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Guidance for financial reporting by electricity distribution businesses in 2021

This document provides guidance to preparers of financial statements of electricity distribution businesses (EDBs) with 31 March 2021 and 30 June 2021 balance dates.

This guidance covers the following matters:

  • Disclosure expectations for Covid-19 impacts.
  • Impact of 2020 Default Price-Quality Path Determination on revenue recognition and disclosure for those EDBs subject to price control.
  • Financial reporting consequences of any non-compliance with reliability standards for those EDBs subject to quality assessments.
  • New and amended standards applied for the first-time in 2021.
  • Standards issued and not yet effective and not early adopted.

If you wish to discuss any of these matters further, please contact your audit team.

Disclosure expectations for Covid-19 impacts

While the risks and uncertainties associated with Covid-19 have reduced since the 2020 financial statements were prepared, we expect that EDBs will continue to disclose information in their 2021 financial statements about the impact that Covid-19 has had on their operations and financial statements during the year. The Covid-19 disclosures made in the 2020 financial statements will need updating to be relevant for the 2021 year.

This disclosure might cover significant impacts on:

  • operations, including maintenance and capital programmes (particularly during lockdowns);
  • revenue and expenses;
  • performance measures, such as SAIDI and SAIFI;
  • balance sheet valuation uncertainties (for example, the extent to which any significant valuation uncertainties disclosed in last year’s financial statements are still present); and
  • any continuing impairment indicators due to Covid-19.

An illustrative disclosure is provided below. This will need to be tailored to suit the specific circumstances of each EDB.

Note [xx] Impacts of Covid-19 on the Group

On 11 March 2020, the World Health Organisation declared the outbreak of Covid-19 a pandemic, and two weeks later the New Zealand Government declared a State of National Emergency. From this, the country was in lockdown at Alert Level 4 for the period 26 March to 27 April and remained in lockdown at Alert Level 3 until 13 May. The country moved to Alert Level 1 on 9 June 2020. Additionally, parts of the country moved into Alert Level 2 for some time during August and September 2020 and February and March 2021.

Our business activity during Alert Level 4 was restricted to emergency works response, some essential preventative maintenance, and high priority capital work. Most of our staff were working from home. During Alert Level 2, most of our business activity resumed with the required health and safety protocols in place, and our staff returned to their usual place of work. Alert Level 1 predominantly saw a return to pre Covid-19 activity.

Electricity delivery service revenue during the first quarter of the year was only slightly reduced. Contracting revenue dropped significantly during the first quarter as projects were delayed or deferred, but has since recovered strongly. Impacts on the overall level of network maintenance for the year and other expense impacts were negligible. Capital expenditure for the year was 10% below budget due to delays in projects during Alert Levels 3 and 4. There was no noticeable impact on our SAIDI and SAIFI results.

For the previous year’s revaluation of land and non-substation buildings at 31 March 2020, the Group’s external valuer included a statement in their valuation report that the assessed value was subject to “material valuation uncertainty” due to Covid-19. The Group engaged its external valuer to assess whether the fair value of land and non-substation buildings as at 31 March 2021 differed materially to their carrying value at that date. The valuer has confirmed that fair value was not materially different to carrying value and also noted that, while there remains some uncertainty about land and non-substation building values due to Covid-19, there was not a material valuation uncertainty as at 31 March 2021.

No impairment test has been performed over the carrying value of the electricity distribution, contracting, and fibre cash generating units this year because the Group considers that there are no impairment indicators as at 31 March 2021.

Impact of 2020 Default Price-Quality Path Determination on revenue recognition and disclosure for those EDBs subject to price control

The Electricity Distribution Services Default Price-Quality Path Determination 2020 (the 2020-2025 DPP) issued by the Commerce Commission (the Commission) has revised the mechanism for revenue control with the introduction of a revenue cap with wash-up functionality.

We are considering what impact, if any, the wash-up mechanism has on revenue recognition and disclosure in the 2021 financial statements for those EDBs subject to the DPP. EDBs with significant wash-ups should discuss this with their Appointed Auditor.

Financial reporting consequences of any non-compliance with reliability standards for those EDBs subject to quality assessments

The 2020-2025 DPP has also introduced a revised approach to the assessment of compliance with the SAIDI and SAIFI quality standards. This includes more granular quality measures and some measures being assessed for compliance based on a single annual assessment.

EDBs subject to the 2020-2025 DPP (or customised price-quality path, if applicable) that have failed to meet one or more of their reliability standards for the year need to consider what accounting and disclosure is required.

An EDB’s failure to comply with the quality standards is prima facie a contravention of the Commerce Act 1986 and is an obligating event under NZ IAS 37 Provisions, Contingent Liabilities and Contingent Assets. However, the Commission is not bound to impose pecuniary penalties via the High Court, resulting in uncertainty about whether a penalty will be imposed.

EDBs will need to consider the specific facts and circumstances of any non-compliance with the quality standards and assess the probability that the Commission will impose (via the High Court) pecuniary penalties for the contravention.

A provision must be recognised by the EDB (assuming that a reliable estimate can be made) when it is assessed that it is probable that a fine will be imposed. An issue could be assessed as probable even prior to the Commission deciding to investigate the contravention.

If the probability that the Commission will impose pecuniary penalties via the High Court is –

  • probable (more likely than not) – the EDB must recognise a provision, provided that a reliable estimate can be made. The disclosures of NZ IAS 37 apply;
  • possible, but not remote – a contingent liability must be disclosed. The disclosures of NZ IAS 37 apply; or
  • remote – nothing is required to be disclosed in the financial statements.

New and amended standards applied for the first-time in 2021

In preparing the 2021 financial statements, EDBs will need to consider whether any new or amended standards applied for the first time have had an effect on the financial statements. The disclosures of NZ IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors paragraph 28 will need to be considered when a new or amended standard has had an effect on the financial statements.

In Table 1 below, we provide summary information on new and amended standards that came into effect for 31 March 2021 and 30 June 2021 year-ends that might affect some EDBs.

Note that not all new and amended standards are listed here. A complete list of new standards and amendments, including those not yet effective, can be viewed on the XRB’s website at the following link https://www.xrb.govt.nz/accounting-standards/recent-approvals/

Table 1

AmendmentBrief outline
2019 Omnibus Amendments to NZ IFRS The amendment to FRS-44 New Zealand Additional Disclosures requires that, if an International Financial Reporting Standard (IFRS® Standard) has been issued by the International Accounting Standards Board but the equivalent New Zealand IFRS has not yet been issued by the External Reporting Board (XRB), an entity must disclose the information specified in paragraphs 30 and 31 of NZ IAS 8 in relation to that IFRS Standard.

As at 16 April 2021, there are no IFRS Standards issued that have not yet been adopted by the XRB.
Definition of a Business (Amendments to NZ IFRS 3) This amendment might be relevant when an EDB has acquired a business or a group of assets during the 2021 financial year.

The amendments to NZ IFRS 3 Business Combinations clarify the definition of a business and provide guidance to help entities determine whether an acquisition is of a business or a group of assets.

Entities are required to apply the amendments to business combinations for which the acquisition date is on or after the beginning of the current financial year (that is, from 1 April 2020 for 31 March 2021 reporters) and to asset acquisitions made on or after the beginning of the current financial year.
Interest Rate Benchmark Reform – Phase 1 This amendment might be relevant when an EDB has hedge accounting relationship(s) that include derivatives with an overseas-based interest rate benchmark that are subject to the benchmark reforms (such as cross-currency interest rate swaps).

Interest Rate Benchmark Reform – Phase 1 amends NZ IFRS 9 Financial Instruments, NZ IAS 39 Financial Instruments: Recognition and Measurement, and NZ IFRS 7 Financial Instruments: Disclosures.

Some interest rate benchmarks are being reformed and, in some cases, discontinued as part of a global interest rate benchmark reform process.

The New Zealand Bank Bill Benchmark Rate (BKBM) has been largely unaffected by the international reforms. However, some New Zealand entities will have loan agreements or derivative contracts that refer to other interest rate benchmarks (such as interbank offered rates (IBOR) and might encounter financial reporting issues associated with the reforms.

The amendments modify some specific hedge accounting requirements to provide relief from potential effects of the uncertainty caused by the phasing out of interest rate benchmarks, such as IBORs. The amendments also require disclosure of the hedging relationships that are directly affected by these uncertainties.
Definition of Material (Amendments to NZ IAS 1 and NZ IAS 8) The definition of material has been amended and additional guidance provided to make it easier for entities to make materiality judgements in the preparation of their financial statements.

Standards issued and not yet effective and not early adopted

When an EDB has not yet applied a new or amended standard, paragraph 30 of NZ IAS 8 requires information to be disclosed about that new or amended standard. Our view is that this disclosure applies only to those new standards or amendments that will or might affect an EDB’s future financial statements.

In Table 2 below, we provide summary information on new and amended standards that have been issued and not yet effective that might affect some EDBs in future reporting periods. Note that not all standards issued and not yet effective are listed here.

Table 2

StandardBrief outline
Interest Rate Benchmark Reform— Phase 2 The amendments apply for annual reporting periods beginning on or after 1 January 2021, with early adoption permitted.

The amendments address issues that might affect financial reporting during the reform of an interest rate benchmark, including the effects of changes to contractual cash flows or hedging relationships arising from the replacement of an interest rate benchmark with an alternative benchmark. The objective of the amendments is to provide practical relief for particular changes to contractual cash flows and relief from specific hedge accounting requirements.

The amending standard makes amendments to NZ IFRS 9 Financial Instruments, NZ IAS 39 Financial Instruments: Recognition and Measurement, NZ IFRS 7 Financial Instruments: Disclosures, NZ IFRS 4 Insurance Contracts, and NZ IFRS 16 Leases.
Amendments to NZ IAS 1 – Classification of Liabilities as Current or Non-current The amendments apply for annual reporting periods beginning on or after 1 January 2023.

The amendments clarify a criterion in NZ IAS 1 for classifying a liability, such as loans, as non-current: the requirement for an entity to have the right to defer settlement of the liability for at least 12 months after the reporting period.
Amendments to NZ IAS 1 – Disclosure of Accounting Policies The amendments apply for annual reporting periods beginning on or after 1 January 2023.

The amendments to NZ IAS 1 require entities to disclose their material accounting policy information rather than their significant accounting policies.

The amendments aim to improve the relevance of the information in the financial statements by helping an entity to:
  • identify and disclose accounting policy information that is material to users of financial statements; and
  • remove immaterial accounting policy information that might obscure material accounting policy information.

Where a new or amended standard will or might affect an EDB’s financial statements on adoption, the EDB is required to provide the disclosures set out in paragraphs 30 to 31 of NZ IAS 8. The following is an example disclosure for the Classification of liabilities as Current or Non-current amendment.

Standards issued and not yet effective and not early adopted

Certain new accounting standards and amendments have been issued that are not mandatory for the 31 March 2021 financial year and have not been early adopted. Those new standards and amendments that are relevant to the Group are:

Amendments to NZ IAS 1 – Classification of Liabilities as Current or Non-current

The amendments clarify a criterion in NZ IAS 1 for classifying a liability, such as loans, as non-current: the requirement for an entity to have the right to defer settlement of the liability for at least 12 months after the reporting period.

The amendments:

  • specify that an entity’s right to defer settlement must exist at the end of the reporting period;
  • clarify that classification is unaffected by management’s intentions or expectations about whether the entity will exercise its right to defer settlement;
  • clarify how lending conditions, such as loan covenants, affect classification; and
  • clarify requirements for classifying liabilities an entity will or may settle by issuing its own equity instruments.

The amendments are effective for annual reporting periods beginning on or after 1 January 2023 and must be applied retrospectively. The Group will not early adopt these amendments and will first apply the amendments in the 31 March 2024 financial statements. The Group is assessing the effect of these amendments on its loan agreements.

Where none of the changes have relevance to the EDB, we recommend that this be disclosed. An example disclosure is provided below:

Standards issued and not yet effective and not early adopted

Certain new accounting standards and amendments have been issued that are not mandatory for the 31 March 2021 financial year and have not been early adopted by the Group. The Group has assessed that these are not likely to have an effect on its financial statements.