographic areas and major customers. This often occurs when the entity notes it only has one segment.
 
It is also important to note that proper segment identification is relevant, even if the entity is not listed. This is because impairment testing of goodwill requires allocating goodwill to cash-generating units no larger than an operating segment.

Earnings per share (EPS)

Common disclosure mistakes relating to earnings per share include:
  • Profitable entities not identifying potential ordinary shares for calculating diluted EPS (DEPS). Profitable entities MUST identify potential ordinary shares and determine if each of those potential ordinary shares is dilutive.
  • Using the total number of options as potential dilutive ordinary shares rather than adjusting for the exercise price of the option. Potential ordinary shares are only dilutive if the average market price exceeds the exercise price (refer to NZ IAS 33, Example 5 for further information)
  • Failing to reduce the number of shares outstanding for basic EPS for the number of treasury shares held. Treasury shares may be potential ordinary shares for DEPS (NZ IAS 33.20 and 36)
  • If an entity is not profitable, basic EPS and DEPS must be the same because the potential ordinary shares are anti-dilutive. However, NZ IAS 33.70(c) requires disclosure about ‘instruments (including contingently issuable shares) that could potentially dilute basic earnings per share in the future, but were not included in the calculation of diluted earnings per share because they are anti-dilutive for the period(s) presented’.

We are here to help

Preparing disclosures for general purpose financial reports is no easy task, particularly for listed entities. Please contact our Financial Reporting Advisory team for help.

For more on the above, please contact your local BDO representative.

This article has been based on an article that originally appeared on BDO Australia, read the original article here.