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Income Tax Act 2007

Timing and quantifying rules - Financial arrangements rules

EW 15D: IFRS financial reporting method

You could also call this:

“Rules for reporting income using international financial standards”

When you use the IFRS financial reporting method, you need to follow special rules to figure out how much money to report in each tax year. These rules are based on IFRS (International Financial Reporting Standards) but with some changes.

Here are the main things you need to know:

If you have a financial asset, you don’t need to report any changes in its value due to credit quality. But if you’re in the business of dealing with financial arrangements and you use the fair value method, this rule doesn’t apply to you.

You can’t add borrowing costs to the value of an asset.

For interest-free loans, you don’t report any value when you first give or receive the loan, and you don’t report any interest later on.

If you give or receive a loan that’s worth less than its face value because of interest rates, you don’t report the difference in value. You also don’t report any later changes in the loan’s value due to interest rates.

There are special rules for foreign currency agreements and hedges related to them. You can find these rules in sections EW 32 and EW 33B.

Even if IFRS rules say you should report something as equity or other comprehensive income, for tax purposes, you still need to report it as income for the year.

You can’t use the fair value method for a financial arrangement if you’re using it as a hedge for another arrangement that you’re not reporting using the IFRS method.

These rules help make sure that everyone reports their income in a fair and consistent way, even when dealing with complex financial arrangements.

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View the original legislation for this page at https://legislation.govt.nz/act/public/1986/0120/latest/link.aspx?id=DLM1629852.

Topics:
Money and consumer rights > Taxes
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EW 15C: Preparing and reporting methods, or

“How to choose a method for preparing financial statements and reporting on financial arrangements”

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EW 15E: Determination alternatives, or

“Options for calculating tax on financial arrangements”

Part E Timing and quantifying rules
Financial arrangements rules

EW 15DIFRS financial reporting method

  1. Under the IFRS financial reporting method, a person must allocate an amount to an income year under IFRS rules modified, as applicable, under subsection (2).

  2. The allocation is modified as follows:

  3. if the financial arrangement is a financial asset, an amount arising from an impaired credit adjustment under IFRSs is not allocated to an income year. However, when the fair value method is used, adjustments for financial arrangements held by the person are excluded from this paragraph, if the financial arrangements are not derivative instruments and the person's business includes dealing in those financial arrangements:
    1. borrowing costs are not capitalised under NZIAS 23:
      1. if the financial arrangement is an interest-free loan, no amount is allocated to equity, equity reserves, other comprehensive income, or profit or loss when the loan is initially entered into, and no interest is allocated subsequent to the initial entry:
        1. if the financial arrangement is a loan with a fair value (the loan initial value) when the loan is initially entered into that, because of the loan's interest rate, is less than the face value (the consideration initial value) at that time, then no amount is allocated to equity, equity reserves, other comprehensive income, or profit or loss, to the extent to which the amount relates solely to the difference, because of interest rates, between the consideration initial value and the loan initial value. Also, no interest is allocated subsequent to the initial entry on account of a movement in the fair value of the loan, to the extent to which the movement relates solely to the difference, because of interest rates, between the consideration initial value and the loan initial value:
          1. if the financial arrangement is a foreign ASAP, or is an IFRS designated FX hedge for a foreign ASAP, sections EW 32 and EW 33B apply to value, for IFRS rules, the relevant property or service. Section EW 33B also provides rules for subsequently adjusting the treatment of the relevant hedge:
            1. even though an amount may be allocated to equity, equity reserves, or other comprehensive income under IFRSs, the amount must be allocated to an income year for tax purposes.

              1. A person must not use the fair value method for a financial arrangement if—

              2. the financial arrangement is treated under IFRSs by the person as a hedge of another financial arrangement; and
                1. the person uses for the other financial arrangement a method that is not the IFRS financial reporting method.

                  1. For the purposes of this section, impaired credit adjustment means—

                  2. for a financial arrangement accounted for under the fair value method, a movement in fair value—
                    1. through a decline in the credit quality of the arrangement; or
                      1. through an improvement in the credit quality of the arrangement to the extent to which it offsets earlier movements in fair value described in subparagraph (i):
                      2. for a financial arrangement not accounted for under the fair value method, credit impairment adjustments made under IFRSs.

                        Compare
                        Notes
                        • Section EW 15D: inserted, on , by section 366 of the Taxation (Business Taxation and Remedial Matters) Act 2007 (2007 No 109).
                        • Section EW 15D(2)(a): amended (with effect on 1 April 2008), on , by section 135(1) of the Taxation (International Taxation, Life Insurance, and Remedial Matters) Act 2009 (2009 No 34).
                        • Section EW 15D(2)(ab): inserted (with effect on 1 April 2008), on , by section 135(2) of the Taxation (International Taxation, Life Insurance, and Remedial Matters) Act 2009 (2009 No 34).
                        • Section EW 15D(2)(ac): inserted, on (applying for the 2014–15 and later income years), by section 51(1) of the Taxation (Annual Rates, Foreign Superannuation, and Remedial Matters) Act 2014 (2014 No 4).
                        • Section EW 15D(2)(ac): amended (with effect on 1 April 2014), on , by section 132(1) of the Taxation (Annual Rates for 2015–16, Research and Development, and Remedial Matters) Act 2016 (2016 No 1).
                        • Section EW 15D(2)(ad): inserted, on (applying for the 2014–15 and later income years), by section 51(1) of the Taxation (Annual Rates, Foreign Superannuation, and Remedial Matters) Act 2014 (2014 No 4).
                        • Section EW 15D(2)(ad): amended (with effect on 1 April 2014), on , by section 132(2) of the Taxation (Annual Rates for 2015–16, Research and Development, and Remedial Matters) Act 2016 (2016 No 1).
                        • Section EW 15D(2)(ae): inserted (with effect on 1 April 2011 and applying for a financial arrangement entered into by a person: (a) in the 2014–15 income year and later income years, unless paragraph (b) applies; (b) in an income year (the first income year) and later income years, if the person files a return of income for the first income year on the basis that this section applies to a financial arrangement entered into in the first income year, and the first income year is the 2011–12, 2012–13, 2013–14, or 2014–15 income year and the person uses IFRSs to prepare financial statements or to report for financial arrangements for the first income year), on , by section 76(1) of the Taxation (Annual Rates, Employee Allowances, and Remedial Matters) Act 2014 (2014 No 39).
                        • Section EW 15D(2)(b): amended (with effect on 1 April 2015 and applying for the 2015–16 and later income years), on , by section 132(3) of the Taxation (Annual Rates for 2015–16, Research and Development, and Remedial Matters) Act 2016 (2016 No 1).
                        • Section EW 15D(2B) heading: inserted (with effect on 1 April 2008), on , by section 135(3) of the Taxation (International Taxation, Life Insurance, and Remedial Matters) Act 2009 (2009 No 34).
                        • Section EW 15D(2B): inserted (with effect on 1 April 2008), on , by section 135(3) of the Taxation (International Taxation, Life Insurance, and Remedial Matters) Act 2009 (2009 No 34).
                        • Section EW 15D(2B)(b): replaced (with effect on 1 April 2011 and applying for a financial arrangement entered into by a person: (a) in the 2014–15 income year and later income years, unless paragraph (b) applies; (b) in an income year (the first income year) and later income years, if the person files a return of income for the first income year on the basis that this section applies to a financial arrangement entered into in the first income year, and the first income year is the 2011–12, 2012–13, 2013–14, or 2014–15 income year, and the person uses IFRSs to prepare financial statements or to report for financial arrangements for the first income year), on , by section 76(2) of the Taxation (Annual Rates, Employee Allowances, and Remedial Matters) Act 2014 (2014 No 39).
                        • Section EW 15D(3)(a): replaced (with effect on 1 April 2008), on , by section 54 of the Taxation (Annual Rates for 2022–23, Platform Economy, and Remedial Matters) Act 2023 (2023 No 5).
                        • Section EW 15D list of defined terms derivative instrument: inserted (with effect on 1 April 2008), on , by section 135(4) of the Taxation (International Taxation, Life Insurance, and Remedial Matters) Act 2009 (2009 No 34).
                        • Section EW 15D list of defined terms foreign ASAP: inserted (with effect on 1 April 2011 and applying for a financial arrangement entered into by a person: (a) in the 2014–15 income year and later income years, unless paragraph (b) applies; (b) in an income year (the first income year) and later income years, if the person files a return of income for the first income year on the basis that this section applies to a financial arrangement entered into in the first income year, and the first income year is the 2011–12, 2012–13, 2013–14, or 2014–15 income year, and the person uses IFRSs to prepare financial statements or to report for financial arrangements for the first income year), on , by section 76(3) of the Taxation (Annual Rates, Employee Allowances, and Remedial Matters) Act 2014 (2014 No 39).
                        • Section EW 15D list of defined terms FX hedge: inserted (with effect on 1 April 2011 and applying for a financial arrangement entered into by a person: (a) in the 2014–15 income year and later income years, unless paragraph (b) applies; (b) in an income year (the first income year) and later income years, if the person files a return of income for the first income year on the basis that this section applies to a financial arrangement entered into in the first income year, and the first income year is the 2011–12, 2012–13, 2013–14, or 2014–15 income year, and the person uses IFRSs to prepare financial statements or to report for financial arrangements for the first income year), on , by section 76(3) of the Taxation (Annual Rates, Employee Allowances, and Remedial Matters) Act 2014 (2014 No 39).
                        • Section EW 15D list of defined terms NZIAS 23: inserted (with effect on 1 April 2008), on , by section 135(4) of the Taxation (International Taxation, Life Insurance, and Remedial Matters) Act 2009 (2009 No 34).