Financial reports required to give more explanation around going concern

More explanation will be required in financial reports. Photo / 123RF

Those who oversee businesses, charities and council organisations will have to provide more details of any material uncertainties and assumptions made when it comes to declaring an entity is a going concern in annual accounts from the end of this month.

A new financial reporting standard has been pushed through by New Zealand's External Reporting Board to help address the uncertainty created by Covid-19 for investors and other stakeholders.

Normally changes to New Zealand's reporting standards are based on overseas reporting standards and are brought in with a consultation process that takes several months.

But April MacKenzie, chief executive of the External Reporting Board - the government entity that sets reporting standards - said it felt it was in everybody's interests to define what needed to be disclosed and to do so quickly.

"We felt there was an urgency in NZ."

The change means financial reports will have to outline any judgments and assumptions made for the entity to be declared a going concern.

That includes information on material uncertainties about future outcomes for the entity as well as plans to mitigate the effects of any major uncertainties identified.

MacKenzie said that meant if a major part of a business was being affected by border restrictions brought in because of Covid-19 the report needed to describe that.

"Maybe it is uncertainty over supply for a particular component for what they make."

She said explaining how the issue was being dealt with could involve commentary around how the company was looking to source the component locally or from Australia where the supply was easier.

"What you're wanting to do is just describe what the uncertainty is and how it impacts the assessment of going concern."

She said another issue could be getting the right workforce into the country to do certain jobs.

MacKenzie said an accounting standard would bring about consistency across New Zealand entities and also allow comparability between entities.

Policing of the standard will be up to auditors whose job it is to ensure entities are making accurate and full disclosures.

"We are the rule-makers not the police."

She said if the auditor wasn't happy with the disclosure they could give a qualified opinion of the business.

So far MacKenzie said it had seen a healthy approach to entities disclosing the impacts of Covid-19 on businesses.

But she said next year may be even tougher for many.

"We have got to find the new normal. The dust hasn't settled yet."

MacKenzie said it hoped the change would help boost trust and confidence from investors.