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Financial reporting by Credit Unions - a review [2004] NZSecCom 13 (22 December 2004)

Last Updated: 9 November 2014

Financial Reporting by Credit Unions - a Review

Securities Commission
Wellington, New Zealand
December 2004

1. Commission staff undertook a review of the quality of financial reports prepared by credit unions. This review was performed under the Commission's statutory powers contained in Section 10(c) of the Securities Act 1978.
2. The work performed formed part of the Commission's pilot programme to review financial reporting practices of public issuers.
3. The purpose of the review was to form a view on the following matters:

(a)

whether approved financial reporting standards (FRSs) and other elements of generally accepted accounting practice (GAAP) including Statements of Standard Accounting Practice (SSAPs) applicable in New Zealand were being applied by credit unions in their financial statements prepared under the Financial Reporting Act 1993;

(b)

whether any breaches of GAAP identified in those financial statements were likely to cause the financial statements not to show a true and fair view, or were likely to be materially misleading to users in the context of information disclosure (for investment decision making) as envisaged under the Securities Act 1978 and therefore require enforcement action; and

(c)

the overall quality of financial reporting practices by credit unions.

4. The sample of credit unions selected as part of the review was predominantly based on the size of each credit union. The aim was to select an even range of credit unions across New Zealand.
5. The matters found during the course of the review were not considered to be so significant as to cause the financial statements not to show a true and fair view, nor likely to be materially misleading and therefore requiring enforcement action under the Securities Act 1978.
6. However, our review did highlight key areas where we considered that financial reporting standards and/or the Financial Reporting Act 1993 were not being fully complied with and areas where we think improvements can be made.
7. Non-compliance and a need for improvements in disclosures were found in the following areas:

Related Party Disclosures

SSAP-22 Related Party Disclosures sets out various disclosures required about the relationships between the reporting entity, its related parties and transactions with those parties. Disclosures made by credit unions specifically in reference to the requirements of SSAP-22 paragraph 5.1 generally required improvements, particularly in relation to loans and deposits made to/from members of the credit union who are/were also directors of the credit union.

Disclosure of Information about Financial Instruments and Financial Institutions

Our findings indicated that improvements in the general quality of disclosures required by these Standards could be made. Some disclosures made appeared to be fairly generic and sometimes incomplete. We noted many instances where disclosures required by FRS-31 Disclosure of Information about Financial Instruments and FRS-33 Disclosure of Information about Financial Institutions appeared to not comply with some of the detailed requirements of these standards. We question whether the financial risks (i.e. interest, liquidity and credit risks) faced by credit unions are properly set out for investors in their financial statements which accompany prospectuses. These are typically material risk disclosures for financial institutions.

Approval of Financial Statements

Both FRS-5 Events after Balance Date and the Financial Reporting Act 1993 require that the financial statements be dated and signed by those authorised to do so. It is important for users to know when the financial statements were authorised for issue, as the financial report will not reflect events that occurred after this date, and the presence of undated and/or unsigned financial statements includes the risk that the financial statements may not have been approved by the directors of the credit union. In many cases it was found this information was either not disclosed, incomplete or unclear.

Audited Financial Statements

The Financial Reporting Act 1993 requires that the directors of an issuer must ensure that the financial statements of the issuer are audited. The auditor's report (including the audit opinion) should disclose all pages of the financial statements or identify those statements that have been subject to audit. In one case this had not been done, and therefore questions arose as to which information disclosed in the financial statements had actually been subject to audit.

8. In addition to those financial reporting matters referred to above, the following further areas of general concern were identified:

Corporate Governance Concerns

It may be of some concern to the governing bodies of credit unions that should the standards for financial statement presentation and disclosure prescribed under current legislation and financial reporting standards not be adhered to, then their published statutory financial reports may potentially mislead, deceive or confuse users of the financial information. This review has revealed that improvements are required in the application of some key applicable financial reporting standards.

The Transition to New Zealand Equivalents to International Financial Reporting Standards

Significant changes to financial reporting standards will be introduced as part of the Accounting Standards Review Board's decision to adopt International Financial Reporting Standards for reporting periods beginning on or after 1 January 2007 (or periods beginning on or after 1 January 2005 for those wanting to adopt New Zealand Equivalents to International Financial Reporting Standards ("NZ IFRS") earlier).

The transition to NZ IFRS will require a focussed and proactive approach by all reporting entities including credit unions. One of the key considerations is planning ahead to understand the requirements of NZ IFRS and the potential impact on an entity's financial statements in the future.

The Financial Reporting Standards Board has recently issued ED-96 Disclosing the Impact of Adopting New Zealand Equivalents to International Financial Reporting Standards. The objective of the proposed standard is to require issuers, and to encourage other entities, to disclose the impacts of adopting NZ IFRS in their general purpose financial statements before NZ IFRS is actually adopted by the entity.

9. It should be noted that the review conducted was at a desk-top level i.e. on the basis of the information provided in the financial statements followed by requests for the credit unions to provide further information in respect of those queries raised by Commission staff.